Dear Shareholder:
Enclosed is a Notice of Meeting for a Special Joint Shareholders' Meeting
of the Franklin Arkansas Municipal Bond Fund, the Franklin Hawaii Municipal Bond
Fund and the Franklin Washington Municipal Bond Fund, each of which is a series
of Franklin Municipal Securities Trust (the "Trust"). The Meeting has been
called for June 23, 1999 at 1:30 p.m. Pacific time at the offices of the Trust
at 777 Mariners Island Boulevard, San Mateo, CA 94404. The accompanying Joint
Prospectus/Proxy Statement describes a proposal being presented for your
consideration and requests your prompt attention and vote via the enclosed proxy
card(s).
PLEASE TAKE A MOMENT TO FILL OUT, SIGN AND
RETURN THE ENCLOSED PROXY CARD
This meeting is critically important. The Trustees of your fund unanimously
recommend that you consider and approve an Agreement and Plan of Reorganization
that would result in your shares of either the Arkansas, Hawaii or Washington
Municipal Bond Fund being exchanged for those of a fund called Franklin Federal
Tax-Free Income Fund (the "Federal Fund"). If the shareholders of your fund
approve the proposal, you will receive Class A shares of the Federal Fund equal
in value to your investment in shares of your municipal bond fund. You will no
longer be a shareholder of your municipal bond fund, and you will instead be a
shareholder of the Federal Fund.
The proposed transaction is intended to be a tax-free reorganization under
the Internal Revenue Code of 1986, as amended, as further described in the
accompanying Prospectus/Proxy Statement.
The transaction is being proposed because the projected growth in assets of
each of the Arkansas, Hawaii and Washington Municipal Bond Funds was not
sufficient to continue to offer a fund with competitive performance and high
quality service to shareholders over the long term. The Federal Fund has an
investment goal and investment policies that are similar to those of the
municipal bond funds, as outlined in the Joint Prospectus/Proxy Statement. The
Federal Fund is managed by Franklin Advisers, Inc., the current investment
manager of the municipal bond funds. Federal Fund is a larger fund that should
be better able to diversify its investments and to obtain certain savings in
costs for shareholders.
Please take the time to review this document and vote now. The Trustees of
your fund unanimously recommend that you vote in favor of this proposal.
- To ensure that your vote is counted, indicate your position on the
enclosed proxy card.
- Sign and return your card promptly.
- If you determine at a later date that you wish to attend this meeting,
you may revoke your proxy and vote in person.
Thank you for your attention to this matter.
Sincerely,
Deborah R. Gatzek
Secretary
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FRANKLIN MUNICIPAL SECURITIES TRUST
ON BEHALF OF
FRANKLIN ARKANSAS MUNICIPAL BOND FUND
FRANKLIN HAWAII MUNICIPAL BOND FUND
FRANKLIN WASHINGTON MUNICIPAL BOND FUND
777 MARINERS ISLAND BOULEVARD
SAN MATEO, CA 94404
NOTICE OF SPECIAL JOINT SHAREHOLDERS' MEETING
TO BE HELD ON JUNE 23, 1999
To the Shareholders:
NOTICE IS HEREBY GIVEN that a Special Joint Shareholders' Meeting of the
Franklin Arkansas Municipal Bond Fund, the Franklin Hawaii Municipal Bond Fund
and the Franklin Washington Municipal Bond Fund (each, a "Municipal Fund") will
be held at the offices of Franklin Municipal Securities Trust (the "Trust"), 777
Mariners Island Boulevard, San Mateo, CA 94404, on June 23, 1999 at 1:30 p.m.
Pacific time. The Meeting is being called for the following reasons:
1. For shareholders of each Municipal Fund to approve or disapprove an
Agreement and Plan of Reorganization between the Trust, on behalf of the
particular Municipal Fund, and Franklin Federal Tax-Free Income Fund (the
"Federal Fund") that provides for: (i) the acquisition of substantially all of
the assets of the Municipal Fund in exchange for Class A shares of the Federal
Fund; (ii) the distribution of Class A shares of the Federal Fund to the
shareholders of the Municipal Fund; and (iii) the liquidation and dissolution of
the Municipal Fund.
2. To grant the proxyholders the authority to vote upon any other business
as may properly come before the Meeting or any adjournment thereof.
The transaction contemplated by each Agreement and Plan of Reorganization
is described in the attached Joint Prospectus/Proxy Statement. Copies of the
Agreement and Plan of Reorganization for each transaction are attached as
Exhibits A, B and C to the Joint Prospectus/Proxy Statement.
Shareholders of record of each Municipal Fund as of the close of business
on April 19, 1999 are entitled to notice of, and to vote at, the Meeting or any
adjournment thereof.
By Order of the Board of Trustees,
Deborah R. Gatzek
Secretary
May 7, 1999
THE BOARD OF TRUSTEES URGES YOU TO COMPLETE, DATE, SIGN, AND RETURN THE
ENCLOSED PROXY CARD(S) IN THE ENCLOSED POSTAGE-PAID RETURN ENVELOPE. IT IS
IMPORTANT THAT YOU RETURN YOUR SIGNED PROXY CARD(S) PROMPTLY SO THAT A QUORUM
MAY BE ENSURED.
JOINT PROSPECTUS AND PROXY STATEMENT
When reading this Joint Prospectus/Proxy Statement, you will see certain terms
beginning with capital letters. This means the term is explained in our glossary
section.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
COVER PAGES Cover
SUMMARY 3
On what proposal am I being asked to vote? 3
How will the shareholder voting be handled? 3
What are the general tax consequences of the
Transactions? 3
COMPARISONS OF SOME IMPORTANT FEATURES 4
How do the investment goals and policies of the funds
compare? 4
What are the risks of an investment in the funds? 4
Who manages the funds? 4
What are the fees and expenses of each fund and what
might they be after the Transactions? 6
Where can I find more financial information about the
funds? 7
What are other key features of the funds? 8
Transfer Agency and Custody Services 8
Distribution Services 8
Rule 12b-1 Plans 8
Purchases and Redemptions 9
Dividends and Distributions 9
REASONS FOR THE TRANSACTIONS 10
Information about the Transactions 11
How will the Transactions be carried out? 11
Who will pay the expenses of the Transactions? 11
What are the tax consequences of the Transactions? 11
What should I know about Federal Fund -- Class A
Shares? 12
What are the capitalizations of the funds and what
might the capitalization be after the Transactions? 12
COMPARISON OF INVESTMENT GOALS AND POLICIES 12
Are there any significant differences between the
investment goals of the funds? 12
How do the types of securities the funds buy and the
investment policies of the funds compare? 13
How do the fundamental investment restrictions of the
funds differ? 14
What are the risk factors associated with investments
in the funds? 15
</TABLE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
VOTING INFORMATION 17
How many votes are necessary to approve each Agreement
and Plan? 17
How do I ensure my vote is accurately recorded? 17
Can I revoke my proxy? 17
What other matters will be voted upon at the Meeting? 17
Who is entitled to vote? 17
What other solicitations will be made? 17
Are there dissenters' rights? 18
INFORMATION ABOUT THE FEDERAL FUND 18
INFORMATION ABOUT THE MUNICIPAL FUNDS 18
PRINCIPAL HOLDERS OF SHARES 19
GLOSSARY OF USEFUL TERMS AND DEFINITIONS 20
EXHIBITS TO JOINT PROSPECTUS AND PROXY STATEMENT 21
Exhibit A - Agreement and Plan of Reorganization
between Franklin Federal Tax-Free Income Fund and
Municipal Securities Trust on behalf of Franklin
Arkansas Municipal Bond Fund A-1
Exhibit B - Agreement and Plan of Reorganization
between Franklin Federal Tax-Free Income Fund and
Municipal Securities Trust on behalf of Franklin
Hawaii Municipal Bond Fund B-1
Exhibit C - Agreement and Plan of Reorganization
between Franklin Federal Tax-Free Income Fund and
Municipal Securities Trust on behalf of Franklin
Washington Municipal Bond Fund C-1
Exhibit D - Prospectus of Franklin Federal Tax-Free
Income Fund dated September 1, 1998, as amended
January 1, 1999
Exhibit E -- Annual Report to Shareholders of Franklin
Federal Tax-Free Income Fund dated April 30, 1998
</TABLE>
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JOINT PROSPECTUS AND PROXY STATEMENT
DATED APRIL 22, 1999
ACQUISITION OF THE ASSETS OF
FRANKLIN ARKANSAS MUNICIPAL BOND FUND
FRANKLIN HAWAII MUNICIPAL BOND FUND AND
FRANKLIN WASHINGTON MUNICIPAL BOND FUND
(EACH IS A SERIES OF FRANKLIN MUNICIPAL SECURITIES TRUST)
BY AND IN EXCHANGE FOR SHARES OF
FRANKLIN FEDERAL TAX-FREE INCOME FUND
This Joint Prospectus/Proxy Statement solicits proxies to be voted at a
Special Joint Shareholders' Meeting (the "Meeting") of the Franklin Arkansas
Municipal Bond Fund (the "Arkansas Fund"), the Franklin Hawaii Municipal Bond
Fund (the "Hawaii Fund") and the Franklin Washington Municipal Bond Fund (the
"Washington Fund")(each, a "Municipal Fund"), each of which is a series of
Franklin Municipal Securities Trust (the "Trust"), to approve or disapprove a
separate Agreement and Plan of Reorganization ("Agreement and Plan") for each
Municipal Fund. If shareholders of a Municipal Fund vote to approve the
Agreement and Plan, the net assets of that Municipal Fund will be acquired by
Franklin Federal Tax-Free Income Fund (the "Federal Fund") in exchange for
shares of Franklin Federal Tax-Free Income Fund -- Class A ("Federal
Fund -- Class A Shares"). The Meeting will be held at the principal offices of
the Trust, which are located at 777 Mariners Island Boulevard, San Mateo, CA
94404, on June 23, 1999 at 1:30 p.m. Pacific time. The Board of Trustees of the
Trust, on behalf of each Municipal Fund, is soliciting these proxies. This Joint
Prospectus/Proxy Statement will first be sent to shareholders on or about May 7,
1999.
If the shareholders of your Municipal Fund vote to approve the Agreement
and Plan, you will receive Federal Fund -- Class A Shares equal in value to your
investment in the Municipal Fund. Your Municipal Fund will then be liquidated.
The Federal Fund's investment goal is to provide investors with as high a
level of interest income exempt from federal income taxes as is consistent with
prudent investing, while seeking preservation of shareholders' capital. The
investment goal of each Municipal Fund is substantially similar to the Federal
Fund's goal, except that the Municipal Funds seek to maximize income that is
also exempt from the personal income taxes, if any, for resident shareholders of
the particular fund's state. There are two principal differences between the
funds. One difference is the type of securities in which each fund invests.
Federal Fund normally invests at least 80% of its total assets in municipal
securities that pay interest free from federal income taxes, including the
federal alternative minimum tax. Each Municipal Fund may invest up to 100% of
its assets in securities subject to the federal alternative minimum tax. Second,
Federal Fund, unlike the Municipal Funds, is a diversified fund. Diversified
funds can not invest as much of their assets as non-diversified funds can in the
securities of any single issuer.
This Joint Prospectus/Proxy Statement gives the information about the
proposed reorganization and Federal Fund -- Class A Shares that you should know
before investing. You should retain it for future reference. Additional
information about the Federal Fund and the proposed reorganization can be found
in the following documents.
- The Prospectus of the Federal Fund dated September 1, 1998, as amended
January 1, 1999 (the "Federal Fund Prospectus") is attached to and
considered a part of this Prospectus/Proxy Statement.
- The Annual Report to Shareholders of the Federal Fund dated April 30,
1998 contains financial and performance information for the Federal Fund
and is attached to and considered a part of this Joint Prospectus/Proxy
Statement.
- A Statement of Additional Information dated April 22, 1999 relating to
this Joint Prospectus/Proxy Statement has been filed with the SEC and is
incorporated by reference into this Joint Prospectus/ Proxy Statement.
The Joint Prospectus of the Municipal Funds dated October 1, 1998, as
supplemented January 1, 1999 and January 12, 1999 (the "Municipal Funds
Prospectus") and the Municipal Funds' Annual Report to Shareholders dated May
31, 1998 are on file with the SEC (File nos. 33-44132 and 811-06481) and are
incorporated by reference herein. You may request a free copy of the SAI
relating to this Prospectus/ Proxy Statement or any of the documents referred to
above without charge by calling 1-800/DIAL BEN(R), or by writing to the Federal
Fund or the Trust at 777 Mariners Island Boulevard, P.O. Box 7777, San Mateo, CA
94403-7777.
THE SEC HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE
ADEQUACY OF THIS JOINT PROSPECTUS/PROXY STATEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER U.S. GOVERNMENT
AGENCY. MUTUAL FUND SHARES INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS
OF PRINCIPAL.
2
SUMMARY
This is only a summary of certain information contained in this Joint
Prospectus/Proxy Statement. You should read the more complete information in the
rest of this Joint Prospectus/Proxy Statement, including the Agreements and
Plans (attached as Exhibits A, B and C), the Federal Fund Prospectus (attached
as Exhibit D), and the Federal Fund Annual Report (attached as Exhibit E).
ON WHAT PROPOSAL AM I BEING ASKED TO VOTE?
The Board of Trustees of the Trust has approved an Agreement and Plan for
each of the Municipal Funds and recommends that shareholders of each Municipal
Fund vote to approve that Agreement and Plan. For each Municipal Fund, if the
shareholders vote to approve the Agreement and Plan, that fund's net assets will
be transferred to the Federal Fund in exchange for an equal value of Federal
Fund -- Class A Shares. These Federal Fund -- Class A Shares will then be
distributed to that Municipal Fund's shareholders and that fund will be
liquidated. (This proposed transaction for each Municipal Fund is referred to in
this Joint Prospectus/Proxy Statement individually as the "Transaction" and
collectively as the "Transactions.")
This means that your shares of a Municipal Fund will be exchanged for an
equal value of Federal Fund -- Class A Shares. As a result, you will cease to be
a shareholder of your Municipal Fund and will become a shareholder of the
Federal Fund. This exchange will occur on the closing date of each Transaction,
which is the specific date on which the Transaction takes place.
Like each Municipal Fund, the Federal Fund is a mutual fund in the Franklin
Templeton Group of Funds that is managed by Advisers. It has investment goals
and policies that are similar, but not identical, to those of each Municipal
Fund.
For the reasons set forth below under "Reasons for the Transactions," the
Board of Trustees of the Trust has concluded that the Transactions are in the
best interests of the shareholders of each Municipal Fund. The Board of Trustees
of the Trust and the Board of Directors of Federal Fund also concluded that no
dilution in value would result to the shareholders of any Municipal Fund or to
the shareholders of the Federal Fund, respectively, as a result of the
Transactions.
THE BOARD OF TRUSTEES RECOMMENDS THAT YOU VOTE
TO APPROVE THE AGREEMENT AND PLAN.
HOW WILL THE SHAREHOLDER VOTING BE HANDLED?
Shareholders of each of the three Municipal Funds will vote separately to
determine whether their fund will be reorganized into the Federal Fund.
Shareholders who own shares at the close of business on April 19, 1999 will be
entitled to vote at the Meeting, and will be entitled to one vote for each full
share and a fractional vote for each fractional share that they hold. To approve
the reorganization of any one of the Municipal Funds into the Federal Fund, a
majority of the outstanding shares of that fund must be voted in favor of the
Agreement and Plan.
Please vote by proxy as soon as you receive this Joint Prospectus/Proxy
Statement. You may place your vote by completing and signing the enclosed proxy
card(s). If you return your signed proxy card, your votes will be officially
cast at the Meeting by the persons appointed as proxies.
You can revoke your proxy or change your voting instructions at any time
until the vote is taken at the Meeting. For more details about shareholder
voting, see the "Voting Information" section of this Joint Prospectus/Proxy
Statement.
WHAT ARE THE GENERAL TAX CONSEQUENCES OF THE TRANSACTIONS?
It is expected that shareholders of the Municipal Funds will not recognize
any gain or loss for federal income tax purposes as a result of the exchange of
their shares for Federal Fund -- Class A Shares. You
3
should, however, consult your tax advisor regarding the effect, if any, of the
Transaction in light of your individual circumstances. You also should consult
your tax advisor about state and local tax consequences of the Transaction, if
any, because this discussion only relates to the federal income tax
consequences. For more information about the tax consequences of the
Transactions, see "Information About the Transactions -- What are the tax
consequences of the Transactions?"
COMPARISONS OF SOME IMPORTANT FEATURES
HOW DO THE INVESTMENT GOALS AND POLICIES OF THE FUNDS COMPARE?
The Federal Fund and the Municipal Funds share similar investment goals.
Each fund seeks to provide its investors with as high a level of income exempt
from federal income taxes as is consistent with prudent investing, while seeking
preservation of shareholders' capital. The Municipal Funds, however, also seek
to have that income be exempt from personal income taxes, if any, for resident
shareholders of the fund's state. All of the funds seek to achieve their goals
by trying to invest all of their assets in tax-free municipal securities.
Therefore, each fund normally invests at least 80% of its assets in municipal
securities that pay interest free from federal income taxes including, only in
the case of Federal Fund, the federal alternative minimum tax. In addition,
consistent with their goals, the Municipal Funds normally invest at least 80% of
their net assets in securities that pay interest free from the personal income
taxes, if any, of their individual states.
These differences in the investment policies of the Federal Fund and the
Municipal Funds may result in different tax treatment for the distributions from
the Federal Fund and the Municipal Funds. In addition, each Municipal Fund
normally invests at least 65% of its total assets in municipal securities of the
fund's state. The Federal Fund does not limit its investments to the municipal
securities of any state. Furthermore, unlike the Municipal Funds, which are
non-diversified funds, Federal Fund is a diversified fund. As a diversified
fund, Federal Fund is required to spread its investments among more issuers.
For more information about the investment goals and policies of the funds,
see "Comparison of Investment Goals and Policies."
WHAT ARE THE RISKS OF AN INVESTMENT IN THE FUNDS?
As with most investments, investments in the Federal Fund and the Municipal
Funds involve risks. There can be no guarantee against losses resulting from an
investment in any fund, nor can there be any assurance that any fund will
achieve its investment goal. The risks associated with an investment in the
funds are substantially similar and include interest rate, income, credit,
market and call risks. In general, however, an investment in the Federal Fund
may involve relatively less risk than a similar investment in any of the
Municipal Funds because the Federal Fund does not concentrate its investments in
the municipal securities of any state. The fact that Federal Fund is a
diversified fund may also reduce the relative risks associated with investments
in the funds because Federal Fund's investments may not be as focused as those
of the Municipal Funds on single issuers.
For more information about the risks of the funds, see "What are the risk
factors associated with investments in the funds?" under the heading "Comparison
of Investment Goals and Policies."
WHO MANAGES THE FUNDS?
The management of the business and affairs of the funds is the
responsibility of the Board of Directors (in the case of the Federal Fund) or
Board of Trustees (in the case of the Municipal Funds). Each Board elects
officers who are responsible for the day-to-day operations of the funds.
Advisers manages the assets of each of the funds and makes each fund's
investment decisions. Advisers is a wholly owned subsidiary of Resources.
Resources is a publicly owned company engaged in various aspects of the
financial services industry through its subsidiaries. Together, Advisers and its
affiliates serve as investment manager or administrator to 54 registered
investment companies, with
4
approximately 163 U.S.-based funds or series. They have over $216 billion in
combined assets, including $51 billion in the municipal securities market, under
management for approximately 7 million U.S.-based mutual fund shareholder and
other accounts. The principal shareholders of Resources are Charles B. Johnson
and Rupert H. Johnson, Jr.
The team responsible for the day-to-day management of the Federal Fund's
portfolio is:
Thomas Kenny, Executive Vice President of Advisers. Mr. Kenny has been an
analyst or portfolio manager of the Federal Fund since 1987, and of each of the
Municipal Funds since their inception. He is the Director of Franklin's
Municipal Bond Department. He holds a Master of Science degree in Finance from
Golden Gate University and a Bachelor of Arts degree in Business and Economics
from the University of California at Santa Barbara. Mr. Kenny joined the
Franklin Templeton Group in 1986.
Sheila Amoroso, Senior Vice President of Advisers. Ms. Amoroso has been an
analyst or portfolio manager of the Federal Fund since 1987 and of the Hawaii
and Washington Funds since their inception. She holds a Bachelor of Science
degree from San Francisco State University. She joined the Franklin Templeton
Group in 1986.
Ben Barber, Vice President of Advisers. Mr. Barber has been an analyst or
portfolio manager of the Federal Fund since 1993 and of the Arkansas Fund since
its inception. He holds a Bachelor of Arts degree in International Relations and
Political Science from the University of California at Santa Barbara. Mr. Barber
joined the Franklin Templeton Group in 1991.
As indicated, each of these team members currently manages one or more of
the Municipal Funds. Stella Wong, Vice President of Advisers and a member of the
management team of the Hawaii and Washington Funds and John Pomeroy, Vice
President of Advisers and a member of the management team for the Arkansas Fund,
are not members of the management team for the Federal Fund.
Each fund has a management agreement with Advisers under which Advisers
receives a management fee equal to an annual rate of 0.625 of 1% of the value of
net assets up to and including $100 million; 0.50 of 1% of the value of net
assets over $100 million up to and including $250 million; and 0.45 of 1% of the
value of net assets in excess of $250 million. The management fee structure for
the Federal Fund has additional reductions for larger amounts of net assets, the
least of which is 0.36 of 1% of the value of net assets in excess of $20
billion. The fee for the Municipal Funds is calculated daily. The fee for the
Federal Fund is computed at the close of business on the last business day of
each month. Because the Federal Fund has three classes of shares, holders of
Federal Fund -- Class A Shares pay a proportionate share of these fees.
5
WHAT ARE THE FEES AND EXPENSES OF EACH FUND AND WHAT MIGHT THEY BE AFTER THE
TRANSACTIONS?
FEE TABLE FOR FEDERAL FUND -- CLASS A SHARES
AND THE MUNICIPAL FUNDS
<TABLE>
<CAPTION>
ACTUAL+
---------------------------------------- FEDERAL FUND
FEDERAL ARKANSAS HAWAII WASHINGTON AFTER TRANSACTION
FUND FUND FUND FUND (PROJECTED)
------- -------- ------ ---------- ------------------
<S> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES*
Maximum Sales Charge (as a percentage
of Offering Price)................... 4.25% 4.25% 4.25% 4.25% 4.25%
Paid at time of purchase(1).......... 4.25% 4.25% 4.25% 4.25% 4.25%
Paid at time of redemption(2)........ None None None None None
Exchange Fee (per transaction)......... $5.00** None None None $5.00**
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees........................ 0.45% 0.63%3 0.63%3 0.63%3 0.45%
Rule 12b-1 Fees(4)..................... 0.07% 0.10% 0.10% 0.10% 0.08%
Other Expenses......................... 0.07% 0.10% 0.08% 0.10% 0.07%
----- ----- ----- ----- -----
Total Fund Operating Expenses.......... 0.59% 0.83%3 0.81%3 0.83%3 0.60%
===== ===== ===== ===== =====
</TABLE>
<TABLE>
<C> <S>
+ Information provided is for Federal Fund -- Class A Shares
for the fiscal year ended April 30, 1998. Information for
the Arkansas, Hawaii and Washington Funds is provided for
the fiscal year ended May 31, 1998.
* If your transaction is processed through your Securities
Dealer, you may be charged a fee by your Securities Dealer
for this service.
** $5.00 fee is for Market Timers. We process all other
exchanges without a fee.
1. There is no front-end sales charge if you invest $1 million
or more.
2. A Contingent Deferred Sales Charge may apply to any purchase
of $1 million or more if you sell the shares within one
year. The charge is 1% of the value of the shares sold or
the Net Asset Value at the time of purchase, whichever is
less. The number in the table shows the charge as a
percentage of Offering Price. While the percentage is
different depending on whether the charge is shown based on
the Net Asset Value or the Offering Price, the dollar amount
you would pay is the same. See "How Do I Sell
Shares? -- Contingent Deferred Sales Charge" in the
prospectuses of the relevant fund for details.
3. For the period shown, Advisers had agreed in advance to
waive or limit its management fees and to assume as its own
certain expenses otherwise payable by the funds. With this
reduction, management fees were 0.22% for the Hawaii Fund
and the Arkansas and Washington Funds paid no management
fees. Total operating expenses were 0.10% for the Arkansas
and Washington Funds, and 0.40% for the Hawaii Fund.
4. These fees may not exceed 0.10% for the Federal and Hawaii
Funds and 0.15% for the Arkansas and Washington Funds. The
combination of front-end sales charges and Rule 12b-1 fees
could cause long-term shareholders to pay more than the
economic equivalent of the maximum front-end sales charges
permitted under the NASD's rules.
</TABLE>
6
EXAMPLE
Assume the annual return for each fund is 5%, operating expenses are as
described above, and you sell your shares after the number of years shown. These
are the projected expenses for each $10,000 that you invest in the fund.
<TABLE>
<CAPTION>
1 YEAR* 3 YEARS 5 YEARS 10 YEARS
------- ------- ------- --------
<S> <C> <C> <C> <C>
Federal Fund............................................ $483 $606 $740 $1,132
Arkansas Fund........................................... $506 $679 $866 $1,407
Hawaii Fund............................................. $504 $673 $856 $1,384
Washington Fund......................................... $506 $679 $866 $1,407
Projected Federal Fund (after proposed Transaction)..... $484 $609 $746 $1,143
</TABLE>
* Assumes a Contingent Deferred Sales Charge will not apply.
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. Each
fund pays its operating expenses. The effects of these expenses are reflected in
the Net Asset Value or dividends and are not directly charged to your account.
WHERE CAN I FIND MORE FINANCIAL INFORMATION ABOUT THE FUNDS?
For the Federal Fund, per share income information for the past five fiscal
years (and the most recent six month semi-annual period) is shown immediately
below under the heading "Financial Highlights." Also, the current Annual Report
to Shareholders of Federal Fund for the fiscal year ended April 30, 1998, which
is attached, includes a discussion of that fund's performance during the fiscal
year ended April 30, 1998.
The Municipal Funds Prospectus, as well as the Annual and Semi-Annual
Reports for the Municipal Funds, contain more financial information about those
funds. These documents are available free of charge upon request (See
"Information About the Municipal Funds").
7
FINANCIAL HIGHLIGHTS
FRANKLIN FEDERAL TAX-FREE INCOME FUND -- CLASS A
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED APRIL 30,
OCTOBER 31, 1998 ------------------------------------------
(UNAUDITED) 1998 1997 1996 1995 1994
---------------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance (for a
share outstanding throughout the
period)
Net asset value, beginning of period... $12.25 $11.90 $11.83 $11.73 $11.81 $12.24
---------------------------------------------------------
Income from investment operations:
Net investment income................ .34 .69 .71 .74 .75 .77
Net realized and unrealized gains
(losses).......................... .17 .35 .07 .10 (.05) (.41)
---------------------------------------------------------
Total from investment operations....... .51 1.04 .78 .84 .70 .36
Less distributions from net investment
income............................... (.34) (.69) (.71) (.74) (.78) (.79)
---------------------------------------------------------
Net asset value, end of period......... $12.42 $12.25 $11.90 $11.83 $11.73 $11.81
---------------------------------------------------------
---------------------------------------------------------
Total return*.......................... 4.19% 8.92% 6.81% 7.33% 6.21% 2.58%
Ratios/supplemental data
Net assets, end of period (millions)... $7,134 $7,023 $6,905 $7,013 $6,887 $6,804
Ratios to average net assets:
Expenses............................. .58%** .59% .58% .57% .59% .52%
Net investment income................ 5.46%** 5.70% 6.00% 6.20% 6.47% 6.27%
Portfolio turnover rate................ 6.54% 14.54% 16.43% 25.10% 19.88% 24.59%
</TABLE>
* Total return does not reflect sales commissions or the Contingent Deferred
Sales Charge, and is not annualized. Before May 1, 1994, dividends from net
investment income were reinvested at the Offering Price.
** Annualized.
WHAT ARE OTHER KEY FEATURES OF THE FUNDS?
Transfer Agency and Custody Services. Investor Services, a wholly owned
subsidiary of Resources, is the shareholder servicing agent and acts as the
transfer agent and dividend-paying agent for the funds.
Bank of New York acts as the custodian of the securities and other assets
of the funds. The main office of the Bank of New York is 90 Washington Street,
New York, NY 10286.
Distribution Services. Pursuant to underwriting agreements with each of
the funds, Distributors acts as principal underwriter in a continuous public
offering of the funds' shares. Distributors pays the expenses of the
distribution of fund shares, including advertising expenses and the costs of
printing sales materials and prospectuses used to offer shares to the public.
Rule 12b-1 Plans. Each fund (and class in the case of the Federal Fund)
has a separate distribution or "Rule 12b-1" plan under which it shall pay or may
reimburse Distributors or others for the expenses of activities that are
primarily intended to sell shares of the fund. These expenses may include, among
others, distribution or service fees paid to Securities Dealers or others who
have executed a servicing agreement with the fund, Distributors or its
affiliates; a prorated portion of Distributors' overhead expenses; and the
expenses of printing prospectuses and reports used for sales purposes, and
preparing and distributing sales literature and advertisements.
Payments by the Federal Fund under its Class A plan may not exceed 0.10%
per year of Class A's average daily net assets, and payments by the Hawaii Fund
under its plan similarly may not exceed 0.10% per year of that fund's average
daily net assets. Payments by the Arkansas and Washington Funds may not exceed
0.15% per year of those funds' average daily net assets, although each fund is
currently only reimbursing up to 0.10%. All distribution expenses over these
amounts will be borne by those who have
8
incurred them. During the first year after certain Class A purchases made
without a sales charge, Securities Dealers may not be eligible to receive the
Rule 12b-1 fees associated with the purchase.
In the case of Federal Fund, which has three classes of shares, the Rule
12b-1 fees charged to Class A are based only on the fees attributable to that
class. For more information, please see "The Fund's Underwriter" in the SAI for
Federal Fund.
Purchases and Redemptions. Each fund has a maximum front-end sales charge
of 4.25% with reduced charges for purchases of $100,000 or more and no front-end
sales charges for purchases of $1,000,000 or more. Each fund generally requires
a minimum initial investment of $1,000 and subsequent investments of at least
$50.
You may sell (redeem) your shares at any time. Shares of each fund also may
be exchanged for shares of other Franklin Templeton Funds, subject to certain
limitations, as provided in the prospectuses of the respective Franklin
Templeton Fund. Because it is technically a sale and a purchase of shares, an
exchange is a taxable transaction.
Shares of each fund may be redeemed at their respective Net Asset Value per
share. However, redemptions of Class A shares of each fund which were purchased
in amounts of $1,000,000 or more generally are subject to a Contingent Deferred
Sales Charge. Federal Fund shares acquired by Municipal Fund shareholders as a
result of this Transaction are subject to a Contingent Deferred Sales Charge to
the same extent that the Municipal Fund shares were subject to a Contingent
Deferred Sales Charge.
Additional information and specific instructions explaining how to buy,
sell, and exchange shares of the funds are outlined in the current prospectus of
each fund under the heading "About Your Account." The accompanying prospectus of
the Federal Fund also lists phone numbers for you to call if you have any
questions about your account under the heading "What If I Have Questions About
My Account?" These phone numbers are the same for all funds.
Dividends and Distributions. The Federal Fund intends to pay a dividend
from its net investment income at least monthly, on or about the 15th day of the
month. The Municipal Funds declare dividends daily from their net investment
income and pay them monthly on or about the 20th day of the month. The amount of
these dividends will vary depending on changes in the funds' net investment
income. No fund pays "interest" nor guarantees any amount of dividends or return
on an investment in its shares.
Capital gains for the funds, if any, may be distributed annually.
Each fund automatically reinvests distributions in additional shares of
that fund unless you select a different option. Specific instructions explaining
how to select a different option are outlined in the current prospectus of each
fund under the heading "What Distributions Might I Receive From the Funds?"
Distributions made by the fund to you from interest income on municipal
securities will be exempt from the regular federal income tax. Distributions
made to you from other income on temporary investments, short-term capital
gains, or ordinary income from the sale of market discount bonds will be taxable
to you as ordinary dividends, whether you receive them in cash or in additional
shares. Distributions made to you from interest on certain private activity
bonds, while still exempt from regular federal income tax, are a preference item
when determining your alternate minimum tax. Distributions designated by the
funds as long-term capital gains are taxable to you as such.
Ordinary dividends and capital gain distributions that you receive from the
funds, and gains arising from redemptions or exchanges of your fund shares, will
generally be subject to state and local income tax (Washington does not impose a
personal income tax). Distributions paid by the funds from the interest earned
on municipal securities of a state, or its political subdivisions, will
generally be exempt from that state's personal income taxes. Because Federal
Fund does not, like the Municipal Funds, focus its investments on the municipal
securities of any state, a greater portion of the distributions paid by Federal
Fund will be subject to state personal income taxes, if any.
9
Each fund notifies its shareholders annually of the amount of
exempt-interest dividends, ordinary dividends, capital gain distributions,
interest income that is a tax preference item under the alternative minimum tax
and non-taxable distributions received from the fund in the prior year.
For more information about the tax implications of investments in the
funds, see the current prospectuses of the funds under the heading "How Taxation
Affects the Funds and Their Shareholders."
REASONS FOR THE TRANSACTIONS
The Board of Trustees of the Trust, on behalf of the Arkansas, Hawaii, and
Washington Funds, has recommended the Transactions for purposes of combining
those funds with a larger fund. Because of the relatively low demand for each of
the Municipal Funds, Advisers recommended to the Board of Trustees of the Trust
that the assets of each of the Municipal Funds be combined with a larger fund
that has similar investment goals and policies. A larger fund should be better
able to diversify its investments and to obtain certain savings in costs for the
Municipal Funds and their shareholders. The Transactions were also recommended
to combine similar funds within the Franklin Templeton Group to eliminate
duplication of expenses and internal competition.
Each Agreement and Plan was presented to the Trust's Board of Trustees at a
meeting of the Board. At the meeting, the Board questioned management about the
potential benefits and costs to shareholders of the Municipal Funds. In deciding
whether to recommend approval of each Transaction to shareholders, the Board of
Trustees considered, among other things: the expense ratios of the Federal Fund
and each Municipal Fund; the comparative investment performance of the Federal
Fund and each Municipal Fund; the compatibility of the investment goals,
policies, restrictions and investments of each of the Municipal Funds with those
of the Federal Fund; the tax consequences of the Transactions; and the
significant experience of Advisers. During the course of its deliberations, the
Board of Trustees also considered that the expenses of each Transaction will be
shared one-quarter by the Federal Fund, one-quarter by the affected Municipal
Fund, and one-half by Advisers.
The Board of Trustees concluded that each Transaction is in the best
interests of the shareholders of the respective Municipal Fund and that no
dilution of value would result to the shareholders of any Municipal Fund from
the Transactions. It then decided to approve each Agreement and Plan and to
recommend that shareholders of the Municipal Funds vote to approve the
Transactions. As required by law, the Board members approving each Agreement and
Plan included a majority of the trustees who are not interested persons of each
Municipal Fund.
The Board of Trustees' conclusion was based on a number of factors,
including that the Transactions would permit shareholders to pursue their
investment goals in a larger fund. A larger fund should have an enhanced ability
to effect portfolio transactions on more favorable terms and should have greater
investment flexibility. A fund with higher aggregate net assets may also be able
to reduce or eliminate certain duplicative costs and expenses. This may result
in lower overall expense ratios through the spreading of fixed costs of fund
operations over a larger asset base. However, variable expenses that are based
on the value of assets or the number of shareholder accounts, such as custody
and transfer agent fees, would be largely unaffected by the Transactions.
The Board of Directors of the Federal Fund also determined that the
Transactions were in the best interests of the Federal Fund and its shareholders
and that no dilution would result to those shareholders.
FOR THE REASONS DISCUSSED ABOVE, THE BOARD OF TRUSTEES OF THE TRUST, ON
BEHALF OF EACH MUNICIPAL FUND, RECOMMENDS THAT YOU VOTE FOR THE AGREEMENT AND
PLAN. If the shareholders of a Municipal Fund do not approve the Agreement and
Plan, the Board of Trustees will consider other possible courses of action for
that Municipal Fund, including dissolution and liquidation.
10
INFORMATION ABOUT THE TRANSACTIONS
This is only a summary of each Agreement and Plan. You should read the
actual Agreements and Plans. They are attached as Exhibits A, B and C.
HOW WILL THE TRANSACTIONS BE CARRIED OUT?
If the shareholders of a Municipal Fund approve the Agreement and Plan, the
Transaction will take place after various conditions are satisfied by the Trust
on behalf of the Municipal Fund, and by the Federal Fund, including the delivery
of certain documents. The Trust and the Federal Fund will agree on the closing
date. If the shareholders of a Municipal Fund do not approve the Agreement and
Plan, the Transaction will not take place for that fund.
If shareholders of a Municipal Fund do approve the Agreement and Plan on
June 23, 1999, shares of that Municipal Fund will no longer be offered for sale,
except for the reinvestment of dividend and capital gain distributions. Until
the close of business on June 23, 1999, you may continue to add to your existing
account subject to your applicable minimum additional investment amount or buy
additional shares through the reinvestment of dividend and capital gain
distributions.
If the shareholders of a Municipal Fund approve the Agreement and Plan,
that fund will deliver to the Federal Fund substantially all of its assets on
the closing date. In exchange, the Trust, on behalf of that Municipal Fund, will
receive Federal Fund -- Class A Shares that have a value equal to the dollar
value of the assets initially delivered to the Federal Fund. These shares will
be distributed pro rata to that Municipal Fund's shareholders of record as of
the close of business on the closing date. The stock transfer books of the
Municipal Fund will be permanently closed as of 1:00 p.m. Pacific time on the
closing date. The Municipal Fund will only accept requests for redemption
received in proper form before 1:00 p.m. on the closing date. Requests received
after that time will be considered requests to redeem shares of the Federal
Fund.
To the extent permitted by law, the Trust and the Federal Fund may agree to
amend the Agreements and Plans without shareholder approval. They may also agree
to terminate and abandon any Transaction at any time before or, to the extent
permitted by law, after the approval of shareholders of a Municipal Fund.
WHO WILL PAY THE EXPENSES OF THE TRANSACTIONS?
The expenses resulting from each Transaction will be shared by the
following parties in the percentages indicated: 25% by the Federal Fund, 25% by
the Municipal Fund, and 50% by Advisers. As described above, Advisers is the
investment manager for the funds involved in the Transactions.
WHAT ARE THE TAX CONSEQUENCES OF THE TRANSACTIONS?
Each Transaction is intended to qualify as a tax-free reorganization for
federal income tax purposes under Section 368(a)(1) of the Internal Revenue Code
of 1986, as amended. Based on certain assumptions and representations received
from the Trust, on behalf of each Municipal Fund, and the Federal Fund, it is
the opinion of Stradley, Ronon, Stevens & Young, LLP, counsel to the funds, that
shareholders of the Municipal Funds will not recognize any gain or loss for
federal income tax purposes as a result of the exchange of their shares of the
Municipal Funds for shares of the Federal Fund and that the Federal Fund will
not recognize any gain or loss upon receipt of the Municipal Funds' assets.
You will continue to be responsible for tracking the purchase cost and
holding period of your shares and should consult your tax advisor regarding the
effect, if any, of the Transaction in light of your individual circumstances.
You should also consult your tax advisor as to state and local tax consequences,
if any, of the Transaction because this discussion only relates to the federal
income tax consequences.
11
WHAT SHOULD I KNOW ABOUT FEDERAL FUND -- CLASS A SHARES?
Federal Fund -- Class A Shares will be distributed to shareholders of each
Municipal Fund in connection with the Transaction. Each share will be fully paid
and nonassessable when issued with no personal liability attaching to the
ownership thereof. Each Federal Fund -- Class A Share will have no preemptive or
conversion rights, and will be transferable upon the books of the Federal Fund.
The shares of the Federal Fund will be recorded electronically in each
shareholder's account. The Federal Fund will then send a confirmation to each
shareholder. As described in its prospectus, the Federal Fund does not issue
share certificates unless requested. Former shareholders of the Municipal Funds
whose shares are represented by outstanding share certificates will not be
allowed to redeem shares of the Federal Fund until the certificates have been
returned.
The Federal Fund -- Class A Shares have cumulative voting rights. This
gives each shareholder a number of votes equal to the number of shares owned
times the number of members of the Board of Directors to be elected.
Shareholders may cast all of their votes for one candidate or distribute their
votes between two or more candidates.
The Municipal Funds are series of the Trust, a Delaware business trust. The
Federal Fund is a California corporation. Like the Municipal Funds, the Federal
Fund does not routinely hold annual shareholders' meetings. The Federal Fund may
hold special meetings for matters requiring shareholder approval. A meeting of
the Federal Fund's shareholders may also be called by the Board of Directors in
its discretion or by shareholders who hold at least 10% of the fund's
outstanding shares.
WHAT ARE THE CAPITALIZATIONS OF THE FUNDS AND WHAT MIGHT THE CAPITALIZATION BE
AFTER THE TRANSACTIONS?
The following table sets forth, as of February 28, 1999, the separate
capitalizations of the Federal, Arkansas, Hawaii and Washington Funds, and the
projected capitalization of the Federal Fund as adjusted to give effect to the
proposed Transactions. The capitalization of the Federal Fund is likely to be
different when the Transactions are consummated.
<TABLE>
<CAPTION>
WASHINGTON FEDERAL FUND
FEDERAL FUND ARKANSAS FUND HAWAII FUND FUND AFTER TRANSACTION
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (PROJECTED)
------------ ------------- ----------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
Net assets (millions)........ $7,382 $43 $47 $12 $7,484
Total shares outstanding..... 597,482,020 3,941,311 4,204,647 1,138,468 605,768,547
Net Asset Value per share.... $12.36 $11.00 $11.19 $10.56 $12.36
</TABLE>
COMPARISON OF INVESTMENT GOALS AND POLICIES
This section describes key investment policies of the Federal Fund and the
Municipal Funds, and certain noteworthy differences between the investment goals
and policies of the funds. For a complete description of the Federal Fund's
investment policies and risks, you should read the Federal Fund Prospectus,
which is attached to this Joint Prospectus/Proxy Statement as Exhibit D.
ARE THERE ANY SIGNIFICANT DIFFERENCES BETWEEN THE INVESTMENT GOALS OF THE FUNDS?
The Municipal Funds and Federal Fund all have the investment goal of
providing investors with as high a level of income exempt from federal income
taxes as is consistent with prudent investing, while seeking preservation of
shareholders' capital. The Municipal Funds additionally seek to have that income
be exempt from personal income taxes, if any, for resident shareholders of the
fund's state. These investment goals are fundamental. Each fund seeks to achieve
its goal by trying to invest all of its assets in tax-free municipal securities,
including bonds, notes and commercial paper.
Policies or restrictions that are deemed fundamental may not be changed
without the approval of the lesser of (i) a majority of the outstanding shares
of the fund, or (ii) 67% or more of the shares
12
represented at a shareholders' meeting at which the holders of more than 50% of
the outstanding shares are represented ("Majority Vote").
One significant difference between the funds is that each of the Municipal
Funds normally invests at least 80% of its net assets in securities that pay
interest free from its state's personal income taxes, if any, as well as regular
federal income taxes, and normally invests at least 65% of its total assets in
municipal securities of its state. Distributions from the Federal Fund may
therefore be subject to higher state personal income taxes than distributions
from the Municipal Funds. In addition, the Municipal Funds are all
non-diversified funds. The Federal Fund is a diversified fund. And, unlike the
Federal Fund, which may have 20% or less of its total assets in securities that
pay interest subject to the federal alternative minimum tax, the Municipal Funds
may each invest up to 100% of their assets in securities that pay interest
subject to the federal alternative minimum tax.
HOW DO THE TYPES OF SECURITIES THE FUNDS BUY AND INVESTMENT POLICIES OF THE
FUNDS COMPARE?
Municipal Securities.
All of the funds generally seek to invest their assets in securities that
pay interest free from income taxes. As fundamental policies, they normally
invest at least 80% of their assets in securities that pay interest free from
federal income taxes and, in the case of the Federal Fund, federal alternative
minimum tax. In addition, in the case of the Municipal Funds, each fund normally
invests at least 80% of its net assets in securities that pay interest free from
the personal income taxes of the fund's state. Thus, it is possible, although
not anticipated, that each fund may have up to 20% of its assets in securities
that pay taxable interest. The Municipal Funds also may have up to 100% of their
assets in municipal securities that pay interest subject to the federal
alternative minimum tax, while only up to 20% of the Federal Fund's assets may
be invested in securities subject to that tax. In addition, at least 65% of each
Municipal Fund's total assets are normally invested in municipal securities of
its state.
Municipal securities are issued by state and local governments, their
agencies and authorities, as well as by the District of Columbia and U.S.
territories and possessions, to borrow money for various public or private
projects. The issuer pays a fixed or variable rate of interest, and must repay
the amount borrowed (the "principal") at maturity. These types of securities
generally pay interest free from federal income tax and, if issued by the fund's
state or that state's counties, municipalities, authorities, agencies, or other
subdivisions, or by U.S. territories, state personal income taxes, if any, for
residents of the fund's state.
Quality. All of the funds only invest in investment grade municipal
securities, which include those in one of the four highest rating levels as
rated by an independent rating agency, or unrated securities that Advisers
believes are comparable.
Maturity. None of the funds have a restriction on the maturity -- the time
when the issuer must repay the amount borrowed -- of the securities they may
buy. They also do not have restrictions on their average portfolio maturity.
Variable and floating rate securities. Each fund may invest in investment
grade variable and floating rate securities. These are securities that have
interest rates that change either at specific intervals or whenever a benchmark
rate changes. This helps to protect against a decline in the security's market
price, but also lowers a fund's income when interest rates fall. If, however,
interest rates increase, a fund's income from its variable rate investments will
also increase.
Municipal lease obligations. Each of the funds may invest in municipal
lease obligations without limit if the obligations meet the fund's quality and
maturity standards. Municipal lease obligations generally finance the purchase
of public property. The property is leased to the state or a local government,
and the lease payments are used to pay the interest on the obligations.
Municipal lease obligations differ from other municipal securities because the
lessee's governing body must set aside the money to make the lease payments each
year. If the money is not set aside, the issuer or the lessee can end the lease
without penalty. If the lease is cancelled, investors who own the municipal
lease obligations may not be paid.
13
Temporary Investments.
When Advisers believes unusual or adverse economic, market or other
conditions exist, it may invest each fund's portfolio assets in a temporary
defensive manner. Under these circumstances, a fund may invest all of its assets
in securities that pay taxable interest, including (i) high quality commercial
paper; or (ii) securities issued or guaranteed by the full faith and credit of
the U.S. government. In addition, the Municipal Funds may invest in obligations
of U.S. banks with assets of $1 billion or more, and municipal securities issued
by a state or local government other than the fund's state or by a U.S.
territory such as Guam, Puerto Rico or the Mariana Islands.
When-Issued and Delayed Delivery Transactions.
All of the funds may engage in when-issued and delayed delivery
transactions -- those where payment and delivery for the security take place at
a future date. Since the market price of the security may fluctuate during the
time before payment and delivery, the funds assume the risk that the value of
the security at delivery may be more or less than the purchase price. When a
fund is the buyer in the transaction, it will maintain cash or liquid
securities, with an aggregate value equal to the amount of its purchase
commitments, in a segregated account with its custodian bank until payment is
made.
Diversification.
Unlike the Municipal Funds, Federal Fund is a diversified fund under the
1940 Act. As a diversified fund, the Federal Fund will not buy a security if,
with respect to 75% of its total assets, more than 5% would be in the securities
of any single issuer (this limitation does not apply to investments issued or
guaranteed by the U.S. government or its instrumentalities) or if it would
result in the fund owning more than 10% of the voting securities of a single
issuer. The remaining 25% of its total assets may be invested in the securities
of a single issuer. Although the Municipal Funds may invest a greater portion of
their assets in the securities of a single issuer than a diversified fund, they
each intend to meet the diversification requirements of the Internal Revenue
Code. Those diversification requirements are similar to the diversification
requirements of the 1940 Act except that the limitations only apply to 50% (not
75%) of total assets. As to the remaining 50% of fund assets, a fund may buy as
few as two separate securities each representing 25% of the value of the fund.
Each fund may invest more than 25% of its assets in municipal securities that
finance similar types of projects, such as hospitals, housing, industrial
development, transportation or pollution control. Economic, business, political
or other changes can affect all securities of a similar type. Non-diversified
funds, such as the Municipal Funds, may be more sensitive to these changes.
HOW DO THE FUNDAMENTAL INVESTMENT RESTRICTIONS OF THE FUNDS DIFFER?
Except as described below, the funds have adopted similar restrictions as
fundamental policies, which may not be changed without the approval of a
Majority Vote.
Although all of the funds are prohibited from buying securities on "margin"
or selling securities "short," the Municipal Funds may use such short-term
credits as are necessary for the clearance of transactions.
All of the funds also are generally prohibited from making loans. This
prohibition does not prohibit any of the funds from purchasing debt securities
that, in the case of all funds, are publicly distributed or, in the case of the
Municipal Funds, if such debt securities are customarily purchased by
institutional investors. Furthermore, this restriction does not prohibit any of
the funds from entering into repurchase agreements to the extent that they are
deemed to be loans.
The funds also are each prohibited from purchasing securities from or
selling securities to officers or directors/trustees, including any firm of
which any officer or director/trustee is a member, as principal. Federal Fund
may, however, deal with those persons or firms as brokers and pay a customary
brokerage commission.
14
None of the funds may invest in commodities and commodity contracts, puts,
calls, straddles, spreads or any combination thereof, or interests in oil, gas,
or other mineral exploration or development programs. This restriction does not,
however, prohibit any of the Municipal Funds from purchasing, holding and
disposing of "obligations with puts attached" in accordance with its investment
policies. The Federal Fund may write covered call options listed for trading on
a national securities exchange and purchase call options to the extent necessary
to cancel call options previously written. It should be noted, however, that
there are no option transactions currently available to the Federal Fund because
there are presently no options listed for trading on a national securities
exchange covering the types of securities that are appropriate for investment by
the Federal Fund. In addition, the Federal Fund's ability to write call options
would be further limited under California law to 25% of its net assets.
None of the funds is generally permitted to purchase securities of other
investment companies. All of the funds may do so, however, in connection with a
merger, consolidation, acquisition or reorganization. Each Municipal Fund also
may invest in shares of one or more money market funds managed by Advisers or
its affiliates to the extent permitted by exemptions which may be granted under
the 1940 Act. The Federal Fund may only purchase securities of another
investment company using uninvested daily cash balances and then only to invest
in shares of the Franklin Tax-Exempt Money Fund and other tax-exempt money
market funds in the Franklin Templeton Group of Funds provided (i) its purchases
and redemptions of such money market fund shares may not be subject to any
purchase or redemption fees, (ii) its investments may not be subject to
duplication of management fees, nor to any charge related to the expense of
distributing the fund's shares (as determined under Rule 12b-1, as amended under
the federal securities laws), and (iii) provided aggregate investments by the
fund in any such money market fund do not exceed (A) the greater of (i) 5% of
the funds total net assets or (ii) $2.5 million, or (B) more than 3% of the
outstanding shares of any such money market fund.
Also, the Federal Fund may not purchase the securities of any issuer that
would result in the fund owning more than 10% of the voting securities of such
issuer.
Finally, the Arkansas Fund's investment restrictions are designed
specifically to provide the flexibility for that fund to convert into a
master-feeder structure if that structure were considered desirable.
WHAT ARE THE RISK FACTORS ASSOCIATED WITH INVESTMENTS IN THE FUNDS?
Like all investments, an investment in the funds involves risk. There is no
assurance that the funds will meet their investment goals. The achievement of
the funds' goals depends upon market conditions, generally, and on Advisers'
analytical and portfolio management skills. The risks of the funds are basically
the same as those of other investments in municipal securities of similar
quality, although an investment in the Municipal Funds may involve more risk
than an investment in a fund that does not focus on securities of a single
state.
Interest Rate, Income, Credit, Market and Call Risk.
Investments in each fund are subject to interest rate, income, credit,
market and call risks.
Interest rate risk is the risk that changes in interest rates can reduce
the value of a security. When interest rates rise, municipal security prices
fall. The opposite is also true: municipal security prices go up when interest
rates fall. Interest rates have increased and decreased in the past. These
changes are unpredictable.
Income risk is the risk that a fund's income will decrease due to falling
interest rates. Since a fund can only distribute what it earns, a fund's
distributions to its shareholders may decline when interest rates fall.
Credit risk is the possibility that an issuer of a security will be unable
to make interest payments or to pay the principal of a security upon maturity.
Changes in an issuer's financial strength or in a security's credit rating may
affect its value. Even securities supported by credit enhancements have the
credit risk of the entity providing the credit support. Credit support provided
by a foreign entity may be less certain
15
because of the possibility of adverse foreign economic, political or legal
developments that may affect the ability of that foreign entity to meet its
obligations. A change in the credit risk associated with a security may cause a
corresponding change in the security's price, and, therefore, the fund's share
price.
Market risk is the risk that a security's value will be reduced by market
activity or the results of supply and demand. This is a basic risk associated
with all securities. When there are more sellers than buyers, prices tend to
fall. Likewise, when there are more buyers than sellers, prices tend to
increase. A security's maturity length also affects its price. In general,
securities with longer maturities are more sensitive to price changes.
Call risk is the likelihood that a security will be prepaid (or "called")
before maturity. An issuer is more likely to call its bonds when interest rates
are falling, because the issuer can issue new bonds with lower interest
payments. If a bond is called, a fund may have to replace it with a
lower-yielding security. At any time, the fund may have a large amount of its
assets invested in municipal securities subject to call risk, including
escrow-secured or defeased bonds. A call of some or all of these securities may
lower the fund's income and its distributions to shareholders.
State Risks.
Since each of the Municipal Funds invest heavily in municipal securities of
its state, events in that state are likely to affect the fund's investments and
its performance. These events may include economic or political policy changes,
tax base erosion, state constitutional limits on tax increases, budget deficits
and other financial difficulties, and changes in the ratings assigned to
municipal issuers. A negative change in any one of these or other areas could
affect the ability of a state's municipal issuers to meet their obligations. It
is important to remember that economic, budget and other conditions within a
state are unpredictable and can change at any time.
For more specific information on the economy and financial strength of
Arkansas, Hawaii, and Washington, please see, "What Are the Risks of Investing
in the Funds?" in the current SAI for the Municipal Funds.
To the extent the Federal Fund is invested in a state, events in that state
may affect its investments and its performance.
U.S. Territories Risks.
Each fund may invest a portion of its assets in municipal securities issued
by U.S. territories such as Guam, Puerto Rico or the Mariana Islands. As with
state municipal securities, events in any of these territories where a fund
invests may affect the fund's investments and its performance.
Diversification.
A potential difference in the risks associated with investments in each of
the funds arises from the fact that the Municipal Funds, unlike the Federal
Fund, are non-diversified. To the extent a fund's investments are not
diversified, the fund may be more susceptible than a fully diversified fund to
adverse economic, political, business, or regulatory developments affecting a
single issuer or industry. This, in turn, can affect the fund's share price.
Concentration.
Although none of the funds can invest more than 25% of their assets in
securities of any industry, the funds may invest more than 25% of their assets
in municipal securities that finance similar types of projects, such as
hospitals, housing, industrial development, transportation or pollution control.
A change that affects one project would likely affect all similar projects.
16
VOTING INFORMATION
HOW MANY VOTES ARE NECESSARY TO APPROVE EACH AGREEMENT AND PLAN?
The affirmative vote of a majority of the holders of all of the outstanding
shares of each Municipal Fund is necessary to approve the Agreement and Plan for
that fund. Each shareholder will be entitled to one vote for each full share,
and a fractional vote for each fractional share, of a Municipal Fund held at the
close of business on April 19, 1999 (the "Record Date"). If sufficient votes to
approve the Agreement and Plan for any Municipal Fund are not received by the
date of the Meeting, the Meeting may be adjourned with respect to that fund to
permit further solicitations of proxies. The holders of a majority of shares of
a Municipal Fund entitled to vote at the Meeting and present in person or by
proxy (whether or not sufficient to constitute quorum) may adjourn the Meeting
with respect to that fund.
Abstentions and broker non-votes will be included for purposes of
determining whether a quorum is present at the Meeting, but will be treated as
votes not cast and, therefore, will not be counted for purposes of determining
whether the matters to be voted upon at the Meeting have been approved, and will
have the same effect as a vote against the Agreement and Plan.
HOW DO I ENSURE MY VOTE IS ACCURATELY RECORDED?
You can vote in any one of three ways:
- By mail, with the enclosed proxy card(s).
- In person at the Meeting.
- Through Shareholder Communications Corporation ("SCC"), a proxy
solicitor, by calling 1-800/645-3559.
A proxy card is, in essence, a ballot. IF YOU SIMPLY SIGN AND DATE THE
PROXY BUT GIVE NO VOTING INSTRUCTIONS, YOUR SHARES WILL BE VOTED IN FAVOR OF THE
AGREEMENT AND PLAN AND IN ACCORDANCE WITH THE VIEWS OF MANAGEMENT UPON ANY
UNEXPECTED MATTERS THAT COME BEFORE THE MEETING OR ADJOURNMENT OF THE MEETING.
CAN I REVOKE MY PROXY?
You may revoke your proxy at any time before it is voted by sending a
written notice to the Trust expressly revoking your proxy, by signing and
forwarding to the Trust a later-dated proxy, or by attending the Meeting and
voting in person.
WHAT OTHER MATTERS WILL BE VOTED UPON AT THE MEETING?
The Board of Trustees of the Trust does not intend to bring any matters
before the Meeting other than described in this Prospectus/Proxy Statement. It
is not aware of any other matters to be brought before the Meeting by others. If
any other matter legally comes before the Meeting, proxies for which discretion
has been granted will be voted in accordance with the views of management.
WHO IS ENTITLED TO VOTE?
Shareholders of record of each Municipal Fund on the Record Date will be
entitled to vote at the Meeting. On the Record Date, there were 3,894,178.272
outstanding shares of the Arkansas Fund, 3,903,579.814 outstanding shares of the
Hawaii Fund, and 1,123,049.623 outstanding shares of the Washington Fund.
WHAT OTHER SOLICITATIONS WILL BE MADE?
Each Municipal Fund will request broker-dealer firms, custodians, nominees
and fiduciaries to forward proxy material to the beneficial owners of the shares
of record. The Municipal Funds may reimburse
17
broker-dealer firms, custodians, nominees and fiduciaries for their reasonable
expenses incurred in connection with such proxy solicitation. In addition to
solicitations by mail, officers and employees of the Trust, without extra pay,
may conduct additional solicitations by telephone, personal interviews and other
means. The Trust, on behalf of the Municipal Funds, has engaged SCC to solicit
proxies from brokers, banks, other institutional holders and individual
shareholders for an approximate fee, including out-of-pocket expenses, of $2,500
and $2,000 for the Arkansas Fund and the Washington Fund, respectively, and
ranging between $4,425 and $6,415 for the Hawaii Fund. The costs of any such
additional solicitation and of any adjourned session will be shared one-quarter
by the affected Municipal Fund, one-quarter by the Federal Fund, and one-half by
Advisers.
ARE THERE DISSENTERS' RIGHTS?
Shareholders of the Municipal Funds will not be entitled to any
"dissenters' rights" since each of the proposed Transactions involve two
open-end investment companies registered under the 1940 Act (commonly called
mutual funds). Although no dissenters' rights may be available, you have the
right to redeem your shares at Net Asset Value until the closing date. After the
closing date, you may redeem your Federal Fund shares or exchange them for
shares of certain other funds in the Franklin Templeton Funds, subject to the
terms in the prospectus of the respective fund.
INFORMATION ABOUT THE FEDERAL FUND
Information about the Federal Fund is included in the Federal Fund
Prospectus, which is attached to and considered a part of this Joint
Prospectus/Proxy Statement. Additional information about the Federal Fund is
included in its SAI dated September 1, 1998, as supplemented April 1, 1999,
which has been filed with the SEC and is incorporated into the SAI relating to
this Joint Prospectus/Proxy Statement. You may request a free copy of the
Federal Fund SAI and other information by calling 1-800/DIAL BEN(R) or by
writing to the Federal Fund at 777 Mariners Island Blvd., P.O. Box 7777, San
Mateo, CA 94403-7777. The Federal Fund's Annual Report to Shareholders for the
fiscal year ended April 30, 1998 is attached to and considered a part of this
Joint Prospectus/Proxy Statement.
The Federal Fund files proxy materials, reports and other information with
the SEC in accordance with the informational requirements of the Securities
Exchange Act of 1934 and the 1940 Act. These materials can be inspected and
copied at the SEC's Public Reference Room at 450 Fifth Street NW, Washington, DC
20549, and at the Regional Offices of the SEC located in New York City at 7
World Trade Center, Suite 1300, New York, New York 10048 and in Chicago at 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Also, copies of such
material can be obtained from the SEC's Public Reference Section, Washington, DC
20549-6009, at prescribed rates, or from the SEC's internet address at
http://www.sec.gov.
INFORMATION ABOUT THE MUNICIPAL FUNDS
Information about each Municipal Fund is included in the Municipal Fund
Prospectus and the Municipal Funds' SAI dated October 1, 1998, as supplemented
April 1, 1999, and in the Municipal Funds' Annual Report to Shareholders dated
May 31, 1998. These documents have been filed with the SEC and the Municipal
Fund Prospectus and Annual Report are incorporated by reference herein. You may
request free copies of these documents and other information by calling
1-800/DIAL BEN(R) or by writing to 777 Mariners Island Blvd., P.O. Box 7777, San
Mateo, CA 94403-7777. Reports and other information filed by the Municipal Funds
can be inspected and copied at the SEC's Public Reference Room at 450 Fifth
Street NW, Washington, DC 20549, and at the Regional Offices of the SEC located
in New York City at 7 World Trade Center, Suite 1300, New York, New York 10048
and in Chicago at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Also, copies of such material can be obtained from the SEC's Public Reference
Section, Washington, DC 20549-6009, at prescribed rates, or from the SEC's
internet address at http://www.sec.gov.
18
PRINCIPAL HOLDERS OF SHARES
As of the Record Date, the officers and Trustees of the Trust, as a group,
owned less than 1% of the outstanding voting shares of each Municipal Fund. From
time to time, the number of fund shares held in the "street name" accounts of
various securities dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total shares outstanding. As of the
Record Date, no other person owned (beneficially or of record) 5% or more of the
outstanding shares of the Federal Fund. As of the Record Date, the following
shareholders of the Municipal Funds (beneficial or of record) held 5% or more of
the outstanding shares of those funds:
NAME AND ADDRESS PERCENTAGE
- ------------------------------------------------------------
ARKANSAS FUND 5.37%
Joe N. Basore Revocable Trust
311 Town Center
Bella Vista, AR 72714
HAWAII FUND 11.65%
Lucy C.H. Change and Liu Change
1525 Wilder Ave., Apt. 1108
Honolulu, HI 96822-4687
WASHINGTON FUND 23.79%
Franklin Resources, Inc.
Corporate Accounting
555 Airport Blvd., 4th Floor
Burlingame, CA 94010
NFSC FEBO 5.10%
Clair L. Jenkins and Nancy Jenkins
6622 214th Court NE
Redmond, WA 98053
19
GLOSSORY OF USEFUL TERMS AND DEFINITIONS
1940 Act -- Investment Company Act of 1940, as amended
Advisers -- Franklin Advisers, Inc., 777 Mariners Island Boulevard, San Mateo,
CA 94404, the investment manager for the Federal Fund and the Municipal Funds
Contingent Deferred Sales Charge (CDSC) -- A sales charge of 1% that may apply
if you sell your shares within 12 months of purchase.
Distributors -- Franklin/Templeton Distributors, Inc., 777 Mariners Island
Boulevard, San Mateo, CA 94404, the principal underwriter for the funds
Franklin Templeton Funds -- The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds, except Franklin Valuemark
Funds, Templeton Capital Accumulator Fund, Inc., and Templeton Variable Products
Series Fund
Franklin Templeton Group -- Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
Franklin Templeton Group of Funds -- All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
Investor Services -- Franklin/Templeton Investor Services, Inc., 777 Mariners
Island Boulevard, San Mateo, CA 94404, the shareholder servicing and transfer
agent to the funds
Market Timers -- Market Timers generally include market timing or asset
allocation services, accounts administered so as to buy, sell or exchange shares
based on predetermined market indicators, or any person or group whose
transactions seem to follow a timing pattern or whose transactions include
frequent or large exchanges.
NASD -- National Association of Securities Dealers, Inc.
Net Asset Value (NAV) -- The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
Offering Price -- The public offering price is based on the Net Asset Value per
share and includes the front-end sales charge. The maximum front-end sales
charge for each fund is 4.25%.
Resources -- Franklin Resources, Inc.
SAI -- Statement of Additional Information
SEC -- U.S. Securities and Exchange Commission
Securities Dealer -- A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the funds. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
U.S. -- United States
We/Our/Us -- Unless the context indicates a different meaning, these terms refer
to the funds and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
20
EXHIBITS TO JOINT PROSPECTUS AND
PROXY STATEMENT
<TABLE>
<CAPTION>
EXHIBIT
- -------
<C> <S>
A Agreement and Plan of Reorganization between Franklin
Federal Tax-Free Income Fund and Franklin Municipal
Securities Trust on behalf of the Franklin Arkansas
Municipal Bond Fund
B Agreement and Plan of Reorganization between Franklin
Federal Tax-Free Income Fund and Franklin Municipal
Securities Trust on behalf of the Franklin Hawaii Municipal
Bond Fund
C Agreement and Plan of Reorganization between Franklin
Federal Tax-Free Income Fund and Franklin Municipal
Securities Trust on behalf of the Franklin Washington
Municipal Bond Fund
D Prospectus of Franklin Federal Tax-Free Income Fund, dated
September 1, 1998, as amended January 1, 1999
E Annual Report to Shareholders of Franklin Federal Tax-Free
Income Fund, dated April 30, 1998
</TABLE>
21
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement and Plan"), made as of
this 28th day of April, 1999, by and between FRANKLIN FEDERAL TAX-FREE INCOME
FUND ("Federal Fund"), a corporation incorporated under the laws of the State of
California in 1982, with its principal place of business at 777 Mariners Island
Boulevard, San Mateo, California 94404, and FRANKLIN MUNICIPAL SECURITIES TRUST
(the "Trust"), a business trust created under the laws of the State of Delaware
in 1992, with its principal place of business at 777 Mariners Island Boulevard,
San Mateo, California 94404, on behalf of its series Franklin Arkansas Municipal
Bond Fund, a series of shares of the Trust ("Municipal Fund").
PLAN OF REORGANIZATION
The reorganization (hereinafter referred to as the "Plan of
Reorganization") will consist of (i) the acquisition by Federal Fund of
substantially all of the property, assets and goodwill of Municipal Fund in
exchange solely for shares of common stock, no par value, of Federal
Fund - Class A ("Federal Fund Shares"); (ii) the distribution of Federal Fund
Shares to the shareholders of Municipal Fund according to their respective
interests; and (iii) the subsequent dissolution of Municipal Fund as soon as
practicable after the closing (as defined in Section 3, hereinafter called the
"Closing"), all upon and subject to the terms and conditions of this Agreement
and Plan hereinafter set forth.
AGREEMENT
In order to consummate the Plan of Reorganization and in consideration of
the promises and of the covenants and agreements hereinafter set forth, and
intending to be legally bound, the parties hereto covenant and agree as follows:
1. SALE AND TRANSFER OF ASSETS, LIQUIDATION AND DISSOLUTION OF MUNICIPAL FUND.
(a) Subject to the terms and conditions of this Agreement and Plan, and in
reliance on the representations and warranties of Federal Fund herein contained,
and in consideration of the delivery by Federal Fund of the number of its
Federal Fund Shares hereinafter provided, the Trust, on behalf of Municipal
Fund, agrees that it will convey, transfer and deliver to Federal Fund at the
Closing all of Municipal Fund's then existing assets, free and clear of all
liens, encumbrances, and claims whatsoever (other than shareholders' rights of
redemption), except for cash, bank deposits, or cash equivalent securities in an
estimated amount necessary to (i) pay the costs and expenses of carrying out
this Agreement and Plan (including, but not limited to, fees of counsel and
accountants, and expenses of its liquidation and dissolution contemplated
hereunder), which costs and expenses shall be established on Municipal Fund's
books as liability reserves; (ii) discharge its unpaid liabilities on its books
at the closing date (as defined in Section 3, hereinafter called the "Closing
Date"), including, but not limited to, its income dividends and capital gains
distributions, if any, payable for the period prior to, and through, the Closing
Date; and (iii) pay such contingent liabilities as the Board of Trustees shall
reasonably deem to exist against Municipal Fund, if any, at the Closing Date,
for which contingent and other appropriate liabilities reserves shall be
established on Municipal Fund's books (hereinafter "Net Assets"). Municipal Fund
shall also retain any and all rights that it may have over and against any
person that may have accrued up to and including the close of business on the
Closing Date.
(b) Subject to the terms and conditions of this Agreement and Plan, and in
reliance on the representations and warranties of the Trust herein contained,
and in consideration of such sale, conveyance, transfer, and delivery, Federal
Fund agrees at the Closing to deliver to the Trust the number of Federal Fund
Shares, determined by dividing the aggregate Net Assets of Municipal Fund on the
Closing Date by
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the net asset value per share of Federal Fund Shares, as of 1:00 p.m. Pacific
time on the Closing Date. All such values shall be determined in the manner and
as of the time set forth in Section 2 hereof.
(c) Immediately following the Closing, Municipal Fund shall dissolve and
distribute pro rata to its shareholders of record as of the close of business on
the Closing Date Federal Fund Shares received by Municipal Fund pursuant to this
Section 1. Such liquidation and distribution shall be accomplished by the
establishment of accounts on the share records of Federal Fund of the type and
in the amounts due such shareholders based on their respective holdings as of
the close of business on the Closing Date. Fractional Federal Fund Shares shall
be carried to the third decimal place. As promptly as practicable after the
Closing, each holder of any outstanding certificate or certificates representing
shares of beneficial interest of Municipal Fund shall be entitled to surrender
the same to the transfer agent for the Federal Fund in exchange for the number
of Federal Fund Shares into which the shares of the Municipal Fund theretofore
represented by the certificate or certificates so surrendered shall have been
converted. Certificates for Federal Fund Shares shall not be issued, unless
specifically requested by the shareholders. Until so surrendered, each
outstanding certificate which, prior to the Closing, represented shares of
beneficial interest of the Municipal Fund shall be deemed for all the Federal
Fund's purposes to evidence ownership of the number of Federal Fund's Shares
into which the shares of beneficial interest of the Municipal Fund (which prior
to the Closing were represented thereby) have been converted.
2. VALUATION.
(a) The value of Municipal Fund's Net Assets to be acquired by Federal Fund
hereunder shall be computed as of 1:00 p.m. Pacific time on the Closing Date
using the valuation procedures set forth in Municipal Fund's currently effective
prospectus.
(b) The net asset value of a share of common stock of Federal Fund shall be
determined to the nearest full cent as of 1:00 p.m. Pacific time on the Closing
Date using the valuation procedures set forth in Federal Fund's currently
effective prospectus.
(c) The net asset value of a share of beneficial interest of Municipal Fund
shall be determined to the fourth decimal place as of 1:00 p.m. Pacific time on
the Closing Date using the valuation procedures set forth in Municipal Fund's
currently effective prospectus.
3. CLOSING AND CLOSING DATE.
The Closing Date shall be August 26, 1999, or such later date as the
parties may mutually agree. The Closing shall take place at the principal office
of Federal Fund at 2:00 p.m. Pacific time on the Closing Date. The Trust shall
have provided for delivery, as of the Closing, of those Net Assets of Municipal
Fund to be transferred to Federal Fund's Custodian, Bank of New York, Mutual
Funds Division, 90 Washington Street, New York, New York 10286. Also, the Trust
shall deliver at the Closing a list of names and addresses of the shareholders
of record of Municipal Fund's shares and the number of shares of beneficial
interest owned by each such shareholder, indicating thereon which such shares
are represented by outstanding certificates and which by book-entry accounts,
all as of 1:00 p.m. Pacific time on the Closing Date, certified by its transfer
agent or by its President to the best of its or his knowledge and belief.
Federal Fund shall issue and deliver a certificate or certificates evidencing
the shares of common stock of Federal Fund to be delivered to said transfer
agent registered in such manner as the Trust may request, or provide evidence
satisfactory to the Trust that such Federal Fund Shares have been registered in
an account on the books of Federal Fund in such manner as the Trust may request.
4. REPRESENTATIONS AND WARRANTIES BY THE TRUST.
The Trust represents and warrants to Federal Fund that:
(a) The Trust is a business trust created under the laws of the State of
Delaware on June 15, 1992, and is validly existing and in good standing under
the laws of that state. The Trust is duly registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end, management
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investment company and all of Municipal Fund's shares sold were sold pursuant to
an effective registration statement filed under the Securities Act of 1933, as
amended (the "1933 Act"), except for those shares sold pursuant to the private
offering exemption for the purpose of raising the required initial capital.
(b) The Trust is authorized to issue an unlimited number of shares of
beneficial interest, $0.01 par value per share, each outstanding share of which
is fully paid, non-assessable, fully transferable and has full voting rights and
currently issues shares of five (5) series including Municipal Fund. The Trust
is authorized to issue an unlimited number of shares of beneficial interest of
each series.
(c) The financial statements appearing in the Trust's Annual Report to
Shareholders for the fiscal year ended May 31, 1998, audited by Coopers &
Lybrand, L.L.P., copies of which have been delivered to Federal Fund, fairly
present the financial position of Municipal Fund as of such date and the results
of its operations for the periods indicated in conformity with generally
accepted accounting principles applied on a consistent basis.
(d) The books and records of Municipal Fund made available to Federal Fund
and/or its counsel accurately summarize the accounting data represented and
contain no material omissions with respect to the business and operations of
Municipal Fund.
(e) The Trust has the necessary power and authority to conduct Municipal
Fund's business as such business is now being conducted.
(f) The Trust is not a party to or obligated under any provision of the
Trust's Agreement and Declaration of Trust or By-laws, or any contract or any
other commitment or obligation, and is not subject to any order or decree that
would be violated by the Trust's execution or performance under this Agreement
and Plan.
(g) The Trust has elected to treat the Municipal Fund as a regulated
investment company ("RIC") for federal income tax purposes under Part I of
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), and
Municipal Fund has qualified as a RIC for each taxable year since its inception
and will qualify as a RIC as of the Closing Date.
5. REPRESENTATIONS AND WARRANTIES BY FEDERAL FUND.
Federal Fund represents and warrants to the Trust, on behalf of Municipal
Fund, that:
(a) Federal Fund is a corporation incorporated under the laws of the State
of California on January 7, 1982, and is validly existing and in good standing
under the laws of that state. Federal Fund is duly registered under the 1940 Act
as a diversified, open-end, management investment company and all its shares
sold have been sold pursuant to an effective registration statement filed under
the 1933 Act, except for those shares sold pursuant to the private offering
exemption for the purpose of raising the required initial capital.
(b) Federal Fund is authorized to issue ten billion (10,000,000,000) shares
of common stock, no par value, all of which is allocated to the Franklin Federal
Tax-Free Income Fund Series of which three billion (3,000,000,000) shares are
further allocated to Class A of that series, and each outstanding share of which
is fully paid, non-assessable, fully transferable, and has full voting rights.
Federal Fund Shares to be issued pursuant to this Agreement and Plan will be
fully paid, non-assessable, freely transferable and have full voting rights.
(c) At the Closing, Federal Fund Shares will be eligible for offering to
the public in those states of the United States and jurisdictions in which the
shares of Municipal Fund are presently eligible for offering to the public, and
there are a sufficient number of Federal Fund Shares registered under the 1933
Act to permit the transfers contemplated by this Agreement and Plan to be
consummated.
(d) The financial statements appearing in Federal Fund's Annual Report to
Shareholders for the fiscal year ended April 30, 1998, audited by Coopers &
Lybrand L.L.P., copies of which have been delivered to Municipal Fund, fairly
present the financial position of Federal Fund as of such date and the
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results of its operations for the periods indicated in conformity with generally
accepted accounting principles applied on a consistent basis.
(e) Federal Fund has the necessary power and authority to conduct its
business as such business is now being conducted.
(f) Federal Fund is not a party to or obligated under any provision of its
Articles of Incorporation or By-laws, or any contract or any other commitment or
obligation, and is not subject to any order or decree, that would be violated by
its execution of or performance under this Agreement and Plan.
(g) Federal Fund has elected to be treated as a RIC for federal income tax
purposes under Part I of Subchapter M of the Code, has qualified as a RIC for
each taxable year since its inception, and will qualify as a RIC as of the
Closing Date.
6. REPRESENTATIONS AND WARRANTIES BY THE TRUST AND FEDERAL FUND.
The Trust and Federal Fund each represents and warrants to the other that:
(a) The statement of assets and liabilities to be furnished by it as of
1:00 p.m. Pacific time on the Closing Date for the purpose of determining the
number of Federal Fund Shares to be issued pursuant to Section 1 of this
Agreement and Plan will accurately reflect its Net Assets in the case of
Municipal Fund and its net assets in the case of Federal Fund, and outstanding
shares of common stock, as of such date, in conformity with generally accepted
accounting principles applied on a consistent basis.
(b) At the Closing, it will have good and marketable title to all of the
securities and other assets shown on the statement of assets and liabilities
referred to in "(a)" above, free and clear of all liens or encumbrances of any
nature whatsoever, except such imperfections of title or encumbrances as do not
materially detract from the value or use of the assets subject thereto, or
materially affect title thereto.
(c) Except as disclosed in its currently effective prospectus, there is no
material suit, judicial action, or legal or administrative proceeding pending or
threatened against it.
(d) There are no known actual or proposed deficiency assessments with
respect to any taxes payable by it.
(e) The execution, delivery, and performance of this Agreement and Plan
have been duly authorized by all necessary action of its Board of Trustees or
Board of Directors, as applicable, and this Agreement and Plan constitutes a
valid and binding obligation enforceable in accordance with its terms.
(f) It anticipates that consummation of this Agreement and Plan will not
cause it, in the case of Federal Fund, and Municipal Fund, in the case of the
Trust, to fail to conform to the requirements of Subchapter M of the Code for
federal income taxation as a RIC at the end of its fiscal year.
(g) It has the necessary power and authority to conduct its business, in
the case of Federal Fund, and Municipal Fund's business, in the case of
Municipal Fund, as such business is now being conducted.
7. COVENANTS OF THE TRUST AND FEDERAL FUND.
(a) The Trust, on behalf of Municipal Fund, and Federal Fund each covenant
to operate their respective businesses as presently conducted between the date
hereof and the Closing.
(b) The Trust undertakes that it will not acquire the Federal Fund Shares
for the purpose of making distributions thereof to anyone other than Municipal
Fund's shareholders.
(c) The Trust undertakes that, if this Agreement and Plan is consummated,
it will dissolve Municipal Fund and rescind the establishment of Municipal Fund
as a series of the Trust.
(d) The Trust and Federal Fund each agree that, by the Closing, all of
their federal and other tax returns and reports required by law to be filed by
the Trust, on behalf of Municipal Fund, or by Federal Fund on or before such
date shall have been filed, and all federal and other taxes shown as due on said
A-4
returns shall have either been paid or adequate liability reserves shall have
been provided for the payment of such taxes.
(e) At the Closing, the Trust will provide Federal Fund with a copy of the
shareholder ledger accounts of Municipal Fund, certified by its transfer agent
or its President to the best of its or his knowledge and belief, for all the
shareholders of record of Municipal Fund's shares as of 1:00 p.m. Pacific time
on the Closing Date who are to become shareholders of Federal Fund as a result
of the transfer of assets that is the subject of this Agreement and Plan.
(f) The Trust agrees to mail to each shareholder of record entitled to vote
at the meeting of Municipal Fund's shareholders at which action on this
Agreement and Plan is to be considered, in sufficient time to comply with
requirements as to notice thereof, a Joint Prospectus and Proxy Statement that
complies in all material respects with the applicable provisions of Section
14(a) of the Securities Exchange Act of 1934, as amended, and Section 20(a) of
the 1940 Act, and the rules and regulations, respectively, thereunder.
(g) Federal Fund will file with the U.S. Securities and Exchange Commission
a registration statement on Form N-14 under the 1933 Act relating to the Federal
Fund Shares issuable hereunder ("Registration Statement"), and will use its best
efforts to provide that the Registration Statement becomes effective as promptly
as practicable. At the time it becomes effective, the Registration Statement
will (i) comply in all material respects with the applicable provisions of the
1933 Act, and the rules and regulations promulgated thereunder; and (ii) not
contain any untrue statement of material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading. At the time the Registration Statement becomes effective, at the
time of Municipal Fund's shareholders' meeting, and at the Closing Date, the
prospectus and statement of additional information included in the Registration
Statement will not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading.
8. CONDITIONS PRECEDENT TO BE FULFILLED BY THE TRUST AND FEDERAL FUND.
The obligations of the Trust and Federal Fund to effectuate this Agreement
and Plan shall be subject to the following respective conditions:
(a) That: (i) all the representations and warranties of the other party
contained herein shall be true and correct as of the Closing with the same
effect as though made as of and at such date; (ii) the other party shall have
performed all obligations required by this Agreement and Plan to be performed by
it prior to the Closing; and (iii) the other party shall have delivered to such
party a certificate signed by the President and by the Secretary or equivalent
officer to the foregoing effect.
(b) That each party shall have delivered to the other party a copy of the
resolutions approving this Agreement and Plan adopted by its Board of Trustees
or Board of Directors, as applicable, certified by its Secretary or equivalent
officer.
(c) That the U.S. Securities and Exchange Commission shall not have issued
an unfavorable management report under Section 25(b) of the 1940 Act or
instituted or threatened to institute any proceeding seeking to enjoin
consummation of the Plan of Reorganization under Section 25(c) of the 1940 Act.
And, further, no other legal, administrative or other proceeding shall have been
instituted or threatened that would materially affect the financial condition of
either party or would prohibit the transactions contemplated hereby.
(d) That this Agreement and Plan and the Plan of Reorganization
contemplated hereby shall have been adopted and approved by the appropriate
action of the shareholders of Municipal Fund at an annual or special meeting or
any adjournment thereof.
(e) That each party shall have declared a distribution or distributions
prior to the Closing Date that, together with all previous distributions, shall
have the effect of distributing to its shareholders (i) all of its
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net investment income and all of its net realized capital gains, if any, for the
period from the close of its last fiscal year to 1:00 p.m. Pacific time on the
Closing Date; and (ii) any undistributed net investment income and net realized
capital gains from any period to the extent not otherwise declared for
distribution.
(f) That there shall be delivered to the Trust and Federal Fund an opinion
from Messrs. Stradley, Ronon, Stevens & Young, LLP, counsel to the Trust and
Federal Fund, to the effect that, provided the acquisition contemplated hereby
is carried out in accordance with this Agreement and Plan and based upon
certificates of the officers of the Trust and Federal Fund with regard to
matters of fact:
(1) The acquisition by Federal Fund of substantially all the assets of
Municipal Fund as provided for herein in exchange for Federal Fund Shares
will qualify as a reorganization within the meaning of Section 368(a)(1)(C)
of the Code, and Municipal Fund and Federal Fund will each be a party to
the respective reorganization within the meaning of Section 368(b) of the
Code;
(2) No gain or loss will be recognized by Municipal Fund upon the
transfer of substantially all of its assets to Federal Fund in exchange
solely for voting shares of Federal Fund (Sections 361(a) and 357(a)). No
opinion, however, will be expressed as to whether any accrued market
discount will be required to be recognized as ordinary income pursuant to
Section 1276 of the Code;
(3) No gain or loss will be recognized by Federal Fund upon the
receipt of substantially all of the assets of Municipal Fund in exchange
solely for voting shares of Federal Fund (Section 1032(a));
(4) The basis of the assets of Municipal Fund received by Federal Fund
will be the same as the basis of such assets to Municipal Fund immediately
prior to the exchange (Section 362(b));
(5) The holding period of the assets of Municipal Fund received by
Federal Fund will include the period during which such assets were held by
Municipal Fund (Section 1223(2));
(6) No gain or loss will be recognized to the shareholders of
Municipal Fund upon the exchange of their shares in Municipal Fund for
voting shares of Federal Fund (Section 354(a));
(7) The basis of the Federal Fund Shares received by Municipal Fund's
shareholders shall be the same as the basis of the shares of Municipal Fund
exchanged therefor (Section 358(a)(1));
(8) The holding period of Federal Fund Shares received by Municipal
Fund's shareholders (including fractional shares to which they may be
entitled) will include the holding period of Municipal Fund's shares
surrendered in exchange therefor, provided that Municipal Fund's shares
were held as a capital asset on the date of the exchange (Section 1223(1));
and
(9) Federal Fund will succeed to and take into account as of the date
of the proposed transfer (as defined in Section 1.381(b)-1(b) of the Income
Tax Regulations) the items of Municipal Fund described in Section 381(c) of
the Code (as defined in Section 1.381(b)-1(b) of the Income Tax
Regulations), subject to the conditions and limitations specified in
Sections 381(b) and (c), 382, 383 and 384 of the Code and the Income Tax
Regulations thereunder.
(g) That Federal Fund shall have received an opinion in form and substance
satisfactory to it from Messrs. Stradley, Ronon, Stevens & Young, LLP, counsel
to the Trust, to the effect that, subject in all respects to the effects of
bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, and
other laws now or hereafter affecting generally the enforcement of creditors'
rights:
(1) The Trust was created as a business trust under the laws of the
State of Delaware on June 15, 1992, and is validly existing and in good
standing under the laws of that state;
(2) The Trust is authorized to issue an unlimited number of shares of
beneficial interest of Municipal Fund, $0.01 par value per share. Assuming
that the initial shares of beneficial interest were issued in accordance
with the 1940 Act and the Agreement and Declaration and By-laws of the
Trust, and that all other outstanding shares of Municipal Fund were sold,
issued and paid for in accordance with the terms of Municipal Fund's
prospectus in effect at the time of such sales, each such outstanding share
is fully paid, non-assessable, fully transferable and has full voting
rights;
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(3) The Trust is an open-end investment company of the management type
registered as such under the 1940 Act;
(4) Except as disclosed in Municipal Fund's currently effective
prospectus, such counsel does not know of any material suit, action, or
legal or administrative proceeding pending or threatened against the Trust,
the unfavorable outcome of which would materially and adversely affect the
Trust or Municipal Fund;
(5) All actions required to be taken by the Trust to authorize this
Agreement and Plan and to effect the Plan of Reorganization contemplated
hereby have been duly authorized by all necessary action on the part of the
Trust; and
(6) Neither the execution, delivery, nor performance of this Agreement
and Plan by the Trust violates any provision of its Agreement and
Declaration of Trust or By-laws, or the provisions of any agreement or
other instrument known to such counsel to which the Trust is a party or by
which Municipal Fund is otherwise bound; this Agreement and Plan is the
legal, valid and binding obligation of the Trust and Municipal Fund and is
enforceable against the Trust and/or Municipal Fund in accordance with its
terms.
In giving the opinions set forth above, this counsel may state that it is
relying on certificates of the officers of the Trust with regard to matters of
fact, and certain certifications and written statements of governmental
officials with respect to the good standing of the Trust and Municipal Fund.
(h) That the Trust shall have received an opinion in form and substance
satisfactory to it from Messrs. Stradley, Ronon, Stevens & Young, LLP, counsel
to Federal Fund, to the effect that, subject in all respects to the effects of
bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance and
other laws now or hereafter affecting generally the enforcement of creditors'
rights:
(1) Federal Fund was incorporated under the laws of the State of
California on January 7, 1982, and is validly existing and in good standing
under the laws of that state;
(2) Federal Fund is authorized to issue ten billion (10,000,000,000)
shares of common stock, no par value, all of which is allocated to the
Franklin Federal Tax-Free Income Fund Series of which three billion
(3,000,000,000) shares are further allocated to Class A of that series, and
each outstanding share of which is fully paid, non-assessable, fully
transferable, and has full voting rights. Assuming that the initial capital
shares of Federal Fund were issued in accordance with the 1940 Act, and the
Articles of Incorporation and By-laws of Federal Fund, and that all other
outstanding shares of Federal Fund were sold, issued and paid for in
accordance with the terms of Federal Fund's prospectus in effect at the
time of such sales, each such outstanding share of Federal Fund is fully
paid, non-assessable, freely transferable and has full voting rights;
(3) Federal Fund is an open-end, diversified investment company of the
management type registered as such under the 1940 Act;
(4) Except as disclosed in Federal Fund's currently effective
prospectus, such counsel does not know of any material suit, action, or
legal or administrative proceeding pending or threatened against Federal
Fund, the unfavorable outcome of which would materially and adversely
affect Federal Fund;
(5) Federal Fund Shares to be issued pursuant to the terms of this
Agreement and Plan have been duly authorized and, when issued and delivered
as provided in this Agreement and Plan, will have been validly issued and
fully paid and will be non-assessable by Federal Fund;
(6) All corporate actions required to be taken by Federal Fund to
authorize this Agreement and Plan and to effect the Plan of Reorganization
contemplated hereby have been duly authorized by all necessary corporate
action on the part of Federal Fund;
(7) Neither the execution, delivery, nor performance of this Agreement
and Plan by Federal Fund violates any provision of its Articles of
Incorporation, its By-laws, or the provisions of any agreement or other
instrument known to such counsel to which Federal Fund is a party or by
which
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Federal Fund is otherwise bound; this Agreement and Plan is the legal,
valid and binding obligation of Federal Fund and is enforceable against
Federal Fund in accordance with its terms; and
(8) The registration statement of which the prospectus, dated
September 1, 1998, as amended January 1, 1999, of Federal Fund is a part
(the "Prospectus") is, at the time of the signing of this Agreement and
Plan, effective under the 1933 Act, and, to the best knowledge of such
counsel, no stop order suspending the effectiveness of such registration
statement has been issued, and no proceedings for such purpose have been
instituted or are pending before or threatened by the U.S. Securities and
Exchange Commission under the 1933 Act, and nothing has come to such
counsel's attention that causes it to believe that, at the time the
Prospectus became effective, or at the time of the signing of this
Agreement and Plan, or at the Closing, such Prospectus (except for the
financial statements and other financial and statistical data included
therein, as to which counsel need not express an opinion), contained any
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading; and such counsel knows of no legal or government
proceedings required to be described in the Prospectus, or of any contract
or document of a character required to be described in the Prospectus that
is not described as required.
In giving the opinions set forth above, this counsel may state that it is
relying on certificates of the officers of Federal Fund with regard to matters
of fact, and certain certifications and written statements of governmental
officials with respect to the good standing of Federal Fund.
(i) That the Trust shall have received a certificate from the President and
Secretary of Federal Fund to the effect that the statements contained in Federal
Fund's Prospectus, at the time the Prospectus became effective, at the date of
the signing of this Agreement and Plan, and at the Closing, did not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading.
(j) That Federal Fund's Registration Statement with respect to the Federal
Fund Shares to be delivered to the Municipal Fund's shareholders in accordance
with this Agreement and Plan shall have become effective, and no stop order
suspending the effectiveness of the Registration Statement or any amendment or
supplement thereto, shall have been issued prior to the Closing Date or shall be
in effect at Closing, and no proceedings for the issuance of such an order shall
be pending or threatened on that date.
(k) That the Federal Fund Shares to be delivered hereunder shall be
eligible for sale by Federal Fund with each state commission or agency with
which such eligibility is required in order to permit the Federal Fund Shares
lawfully to be delivered to each Municipal Fund shareholder.
(l) That, at the Closing, the Trust, on behalf of Municipal Fund, transfers
to Federal Fund aggregate Net Assets of Municipal Fund comprising at least 90%
in fair market value of the total net assets and 70% of the fair market value of
the total gross assets recorded on the books of Municipal Fund on the Closing
Date.
9. BROKERAGE FEES AND EXPENSES.
(a) The Trust and Federal Fund each represents and warrants to the other
that there are no broker or finders' fees payable by it in connection with the
transactions provided for herein.
(b) The expenses of entering into and carrying out the provisions of this
Agreement and Plan shall be borne one-quarter by Municipal Fund, one-quarter by
Federal Fund, and one-half by Franklin Advisers, Inc.
10. TERMINATION; POSTPONEMENT; WAIVER; ORDER.
(a) Anything contained in this Agreement and Plan to the contrary
notwithstanding, this Agreement and Plan may be terminated and the Plan of
Reorganization abandoned at any time (whether before or
A-8
after approval thereof by the shareholders of Municipal Fund) prior to the
Closing or the Closing may be postponed as follows:
(1) by mutual consent of the Trust and Federal Fund;
(2) by Federal Fund if any condition of its obligations set forth in
Section 8 has not been fulfilled or waived; or
(3) by the Trust, if any condition of its obligations set forth in
Section 8 has not been fulfilled or waived.
An election by the Trust, on behalf of Municipal Fund, or Federal Fund to
terminate this Agreement and Plan and to abandon the Plan of Reorganization
shall be exercised, respectively, by the Board of Trustees of the Trust or Board
of Directors of Federal Fund.
(b) If the transactions contemplated by this Agreement and Plan have not
been consummated by December 31, 1999, the Agreement and Plan shall
automatically terminate on that date, unless a later date is agreed to by both
Federal Fund and the Trust.
(c) In the event of termination of this Agreement and Plan pursuant to the
provisions hereof, the same shall become void and have no further effect, and
neither the Trust nor Federal Fund, nor their directors or trustees, officers,
agents or shareholders shall have any liability in respect of this Agreement and
Plan.
(d) At any time prior to the Closing, any of the terms or conditions of
this Agreement and Plan may be waived by the party who is entitled to the
benefit thereof by action taken by that party's Board of Trustees or Board of
Directors, as applicable, if, in the judgment of such Board, such action or
waiver will not have a material adverse effect on the benefits intended under
this Agreement and Plan to its shareholders, on behalf of whom such action is
taken.
(e) The respective representations and warranties contained in Sections 4
to 6 hereof shall expire with and be terminated by the Plan of Reorganization,
and neither the Trust nor Federal Fund, nor any of their officers, trustees or
directors, agents or shareholders shall have any liability with respect to such
representations or warranties after the Closing. This provision shall not
protect any officer, trustee or director, agent or shareholder of the Trust or
Federal Fund against any liability to the entity for which that officer, trustee
or director, agent or shareholder so acts or to its shareholders to which that
officer, trustee or director, agent or shareholder would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties in the conduct of such office.
(f) If any order or orders of the U.S. Securities and Exchange Commission
with respect to this Agreement and Plan shall be issued prior to the Closing and
shall impose any terms or conditions that are determined by action of the Board
of Trustees of the Trust or of the Board of Directors of the Federal Fund to be
acceptable, such terms and conditions shall be binding as if a part of this
Agreement and Plan without further vote or approval of the shareholders of
Municipal Fund, unless such terms and conditions shall result in a change in the
method of computing the number of Federal Fund Shares to be issued to Municipal
Fund in which event, unless such terms and conditions shall have been included
in the proxy solicitation material furnished to the shareholders of Municipal
Fund prior to the meeting at which the transactions contemplated by this
Agreement and Plan shall have been approved, this Agreement and Plan shall not
be consummated and shall terminate unless Municipal Fund shall promptly call a
special meeting of shareholders at which such conditions so imposed shall be
submitted for approval.
11. ENTIRE AGREEMENT AND AMENDMENTS.
This Agreement and Plan embodies the entire agreement between the parties
and there are no agreements, understandings, restrictions, or warranties between
the parties other than those set forth herein or herein provided for. This
Agreement and Plan may be amended only by mutual consent of the parties in
writing. Neither this Agreement and Plan nor any interest herein may be assigned
without the prior written consent of the other party.
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12. COUNTERPARTS.
This Agreement and Plan may be executed in any number of counterparts, each
of which shall be deemed to be an original, but all such counterparts together
shall constitute but one instrument.
13. NOTICES.
Any notice, report, or demand required or permitted by any provision of
this Agreement and Plan shall be in writing and shall be deemed to have been
given if delivered or mailed, first class postage prepaid, addressed to Franklin
Federal Tax-Free Income Fund at 777 Mariners Island Boulevard, P.O. Box 7777,
San Mateo, CA 94403-7777, Attention: Secretary, or Franklin Municipal Securities
Trust, at 777 Mariners Island Boulevard, P.O. Box 7777, San Mateo CA 94403-7777,
Attention: Secretary, as the case may be.
14. GOVERNING LAW.
This Agreement shall be governed by and carried out in accordance with the
laws of the State of Delaware.
IN WITNESS WHEREOF, Franklin Federal Tax-Free Income Fund and Franklin
Municipal Securities Trust, on behalf of Franklin Arkansas Municipal Bond Fund,
have each caused this Agreement and Plan to be executed on its behalf by its
duly authorized officers, all as of the date and year first-above written.
<TABLE>
<S> <C>
FRANKLIN FEDERAL TAX-FREE
INCOME FUND
Attest:
/s/ LEIANN NUZUM By: /s/ DEBORAH R. GATZEK
- ----------------------------------------------------- -----------------------------------------------------
Assistant Secretary Deborah R. Gatzek
Vice President and Secretary
FRANKLIN MUNICIPAL SECURITIES
TRUST, ON BEHALF OF FRANKLIN
ARKANSAS MUNICIPAL BOND FUND
Attest:
/s/ LEIANN NUZUM By: /s/ DEBORAH R. GATZEK
- ----------------------------------------------------- -----------------------------------------------------
Assistant Secretary Deborah R. Gatzek
Vice President and Secretary
</TABLE>
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EXHIBIT B
AGREEMENT AND PLAN OF REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement and Plan"), made as of
this 28th day of April, 1999, by and between FRANKLIN FEDERAL TAX-FREE INCOME
FUND ("Federal Fund"), a corporation incorporated under the laws of the State of
California in 1982, with its principal place of business at 777 Mariners Island
Boulevard, San Mateo, California 94404, and FRANKLIN MUNICIPAL SECURITIES TRUST
(the "Trust"), a business trust created under the laws of the State of Delaware
in 1992, with its principal place of business at 777 Mariners Island Boulevard,
San Mateo, California 94404, on behalf of its series Franklin Hawaii Municipal
Bond Fund, a series of shares of the Trust ("Municipal Fund").
PLAN OF REORGANIZATION
The reorganization (hereinafter referred to as the "Plan of
Reorganization") will consist of (i) the acquisition by Federal Fund of
substantially all of the property, assets and goodwill of Municipal Fund in
exchange solely for shares of common stock, no par value, of Federal Fund -
Class A ("Federal Fund Shares"); (ii) the distribution of Federal Fund Shares to
the shareholders of Municipal Fund according to their respective interests; and
(iii) the subsequent dissolution of Municipal Fund as soon as practicable after
the closing (as defined in Section 3, hereinafter called the "Closing"), all
upon and subject to the terms and conditions of this Agreement and Plan
hereinafter set forth.
AGREEMENT
In order to consummate the Plan of Reorganization and in consideration of
the promises and of the covenants and agreements hereinafter set forth, and
intending to be legally bound, the parties hereto covenant and agree as follows:
1. SALE AND TRANSFER OF ASSETS, LIQUIDATION AND DISSOLUTION OF MUNICIPAL FUND.
(a) Subject to the terms and conditions of this Agreement and Plan, and in
reliance on the representations and warranties of Federal Fund herein contained,
and in consideration of the delivery by Federal Fund of the number of its
Federal Fund Shares hereinafter provided, the Trust, on behalf of Municipal
Fund, agrees that it will convey, transfer and deliver to Federal Fund at the
Closing all of Municipal Fund's then existing assets, free and clear of all
liens, encumbrances, and claims whatsoever (other than shareholders' rights of
redemption), except for cash, bank deposits, or cash equivalent securities in an
estimated amount necessary to (i) pay the costs and expenses of carrying out
this Agreement and Plan (including, but not limited to, fees of counsel and
accountants, and expenses of its liquidation and dissolution contemplated
hereunder), which costs and expenses shall be established on Municipal Fund's
books as liability reserves; (ii) discharge its unpaid liabilities on its books
at the closing date (as defined in Section 3, hereinafter called the "Closing
Date"), including, but not limited to, its income dividends and capital gains
distributions, if any, payable for the period prior to, and through, the Closing
Date; and (iii) pay such contingent liabilities as the Board of Trustees shall
reasonably deem to exist against Municipal Fund, if any, at the Closing Date,
for which contingent and other appropriate liabilities reserves shall be
established on Municipal Fund's books (hereinafter "Net Assets"). Municipal Fund
shall also retain any and all rights that it may have over and against any
person that may have accrued up to and including the close of business on the
Closing Date.
(b) Subject to the terms and conditions of this Agreement and Plan, and in
reliance on the representations and warranties of the Trust herein contained,
and in consideration of such sale, conveyance, transfer, and delivery, Federal
Fund agrees at the Closing to deliver to the Trust the number of Federal Fund
Shares, determined by dividing the aggregate Net Assets of Municipal Fund on the
Closing Date by
B-1
the net asset value per share of Federal Fund Shares, as of 1:00 p.m. Pacific
time on the Closing Date. All such values shall be determined in the manner and
as of the time set forth in Section 2 hereof.
(c) Immediately following the Closing, Municipal Fund shall dissolve and
distribute pro rata to its shareholders of record as of the close of business on
the Closing Date Federal Fund Shares received by Municipal Fund pursuant to this
Section 1. Such liquidation and distribution shall be accomplished by the
establishment of accounts on the share records of Federal Fund of the type and
in the amounts due such shareholders based on their respective holdings as of
the close of business on the Closing Date. Fractional Federal Fund Shares shall
be carried to the third decimal place. As promptly as practicable after the
Closing, each holder of any outstanding certificate or certificates representing
shares of beneficial interest of Municipal Fund shall be entitled to surrender
the same to the transfer agent for the Federal Fund in exchange for the number
of Federal Fund Shares into which the shares of the Municipal Fund theretofore
represented by the certificate or certificates so surrendered shall have been
converted. Certificates for Federal Fund Shares shall not be issued, unless
specifically requested by the shareholders. Until so surrendered, each
outstanding certificate which, prior to the Closing, represented shares of
beneficial interest of the Municipal Fund shall be deemed for all the Federal
Fund's purposes to evidence ownership of the number of Federal Fund's Shares
into which the shares of beneficial interest of the Municipal Fund (which prior
to the Closing were represented thereby) have been converted.
2. VALUATION.
(a) The value of Municipal Fund's Net Assets to be acquired by Federal Fund
hereunder shall be computed as of 1:00 p.m. Pacific time on the Closing Date
using the valuation procedures set forth in Municipal Fund's currently effective
prospectus.
(b) The net asset value of a share of common stock of Federal Fund shall be
determined to the nearest full cent as of 1:00 p.m. Pacific time on the Closing
Date using the valuation procedures set forth in Federal Fund's currently
effective prospectus.
(c) The net asset value of a share of beneficial interest of Municipal Fund
shall be determined to the fourth decimal place as of 1:00 p.m. Pacific time on
the Closing Date using the valuation procedures set forth in Municipal Fund's
currently effective prospectus.
3. CLOSING AND CLOSING DATE.
The Closing Date shall be June 24, 1999, or such later date as the parties
may mutually agree. The Closing shall take place at the principal office of
Federal Fund at 2:00 p.m. Pacific time on the Closing Date. The Trust shall have
provided for delivery, as of the Closing, of those Net Assets of Municipal Fund
to be transferred to Federal Fund's Custodian, Bank of New York, Mutual Funds
Division, 90 Washington Street, New York, New York 10286. Also, the Trust shall
deliver at the Closing a list of names and addresses of the shareholders of
record of Municipal Fund's shares and the number of shares of beneficial
interest owned by each such shareholder, indicating thereon which such shares
are represented by outstanding certificates and which by book-entry accounts,
all as of 1:00 p.m. Pacific time on the Closing Date, certified by its transfer
agent or by its President to the best of its or his knowledge and belief.
Federal Fund shall issue and deliver a certificate or certificates evidencing
the shares of common stock of Federal Fund to be delivered to said transfer
agent registered in such manner as the Trust may request, or provide evidence
satisfactory to the Trust that such Federal Fund Shares have been registered in
an account on the books of Federal Fund in such manner as the Trust may request.
4. REPRESENTATIONS AND WARRANTIES BY THE TRUST.
The Trust represents and warrants to Federal Fund that:
(a) The Trust is a business trust created under the laws of the State of
Delaware on June 15, 1992, and is validly existing and in good standing under
the laws of that state. The Trust is duly registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end, management
B-2
investment company and all of Municipal Fund's shares sold were sold pursuant to
an effective registration statement filed under the Securities Act of 1933, as
amended (the "1933 Act"), except for those shares sold pursuant to the private
offering exemption for the purpose of raising the required initial capital.
(b) The Trust is authorized to issue an unlimited number of shares of
beneficial interest, $0.01 par value per share, each outstanding share of which
is fully paid, non-assessable, fully transferable and has full voting rights and
currently issues shares of five (5) series including Municipal Fund. The Trust
is authorized to issue an unlimited number of shares of beneficial interest of
each series.
(c) The financial statements appearing in the Trust's Annual Report to
Shareholders for the fiscal year ended May 31, 1998, audited by Coopers &
Lybrand, L.L.P., copies of which have been delivered to Federal Fund, fairly
present the financial position of Municipal Fund as of such date and the results
of its operations for the periods indicated in conformity with generally
accepted accounting principles applied on a consistent basis.
(d) The books and records of Municipal Fund made available to Federal Fund
and/or its counsel accurately summarize the accounting data represented and
contain no material omissions with respect to the business and operations of
Municipal Fund.
(e) The Trust has the necessary power and authority to conduct Municipal
Fund's business as such business is now being conducted.
(f) The Trust is not a party to or obligated under any provision of the
Trust's Agreement and Declaration of Trust or By-laws, or any contract or any
other commitment or obligation, and is not subject to any order or decree that
would be violated by the Trust's execution or performance under this Agreement
and Plan.
(g) The Trust has elected to treat the Municipal Fund as a regulated
investment company ("RIC") for federal income tax purposes under Part I of
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), and
Municipal Fund has qualified as a RIC for each taxable year since its inception
and will qualify as a RIC as of the Closing Date.
5. REPRESENTATIONS AND WARRANTIES BY FEDERAL FUND.
Federal Fund represents and warrants to the Trust, on behalf of Municipal
Fund, that:
(a) Federal Fund is a corporation incorporated under the laws of the State
of California on January 7, 1982, and is validly existing and in good standing
under the laws of that state. Federal Fund is duly registered under the 1940 Act
as a diversified, open-end, management investment company and all its shares
sold have been sold pursuant to an effective registration statement filed under
the 1933 Act, except for those shares sold pursuant to the private offering
exemption for the purpose of raising the required initial capital.
(b) Federal Fund is authorized to issue ten billion (10,000,000,000) shares
of common stock, no par value, all of which is allocated to the Franklin Federal
Tax-Free Income Fund Series of which three billion (3,000,000,000) shares are
further allocated to Class A of that series, and each outstanding share of which
is fully paid, non-assessable, fully transferable, and has full voting rights.
Federal Fund Shares to be issued pursuant to this Agreement and Plan will be
fully paid, non-assessable, freely transferable and have full voting rights.
(c) At the Closing, Federal Fund Shares will be eligible for offering to
the public in those states of the United States and jurisdictions in which the
shares of Municipal Fund are presently eligible for offering to the public, and
there are a sufficient number of Federal Fund Shares registered under the 1933
Act to permit the transfers contemplated by this Agreement and Plan to be
consummated.
(d) The financial statements appearing in Federal Fund's Annual Report to
Shareholders for the fiscal year ended April 30, 1998, audited by Coopers &
Lybrand L.L.P., copies of which have been delivered to Municipal Fund, fairly
present the financial position of Federal Fund as of such date and the
B-3
results of its operations for the periods indicated in conformity with generally
accepted accounting principles applied on a consistent basis.
(e) Federal Fund has the necessary power and authority to conduct its
business as such business is now being conducted.
(f) Federal Fund is not a party to or obligated under any provision of its
Articles of Incorporation or By-laws, or any contract or any other commitment or
obligation, and is not subject to any order or decree, that would be violated by
its execution of or performance under this Agreement and Plan.
(g) Federal Fund has elected to be treated as a RIC for federal income tax
purposes under Part I of Subchapter M of the Code, has qualified as a RIC for
each taxable year since its inception, and will qualify as a RIC as of the
Closing Date.
6. REPRESENTATIONS AND WARRANTIES BY THE TRUST AND FEDERAL FUND.
The Trust and Federal Fund each represents and warrants to the other that:
(a) The statement of assets and liabilities to be furnished by it as of
1:00 p.m. Pacific time on the Closing Date for the purpose of determining the
number of Federal Fund Shares to be issued pursuant to Section 1 of this
Agreement and Plan will accurately reflect its Net Assets in the case of
Municipal Fund and its net assets in the case of Federal Fund, and outstanding
shares of common stock, as of such date, in conformity with generally accepted
accounting principles applied on a consistent basis.
(b) At the Closing, it will have good and marketable title to all of the
securities and other assets shown on the statement of assets and liabilities
referred to in "(a)" above, free and clear of all liens or encumbrances of any
nature whatsoever, except such imperfections of title or encumbrances as do not
materially detract from the value or use of the assets subject thereto, or
materially affect title thereto.
(c) Except as disclosed in its currently effective prospectus, there is no
material suit, judicial action, or legal or administrative proceeding pending or
threatened against it.
(d) There are no known actual or proposed deficiency assessments with
respect to any taxes payable by it.
(e) The execution, delivery, and performance of this Agreement and Plan
have been duly authorized by all necessary action of its Board of Trustees or
Board of Directors, as applicable, and this Agreement and Plan constitutes a
valid and binding obligation enforceable in accordance with its terms.
(f) It anticipates that consummation of this Agreement and Plan will not
cause it, in the case of Federal Fund, and Municipal Fund, in the case of the
Trust, to fail to conform to the requirements of Subchapter M of the Code for
federal income taxation as a RIC at the end of its fiscal year.
(g) It has the necessary power and authority to conduct its business, in
the case of Federal Fund, and Municipal Fund's business, in the case of
Municipal Fund, as such business is now being conducted.
7. COVENANTS OF THE TRUST AND FEDERAL FUND.
(a) The Trust, on behalf of Municipal Fund, and Federal Fund each covenant
to operate their respective businesses as presently conducted between the date
hereof and the Closing.
(b) The Trust undertakes that it will not acquire the Federal Fund Shares
for the purpose of making distributions thereof to anyone other than Municipal
Fund's shareholders.
(c) The Trust undertakes that, if this Agreement and Plan is consummated,
it will dissolve Municipal Fund and rescind the establishment of Municipal Fund
as a series of the Trust.
(d) The Trust and Federal Fund each agree that, by the Closing, all of
their federal and other tax returns and reports required by law to be filed by
the Trust, on behalf of Municipal Fund, or by Federal Fund on or before such
date shall have been filed, and all federal and other taxes shown as due on said
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returns shall have either been paid or adequate liability reserves shall have
been provided for the payment of such taxes.
(e) At the Closing, the Trust will provide Federal Fund with a copy of the
shareholder ledger accounts of Municipal Fund, certified by its transfer agent
or its President to the best of its or his knowledge and belief, for all the
shareholders of record of Municipal Fund's shares as of 1:00 p.m. Pacific time
on the Closing Date who are to become shareholders of Federal Fund as a result
of the transfer of assets that is the subject of this Agreement and Plan.
(f) The Trust agrees to mail to each shareholder of record entitled to vote
at the meeting of Municipal Fund's shareholders at which action on this
Agreement and Plan is to be considered, in sufficient time to comply with
requirements as to notice thereof, a Joint Prospectus and Proxy Statement that
complies in all material respects with the applicable provisions of Section
14(a) of the Securities Exchange Act of 1934, as amended, and Section 20(a) of
the 1940 Act, and the rules and regulations, respectively, thereunder.
(g) Federal Fund will file with the U.S. Securities and Exchange Commission
a registration statement on Form N-14 under the 1933 Act relating to the Federal
Fund Shares issuable hereunder ("Registration Statement"), and will use its best
efforts to provide that the Registration Statement becomes effective as promptly
as practicable. At the time it becomes effective, the Registration Statement
will (i) comply in all material respects with the applicable provisions of the
1933 Act, and the rules and regulations promulgated thereunder; and (ii) not
contain any untrue statement of material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading. At the time the Registration Statement becomes effective, at the
time of Municipal Fund's shareholders' meeting, and at the Closing Date, the
prospectus and statement of additional information included in the Registration
Statement will not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading.
8. CONDITIONS PRECEDENT TO BE FULFILLED BY THE TRUST AND FEDERAL FUND.
The obligations of the Trust and Federal Fund to effectuate this Agreement
and Plan shall be subject to the following respective conditions:
(a) That: (i) all the representations and warranties of the other party
contained herein shall be true and correct as of the Closing with the same
effect as though made as of and at such date; (ii) the other party shall have
performed all obligations required by this Agreement and Plan to be performed by
it prior to the Closing; and (iii) the other party shall have delivered to such
party a certificate signed by the President and by the Secretary or equivalent
officer to the foregoing effect.
(b) That each party shall have delivered to the other party a copy of the
resolutions approving this Agreement and Plan adopted by its Board of Trustees
or Board of Directors, as applicable, certified by its Secretary or equivalent
officer.
(c) That the U.S. Securities and Exchange Commission shall not have issued
an unfavorable management report under Section 25(b) of the 1940 Act or
instituted or threatened to institute any proceeding seeking to enjoin
consummation of the Plan of Reorganization under Section 25(c) of the 1940 Act.
And, further, no other legal, administrative or other proceeding shall have been
instituted or threatened that would materially affect the financial condition of
either party or would prohibit the transactions contemplated hereby.
(d) That this Agreement and Plan and the Plan of Reorganization
contemplated hereby shall have been adopted and approved by the appropriate
action of the shareholders of Municipal Fund at an annual or special meeting or
any adjournment thereof.
(e) That each party shall have declared a distribution or distributions
prior to the Closing Date that, together with all previous distributions, shall
have the effect of distributing to its shareholders (i) all of its
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net investment income and all of its net realized capital gains, if any, for the
period from the close of its last fiscal year to 1:00 p.m. Pacific time on the
Closing Date; and (ii) any undistributed net investment income and net realized
capital gains from any period to the extent not otherwise declared for
distribution.
(f) That there shall be delivered to the Trust and Federal Fund an opinion
from Messrs. Stradley, Ronon, Stevens & Young, LLP, counsel to the Trust and
Federal Fund, to the effect that, provided the acquisition contemplated hereby
is carried out in accordance with this Agreement and Plan and based upon
certificates of the officers of the Trust and Federal Fund with regard to
matters of fact:
(1) The acquisition by Federal Fund of substantially all the assets of
Municipal Fund as provided for herein in exchange for Federal Fund Shares
will qualify as a reorganization within the meaning of Section 368(a)(1)(C)
of the Code, and Municipal Fund and Federal Fund will each be a party to
the respective reorganization within the meaning of Section 368(b) of the
Code;
(2) No gain or loss will be recognized by Municipal Fund upon the
transfer of substantially all of its assets to Federal Fund in exchange
solely for voting shares of Federal Fund (Sections 361(a) and 357(a)). No
opinion, however, will be expressed as to whether any accrued market
discount will be required to be recognized as ordinary income pursuant to
Section 1276 of the Code;
(3) No gain or loss will be recognized by Federal Fund upon the
receipt of substantially all of the assets of Municipal Fund in exchange
solely for voting shares of Federal Fund (Section 1032(a));
(4) The basis of the assets of Municipal Fund received by Federal Fund
will be the same as the basis of such assets to Municipal Fund immediately
prior to the exchange (Section 362(b));
(5) The holding period of the assets of Municipal Fund received by
Federal Fund will include the period during which such assets were held by
Municipal Fund (Section 1223(2));
(6) No gain or loss will be recognized to the shareholders of
Municipal Fund upon the exchange of their shares in Municipal Fund for
voting shares of Federal Fund (Section 354(a));
(7) The basis of the Federal Fund Shares received by Municipal Fund's
shareholders shall be the same as the basis of the shares of Municipal Fund
exchanged therefor (Section 358(a)(1));
(8) The holding period of Federal Fund Shares received by Municipal
Fund's shareholders (including fractional shares to which they may be
entitled) will include the holding period of Municipal Fund's shares
surrendered in exchange therefor, provided that Municipal Fund's shares
were held as a capital asset on the date of the exchange (Section 1223(1));
and
(9) Federal Fund will succeed to and take into account as of the date
of the proposed transfer (as defined in Section 1.381(b)-1(b) of the Income
Tax Regulations) the items of Municipal Fund described in Section 381(c) of
the Code (as defined in Section 1.381(b)-1(b) of the Income Tax
Regulations), subject to the conditions and limitations specified in
Sections 381(b) and (c), 382, 383 and 384 of the Code and the Income Tax
Regulations thereunder.
(g) That Federal Fund shall have received an opinion in form and substance
satisfactory to it from Messrs. Stradley, Ronon, Stevens & Young, LLP, counsel
to the Trust, to the effect that, subject in all respects to the effects of
bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, and
other laws now or hereafter affecting generally the enforcement of creditors'
rights:
(1) The Trust was created as a business trust under the laws of the
State of Delaware on June 15, 1992, and is validly existing and in good
standing under the laws of that state;
(2) The Trust is authorized to issue an unlimited number of shares of
beneficial interest of Municipal Fund, $0.01 par value per share. Assuming
that the initial shares of beneficial interest were issued in accordance
with the 1940 Act and the Agreement and Declaration and By-laws of the
Trust, and that all other outstanding shares of Municipal Fund were sold,
issued and paid for in accordance with the terms of Municipal Fund's
prospectus in effect at the time of such sales, each such outstanding share
is fully paid, non-assessable, fully transferable and has full voting
rights;
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(3) The Trust is an open-end investment company of the management type
registered as such under the 1940 Act;
(4) Except as disclosed in Municipal Fund's currently effective
prospectus, such counsel does not know of any material suit, action, or
legal or administrative proceeding pending or threatened against the Trust,
the unfavorable outcome of which would materially and adversely affect the
Trust or Municipal Fund;
(5) All actions required to be taken by the Trust to authorize this
Agreement and Plan and to effect the Plan of Reorganization contemplated
hereby have been duly authorized by all necessary action on the part of the
Trust; and
(6) Neither the execution, delivery, nor performance of this Agreement
and Trust by the Trust violates any provision of its Agreement and
Declaration of Trust or By-laws, or the provisions of any agreement or
other instrument known to such counsel to which the Trust is a party or by
which Municipal Fund is otherwise bound; this Agreement and Plan is the
legal, valid and binding obligation of the Trust and Municipal Fund and is
enforceable against the Trust and/or Municipal Fund in accordance with its
terms.
In giving the opinions set forth above, this counsel may state that it is
relying on certificates of the officers of the Trust with regard to matters of
fact, and certain certifications and written statements of governmental
officials with respect to the good standing of the Trust and Municipal Fund.
(h) That the Trust shall have received an opinion in form and substance
satisfactory to it from Messrs. Stradley, Ronon, Stevens & Young, LLP, counsel
to Federal Fund, to the effect that, subject in all respects to the effects of
bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance and
other laws now or hereafter affecting generally the enforcement of creditors'
rights:
(1) Federal Fund was incorporated under the laws of the State of
California on January 7, 1982, and is validly existing and in good standing
under the laws of that state;
(2) Federal Fund is authorized to issue ten billion (10,000,000,000)
shares of common stock, no par value, all of which is allocated to the
Franklin Federal Tax-Free Income Fund Series of which three billion
(3,000,000,000) shares are further allocated to Class A of that series, and
each outstanding share of which is fully paid, non-assessable, fully
transferable, and has full voting rights. Assuming that the initial capital
shares of Federal Fund were issued in accordance with the 1940 Act, and the
Articles of Incorporation and By-laws of Federal Fund, and that all other
outstanding shares of Federal Fund were sold, issued and paid for in
accordance with the terms of Federal Fund's prospectus in effect at the
time of such sales, each such outstanding share of Federal Fund is fully
paid, non-assessable, freely transferable and has full voting rights;
(3) Federal Fund is an open-end, diversified investment company of the
management type registered as such under the 1940 Act;
(4) Except as disclosed in Federal Fund's currently effective
prospectus, such counsel does not know of any material suit, action, or
legal or administrative proceeding pending or threatened against Federal
Fund, the unfavorable outcome of which would materially and adversely
affect Federal Fund;
(5) Federal Fund Shares to be issued pursuant to the terms of this
Agreement and Plan have been duly authorized and, when issued and delivered
as provided in this Agreement and Plan, will have been validly issued and
fully paid and will be non-assessable by Federal Fund;
(6) All corporate actions required to be taken by Federal Fund to
authorize this Agreement and Plan and to effect the Plan of Reorganization
contemplated hereby have been duly authorized by all necessary corporate
action on the part of Federal Fund;
(7) Neither the execution, delivery, nor performance of this Agreement
and Plan by Federal Fund violates any provision of its Articles of
Incorporation, its By-laws, or the provisions of any agreement or other
instrument known to such counsel to which Federal Fund is a party or by
which
B-7
Federal Fund is otherwise bound; this Agreement and Plan is the legal,
valid and binding obligation of Federal Fund and is enforceable against
Federal Fund in accordance with its terms; and
(8) The registration statement of which the prospectus, dated
September 1, 1998, as amended January 1, 1999, of Federal Fund is a part
(the "Prospectus") is, at the time of the signing of this Agreement and
Plan, effective under the 1933 Act, and, to the best knowledge of such
counsel, no stop order suspending the effectiveness of such registration
statement has been issued, and no proceedings for such purpose have been
instituted or are pending before or threatened by the U.S. Securities and
Exchange Commission under the 1933 Act, and nothing has come to such
counsel's attention that causes it to believe that, at the time the
Prospectus became effective, or at the time of the signing of this
Agreement and Plan, or at the Closing, such Prospectus (except for the
financial statements and other financial and statistical data included
therein, as to which counsel need not express an opinion), contained any
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading; and such counsel knows of no legal or government
proceedings required to be described in the Prospectus, or of any contract
or document of a character required to be described in the Prospectus that
is not described as required.
In giving the opinions set forth above, this counsel may state that it is
relying on certificates of the officers of Federal Fund with regard to matters
of fact, and certain certifications and written statements of governmental
officials with respect to the good standing of Federal Fund.
(i) That the Trust shall have received a certificate from the President and
Secretary of Federal Fund to the effect that the statements contained in Federal
Fund's Prospectus, at the time the Prospectus became effective, at the date of
the signing of this Agreement and Plan, and at the Closing, did not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading.
(j) That Federal Fund's Registration Statement with respect to the Federal
Fund Shares to be delivered to the Municipal Fund's shareholders in accordance
with this Agreement and Plan shall have become effective, and no stop order
suspending the effectiveness of the Registration Statement or any amendment or
supplement thereto, shall have been issued prior to the Closing Date or shall be
in effect at Closing, and no proceedings for the issuance of such an order shall
be pending or threatened on that date.
(k) That the Federal Fund Shares to be delivered hereunder shall be
eligible for sale by Federal Fund with each state commission or agency with
which such eligibility is required in order to permit the Federal Fund Shares
lawfully to be delivered to each Municipal Fund shareholder.
(l) That, at the Closing, the Trust, on behalf of Municipal Fund, transfers
to Federal Fund aggregate Net Assets of Municipal Fund comprising at least 90%
in fair market value of the total net assets and 70% of the fair market value of
the total gross assets recorded on the books of Municipal Fund on the Closing
Date.
9. BROKERAGE FEES AND EXPENSES.
(a) The Trust and Federal Fund each represents and warrants to the other
that there are no broker or finders' fees payable by it in connection with the
transactions provided for herein.
(b) The expenses of entering into and carrying out the provisions of this
Agreement and Plan shall be borne one-quarter by Municipal Fund, one-quarter by
Federal Fund, and one-half by Franklin Advisers, Inc.
10. TERMINATION; POSTPONEMENT; WAIVER; ORDER.
(a) Anything contained in this Agreement and Plan to the contrary
notwithstanding, this Agreement and Plan may be terminated and the Plan of
Reorganization abandoned at any time (whether before or
B-8
after approval thereof by the shareholders of Municipal Fund) prior to the
Closing or the Closing may be postponed as follows:
(1) by mutual consent of the Trust and Federal Fund;
(2) by Federal Fund if any condition of its obligations set forth in
Section 8 has not been fulfilled or waived; or
(3) by the Trust, if any condition of its obligations set forth in
Section 8 has not been fulfilled or waived.
An election by the Trust, on behalf of Municipal Fund, or Federal Fund to
terminate this Agreement and Plan and to abandon the Plan of Reorganization
shall be exercised, respectively, by the Board of Trustees of the Trust or Board
of Directors of Federal Fund.
(b) If the transactions contemplated by this Agreement and Plan have not
been consummated by December 31, 1999, the Agreement and Plan shall
automatically terminate on that date, unless a later date is agreed to by both
Federal Fund and the Trust.
(c) In the event of termination of this Agreement and Plan pursuant to the
provisions hereof, the same shall become void and have no further effect, and
neither the Trust nor Federal Fund, nor their directors or trustees, officers,
agents or shareholders shall have any liability in respect of this Agreement and
Plan.
(d) At any time prior to the Closing, any of the terms or conditions of
this Agreement and Plan may be waived by the party who is entitled to the
benefit thereof by action taken by that party's Board of Trustees or Board of
Directors, as applicable, if, in the judgment of such Board, such action or
waiver will not have a material adverse effect on the benefits intended under
this Agreement and Plan to its shareholders, on behalf of whom such action is
taken.
(e) The respective representations and warranties contained in Sections 4
to 6 hereof shall expire with and be terminated by the Plan of Reorganization,
and neither the Trust nor Federal Fund, nor any of their officers, trustees or
directors, agents or shareholders shall have any liability with respect to such
representations or warranties after the Closing. This provision shall not
protect any officer, trustee or director, agent or shareholder of the Trust or
Federal Fund against any liability to the entity for which that officer, trustee
or director, agent or shareholder so acts or to its shareholders to which that
officer, trustee or director, agent or shareholder would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties in the conduct of such office.
(f) If any order or orders of the U.S. Securities and Exchange Commission
with respect to this Agreement and Plan shall be issued prior to the Closing and
shall impose any terms or conditions that are determined by action of the Board
of Trustees of the Trust or of the Board of Directors of the Federal Fund to be
acceptable, such terms and conditions shall be binding as if a part of this
Agreement and Plan without further vote or approval of the shareholders of
Municipal Fund, unless such terms and conditions shall result in a change in the
method of computing the number of Federal Fund Shares to be issued to Municipal
Fund in which event, unless such terms and conditions shall have been included
in the proxy solicitation material furnished to the shareholders of Municipal
Fund prior to the meeting at which the transactions contemplated by this
Agreement and Plan shall have been approved, this Agreement and Plan shall not
be consummated and shall terminate unless Municipal Fund shall promptly call a
special meeting of shareholders at which such conditions so imposed shall be
submitted for approval.
11. ENTIRE AGREEMENT AND AMENDMENTS.
This Agreement and Plan embodies the entire agreement between the parties
and there are no agreements, understandings, restrictions, or warranties between
the parties other than those set forth herein or herein provided for. This
Agreement and Plan may be amended only by mutual consent of the parties in
writing. Neither this Agreement and Plan nor any interest herein may be assigned
without the prior written consent of the other party.
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12. COUNTERPARTS.
This Agreement and Plan may be executed in any number of counterparts, each
of which shall be deemed to be an original, but all such counterparts together
shall constitute but one instrument.
13. NOTICES.
Any notice, report, or demand required or permitted by any provision of
this Agreement and Plan shall be in writing and shall be deemed to have been
given if delivered or mailed, first class postage prepaid, addressed to Franklin
Federal Tax-Free Income Fund at 777 Mariners Island Boulevard, P. O. Box 7777,
San Mateo, CA 94403-7777, Attention: Secretary, or Franklin Municipal Securities
Trust, at 777 Mariners Island Boulevard, P.O. Box 7777, San Mateo CA 94403-7777,
Attention: Secretary, as the case may be.
14. GOVERNING LAW.
This Agreement shall be governed by and carried out in accordance with the
laws of the State of Delaware.
IN WITNESS WHEREOF, Franklin Federal Tax-Free Income Fund and Franklin
Municipal Securities Trust, on behalf of Franklin Hawaii Municipal Bond Fund,
have each caused this Agreement and Plan to be executed on its behalf by its
duly authorized officers, all as of the date and year first-above written.
<TABLE>
<S> <C>
FRANKLIN FEDERAL TAX-FREE
INCOME FUND
Attest:
/s/ LEIANN NUZUM By: /s/ DEBORAH R. GATZEK
- ----------------------------------------------------- -----------------------------------------------------
Assistant Secretary Deborah R. Gatzek
Vice President and Secretary
FRANKLIN MUNICIPAL SECURITIES TRUST, ON BEHALF OF
FRANKLIN HAWAII MUNICIPAL BOND FUND
Attest:
/s/ LEIANN NUZUM By: /s/ DEBORAH R. GATZEK
- ----------------------------------------------------- -----------------------------------------------------
Assistant Secretary Deborah R. Gatzek
Vice President and Secretary
</TABLE>
B-10
EXHIBIT C
AGREEMENT AND PLAN OF REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement and Plan"), made as of
this 28th day of April, 1999, by and between FRANKLIN FEDERAL TAX-FREE INCOME
FUND ("Federal Fund"), a corporation incorporated under the laws of the State of
California in 1982, with its principal place of business at 777 Mariners Island
Boulevard, San Mateo, California 94404, and FRANKLIN MUNICIPAL SECURITIES TRUST
(the "Trust"), a business trust created under the laws of the State of Delaware
in 1992, with its principal place of business at 777 Mariners Island Boulevard,
San Mateo, California 94404, on behalf of its series Franklin Washington
Municipal Bond Fund, a series of shares of the Trust ("Municipal Fund").
PLAN OF REORGANIZATION
The reorganization (hereinafter referred to as the "Plan of
Reorganization") will consist of (i) the acquisition by Federal Fund of
substantially all of the property, assets and goodwill of Municipal Fund in
exchange solely for shares of common stock, no par value, of Federal
Fund - Class A ("Federal Fund Shares"); (ii) the distribution of Federal Fund
Shares to the shareholders of Municipal Fund according to their respective
interests; and (iii) the subsequent dissolution of Municipal Fund as soon as
practicable after the closing (as defined in Section 3, hereinafter called the
"Closing"), all upon and subject to the terms and conditions of this Agreement
and Plan hereinafter set forth.
AGREEMENT
In order to consummate the Plan of Reorganization and in consideration of
the promises and of the covenants and agreements hereinafter set forth, and
intending to be legally bound, the parties hereto covenant and agree as follows:
1. SALE AND TRANSFER OF ASSETS, LIQUIDATION AND DISSOLUTION OF MUNICIPAL FUND.
(a) Subject to the terms and conditions of this Agreement and Plan, and in
reliance on the representations and warranties of Federal Fund herein contained,
and in consideration of the delivery by Federal Fund of the number of its
Federal Fund Shares hereinafter provided, the Trust, on behalf of Municipal
Fund, agrees that it will convey, transfer and deliver to Federal Fund at the
Closing all of Municipal Fund's then existing assets, free and clear of all
liens, encumbrances, and claims whatsoever (other than shareholders' rights of
redemption), except for cash, bank deposits, or cash equivalent securities in an
estimated amount necessary to (i) pay the costs and expenses of carrying out
this Agreement and Plan (including, but not limited to, fees of counsel and
accountants, and expenses of its liquidation and dissolution contemplated
hereunder), which costs and expenses shall be established on Municipal Fund's
books as liability reserves; (ii) discharge its unpaid liabilities on its books
at the closing date (as defined in Section 3, hereinafter called the "Closing
Date"), including, but not limited to, its income dividends and capital gains
distributions, if any, payable for the period prior to, and through, the Closing
Date; and (iii) pay such contingent liabilities as the Board of Trustees shall
reasonably deem to exist against Municipal Fund, if any, at the Closing Date,
for which contingent and other appropriate liabilities reserves shall be
established on Municipal Fund's books (hereinafter "Net Assets"). Municipal Fund
shall also retain any and all rights that it may have over and against any
person that may have accrued up to and including the close of business on the
Closing Date.
(b) Subject to the terms and conditions of this Agreement and Plan, and in
reliance on the representations and warranties of the Trust herein contained,
and in consideration of such sale, conveyance, transfer, and delivery, Federal
Fund agrees at the Closing to deliver to the Trust the number of Federal Fund
Shares, determined by dividing the aggregate Net Assets of Municipal Fund on the
Closing Date by the net asset value per share of Federal Fund Shares, as of 1:00
p.m. Pacific time on the Closing Date. All such values shall be determined in
the manner and as of the time set forth in Section 2 hereof.
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(c) Immediately following the Closing, Municipal Fund shall dissolve and
distribute pro rata to its shareholders of record as of the close of business on
the Closing Date Federal Fund Shares received by Municipal Fund pursuant to this
Section 1. Such liquidation and distribution shall be accomplished by the
establishment of accounts on the share records of Federal Fund of the type and
in the amounts due such shareholders based on their respective holdings as of
the close of business on the Closing Date. Fractional Federal Fund Shares shall
be carried to the third decimal place. As promptly as practicable after the
Closing, each holder of any outstanding certificate or certificates representing
shares of beneficial interest of Municipal Fund shall be entitled to surrender
the same to the transfer agent for the Federal Fund in exchange for the number
of Federal Fund Shares into which the shares of the Municipal Fund theretofore
represented by the certificate or certificates so surrendered shall have been
converted. Certificates for Federal Fund Shares shall not be issued, unless
specifically requested by the shareholders. Until so surrendered, each
outstanding certificate which, prior to the Closing, represented shares of
beneficial interest of the Municipal Fund shall be deemed for all the Federal
Fund's purposes to evidence ownership of the number of Federal Fund's Shares
into which the shares of beneficial interest of the Municipal Fund (which prior
to the Closing were represented thereby) have been converted.
2. VALUATION.
(a) The value of Municipal Fund's Net Assets to be acquired by Federal Fund
hereunder shall be computed as of 1:00 p.m. Pacific time on the Closing Date
using the valuation procedures set forth in Municipal Fund's currently effective
prospectus.
(b) The net asset value of a share of common stock of Federal Fund shall be
determined to the nearest full cent as of 1:00 p.m. Pacific time on the Closing
Date using the valuation procedures set forth in Federal Fund's currently
effective prospectus.
(c) The net asset value of a share of beneficial interest of Municipal Fund
shall be determined to the fourth decimal place as of 1:00 p.m. Pacific time on
the Closing Date using the valuation procedures set forth in Municipal Fund's
currently effective prospectus.
3. CLOSING AND CLOSING DATE.
The Closing Date shall be August 26, 1999, or such later date as the
parties may mutually agree. The Closing shall take place at the principal office
of Federal Fund at 2:00 p.m. Pacific time on the Closing Date. The Trust shall
have provided for delivery, as of the Closing, of those Net Assets of Municipal
Fund to be transferred to Federal Fund's Custodian, Bank of New York, Mutual
Funds Division, 90 Washington Street, New York, New York 10286. Also, the Trust
shall deliver at the Closing a list of names and addresses of the shareholders
of record of Municipal Fund's shares and the number of shares of beneficial
interest owned by each such shareholder, indicating thereon which such shares
are represented by outstanding certificates and which by book-entry accounts,
all as of 1:00 p.m. Pacific time on the Closing Date, certified by its transfer
agent or by its President to the best of its or his knowledge and belief.
Federal Fund shall issue and deliver a certificate or certificates evidencing
the shares of common stock of Federal Fund to be delivered to said transfer
agent registered in such manner as the Trust may request, or provide evidence
satisfactory to the Trust that such Federal Fund Shares have been registered in
an account on the books of Federal Fund in such manner as the Trust may request.
4. REPRESENTATIONS AND WARRANTIES BY THE TRUST.
The Trust represents and warrants to Federal Fund that:
(a) The Trust is a business trust created under the laws of the State of
Delaware on June 15, 1992, and is validly existing and in good standing under
the laws of that state. The Trust is duly registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end, management
investment company and all of Municipal Fund's shares sold were sold pursuant to
an effective registration statement filed under the Securities Act of 1933, as
amended (the "1933 Act"), except for those shares sold pursuant to the private
offering exemption for the purpose of raising the required initial capital.
C-2
(b) The Trust is authorized to issue an unlimited number of shares of
beneficial interest, $0.01 par value per share, each outstanding share of which
is fully paid, non-assessable, fully transferable and has full voting rights and
currently issues shares of five (5) series including Municipal Fund. The Trust
is authorized to issue an unlimited number of shares of beneficial interest of
each series.
(c) The financial statements appearing in the Trust's Annual Report to
Shareholders for the fiscal year ended May 31, 1998, audited by Coopers &
Lybrand, L.L.P., copies of which have been delivered to Federal Fund, fairly
present the financial position of Municipal Fund as of such date and the results
of its operations for the periods indicated in conformity with generally
accepted accounting principles applied on a consistent basis.
(d) The books and records of Municipal Fund made available to Federal Fund
and/or its counsel accurately summarize the accounting data represented and
contain no material omissions with respect to the business and operations of
Municipal Fund.
(e) The Trust has the necessary power and authority to conduct Municipal
Fund's business as such business is now being conducted.
(f) The Trust is not a party to or obligated under any provision of the
Trust's Agreement and Declaration of Trust or By-laws, or any contract or any
other commitment or obligation, and is not subject to any order or decree that
would be violated by the Trust's execution or performance under this Agreement
and Plan.
(g) The Trust has elected to treat the Municipal Fund as a regulated
investment company ("RIC") for federal income tax purposes under Part I of
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), and
Municipal Fund has qualified as a RIC for each taxable year since its inception
and will qualify as a RIC as of the Closing Date.
5. REPRESENTATIONS AND WARRANTIES BY FEDERAL FUND.
Federal Fund represents and warrants to the Trust, on behalf of Municipal
Fund, that:
(a) Federal Fund is a corporation incorporated under the laws of the State
of California on January 7, 1982, and is validly existing and in good standing
under the laws of that state. Federal Fund is duly registered under the 1940 Act
as a diversified, open-end, management investment company and all its shares
sold have been sold pursuant to an effective registration statement filed under
the 1933 Act, except for those shares sold pursuant to the private offering
exemption for the purpose of raising the required initial capital.
(b) Federal Fund is authorized to issue ten billion (10,000,000,000) shares
of common stock, no par value, all of which is allocated to the Franklin Federal
Tax-Free Income Fund Series of which three billion (3,000,000,000) shares are
further allocated to Class A of that series, and each outstanding share of which
is fully paid, non-assessable, fully transferable, and has full voting rights.
Federal Fund Shares to be issued pursuant to this Agreement and Plan will be
fully paid, non-assessable, freely transferable and have full voting rights.
(c) At the Closing, Federal Fund Shares will be eligible for offering to
the public in those states of the United States and jurisdictions in which the
shares of Municipal Fund are presently eligible for offering to the public, and
there are a sufficient number of Federal Fund Shares registered under the 1933
Act to permit the transfers contemplated by this Agreement and Plan to be
consummated.
(d) The financial statements appearing in Federal Fund's Annual Report to
Shareholders for the fiscal year ended April 30, 1998, audited by Coopers &
Lybrand L.L.P., copies of which have been delivered to Municipal Fund, fairly
present the financial position of Federal Fund as of such date and the results
of its operations for the periods indicated in conformity with generally
accepted accounting principles applied on a consistent basis.
C-3
(e) Federal Fund has the necessary power and authority to conduct its
business as such business is now being conducted.
(f) Federal Fund is not a party to or obligated under any provision of its
Articles of Incorporation or By-laws, or any contract or any other commitment or
obligation, and is not subject to any order or decree, that would be violated by
its execution of or performance under this Agreement and Plan.
(g) Federal Fund has elected to be treated as a RIC for federal income tax
purposes under Part I of Subchapter M of the Code, has qualified as a RIC for
each taxable year since its inception, and will qualify as a RIC as of the
Closing Date.
6. REPRESENTATIONS AND WARRANTIES BY THE TRUST AND FEDERAL FUND.
The Trust and Federal Fund each represents and warrants to the other that:
(a) The statement of assets and liabilities to be furnished by it as of
1:00 p.m. Pacific time on the Closing Date for the purpose of determining the
number of Federal Fund Shares to be issued pursuant to Section 1 of this
Agreement and Plan will accurately reflect its Net Assets in the case of
Municipal Fund and its net assets in the case of Federal Fund, and outstanding
shares of common stock, as of such date, in conformity with generally accepted
accounting principles applied on a consistent basis.
(b) At the Closing, it will have good and marketable title to all of the
securities and other assets shown on the statement of assets and liabilities
referred to in "(a)" above, free and clear of all liens or encumbrances of any
nature whatsoever, except such imperfections of title or encumbrances as do not
materially detract from the value or use of the assets subject thereto, or
materially affect title thereto.
(c) Except as disclosed in its currently effective prospectus, there is no
material suit, judicial action, or legal or administrative proceeding pending or
threatened against it.
(d) There are no known actual or proposed deficiency assessments with
respect to any taxes payable by it.
(e) The execution, delivery, and performance of this Agreement and Plan
have been duly authorized by all necessary action of its Board of Trustees or
Board of Directors, as applicable, and this Agreement and Plan constitutes a
valid and binding obligation enforceable in accordance with its terms.
(f) It anticipates that consummation of this Agreement and Plan will not
cause it, in the case of Federal Fund, and Municipal Fund, in the case of the
Trust, to fail to conform to the requirements of Subchapter M of the Code for
federal income taxation as a RIC at the end of its fiscal year.
(g) It has the necessary power and authority to conduct its business, in
the case of Federal Fund, and Municipal Fund's business, in the case of
Municipal Fund, as such business is now being conducted.
7. COVENANTS OF THE TRUST AND FEDERAL FUND.
(a) The Trust, on behalf of Municipal Fund, and Federal Fund each covenant
to operate their respective businesses as presently conducted between the date
hereof and the Closing.
(b) The Trust undertakes that it will not acquire the Federal Fund Shares
for the purpose of making distributions thereof to anyone other than Municipal
Fund's shareholders.
(c) The Trust undertakes that, if this Agreement and Plan is consummated,
it will dissolve Municipal Fund and rescind the establishment of Municipal Fund
as a series of the Trust.
(d) The Trust and Federal Fund each agree that, by the Closing, all of
their federal and other tax returns and reports required by law to be filed by
the Trust, on behalf of Municipal Fund, or by Federal Fund on or before such
date shall have been filed, and all federal and other taxes shown as due on said
returns shall have either been paid or adequate liability reserves shall have
been provided for the payment of such taxes.
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(e) At the Closing, the Trust will provide Federal Fund with a copy of the
shareholder ledger accounts of Municipal Fund, certified by its transfer agent
or its President to the best of its or his knowledge and belief, for all the
shareholders of record of Municipal Fund's shares as of 1:00 p.m. Pacific time
on the Closing Date who are to become shareholders of Federal Fund as a result
of the transfer of assets that is the subject of this Agreement and Plan.
(f) The Trust agrees to mail to each shareholder of record entitled to vote
at the meeting of Municipal Fund's shareholders at which action on this
Agreement and Plan is to be considered, in sufficient time to comply with
requirements as to notice thereof, a Joint Prospectus and Proxy Statement that
complies in all material respects with the applicable provisions of Section
14(a) of the Securities Exchange Act of 1934, as amended, and Section 20(a) of
the 1940 Act, and the rules and regulations, respectively, thereunder.
(g) Federal Fund will file with the U.S. Securities and Exchange Commission
a registration statement on Form N-14 under the 1933 Act relating to the Federal
Fund Shares issuable hereunder ("Registration Statement"), and will use its best
efforts to provide that the Registration Statement becomes effective as promptly
as practicable. At the time it becomes effective, the Registration Statement
will (i) comply in all material respects with the applicable provisions of the
1933 Act, and the rules and regulations promulgated thereunder; and (ii) not
contain any untrue statement of material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading. At the time the Registration Statement becomes effective, at the
time of Municipal Fund's shareholders' meeting, and at the Closing Date, the
prospectus and statement of additional information included in the Registration
Statement will not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading.
8. CONDITIONS PRECEDENT TO BE FULFILLED BY THE TRUST AND FEDERAL FUND.
The obligations of the Trust and Federal Fund to effectuate this Agreement
and Plan shall be subject to the following respective conditions:
(a) That: (i) all the representations and warranties of the other party
contained herein shall be true and correct as of the Closing with the same
effect as though made as of and at such date; (ii) the other party shall have
performed all obligations required by this Agreement and Plan to be performed by
it prior to the Closing; and (iii) the other party shall have delivered to such
party a certificate signed by the President and by the Secretary or equivalent
officer to the foregoing effect.
(b) That each party shall have delivered to the other party a copy of the
resolutions approving this Agreement and Plan adopted by its Board of Trustees
or Board of Directors, as applicable, certified by its Secretary or equivalent
officer.
(c) That the U.S. Securities and Exchange Commission shall not have issued
an unfavorable management report under Section 25(b) of the 1940 Act or
instituted or threatened to institute any proceeding seeking to enjoin
consummation of the Plan of Reorganization under Section 25(c) of the 1940 Act.
And, further, no other legal, administrative or other proceeding shall have been
instituted or threatened that would materially affect the financial condition of
either party or would prohibit the transactions contemplated hereby.
(d) That this Agreement and Plan and the Plan of Reorganization
contemplated hereby shall have been adopted and approved by the appropriate
action of the shareholders of Municipal Fund at an annual or special meeting or
any adjournment thereof.
(e) That each party shall have declared a distribution or distributions
prior to the Closing Date that, together with all previous distributions, shall
have the effect of distributing to its shareholders (i) all of its net
investment income and all of its net realized capital gains, if any, for the
period from the close of its last fiscal year to 1:00 p.m. Pacific time on the
Closing Date; and (ii) any undistributed net investment income and net realized
capital gains from any period to the extent not otherwise declared for
distribution.
C-5
(f) That there shall be delivered to the Trust and Federal Fund an opinion
from Messrs. Stradley, Ronon, Stevens & Young, LLP, counsel to the Trust and
Federal Fund, to the effect that, provided the acquisition contemplated hereby
is carried out in accordance with this Agreement and Plan and based upon
certificates of the officers of the Trust and Federal Fund with regard to
matters of fact:
(1) The acquisition by Federal Fund of substantially all the assets of
Municipal Fund as provided for herein in exchange for Federal Fund Shares
will qualify as a reorganization within the meaning of Section 368(a)(1)(C)
of the Code, and Municipal Fund and Federal Fund will each be a party to
the respective reorganization within the meaning of Section 368(b) of the
Code;
(2) No gain or loss will be recognized by Municipal Fund upon the
transfer of substantially all of its assets to Federal Fund in exchange
solely for voting shares of Federal Fund (Sections 361(a) and 357(a)). No
opinion, however, will be expressed as to whether any accrued market
discount will be required to be recognized as ordinary income pursuant to
Section 1276 of the Code;
(3) No gain or loss will be recognized by Federal Fund upon the
receipt of substantially all of the assets of Municipal Fund in exchange
solely for voting shares of Federal Fund (Section 1032(a));
(4) The basis of the assets of Municipal Fund received by Federal Fund
will be the same as the basis of such assets to Municipal Fund immediately
prior to the exchange (Section 362(b));
(5) The holding period of the assets of Municipal Fund received by
Federal Fund will include the period during which such assets were held by
Municipal Fund (Section 1223(2));
(6) No gain or loss will be recognized to the shareholders of
Municipal Fund upon the exchange of their shares in Municipal Fund for
voting shares of Federal Fund (Section 354(a));
(7) The basis of the Federal Fund Shares received by Municipal Fund's
shareholders shall be the same as the basis of the shares of Municipal Fund
exchanged therefor (Section 358(a)(1));
(8) The holding period of Federal Fund Shares received by Municipal
Fund's shareholders (including fractional shares to which they may be
entitled) will include the holding period of Municipal Fund's shares
surrendered in exchange therefor, provided that Municipal Fund's shares
were held as a capital asset on the date of the exchange (Section 1223(1));
and
(9) Federal Fund will succeed to and take into account as of the date
of the proposed transfer (as defined in Section 1.381(b)-1(b) of the Income
Tax Regulations) the items of Municipal Fund described in Section 381(c) of
the Code (as defined in Section 1.381(b)-1(b) of the Income Tax
Regulations), subject to the conditions and limitations specified in
Sections 381(b) and (c), 382, 383 and 384 of the Code and the Income Tax
Regulations thereunder.
(g) That Federal Fund shall have received an opinion in form and substance
satisfactory to it from Messrs. Stradley Ronon Stevens & Young, LLP, counsel to
the Trust, to the effect that, subject in all respects to the effects of
bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, and
other laws now or hereafter affecting generally the enforcement of creditors'
rights:
(1) The Trust was created as a business trust under the laws of the
State of Delaware on June 15, 1992, and is validly existing and in good
standing under the laws of that state;
(2) The Trust is authorized to issue an unlimited number of shares of
beneficial interest of Municipal Fund, $0.01 par value per share. Assuming
that the initial shares of beneficial interest were issued in accordance
with the 1940 Act and the Agreement and Declaration and By-laws of the
Trust, and that all other outstanding shares of Municipal Fund were sold,
issued and paid for in accordance with the terms of Municipal Fund's
prospectus in effect at the time of such sales, each such outstanding share
is fully paid, non-assessable, fully transferable and has full voting
rights;
(3) The Trust is an open-end investment company of the management type
registered as such under the 1940 Act;
C-6
(4) Except as disclosed in Municipal Fund's currently effective
prospectus, such counsel does not know of any material suit, action, or
legal or administrative proceeding pending or threatened against the Trust,
the unfavorable outcome of which would materially and adversely affect the
Trust or Municipal Fund;
(5) All actions required to be taken by the Trust to authorize this
Agreement and Plan and to effect the Plan of Reorganization contemplated
hereby have been duly authorized by all necessary action on the part of the
Trust; and
(6) Neither the execution, delivery, nor performance of this Agreement
and Plan by the Trust violates any provision of its Agreement and
Declaration of Trust or By-laws, or the provisions of any agreement or
other instrument known to such counsel to which the Trust is a party or by
which Municipal Fund is otherwise bound; this Agreement and Plan is the
legal, valid and binding obligation of the Trust and Municipal Fund and is
enforceable against the Trust and/or Municipal Fund in accordance with its
terms.
In giving the opinions set forth above, this counsel may state that it is
relying on certificates of the officers of the Trust with regard to matters of
fact, and certain certifications and written statements of governmental
officials with respect to the good standing of the Trust and Municipal Fund.
(h) That the Trust shall have received an opinion in form and substance
satisfactory to it from Messrs. Stradley, Ronon, Stevens & Young, LLP, counsel
to Federal Fund, to the effect that, subject in all respects to the effects of
bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance and
other laws now or hereafter affecting generally the enforcement of creditors'
rights:
(1) Federal Fund was incorporated under the laws of the State of
California on January 7, 1982, and is validly existing and in good standing
under the laws of that state;
(2) Federal Fund is authorized to issue ten billion (10,000,000,000)
shares of common stock, no par value, all of which is allocated to the
Franklin Federal Tax-Free Income Fund Series of which three billion
(3,000,000,000) shares are further allocated to Class A of that series, and
each outstanding share of which is fully paid, non-assessable, fully
transferable, and has full voting rights. Assuming that the initial capital
shares of Federal Fund were issued in accordance with the 1940 Act, and the
Articles of Incorporation and By-laws of Federal Fund, and that all other
outstanding shares of Federal Fund were sold, issued and paid for in
accordance with the terms of Federal Fund's prospectus in effect at the
time of such sales, each such outstanding share of Federal Fund is fully
paid, non-assessable, freely transferable and has full voting rights;
(3) Federal Fund is an open-end, diversified investment company of the
management type registered as such under the 1940 Act;
(4) Except as disclosed in Federal Fund's currently effective
prospectus, such counsel does not know of any material suit, action, or
legal or administrative proceeding pending or threatened against Federal
Fund, the unfavorable outcome of which would materially and adversely
affect Federal Fund;
(5) Federal Fund Shares to be issued pursuant to the terms of this
Agreement and Plan have been duly authorized and, when issued and delivered
as provided in this Agreement and Plan, will have been validly issued and
fully paid and will be non-assessable by Federal Fund;
(6) All corporate actions required to be taken by Federal Fund to
authorize this Agreement and Plan and to effect the Plan of Reorganization
contemplated hereby have been duly authorized by all necessary corporate
action on the part of Federal Fund;
(7) Neither the execution, delivery, nor performance of this Agreement
and Plan by Federal Fund violates any provision of its Articles of
Incorporation, its By-laws, or the provisions of any agreement or other
instrument known to such counsel to which Federal Fund is a party or by
which
C-7
Federal Fund is otherwise bound; this Agreement and Plan is the legal,
valid and binding obligation of Federal Fund and is enforceable against
Federal Fund in accordance with its terms; and
(8) The registration statement of which the prospectus, dated
September 1, 1998, as amended January 1, 1999, of Federal Fund is a part
(the "Prospectus") is, at the time of the signing of this Agreement and
Plan, effective under the 1933 Act, and, to the best knowledge of such
counsel, no stop order suspending the effectiveness of such registration
statement has been issued, and no proceedings for such purpose have been
instituted or are pending before or threatened by the U.S. Securities and
Exchange Commission under the 1933 Act, and nothing has come to such
counsel's attention that causes it to believe that, at the time the
Prospectus became effective, or at the time of the signing of this
Agreement and Plan, or at the Closing, such Prospectus (except for the
financial statements and other financial and statistical data included
therein, as to which counsel need not express an opinion), contained any
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading; and such counsel knows of no legal or government
proceedings required to be described in the Prospectus, or of any contract
or document of a character required to be described in the Prospectus that
is not described as required.
In giving the opinions set forth above, this counsel may state that it is
relying on certificates of the officers of Federal Fund with regard to matters
of fact, and certain certifications and written statements of governmental
officials with respect to the good standing of Federal Fund.
(i) That the Trust shall have received a certificate from the President and
Secretary of Federal Fund to the effect that the statements contained in Federal
Fund's Prospectus, at the time the Prospectus became effective, at the date of
the signing of this Agreement and Plan, and at the Closing, did not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading.
(j) That Federal Fund's Registration Statement with respect to the Federal
Fund Shares to be delivered to the Municipal Fund's shareholders in accordance
with this Agreement and Plan shall have become effective, and no stop order
suspending the effectiveness of the Registration Statement or any amendment or
supplement thereto, shall have been issued prior to the Closing Date or shall be
in effect at Closing, and no proceedings for the issuance of such an order shall
be pending or threatened on that date.
(k) That the Federal Fund Shares to be delivered hereunder shall be
eligible for sale by Federal Fund with each state commission or agency with
which such eligibility is required in order to permit the Federal Fund Shares
lawfully to be delivered to each Municipal Fund shareholder.
(l) That, at the Closing, the Trust, on behalf of Municipal Fund, transfers
to Federal Fund aggregate Net Assets of Municipal Fund comprising at least 90%
in fair market value of the total net assets and 70% of the fair market value of
the total gross assets recorded on the books of Municipal Fund on the Closing
Date.
9. BROKERAGE FEES AND EXPENSES.
(a) The Trust and Federal Fund each represents and warrants to the other
that there are no broker or finders' fees payable by it in connection with the
transactions provided for herein.
(b) The expenses of entering into and carrying out the provisions of this
Agreement and Plan shall be borne one-quarter by Municipal Fund, one-quarter by
Federal Fund, and one-half by Franklin Advisers, Inc.
10. TERMINATION; POSTPONEMENT; WAIVER; ORDER.
(a) Anything contained in this Agreement and Plan to the contrary
notwithstanding, this Agreement and Plan may be terminated and the Plan of
Reorganization abandoned at any time (whether before or
C-8
after approval thereof by the shareholders of Municipal Fund) prior to the
Closing or the Closing may be postponed as follows:
(1) by mutual consent of the Trust and Federal Fund;
(2) by Federal Fund if any condition of its obligations set forth in
Section 8 has not been fulfilled or waived; or
(3) by the Trust, if any condition of its obligations set forth in
Section 8 has not been fulfilled or waived.
An election by the Trust, on behalf of Municipal Fund, or Federal Fund to
terminate this Agreement and Plan and to abandon the Plan of Reorganization
shall be exercised, respectively, by the Board of Trustees of the Trust or Board
of Directors of Federal Fund.
(b) If the transactions contemplated by this Agreement and Plan have not
been consummated by December 31, 1999, the Agreement and Plan shall
automatically terminate on that date, unless a later date is agreed to by both
Federal Fund and the Trust.
(c) In the event of termination of this Agreement and Plan pursuant to the
provisions hereof, the same shall become void and have no further effect, and
neither the Trust nor Federal Fund, nor their directors or trustees, officers,
agents or shareholders shall have any liability in respect of this Agreement and
Plan.
(d) At any time prior to the Closing, any of the terms or conditions of
this Agreement and Plan may be waived by the party who is entitled to the
benefit thereof by action taken by that party's Board of Trustees or Board of
Directors, as applicable, if, in the judgment of such Board, such action or
waiver will not have a material adverse effect on the benefits intended under
this Agreement and Plan to its shareholders, on behalf of whom such action is
taken.
(e) The respective representations and warranties contained in Sections 4
to 6 hereof shall expire with and be terminated by the Plan of Reorganization,
and neither the Trust nor Federal Fund, nor any of their officers, trustees or
directors, agents or shareholders shall have any liability with respect to such
representations or warranties after the Closing. This provision shall not
protect any officer, trustee or director, agent or shareholder of the Trust or
Federal Fund against any liability to the entity for which that officer, trustee
or director, agent or shareholder so acts or to its shareholders to which that
officer, trustee or director, agent or shareholder would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties in the conduct of such office.
(f) If any order or orders of the U.S. Securities and Exchange Commission
with respect to this Agreement and Plan shall be issued prior to the Closing and
shall impose any terms or conditions that are determined by action of the Board
of Trustees of the Trust or of the Board of Directors of the Federal Fund to be
acceptable, such terms and conditions shall be binding as if a part of this
Agreement and Plan without further vote or approval of the shareholders of
Municipal Fund, unless such terms and conditions shall result in a change in the
method of computing the number of Federal Fund Shares to be issued to Municipal
Fund in which event, unless such terms and conditions shall have been included
in the proxy solicitation material furnished to the shareholders of Municipal
Fund prior to the meeting at which the transactions contemplated by this
Agreement and Plan shall have been approved, this Agreement and Plan shall not
be consummated and shall terminate unless Municipal Fund shall promptly call a
special meeting of shareholders at which such conditions so imposed shall be
submitted for approval.
11. ENTIRE AGREEMENT AND AMENDMENTS.
This Agreement and Plan embodies the entire agreement between the parties
and there are no agreements, understandings, restrictions, or warranties between
the parties other than those set forth herein or herein provided for. This
Agreement and Plan may be amended only by mutual consent of the parties in
writing. Neither this Agreement and Plan nor any interest herein may be assigned
without the prior written consent of the other party.
C-9
12. COUNTERPARTS.
This Agreement and Plan may be executed in any number of counterparts, each
of which shall be deemed to be an original, but all such counterparts together
shall constitute but one instrument.
13. NOTICES.
Any notice, report, or demand required or permitted by any provision of
this Agreement and Plan shall be in writing and shall be deemed to have been
given if delivered or mailed, first class postage prepaid, addressed to Franklin
Federal Tax-Free Income Fund at 777 Mariners Island Boulevard, P.O. Box 7777,
San Mateo, CA 94403-7777, Attention: Secretary, or Franklin Municipal Securities
Trust, at 777 Mariners Island Boulevard, P.O. Box 7777, San Mateo CA 94403-7777,
Attention: Secretary, as the case may be.
14. GOVERNING LAW.
This Agreement shall be governed by and carried out in accordance with the
laws of the State of Delaware.
IN WITNESS WHEREOF, Franklin Federal Tax-Free Income Fund and Franklin
Municipal Securities Trust, on behalf of Franklin Washington Municipal Bond
Fund, have each caused this Agreement and Plan to be executed on its behalf by
its duly authorized officers, all as of the date and year first-above written.
<TABLE>
<S> <C>
FRANKLIN FEDERAL TAX-FREE
INCOME FUND
Attest:
/s/ LEIANN NUZUM /s/ DEBORAH R. GATZEK
- ----------------------------------------------------- -----------------------------------------------------
Assistant Secretary Deborah R. Gatzek
Vice President and Secretary
FRANKLIN MUNICIPAL SECURITIES
TRUST, ON BEHALF OF FRANKLIN
WASHINGTON MUNICIPAL BOND FUND
Attest:
/s/ LEIANN NUZUM By: /s/ DEBORAH R. GATZEK
- ----------------------------------------------------- -----------------------------------------------------
Assistant Secretary Deborah R. Gatzek
Vice President and Secretary
</TABLE>
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MUN PROXY
PROSPECTUS
FRANKLIN
FEDERAL TAX-FREE
INCOME FUND
INVESTMENT STRATEGY
TAX-FREE INCOME
SEPTEMBER 1, 1998 AS AMENDED JANUARY 1, 1999
Class A, B & C
Please read this prospectus before investing, and keep it for future
reference. It contains important information, including how the fund invests
and the services available to shareholders.
To learn more about the fund and its policies, you may request a copy of the
fund's Statement of Additional Information ("SAI"), dated September 1, 1998,
which we may amend from time to time. We have filed the SAI with the SEC and
have incorporated it by reference into this prospectus.
For a free copy of the SAI or a larger print version of this prospectus,
contact your investment representative or call 1-800/DIAL BEN.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE
U.S. GOVERNMENT. MUTUAL FUND SHARES INVOLVE INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUND SHARES, THE SEC HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
FRANKLIN FEDERAL
TAX-FREE INCOME FUND
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED IN ANY
STATE, JURISDICTION OR COUNTRY IN WHICH THE OFFERING IS NOT AUTHORIZED. NO
SALES REPRESENTATIVE, DEALER, OR OTHER PERSON IS AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS. FURTHER INFORMATION MAY BE OBTAINED FROM DISTRIBUTORS.
TABLE OF CONTENTS
ABOUT THE FUND
Expense Summary ........................................... 2
Financial Highlights ....................................... 3
How Does the Fund Invest Its Assets?........................ 5
What Are the Risks of Investing in the Fund? ............... 8
Who Manages the Fund? ...................................... 10
How Taxation Affects the Fund and Its Shareholders ......... 13
How Is the Fund Organized? ................................. 16
ABOUT YOUR ACCOUNT
How Do I Buy Shares? ....................................... 16
May I Exchange Shares for Shares of Another Fund? .......... 24
How Do I Sell Shares? ...................................... 27
What Distributions Might I Receive From the Fund? .......... 29
Transaction Procedures and Special Requirements ............ 31
Services to Help You Manage Your Account ................... 35
What If I Have Questions About My Account? ................. 37
GLOSSARY
Useful Terms and Definitions ............................... 38
FRANKLIN
FEDERAL
TAX-FREE
INCOME FUND
September 1, 1998
as amended January 1, 1999
When reading this prospectus, you will see certain terms beginning with
capital letters. This means the term is explained in our glossary section.
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN
ABOUT THE FUND
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in the
fund. It is based on the historical expenses of the fund for the fiscal year
ended April 30, 1998. The fund's actual expenses may vary.
CLASS A 1 CLASS B 2 CLASS C 1
A. SHAREHOLDER TRANSACTION EXPENSES3
Maximum Sales Charge
(as a percentage of Offering Price) 4.25% 4.00% 1.99%
Paid at time of purchase4 4.25% None 1.00%
Paid at redemption5 None 4.00% 0.99%
Exchange Fee (per transaction)6 None None None
B. ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees 0.45% 0.45% 0.45%
Rule 12b-1 Fees7 0.07% 0.65% 0.65%
Other Expenses 0.07% 0.07% 0.07%
-------------------------
Total Fund Operating Expenses 0.59% 1.17% 1.17%
=========================
C. EXAMPLE
Assume the annual return for each class is 5%, operating expenses are as
described above, and you sell your shares after the number of years shown.
These are the projected expenses for each $10,000 that you invest in the fund.
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------
CLASS A $483 8 $606 $740 $1,132
CLASS B
Assuming you sold your
shares at the end of
the period $519 $672 $844 $1,259 9
Assuming you stayed
in the fund $119 $372 $644 $1,259 9
CLASS C $316 10 $468 $737 $1,506
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN.
The fund pays its operating expenses. The effects of these expenses are
reflected in the Net Asset Value or dividends of each class and are not
directly charged to your account.
1. Before January 1, 1999, Class A shares were designated Class I and Class C
shares were designated Class II.
2. The fund began offering Class B shares on January 1, 1999. Annual fund
operating expenses are based on the expenses for Class A and C for the fiscal
year ended April 30, 1998. The Rule 12b-1 fees are based on the maximum fees
allowed under Class B's Rule 12b-1 plan.
3. If your transaction is processed through your Securities Dealer, you may
be charged a fee by your Securities Dealer for this service.
4. There is no front-end sales charge if you invest $1 million or more in
Class A shares. Although Class B and C have a lower front-end sales charge
than Class A, their Rule 12b-1 fees are higher. Over time you may pay more
for Class B and C shares. Please see "How Do I Buy Shares? - Choosing a Share
Class."
5. A Contingent Deferred Sales Charge of 1% may apply to Class A purchases of
$1 million or more if you sell the shares within one year and to any Class C
purchase if you sell the shares within 18 months. A Contingent Deferred Sales
Charge of up to 4% may apply to any Class B purchase if you sell the shares
within six years. The charge is based on the value of the shares sold or the
Net Asset Value at the time of purchase, whichever is less. The number in the
table shows the charge as a percentage of Offering Price. While the
percentage for Class C is different depending on whether the charge is shown
based on the Net Asset Value or the Offering Price, the dollar amount you
would pay is the same. See "How Do I Sell Shares? - Contingent Deferred Sales
Charge" for details.
6. There is a $5 fee for exchanges by Market Timers.
7. These fees may not exceed 0.10% for Class A and 0.65% for Class B and C.
The combination of front-end sales charges and Rule 12b-1 fees could cause
long-term shareholders to pay more than the economic equivalent of the
maximum front-end sales charge permitted under the rules of the National
Association of Securities Dealers, Inc.
8. Assumes a Contingent Deferred Sales Charge will not apply.
9. Assumes conversion of Class B shares to Class A shares after eight years,
lowering your annual expenses from that time on.
10. For the same Class C investment, you would pay projected expenses of $218
if you did not sell your shares at the end of the first year. Your projected
expenses for the remaining periods would be the same.
FINANCIAL HIGHLIGHTS
This table summarizes the fund's financial history. The information has been
audited by PricewaterhouseCoopers LLP, the fund's independent auditor. The
audit report covering each of the most recent five years appears in the
fund's Annual Report to Shareholders for the fiscal year ended April 30,
1998. The Annual Report to Shareholders also includes more information about
the fund's performance. For a free copy, please call Fund Information.
CLASS A
YEAR ENDED APRIL 30,
<TABLE>
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--------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
---------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding
throughout the year)
Net asset value,
beginning of year $11.90 $11.83 $11.73 $11.81 $12.24 $11.68 $11.40 $11.08 $11.33 $10.97
----------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income .69 .71 .74 .75 .77 .80 .82 .83 .84 .85
Net realized and unrealized
gains (losses) .35 .07 .10 (.05) (.41) .58 .30 .34 (.24) .42
--------------------------------------------------------------------------------------
Total from investment
operations 1.04 .78 .84 .70 .36 1.38 1.12 1.17 .60 1.27
Less distributions from net
investment income (.69) (.71) (.74) (.78) (.79) (.82) (.84) (.85) (.85) (.91)
---------------------------------------------------------------------------------------
Net asset value,
end of year $12.25 $11.90 $11.83 $11.73 $11.81 $12.24 $11.68 $11.40 $11.08 $11.33
========================================================================================
Total return* 8.92% 6.81% 7.33% 6.21% 2.58% 11.89% 9.90% 10.67% 5.10% 11.71%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
year (millions) $7,023 $6,905 $7,013 $6,887 $6,804 $6,415 $5,184 $4,353 $3,865 $3,649
Ratios to average net assets:
Expenses .59% .58% .57% .59% .52% .51% .51% .50% .50% .51%
Net investment income 5.70% 6.00% 6.20% 6.47% 6.27% 6.68% 7.70% 7.34% 7.39% 7.59%
Portfolio turnover rate 14.54% 16.43% 25.10% 19.88% 24.59% 13.30% 14.94% 28.79% 17.83% 16.43%
</TABLE>
CLASS C
YEAR ENDED APRIL 30,
1998 1997 1996
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year $11.90 $11.82 $11.73**
========================
Income from investment operations:
Net investment income .63 .66 .68
Net realized and unrealized gains .33 .06 .09
------------------------
Total from investment operations .96 .72 .77
Less distributions from net investment income (.62) (.64) (.68)
------------------------
Net asset value, end of year $12.24 $11.90 $11.82
========================
Total return* 8.22% 6.28% 6.68%
Ratios/supplemental data
Net assets, end of year (000's) $135,195 $71,944 $34,110
Ratios to average net assets:
Expenses 1.17% 1.16% 1.15%
Net investment income 5.12% 5.42% 5.68%
Portfolio turnover rate 14.54% 16.43% 25.10%
*TOTAL RETURN DOES NOT REFLECT SALES COMMISSIONS OR THE CONTINGENT DEFERRED
SALES CHARGE, AND IS NOT ANNUALIZED. PRIOR TO MAY 1, 1994, DIVIDENDS FROM NET
INVESTMENT INCOME WERE REINVESTED AT THE OFFERING PRICE.
**THE FUND PAID A DIVIDEND TO SHAREHOLDERS OF RECORD ON THE BEGINNING OF
BUSINESS, MAY 1, 1995, IN THE AMOUNT OF $0.062 PER SHARE. THE NET ASSET VALUE
PER SHARE AT THE BEGINNING OF THE PERIOD INCLUDES THIS DIVIDEND.
HOW DOES THE FUND INVEST ITS ASSETS?
A QUICK LOOK AT THE FUND
GOAL: High current income free from federal income taxes.
STRATEGY: Invests in investment grade municipal securities whose interest is
free from federal income taxes.
WHAT IS THE MANAGER'S APPROACH?
The manager tries to select securities that it believes will provide the best
balance between risk and return within the fund's range of allowable
investments. The manager considers a number of factors, including general
market and economic conditions and the credit quality of the issuer, when
selecting securities for the fund.
To provide tax-free income to shareholders, the manager typically uses a buy
and hold strategy. This means it holds securities in the fund's portfolio for
income purposes, rather than trading securities for capital gains. The
manager may sell a security at any time, however, when the manager believes
doing so could help the fund meet its goal.
While income is the most important part of return over time, the total return
from a municipal security includes both income and price gains or losses. The
fund's focus on income does not mean it invests only in the highest-yielding
securities available, or that it can avoid losses of principal.
WHO MAY WANT TO INVEST?
The fund may be appropriate for investors in higher tax brackets who seek
high current income that is free from federal income taxes.
The value of the fund's investments and the income they generate will vary
from day to day, and generally reflect interest rates, market conditions, and
other federal and state political and economic news. When you sell your
shares, they may be worth more or less than what you paid for them. Please
consider your investment goals and tolerance for price fluctuations and risk
when making your investment decision.
THE FUND IN MORE DETAIL
WHAT IS THE FUND'S GOAL?
The investment goal of the fund is to provide investors with as high a level
of interest income exempt from federal income taxes as is consistent with
prudent investing, while seeking preservation of shareholders' capital. This
goal is fundamental, which means that it may not be changed without
shareholder approval.
WHAT KINDS OF SECURITIES DOES THE FUND BUY?
The fund tries to invest all of its assets in tax-free municipal securities,
including bonds, notes and commercial paper.
MUNICIPAL SECURITIES are issued by state and local governments, their
agencies and authorities, as well as by the District of Columbia and U.S.
territories and possessions, to borrow money for various public or private
projects. The issuer pays a fixed or variable rate of interest, and must
repay the amount borrowed (the "principal") at maturity. Municipal securities
help the fund meet its investment goal because they generally pay interest
free from federal income tax.
- - The fund normally invests at least 80% of its total assets in municipal
securities that pay interest free from federal income taxes, including the
federal alternative minimum tax (this policy is fundamental).
While the fund tries to invest 100% of its assets in tax-free municipal
securities, it is possible, although not anticipated, that the fund may have up
to 20% of its assets in securities that pay taxable interest. If you are subject
to the federal alternative minimum tax, please keep in mind that the fund may
also have a portion of its assets in municipal securities that pay interest
subject to the federal alternative minimum tax.
QUALITY. All things being equal, the lower a security's credit quality, the
higher the risk and the higher the yield the security generally must pay as
compensation to investors for the higher risk.
A security's credit quality depends on the issuer's ability to pay interest
on the security and, ultimately, to repay the principal. Independent rating
agencies, such as Fitch, Moody's and S&P, often rate municipal securities
based on their opinion of the issuer's credit quality. Most rating agencies
use a descending alphabet scale to rate long-term securities, and a
descending numerical scale to rate short-term securities. For example, Fitch
and S&P use AAA, AA, A and BBB for their top four long-term ratings, while
Moody's uses Aaa, Aa, A and Baa. Securities in the top four ratings are
"investment grade," although securities in the fourth highest rating may have
some speculative features. These ratings are described in more detail in the
SAI.
An insurance company, bank or other foreign or domestic entity may provide
credit support for a municipal security and enhance its credit quality. For
example, some municipal securities are insured, which means they are covered
by an insurance policy that insures the timely payment of principal and
interest. Other municipal securities may be backed by letters of credit,
guarantees, or escrow or trust accounts that contain securities backed by the
full faith and credit of the U.S. government to secure the payment of
principal and interest.
The fund only buys investment grade securities or unrated securities that
the manager believes are comparable.
MATURITY. Municipal securities are issued with a specific maturity date - the
date when the issuer must repay the amount borrowed. Maturities typically
range from less than one year (short term) to 30 years (long term). In
general, securities with longer maturities are more sensitive to price
changes, although they may provide higher yields.
- - The fund has no restrictions on the maturity of the securities it may buy
or on its average portfolio maturity.
VARIABLE AND FLOATING RATE SECURITIES have interest rates that change either
at specific intervals or whenever a benchmark rate changes. While this
feature helps to protect against a decline in the security's market price, it
also lowers the fund's income when interest rates fall. Of course, the fund's
income from its variable rate investments may also increase if interest rates
rise.
- - The fund may invest in investment grade variable and floating rate
securities.
MUNICIPAL LEASE OBLIGATIONS finance the purchase of public property. The
property is leased to the state or a local government, and the lease payments
are used to pay the interest on the obligations. Municipal lease obligations
differ from other municipal securities because the lessee's governing body must
set aside the money to make the lease payments each year. If the money is not
set aside, the issuer or the lessee can end the lease without penalty. If the
lease is cancelled, investors who own the municipal lease obligations may not be
paid.
- - The fund may invest in municipal lease obligations without limit, if the
obligations meet the fund's quality and maturity standards.
WHAT ARE SOME OF THE FUND'S OTHER INVESTMENT STRATEGIES AND PRACTICES?
TEMPORARY INVESTMENTS. When the manager believes unusual or adverse economic,
market or other conditions exist, it may invest the fund's portfolio in a
temporary defensive manner. Under these circumstances, the fund may invest
all of its assets in securities that pay taxable interest, including (i) high
quality commercial paper; or (ii) securities issued or guaranteed by the full
faith and credit of the U.S. government.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS are those where payment and
delivery for the security take place at a future date. Since the market price
of the security may fluctuate during the time before payment and delivery,
the fund assumes the risk that the value of the security at delivery may be
more or less than the purchase price.
DIVERSIFICATION. Diversification involves limiting the amount of money
invested in any one issuer or, on a broader scale, in any one state or type
of project to help spread and reduce the risks of investment. A fund can be
either diversified or non-diversified. A non-diversified fund may invest a
greater portion of its assets in the securities of one issuer than a
diversified fund. Economic, business, political or other changes can affect
all securities of a similar type. A non-diversified fund may be more
sensitive to these changes.
- - The fund is a diversified fund. The fund may, however, invest up to 25% of
its assets in the securities of one issuer or in the securities of issuers
located in the same state. The fund may invest more than 25% of its assets in
municipal securities that finance similar types of projects, such as
hospitals, housing, industrial development, transportation or pollution
control.
OTHER POLICIES AND RESTRICTIONS. The fund has a number of additional
investment policies and restrictions that govern its activities. Those that
are identified as "fundamental" may only be changed with shareholder
approval. The others may be changed by the Board alone. For a list of these
restrictions and more information about the fund's investment policies,
including those described above, please see "How Does the Fund Invest Its
Assets?" and "Investment Restrictions" in the SAI.
Generally, the policies and restrictions discussed in this prospectus and in
the SAI apply when the fund makes an investment. In most cases, the fund is
not required to sell a security because circumstances change and the security no
longer meets one or more of the fund's policies or restrictions.
WHAT ARE THE RISKS OF INVESTING IN THE FUND?
Like all investments, an investment in the fund involves risks. The risks of
the fund are basically the same as those of other investments in municipal
securities of similar quality. Because the fund holds many securities,
however, it is likely to be less risky than any one, or few, directly held
municipal investments.
GENERAL RISK. There is no assurance that the fund will meet its investment
goal. The fund's share price, and the value of your investment, may change.
Generally, when the value of the fund's investments go down, so does the
fund's share price. Similarly, when the value of the fund's investments go
up, so does the fund's share price. Since the value of the fund's shares can
go up or down, it is possible to lose money by investing in the fund.
INTEREST RATE RISK is the risk that changes in interest rates can reduce the
value of a security. When interest rates rise, municipal security prices fall.
The opposite is also true: municipal security prices go up when interest rates
fall. To explain why this is so, assume you hold a municipal security offering a
5% yield. A year later, interest rates are on the rise and comparable securities
are offered with a 6% yield. With higher-yielding securities available, you
would have trouble selling your 5% security for the price you paid - causing you
to lower your asking price. On the other hand, if interest rates were falling
and 4% municipal securities were being offered, you would be able to sell your
5% security for more than you paid.
INCOME RISK is the risk that the fund's income will decrease due to falling
interest rates. Since the fund can only distribute what it earns, the fund's
distributions to its shareholders may decline when interest rates fall.
CREDIT RISK is the possibility that an issuer will be unable to make interest
payments or repay principal. Changes in an issuer's financial strength or in
a security's credit rating may affect its value. Even securities supported by
credit enhancements have the credit risk of the entity providing the credit
support. Credit support provided by a foreign entity may be less certain
because of the possibility of adverse foreign economic, political or legal
developments that may affect the ability of that foreign entity to meet its
obligations. Changes in the credit quality of the credit provider could
affect the value of the security and the fund's share price.
MARKET RISK is the risk that a security's value will be reduced by market
activity or the results of supply and demand. This is a basic risk associated
with all securities. When there are more sellers than buyers, prices tend to
fall. Likewise, when there are more buyers than sellers, prices tend to
increase.
CALL RISK is the likelihood that a security will be prepaid (or "called")
before maturity. An issuer is more likely to call its bonds when interest
rates are falling, because the issuer can issue new bonds with lower interest
payments. If a bond is called, the fund may have to replace it with a
lower-yielding security. At any time, the fund may have a large amount of its
assets invested in municipal securities subject to call risk, including
escrow-secured or defeased bonds. A call of some or all of these securities
may lower the fund's income and its distributions to shareholders.
YEAR 2000. When evaluating current and potential portfolio positions, Year
2000 is one of the factors the fund's manager considers.
The manager will rely upon public filings and other statements made by
issuers about their Year 2000 readiness. The manager, of course, cannot audit
each issuer and its major suppliers to verify their Year 2000 readiness.
If an issuer in which the fund is invested is adversely affected by Year 2000
problems, it is likely that the price of its security will also be adversely
affected. A decrease in the value of one or more of the fund's portfolio
holdings will have a similar impact on the price of the fund's shares. Please
see "Year 2000 Problem" under "Who Manages the Fund?" for more information.
WHO MANAGES THE FUND?
THE BOARD. The Board oversees the management of the fund and elects its
officers. The officers are responsible for the fund's day-to-day operations.
The Board also monitors the fund to ensure no material conflicts exist among
the fund's classes of shares. While none is expected, the Board will act
appropriately to resolve any material conflict that may arise.
INVESTMENT MANAGER. Franklin Advisers, Inc. manages the fund's assets and
makes its investment decisions. The manager also performs similar services
for other funds. It is wholly owned by Resources, a publicly owned company
engaged in the financial services industry through its subsidiaries. Charles
B. Johnson and Rupert H. Johnson, Jr. are the principal shareholders of
Resources. Together, the manager and its affiliates manage over $208 billion
in assets, including more than $50 billion in the municipal securities
market. Please see "Investment Management and Other Services" and
"Miscellaneous Information" in the SAI for information on securities
transactions and a summary of the fund's Code
of Ethics.
MANAGEMENT TEAM. The team responsible for the day-to-day management of the
fund's portfolio is Sheila Amoroso since 1987, Ben Barber since 1993 and
Thomas Kenny since 1987:
Sheila Amoroso
Vice President of Franklin Advisers, Inc.
Ms. Amoroso has been an analyst or portfolio manager for the fund since 1987.
She holds a Bachelor of Science degree from San Francisco State University.
She joined the Franklin Templeton Group in 1986. She is a member of several
securities industry-related committees and associations.
Ben Barber
Portfolio Manager of Franklin Advisers, Inc.
Mr. Barber has been an analyst or portfolio manager for the fund since 1993.
He holds a Bachelor of Arts degree in International Relations and Political
Science from the University of California at Santa Barbara. Mr. Barber joined
the Franklin Templeton Group in 1991. He is a member of several securities
industry-related committees and associations.
Thomas Kenny
Executive Vice President of Franklin Advisers, Inc.
Mr. Kenny has been an analyst or portfolio manager for the fund since 1987.
He is the Director of Franklin's Municipal Bond Department. He holds a Master
of Science degree in Finance from Golden Gate University and a Bachelor of
Arts degree in Business and Economics from the University of California at
Santa Barbara. Mr. Kenny joined the Franklin Templeton Group in 1986. He is a
member of several securities industry-related committees and associations.
MANAGEMENT FEES. During the fiscal year ended April 30, 1998, management fees
totaling 0.45% of the average monthly net assets of the fund were paid to the
manager. Total expenses, including fees paid to the manager, were 0.59% for
Class A and 1.17% for Class C.
PORTFOLIO TRANSACTIONS. The manager tries to obtain the best execution on all
transactions. If the manager believes more than one broker or dealer can
provide the best execution, it may consider research and related services and
the sale of fund shares, as well as shares of other funds in the Franklin
Templeton Group of Funds, when selecting a broker or dealer. Please see "How
Does the Fund Buy Securities for Its Portfolio?" in the SAI for more
information.
ADMINISTRATIVE SERVICES. Under an agreement with the manager, FT Services
provides certain administrative services and facilities for the fund. During
the fiscal year ended April 30, 1998, administration fees totaling 0.08% of
the average daily net assets of the fund were paid to FT Services. These fees
are paid by the manager. They are not a separate expense of the fund. Please
see "Investment Management and Other Services" in the SAI for more
information.
YEAR 2000 PROBLEM. The fund's business operations depend on a worldwide
network of computer systems that contain date fields, including securities
trading systems, securities transfer agent operations and stock market links.
Many of the systems currently use a two digit date field to represent the
date, and unless these systems are changed or modified, they may not be able
to distinguish the Year 1900 from the Year 2000 (commonly referred to as the
Year 2000 problem). In addition, the fact that the Year 2000 is a
non-standard leap year may create difficulties for some systems.
When the Year 2000 arrives, the fund's operations could be adversely affected
if the computer systems used by the manager, its service providers and other
third parties it does business with are not Year 2000 ready. For example, the
fund's portfolio and operational areas could be impacted, including
securities trade processing, interest and dividend payments, securities
pricing, shareholder account services, reporting, custody functions and
others.
The fund's manager and its affiliated service providers are making a
concerted effort to take steps they believe are reasonably designed to
address their Year 2000 problems. Of course, the fund's ability to reduce the
effects of the Year 2000 problem is also very much dependent upon the efforts
of third parties over which the fund and its manager may have no control.
THE RULE 12B-1 PLANS
Each class has a separate distribution or "Rule 12b-1" plan under which the
fund shall pay or may reimburse Distributors or others for the expenses of
activities that are primarily intended to sell shares of the class. These
expenses may include, among others, distribution or service fees paid to
Securities Dealers or others who have executed a servicing agreement with the
fund, Distributors or its affiliates; a prorated portion of Distributors'
overhead expenses; and the expenses of printing prospectuses and reports used
for sales purposes, and preparing and distributing sales literature and
advertisements.
Payments by the fund under the Class A plan may not exceed 0.10% per year of
Class A's average daily net assets. All distribution expenses over this
amount will be borne by those who have incurred them. During the first year
after certain Class A purchases made without a sales charge, Securities
Dealers may not be eligible to receive the Rule 12b-1 fees associated with
the purchase.
Under the Class B plan, the fund pays Distributors up to 0.50% per year of
Class B's average daily net assets to pay Distributors for providing
distribution and related services and bearing certain Class B expenses. All
distribution expenses over this amount will be borne by those who have
incurred them. Securities Dealers are not eligible to receive this portion of
the Rule 12b-1 fees associated with the purchase.
The fund may also pay a servicing fee of up to 0.15% per year of Class B's
average daily net assets under the Class B plan. This fee may be used to pay
Securities Dealers or others for, among other things, helping to establish
and maintain customer accounts and records, helping with requests to buy and
sell shares, receiving and answering correspondence, monitoring dividend
payments from the fund on behalf of customers, and similar servicing and
account maintenance activities. Securities Dealers may be eligible to receive
this portion of the Rule 12b-1 fees from the date of purchase. After 8 years,
Class B shares convert to Class A shares and Securities Dealers may then
receive the Rule 12b-1 fees applicable to Class A.
The expenses relating to the Class B plan are also used to pay Distributors
for advancing the commission costs to Securities Dealers with respect to the
initial sale of Class B shares. Further, the expenses relating to the Class B
plan may be used by Distributors to pay third party financing entities that
have provided financing to Distributors in connection with advancing
commission costs to Securities Dealers.
Under the Class C plan, the fund may pay Distributors up to 0.50% per year of
Class C's average daily net assets to pay Distributors or others for
providing distribution and related services and bearing certain Class C
expenses. All distribution expenses over this amount will be borne by those
who have incurred them. During the first year after a purchase of Class C
shares, Securities Dealers may not be eligible to receive this portion of the
Rule 12b-1 fees associated with the purchase.
The fund may also pay a servicing fee of up to 0.15% per year of Class C's
average daily net assets under the Class C plan. This fee may be used to pay
Securities Dealers or others for, among other things, helping to establish
and maintain customer accounts and records, helping with requests to buy and
sell shares, receiving and answering correspondence, monitoring dividend
payments from the fund on behalf of customers, and similar servicing and
account maintenance activities.
The Rule 12b-1 fees charged to each class are based only on the fees
attributable to that particular class. For more information, please see "The
Fund's Underwriter" in the SAI.
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HOW TAXATION AFFECTS THE FUND AND ITS SHAREHOLDERS
<S> <C>
-------------------------------------------
TAXATION OF THE FUND'S INVESTMENTS. The
fund invests your money in the municipal HOW DOES THE FUND EARN
and other securities described in the INCOME AND GAINS?
section "How Does the Fund Invest Its
Assets?" Special tax rules may apply when The fund earns interest and other income
determining the income and gains that the (the fund's "income") on its investments.
fund earns on its investments. These rules When the fund sells a security for a
may, in turn, affect the amount of price that is higher than it paid, it has
distributions that the fund pays to you. a gain. When the fund sells a security
These special tax rules are discussed in for a price that is lower than it paid,
the SAI. it has a loss. If the fund has held the
security for more than one year, the gain
TAXATION OF THE FUND. As a regulated or loss will be a long-term capital gain
investment company, the fund generally or loss. If the fund has held the
pays no federal income tax on the income security for one year or less, the gain
and gains that it distributes to you. or loss will be a short-term capital gain
or loss. The fund's gains and losses are
TAXATION OF SHAREHOLDERS netted together, and, if the fund has a
net gain (the fund's "gains"), that gain
DISTRIBUTIONS. Distributions made to you will generally be distributed to you
from interest income on municipal -----------------------------------------
securities will be exempt from the regular WHAT IS A DISTRIBUTION?
federal income tax. Distributions made to
you from other income on temporary As a shareholder, you will receive your
investments, short-term capital gains, or share of the fund's income and gains on
ordinary income from the sale of market its investments. The fund's interest
discount bonds will be taxable to you as income on municipal securities is paid to
ordinary dividends, whether you receive you as exempt-interest dividends. The
them in cash or in additional shares. fund's ordinary income and short-term
Distributions made to you from interest on capital gains are paid to you as ordinary
certain private activity bonds, while dividends. The fund's long-term capital
still exempt from the regular federal gains are paid to you as capital gain
income tax, are a preference item when distributions. If the fund pays you an
determining your alternative minimum tax. amount in excess of its income and gains,
this excess will generally be treated as
a non-taxable distribution. These
amounts, taken together, are what we call
the fund's distributions to you.
-------------------------------------------
The fund will send you a statement in January of the current year that reflects the
amount of exempt-interest dividends, ordinary dividends, capital gain distributions,
interest income that is a tax preference item under the alternative minimum tax and
non-taxable distributions you received from the fund in the prior year. This
statement will include distributions declared in December and paid to you in January
of the current year, but which are taxable as if paid on December 31 of the prior
year. The IRS requires you to report these amounts on your income tax return for the
prior year.
DIVIDENDS-RECEIVED DEDUCTION. It is anticipated that no portion of the fund's
distributions will qualify for the corporate dividends-received deduction.
-------------------------------------------
REDEMPTIONS AND EXCHANGES. If you redeem
your shares or if you exchange your shares WHAT IS A REDEMPTION?
in the fund for shares in another Franklin
Templeton Fund, you will generally have a A redemption is a sale by you to the fund
gain or loss that the IRS requires you to of some or all of your shares in the
report on your income tax return. If you fund. The price per share you receive
exchange fund shares held for 90 days or when you redeem fund shares may be more
less and pay no sales charge, or a reduced or less than the price at which you
sales charge, for the new shares, all or a purchased those shares. An exchange of
portion of the sales charge you paid on shares in the fund for shares of another
the purchase of the shares you exchanged Franklin Templeton Fund is treated as a
is not included in their cost for purposes redemption of fund shares and then a
of computing gain or loss on the exchange. purchase of shares of the other fund.
If you hold your shares for six months or When you redeem or exchange your shares,
less, any loss you have will be disallowed you will generally have a gain or loss,
to the extent of any exempt-interest depending upon whether the amount you
dividends paid on your shares. Any such receive for your shares is more or less
loss not disallowed will be treated as a than your cost or other basis in the
long-term capital loss to the extent of shares.
anylong-term capital gain distributions -------------------------------------------
paid on your shares. All or a portion of any
loss on the redemption or exchange of your
shares will be disallowed by the IR
if you buy other shares in the fund within
30 days before or after your redemption
or exchange.
STATE TAXES. Ordinary dividends and capital gain distributions that you receive from
the fund, and gains arising from redemptions or exchanges of your fund shares, will
generally be subject to state and local income tax. Distributions paid from the
interest earned on the municipal securities of a state, or its political
subdivisions, will generally be exempt from that state's personal income taxes.
Dividends paid from interest earned on qualifying U.S. territorial obligations
(including qualifying obligations of Puerto Rico, the U.S. Virgin Islands and Guam)
will also generally be exempt from state personal income taxes. Investments in
municipal securities of other states generally do not qualify for tax-free treatment
in that state. Corporate taxpayers subject to state taxes are subject to special
rules. The holding of fund shares may also be subject to state and local intangibles
taxes. The fund will provide you with information at the end of each calendar year on
the amounts of such dividends that may qualify for exemption from reporting on your
individual income tax returns. You may wish to contact your tax advisor to determine
the state and local tax consequences of your investment in the fund.
SOCIAL SECURITY AND RAILROAD RETIREMENT BENEFits. Exempt-interest dividends paid to
you, although exempt from the regular federal income tax, are includible in the tax
base for determining the taxable portion of your social security or railroad
retirement benefits. The IRS requires you to disclose these exempt-interest dividends
on your federal income tax return.
NON-U.S. INVESTORS. Ordinary dividends generally will be subject to U.S. income tax
withholding. Your home country may also tax ordinary dividends, exempt-interest
dividends, capital gain distributions and gains arising from redemptions or exchanges
of your fund shares. Fund shares held by the estate of a non-U.S. investor may be
subject to U.S. estate tax. You may wish to contact your tax advisor to determine the
U.S. and non-U.S. tax consequences of your investment in the fund.
BACKUP WITHHOLDING. When you open an ------------------------------------------
account, IRS regulations require that you WHAT IS A BACKUP WITHHOLDING?
provide your taxpayer identification Backup withholding occurs when the fund
number ("TIN"), certify that it is is required to withhold and pay over to
correct, and certify that you are not the IRS 31% of your distributions and
subject to backup withholding under IRS redemption proceeds. You can avoid backup
rules. If you fail to provide a correct withholding by providing the fund with
TIN or the proper tax certifications, the your TIN, and by completing the tax
IRS requires the fund to withhold 31% of certifications on your shareholder
all the distributions (including ordinary application that you were asked to sign
dividends and capital gain distributions), when you opened your account. However, if
and redemption proceeds paid to you. The the IRS instructs the fund to begin
fund is also required to begin backup backup withholding, it is required to do
withholding on your account if the IRS so even if you provided the fund with
instructs the fund to do so. The fund your TIN and these tax certifications,
reserves the right not to open your and backup withholding will remain in
account, or, alternatively, to redeem your place until the fund is instructed by the
shares at the current Net Asset Value, IRS that it is no longer required.
less any taxes withheld, if you fail to
provide a correct TIN, fail to provide the -------------------------------------------
proper tax certifications, or the IRS
instructs the fund to begin backup
withholding on your account.
</TABLE>
THIS TAX DISCUSSION IS FOR GENERAL INFORMATION ONLY. PROSPECTIVE INVESTORS
SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE FEDERAL, STATE, LOCAL OR
FOREIGN TAX CONSEQUENCES OF AN INVESTMENT IN THE FUND. FOR A MORE COMPLETE
DISCUSSION OF THESE RULES AND RELATED MATTERS, PLEASE SEE "ADDITIONAL
INFORMATION ON DISTRIBUTIONS AND TAXES" IN THE SAI.
HOW IS THE FUND ORGANIZED?
The fund is an open-end management investment company, commonly called a
mutual fund. It was organized as a California corporation in 1982, and is
registered with the SEC. The fund offers three classes of shares: Franklin
Federal Tax-Free Income Fund - Class A, Franklin Federal Tax-Free Income Fund
- - Class B and Franklin Federal Tax-Free Income Fund - Class C. Additional
classes of shares may be offered in the future.
Shares of each class represent proportionate interests in the assets of the
fund and have the same voting and other rights and preferences as any other
class of the fund for matters that affect the fund as a whole. For matters
that only affect one class, however, only shareholders of that class may
vote. Each class will vote separately on matters affecting only that class,
or expressly required to be voted on separately by state or federal law.
The fund has cumulative voting rights. This gives each shareholder a number
of votes equal to the number of shares owned times the number of Board
members to be elected. You may cast all of your votes for one candidate or
distribute your votes between two or more candidates.
The fund does not intend to hold annual shareholder meetings. The fund may
hold special meetings, however, for matters requiring shareholder approval. A
meeting may be called by the Board to consider the removal of a Board member
if requested in writing by shareholders holding at least 10% of the
outstanding shares. In certain circumstances, we are required to help you
communicate with other shareholders about the removal of a Board member. A
special meeting may also be called by the Board in its discretion.
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
OPENING YOUR ACCOUNT
To open your account, please follow the steps below. This will help avoid any
delays in processing your request.
1. Read this prospectus carefully.
2. Determine how much you would like to invest. The fund's minimum
investments are:
o To open a regular account $1,000
o To open a custodial account
for a minor (an UGMA/UTMA account) $ 100
o To open an account with an
automatic investment plan $ 50
o To add to an account $ 50
We reserve the right to change the amount of these minimums from time to
time or to waive or lower these minimums for certain purchases. We also
reserve the right to refuse any order to buy shares.
3. Carefully complete and sign the enclosed account application, including
the optional shareholder privileges section. By applying for privileges
now, you can avoid the delay and inconvenience of having to send an
additional application to add privileges later. PLEASE ALSO INDICATE WHICH
CLASS OF SHARES YOU WANT TO BUY. IF YOU DO NOT SPECIFY A CLASS, WE WILL
INVEST YOUR PURCHASE IN CLASS A SHARES. It is important that we receive a
signed application since we will not be able to process any redemptions
from your account until we receive your signed application.
4. Make your investment using the table below.
METHOD STEPS TO FOLLOW
- ------------------------------------------------------------------------------
BY MAIL For an initial investment:
Return the application to the fund with your check
made payable to the fund.
For additional investments:
Send a check made payable to the fund. Please
include your account number on the check.
- ------------------------------------------------------------------------------
BY WIRE 1. Call Shareholder Services or, if that number is
busy, call 1-650/312-2000 collect, to receive a
wire control number and wire instructions. You
need a new wire control number every time you
wire money into your account. If you do not have
a currently effective wire control number, we
will return the money to the bank, and we will
not credit the purchase to your account.
2. For an initial investment you must also return
your signed account application to the fund.
IMPORTANT DEADLINES: If we receive your call before
1:00 p.m. Pacific time and the bank receives the
wired funds and reports the receipt of wired funds to
the fund by 3:00 p.m. Pacific time, we will credit
the purchase to your account that day. If we receive
your call after 1:00 p.m. or the bank receives the
wire after 3:00 p.m., we will credit the purchase to
your account the following business day.
- ------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- ------------------------------------------------------------------------------
CHOOSING A SHARE CLASS
Each class has its own sales charge and expense structure, allowing you to
choose the class that best meets your situation. Your financial
representative can help you decide.
CLASS A* Class B* Class C*
- --------------------------------------------------------------------------------
o Front-end sales o No front-end sales o Front-end sales
charge of 4.25% or charge charge of 1%
less
o Contingent Deferred o Contingent Deferred o Contingent Deferred
Sales Charge of 1% on Sales Charge of 4% or Sales Charge of 1% on
purchases of $1 less on shares you shares you sell
million or more sold sell within six years within 18 months
within one year
o Lower annual expenses o Higher annual o Higher annual
than Class B or C due expenses than Class A expenses than Class A
to lower Rule 12b-1 (same as Class C) due (same as Class B) due
fees to higher Rule 12b-1 to higher Rule 12b-1
fees. Automatic fees. No conversion
conversion to Class A to Class A shares, so
shares after eight annual expenses do
years, reducing future not decrease
annual expenses.
o No maximum purchase o Maximum purchase o Maximum purchase
amount amount of $249,999. amount of $999,999.
We invest any investment We invest any
of $250,000 or more in investment of $1
Class A shares, since million or more in
a reduced front-end Class A shares, since
sales charge is there is no front-end
available and Class sales charge and
A's annual expenses Class A's annual
are lower. expenses are lower.
*Before January 1, 1999, Class A shares were designated Class I and Class C
shares were designated Class II. The fund began offering Class B shares on
January 1, 1999.
PURCHASE PRICE OF FUND SHARES
For Class A shares, the sales charge you pay depends on the dollar amount you
invest, as shown in the table below. The sales charge for Class C shares is
1% and, unlike Class A, does not vary based on the size of your purchase.
There is no front-end sales charge for Class B shares.
TOTAL SALES CHARGE AMOUNT PAID TO
AS A PERCENTAGE OF DEALER AS A
AMOUNT OF PURCHASE OFFERING NET AMOUNT PERCENTAGE OF
AT OFFERING PRICE PRICE INVESTED OFFERING PRICE
- ------------------------------------------------------------------
CLASS A
Under $100,000 4.25% 4.44% 4.00%
$100,000 but less than
$250,000 3.50% 3.63% 3.25%
$250,000 but less than
$500,000 2.50% 2.56% 2.25%
$500,000 but less than
$1,000,000 2.00% 2.04% 1.85%
$1,000,000 or more* None None None
CLASS B* None None None
CLASS C
Under $1,000,000* 1.00% 1.01% 1.00%
*A Contingent Deferred Sales Charge of 1% may apply to Class A purchases of
$1 million or more and any Class C purchase. A Contingent Deferred Sales
Charge of up to 4% may apply to any Class B purchase. Please see "How Do I
Sell Shares? - Contingent Deferred Sales Charge." Please also see "Other
Payments to Securities Dealers" below for a discussion of payments
Distributors may make out of its own resources to Securities Dealers for
certain purchases.
SALES CHARGE REDUCTIONS AND WAIVERS
- - IF YOU QUALIFY TO BUY SHARES UNDER ONE OF THE SALES CHARGE REDUCTION OR
WAIVER CATEGORIES DESCRIBED BELOW, PLEASE INCLUDE A WRITTEN STATEMENT WITH
EACH PURCHASE ORDER EXPLAINING WHICH PRIVILEGE APPLIES. IF YOU DON'T INCLUDE
THIS STATEMENT, WE CANNOT GUARANTEE THAT YOU WILL RECEIVE THE SALES CHARGE
REDUCTION OR WAIVER.
CUMULATIVE QUANTITY DISCOUNTS - CLASS A ONLY. To determine if you may pay a
reduced sales charge, the amount of your current Class A purchase is added to
the cost or current value, whichever is higher, of your existing shares in
the Franklin Templeton Funds, as well as those of your spouse, children under
the age of 21 and grandchildren under the age of 21. If you are the sole
owner of a company, you may also add any company accounts, including
retirement plan accounts.
LETTER OF INTENT - CLASS A ONLY. You may buy Class A shares at a reduced
sales charge by completing the Letter of Intent section of the account
application. A Letter of Intent is a commitment by you to invest a specified
dollar amount during a 13 month period. The amount you agree to invest
determines the sales charge you pay on Class A shares.
BY COMPLETING THE LETTER OF INTENT SECTION OF THE ACCOUNT APPLICATION, YOU
ACKNOWLEDGE AND AGREE TO THE FOLLOWING:
o You authorize Distributors to reserve 5% of your total intended purchase in
Class A shares registered in your name until you fulfill your Letter.
o You give Distributors a security interest in the reserved shares and
appoint Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the Letter.
o Although you may exchange your shares, you may not sell reserved shares
until you complete the Letter or pay the higher sales charge.
Your periodic statements will include the reserved shares in the total shares
you own. We will pay or reinvest dividend and capital gain distributions on
the reserved shares as you direct.
If you would like more information about the Letter of Intent privilege,
please see "How Do I Buy, Sell and Exchange Shares? - Letter of Intent" in
the SAI or call Shareholder Services.
GROUP PURCHASES - Class A Only. If you are a member of a qualified group, you
may buy Class A shares at a reduced sales charge that applies to the group as
a whole. The sales charge is based on the combined dollar value of the group
members' existing investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the fund, and
o Meets other uniform criteria that allow Distributors to achieve cost
savings in distributing shares.
SALES CHARGE WAIVERS. If one of the following sales charge waivers applies to
you or your purchase of fund shares, you may buy shares of the fund without a
front-end sales charge or a Contingent Deferred Sales Charge. All of the
sales charge waivers listed below apply to purchases of Class A shares only,
except for items 1 and 2 which also apply to Class B and C purchases.
Certain distributions, payments or redemption proceeds that you receive may
be used to buy shares of the fund without a sales charge if you reinvest them
within 365 days of their payment or redemption date. They include:
1. Dividend and capital gain distributions from any Franklin Templeton Fund.
The distributions generally must be reinvested in the same class of
shares. Certain exceptions apply, however, to Class C shareholders who
chose to reinvest their distributions in Class A shares of the fund
before November 17, 1997, and to Advisor Class or Class Z shareholders of
a Franklin Templeton Fund who may reinvest their distributions in Class A
shares of the fund.
2. Redemption proceeds from the sale of shares of any Franklin Templeton
Fund. The proceeds must be reinvested in the same class of shares, except
proceeds from the sale of Class B shares will be reinvested in Class A
shares.
2. If you paid a Contingent Deferred Sales Charge when you sold your Class A
or C shares, we will credit your account with the amount of the
Contingent Deferred Sales Charge paid but a new Contingent Deferred Sales
Charge will apply. For Class B shares reinvested in Class A, a new
Contingent Deferred Sales Charge will not apply, although your account
will not be credited with the amount of any Contingent Deferred Sales
Charge paid when you sold your Class B shares. If you own both Class A
and B shares and you later sell your shares, we will sell your Class A
shares first, unless otherwise instructed.
Proceeds immediately placed in a Franklin Bank CD also may be reinvested
without an initial sales charge if you reinvest them within 365 days from
the date the CD matures, including any rollover.
This waiver does not apply to shares you buy and sell under our exchange
program. Shares purchased with the proceeds from a money fund may be
subject to a sales charge.
3. Dividend or capital gain distributions from a real estate investment trust
(REIT) sponsored or advised by Franklin Properties, Inc.
4. Annuity payments received under either an annuity option or from death
benefit proceeds, only if the annuity contract offers as an investment
option the Franklin Valuemark Funds or the Templeton Variable Products
Series Fund. You should contact your tax advisor for information on any
tax consequences that may apply.
5. Redemption proceeds from a repurchase of shares of Franklin Floating Rate
Trust, if the shares were continuously held for at least 12 months.
If you immediately placed your redemption proceeds in a Franklin Bank CD
or a Franklin Templeton money fund, you may reinvest them as described
above. The proceeds must be reinvested within 365 days from the date the
CD matures, including any rollover, or the date you redeem your money
fund shares.
6. Redemption proceeds from the sale of Class A shares of any of the
Templeton Global Strategy Funds if you are a qualified investor.
If you paid a contingent deferred sales charge when you sold your Class A
shares from a Templeton Global Strategy Fund, we will credit your account
with the amount of the contingent deferred sales charge paid but a new
Contingent Deferred Sales Charge will apply.
If you immediately placed your redemption proceeds in a Franklin
Templeton money fund, you may reinvest them as described above. The
proceeds must be reinvested within 365 days from the date they are
redeemed from the money fund.
Various individuals and institutions also may buy Class A shares without a
front-end sales charge or Contingent Deferred Sales Charge, including:
1. Trust companies and bank trust departments agreeing to invest in Franklin
Templeton Funds over a 13 month period at least $1 million of assets
held in a fiduciary, agency, advisory, custodial or similar capacity and
over which the trust companies and bank trust departments or other plan
fiduciaries or participants, in the case of certain retirement plans,
have full or shared investment discretion. We will accept orders for
these accounts by mail accompanied by a check or by telephone or other
means of electronic data transfer directly from the bank or trust
company, with payment by federal funds received by the close of business
on the next business day following the order.
2. An Eligible Governmental Authority. Please consult your legal and
investment advisors to determine if an investment in the fund is
permissible and suitable for you and the effect, if any, of payments by
the fund on arbitrage rebate calculations.
3. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for
clients participating in comprehensive fee programs. The minimum initial
investment is $250.
4. Qualified registered investment advisors who buy through a broker-dealer
or service agent who has entered into an agreement with Distributors
5. Registered Securities Dealers and their affiliates, for their investment
accounts only
6. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
7. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family
members, consistent with our then-current policies. The minimum initial
investment is $100.
8. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
9. Accounts managed by the Franklin Templeton Group
10. Certain unit investment trusts and their holders reinvesting
distributions from the trusts
OTHER PAYMENTS TO SECURITIES DEALERS
The payments described below may be made to Securities Dealers who initiate
and are responsible for Class B and C purchases and certain Class A purchases
made without a sales charge. The payments are subject to the sole discretion
of Distributors, and are paid by Distributors or one of its affiliates and
not by the fund or its shareholders.
1. Class A purchases of $1 million or more - up to 0.75% of the amount
invested.
2. Class B purchases - up to 3% of the amount invested.
3. Class C purchases - up to 1% of the purchase price.
4. Class A purchases by trust companies and bank trust departments, Eligible
Governmental Authorities, and broker-dealers or others on behalf of
clients participating in comprehensive fee programs - up to 0.25% of the
amount invested.
A Securities Dealer may receive only one of these payments for each
qualifying purchase. Securities Dealers who receive payments in connection
with investments described in paragraphs 1 or 3 above will be eligible to
receive the Rule 12b-1 fee associated with the purchase starting in the
thirteenth calendar month after the purchase.
FOR BREAKPOINTS THAT MAY APPLY AND INFORMATION ON ADDITIONAL COMPENSATION
PAYABLE TO SECURITIES DEALERS IN CONNECTION WITH THE SALE OF FUND SHARES,
PLEASE SEE "HOW DO I BUY, SELL AND EXCHANGE SHARES? - OTHER PAYMENTS TO
SECURITIES DEALERS" IN THE SAI.
FOR INVESTORS OUTSIDE THE U.S.
The distribution of this prospectus and the offering of fund shares may be
limited in many jurisdictions. An investor who wishes to buy shares of the fund
should determine, or have a broker-dealer determine, the applicable laws and
regulations of the relevant jurisdiction. Investors are responsible for
compliance with tax, currency exchange or other regulations applicable to
redemption and purchase transactions in any jurisdiction to which they may be
subject. Investors should consult appropriate tax and legal advisors to obtain
information on the rules applicable to these transactions.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment from your fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and
a purchase of shares, an exchange is a taxable transaction.
If you own Class A shares, you may exchange into any of our money funds
except Franklin Templeton Money Fund. Franklin Templeton Money Fund is the
only money fund exchange option available to Class B and C shareholders.
Unlike our other money funds, shares of Franklin Templeton Money Fund may not
be purchased directly and no drafts (checks) may be written on Franklin
Templeton Money Fund accounts.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund, its investment goal
and policies, and its rules and requirements for exchanges. For example, some
Franklin Templeton Funds do not accept exchanges and others may have
different investment minimums. Some Franklin Templeton Funds do not offer
Class B or C shares.
METHOD STEPS TO FOLLOW
- ------------------------------------------------------------------------------
BY MAIL 1. Send us signed written instructions
2. Include any outstanding share certificates for the
shares you want to exchange
- ------------------------------------------------------------------------------
BY PHONE Call Shareholder Services or TeleFACTS(R)
- If you do not want the ability to exchange by phone
to apply to your account, please let us know.
- ------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- ------------------------------------------------------------------------------
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
WILL SALES CHARGES APPLY TO MY EXCHANGE?
You can exchange shares between most Franklin Templeton Funds, generally
without paying any additional sales charges. If you exchange shares held for
less than six months, however, you may be charged the difference between the
front-end sales charge of the two funds if the difference is more than 0.25%.
If you exchange shares from a money fund, a sales charge may apply no matter
how long you have held the shares.
CONTINGENT DEFERRED SALES CHARGE. We will not impose a Contingent Deferred
Sales Charge when you exchange shares. Any shares subject to a Contingent
Deferred Sales Charge at the time of exchange, however, will remain so in the
new fund. The purchase price for determining a Contingent Deferred Sales
Charge on exchanged shares will be the price you paid for the original shares.
For accounts with shares subject to a Contingent Deferred Sales Charge, we
will first exchange any shares in your account that are not subject to the
charge. If there are not enough of these to meet your exchange request, we
will exchange shares subject to the charge in the order they were purchased.
If you exchange Class A shares into one of our money funds, the time your
shares are held in that fund will not count towards the completion of any
Contingency Period. If you exchange your Class B or C shares for the same
class of shares of Franklin Templeton Money Fund, however, the time your
shares are held in that fund will count towards the completion of any
Contingency Period.
For more information about the Contingent Deferred Sales Charge, please see
"How Do I Sell Shares?"
EXCHANGE RESTRICTIONS
Please be aware that the following restrictions apply to exchanges:
o You must meet the applicable minimum investment amount of the fund you
are exchanging into, or exchange 100% of your fund shares.
o You may only exchange shares within the same class, except as noted
below. If you exchange your Class B shares for the same class of shares of
another Franklin Templeton Fund, the time your shares are held in that
fund will count towards the eight year period for automatic conversion to
Class A shares.
o Generally exchanges may only be made between identically registered
accounts, unless you send written instructions with a signature guarantee.
You may, however, exchange shares from a fund account requiring two or
more signatures into an identically registered money fund account
requiring only one signature for all transactions. Please notify us in
writing if you do not want this option to be available on your account.
Additional procedures may apply. Please see "Transaction Procedures and
Special Requirements."
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Your exchange may be restricted or refused if you have: (i) requested an
exchange out of the fund within two weeks of an earlier exchange request,
(ii) exchanged shares out of the fund more than twice in a calendar
quarter, or (iii) exchanged shares equal to at least $5 million, or more
than 1% of the fund's net assets. Shares under common ownership or control
are combined for these limits. If you have exchanged shares as described
in this paragraph, you will be considered a Market Timer. Each exchange by
a Market Timer, if accepted, will be charged $5. Some of our funds do not
allow investments by Market Timers.
Because excessive trading can hurt fund performance, operations and
shareholders, we may refuse any exchange purchase if (i) we believe the fund
would be harmed or unable to invest effectively, or (ii) the fund receives or
anticipates simultaneous orders that may significantly affect the fund.
LIMITED EXCHANGES BETWEEN DIFFERENT CLASSES OF SHARES
Certain funds in the Franklin Templeton Funds offer classes of shares not
offered by the fund, such as "Advisor Class" or "Class Z" shares. Because the
fund does not currently offer an Advisor Class, you may exchange Advisor
Class shares of any Franklin Templeton Fund for Class A shares of the fund at
Net Asset Value. If you do so and you later decide you would like to exchange
into a fund that offers an Advisor Class, you may exchange your Class A
shares for Advisor Class shares of that fund. Certain shareholders of Class Z
shares of Franklin Mutual Series Fund Inc. may also exchange their Class Z
shares for Class A shares of the fund at Net Asset Value.
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time.
METHOD STEPS TO FOLLOW
- ------------------------------------------------------------------------------
BY MAIL 1. Send us signed written instructions. If you would
like your redemption proceeds wired to a bank
account, your instructions should include:
o The name, address and telephone number of the
bank where you want the proceeds sent
o Your bank account number
o The Federal Reserve ABA routing number
o If you are using a savings and loan or credit
union, the name of the corresponding bank and
the account number
2. Include any outstanding share certificates for
the shares you are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may
need to send additional documents. Accounts
under court jurisdiction may have other
requirements.
- ------------------------------------------------------------------------------
BY PHONE Call Shareholder Services. If you would like your
redemption proceeds wired to a bank account, other
than an escrow account, you must first sign up for
the wire feature. To sign up, send us written
instructions, with a signature guarantee. To avoid
any delay in processing, the instructions should
include the items listed in "By Mail" above.
Telephone requests will be accepted:
o If the request is $100,000 or less. Institutional
accounts may exceed $100,000 by completing a
separate agreement. Call Institutional Services to
receive a copy.
o If there are no share certificates issued for the
shares you want to sell or you have already
returned them to the fund
o Unless the address on your account was changed by
phone within the last 15 days
- If you do not want the ability to redeem by phone
to apply to your account, please let us know.
- ------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- ------------------------------------------------------------------------------
We will send your redemption check within seven days after we receive your
request in proper form. If you would like the check sent to an address other
than the address of record or made payable to someone other than the
registered owners on the account, send us written instructions signed by all
account owners, with a signature guarantee. We are not able to receive or pay
out cash in the form of currency.
The wiring of redemption proceeds is a special service that we make available
whenever possible for redemption requests of $1,000 or more. If we receive
your request in proper form before 1:00 p.m. Pacific time, your wire payment
will be sent the next business day. For requests received in proper form
after 1:00 p.m. Pacific time, the payment will be sent the second business
day. By offering this service to you, the fund is not bound to meet any
redemption request in less than the seven day period prescribed by law.
Neither the fund nor its agents shall be liable to you or any other person
if, for any reason, a redemption request by wire is not processed as
described in this section.
If you sell shares you recently purchased with a check or draft, we may delay
sending you the proceeds until your check or draft has cleared, which may
take seven business days or more. A certified or cashier's check may clear in
less time.
Under unusual circumstances, we may suspend redemptions or postpone payment
for more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
CONTINGENT DEFERRED SALES CHARGE
For Class A purchases, if you did not pay a front-end sales charge because
you invested $1 million or more or agreed to invest $1 million or more under
a Letter of Intent, a Contingent Deferred Sales Charge may apply if you sell
all or a part of your investment within the Contingency Period. Once you have
invested $1 million or more, any additional Class A investments you make
without a sales charge may also be subject to a Contingent Deferred Sales
Charge if they are sold within the Contingency Period. For any Class C
purchase, a Contingent Deferred Sales Charge may apply if you sell the shares
within the Contingency Period. The charge is 1% of the value of the shares
sold or the Net Asset Value at the time of purchase, whichever is less.
For Class B shares, there is a Contingent Deferred Sales Charge if you sell
your shares within six years, as described in the table below. The charge is
based on the value of the shares sold or the Net Asset Value at the time of
purchase, whichever is less.
THIS % IS DEDUCTED
IF YOU SELL YOUR CLASS B FROM YOUR PROCEEDS AS A
SHARES WITHIN THIS MANY CONTINGENT DEFERRED
YEARS AFTER BUYING THEM SALES CHARGE
- ------------------------------------------
1 Year 4
2 Years 4
3 Years 3
4 Years 3
5 Years 2
6 Years 1
7 Years 0
For each class, we will first redeem any shares in your account that are not
subject to a Contingent Deferred Sales Charge. If there are not enough of
these to meet your request, we will redeem shares subject to the charge in
the order they were purchased.
Unless otherwise specified, when you request to sell a stated DOLLAR AMOUNT,
we will redeem additional shares to cover any Contingent Deferred Sales
Charge. For requests to sell a stated NUMBER OF SHARES, we will deduct the
amount of the Contingent Deferred Sales Charge, if any, from the sale
proceeds.
WAIVERS. We waive the Contingent Deferred Sales Charge for:
o Account fees
o Redemptions by the fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan set up before February
1, 1995
o Redemptions through a systematic withdrawal plan set up on or after
February 1, 1995, up to 1% monthly, 3% quarterly, 6% semiannually or 12%
annually of your account's Net Asset Value depending on the frequency of
your plan
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
The fund receives income generally in the form of interest and other income
derived from its investments. This income, less the expenses incurred in the
fund's operations, is its net investment income from which income dividends
may be distributed. Thus, the amount of dividends paid per share may vary
with each distribution.
The fund intends to pay a dividend at least monthly representing its net
investment income. Capital gains, if any, may be distributed annually. The
amount of this distribution will vary and there is no guarantee the fund will
pay dividends. The fund does not pay "interest" or guarantee any fixed rate
of return on an investment in its shares.
To receive a distribution, you must be a shareholder on the record date. The
record date for the fund's distributions will vary. Please keep in mind that
if you invest in the fund shortly before the record date of a distribution,
any distribution will lower the value of the fund's shares by the amount of
the distribution. If you invest in the fund shortly before the fund deducts a
capital gain distribution from its Net Asset Value, you will receive some of
your investment back in the form of a taxable distribution. If you would like
information on upcoming record dates for the fund's distributions, please
call 1-800/DIAL BEN.
Dividends and capital gains are calculated and distributed the same way for
each class. The amount of any income dividends per share will differ,
however, generally due to the difference in the Rule 12b-1 fees of each class.
DISTRIBUTION OPTIONS
You may receive your distributions from the fund in any of these ways:
1. BUY ADDITIONAL SHARES OF THE FUND - You may reinvest distributions you
receive from the fund in additional shares of the fund (without a sales
charge or imposition of a Contingent Deferred Sales Charge). This is a
convenient way to accumulate additional shares and maintain or increase your
earnings base.
2. BUY SHARES OF OTHER FRANKLIN TEMPLETON FUNDS - You may direct your
distributions to buy shares of another Franklin Templeton Fund (without a
sales charge or imposition of a Contingent Deferred Sales Charge). Many
shareholders find this a convenient way to diversify their investments.
Please note that distributions may only be directed to an existing account.
3. RECEIVE DISTRIBUTIONS IN CASH - You may receive your distributions from
the fund in cash. If you have the money sent to another person or to a
checking or savings account, you may need a signature guarantee. If you send
the money to a checking or savings account, please see "Electronic Fund
Transfers" under "Services to Help You Manage Your Account."
Distributions may be reinvested only in the same class of shares, except as
follows: (i) Class C shareholders who chose to reinvest their distributions
in Class A shares of the fund or another Franklin Templeton Fund before
November 17, 1997, may continue to do so; and (ii) Class B and C shareholders
may reinvest their distributions in shares of any Franklin Templeton money
fund.
PLEASE INDICATE ON YOUR APPLICATION THE DISTRIBUTION OPTION YOU HAVE CHOSEN,
OTHERWISE WE WILL REINVEST YOUR DISTRIBUTIONS IN THE SAME SHARE CLASS OF THE
FUND. You may change your distribution option at any time by notifying us by
mail or phone. Please allow at least seven days before the record date for us
to process the new option.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
SHARE PRICE
When you buy shares, you pay the Offering Price. This is the Net Asset Value
per share of the class you wish to purchase, plus any applicable sales
charges. When you sell shares, you receive the Net Asset Value per share
minus any applicable Contingent Deferred Sales Charges.
The Net Asset Value we use when you buy or sell shares is the one next
calculated after we receive your transaction request in proper form. If you
buy or sell shares through your Securities Dealer, however, we will use the
Net Asset Value next calculated after your Securities Dealer receives your
request, which is promptly transmitted to the fund. Your redemption proceeds
will not earn interest between the time we receive the order from your dealer
and the time we receive any required documents.
HOW AND WHEN SHARES ARE PRICED
The fund is open for business each day the NYSE is open. We determine the Net
Asset Value per share of each class as of the close of the NYSE, normally
1:00 p.m. Pacific time. You can find the prior day's closing Net Asset Value
and Offering Price for each class in many newspapers.
The Net Asset Value of all outstanding shares of each class is calculated on
a pro rata basis. It is based on each class' proportionate participation in
the fund, determined by the value of the shares of each class. Each class,
however, bears the Rule 12b-1 fees payable under its Rule 12b-1 plan. To
calculate Net Asset Value per share of each class, the assets of each class
are valued and totaled, liabilities are subtracted, and the balance, called
net assets, is divided by the number of shares of the class outstanding. The
fund's assets are valued as described under "How Are Fund Shares Valued?" in
the SAI.
WRITTEN INSTRUCTIONS
Written instructions must be signed by all registered owners. To avoid any
delay in processing your transaction, they should include:
o Your name,
o The fund's name,
o The class of shares,
o A description of the request,
o For exchanges, the name of the fund you are exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the
evening if preferred.
JOINT ACCOUNTS. For accounts with more than one registered owner, the fund
accepts written instructions signed by only one owner for transactions and
account changes that could otherwise be made by phone. For all other
transactions and changes, all registered owners must sign the instructions.
Please keep in mind that if you have previously told us that you do not want
telephone exchange or redemption privileges on your account, then we can only
accept written instructions to exchange or redeem shares if they are signed
by all registered owners on the account.
SIGNATURE GUARANTEES
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $100,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered
owners,
3) The proceeds are not being sent to the address of record, preauthorized
bank account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential claims
based on the instructions received.
A signature guarantee verifies the authenticity of your signature. You should
be able to obtain a signature guarantee from a bank, broker, credit union,
savings association, clearing agency, or securities exchange or association.
A NOTARIZED SIGNATURE IS NOT SUFFICIENT.
SHARE CERTIFICATES
We will credit your shares to your fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate
is lost, stolen or destroyed, you may have to pay an insurance premium of up
to 2% of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form and to send the certificate and assignment form in separate
envelopes.
TELEPHONE TRANSACTIONS
You may initiate many transactions and changes to your account by phone.
Please refer to the sections of this prospectus that discuss the transaction
you would like to make or call Shareholder Services.
When you call, we will request personal or other identifying information to
confirm that instructions are genuine. We may also record calls. If our lines
are busy or you are otherwise unable to reach us by phone, you may wish to
ask your investment representative for assistance or send us written
instructions, as described elsewhere in this prospectus.
For your protection, we may delay a transaction or not implement one if we
are not reasonably satisfied that the instructions are genuine. If this
occurs, we will not be liable for any loss. We also will not be liable for
any loss if we follow instructions by phone that we reasonably believe are
genuine or if you are unable to execute a transaction by phone.
ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS
When you open an account, we need you to tell us how you want your shares
registered. How you register your account will affect your ownership rights
and ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
JOINT OWNERSHIP. If you open an account with two or more owners, we register
the account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of
survivorship" is shown as "Jt Ten" on your account statement. For any account
with two or more owners, we cannot accept instructions to change owners on
the account unless all owners agree in writing, even if the law in your state
says otherwise. If you would like another person or owner to sign for you,
please send us a current power of attorney.
GIFTS AND TRANSFERS TO MINORS. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this
form of registration, a minor may not be named as an account owner.
TRUSTS. You should register your account as a trust only if you have a valid
written trust document. This avoids future disputes or possible court action
over who owns the account.
REQUIRED DOCUMENTS. For corporate, partnership and trust accounts, please
send us the following documents when you open your account. This will help
avoid delays in processing your transactions while we verify who may sign on
the account.
TYPE OF ACCOUNT DOCUMENTS REQUIRED
- ------------------------------------------------------------------------------
CORPORATION Corporate Resolution
- ------------------------------------------------------------------------------
PARTNERSHIP 1. The pages from the partnership agreement that
identify the general partners, or
2. A certification for a partnership agreement
- ------------------------------------------------------------------------------
TRUST 1. The pages from the trust document that identify
the trustees, or
2. A certification for trust
- ------------------------------------------------------------------------------
STREET OR NOMINEE ACCOUNTS. If you have fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the
shares to the street or nominee name account of another Securities Dealer.
Both dealers must have an agreement with Distributors or we cannot process
the transfer. Contact your Securities Dealer to initiate the transfer. We
will process the transfer after we receive authorization in proper form from
your delivering Securities Dealer. Accounts may be transferred electronically
through the NSCC. For accounts registered in street or nominee name, we may
take instructions directly from the Securities Dealer or your nominee.
IMPORTANT INFORMATION IF YOU HAVE AN INVESTMENT REPRESENTATIVE
If there is a Securities Dealer or other representative of record on your
account, we are authorized: (1) to provide confirmations, account statements
and other information about your account directly to your dealer and/or
representative; and (2) to accept telephone and electronic instructions
directly from your dealer or representative, including instructions to exchange
or redeem your shares. Electronic instructions may be processed through
established electronic trading systems and programs used by the fund. Telephone
instructions directly from your representative will be accepted unless you have
told us that you do not want telephone privileges to apply to your account.
KEEPING YOUR ACCOUNT OPEN
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $250, or less than $50
for employee accounts and custodial accounts for minors. We will only do this
if the value of your account fell below this amount because you voluntarily
sold your shares and your account has been inactive (except for the
reinvestment of distributions) for at least six months. Before we close your
account, we will notify you and give you 30 days to increase the value of
your account to $1,000, or $100 for employee accounts and custodial accounts
for minors. These minimums do not apply to accounts managed by the Franklin
Templeton Group.
SERVICES TO HELP YOU MANAGE YOUR ACCOUNT
AUTOMATIC INVESTMENT PLAN
Our automatic investment plan offers a convenient way to invest in the fund.
Under the plan, you can have money transferred automatically from your
checking or savings account to the fund each month to buy additional shares.
If you are interested in this program, please refer to the account
application included with this prospectus or contact your investment
representative. The market value of the fund's shares may fluctuate and a
systematic investment plan such as this will not assure a profit or protect
against a loss. You may discontinue the program at any time by calling
Shareholder Services.
AUTOMATIC PAYROLL DEDUCTION - CLASS A ONLY
You may have money transferred from your paycheck to the fund to buy
additional Class A shares. Your investments will continue automatically
until you instruct the fund and your employer to discontinue the plan. To
process your investment, we must receive both the check and payroll deduction
information in required form. Due to different procedures used by employers
to handle payroll deductions, there may be a delay between the time of the
payroll deduction and the time we receive the money.
SYSTEMATIC WITHDRAWAL PLAN
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or
annual basis. The value of your account must be at least $5,000 and the
minimum payment amount for each withdrawal must be at least $50.
If you would like to establish a systematic withdrawal plan, please complete the
systematic withdrawal plan section of the account application included with this
prospectus and indicate how you would like to receive your payments. You may
choose to direct your payments to buy the same class of shares of another
Franklin Templeton Fund or have the money sent directly to you, to another
person, or to a checking or savings account. If you choose to have the money
sent to a checking or savings account, please see "Electronic Fund Transfers"
below. Once your plan is established, any distributions paid by the fund will be
automatically reinvested in your account.
You will generally receive your payment by the end of the month in which a
payment is scheduled. When you sell your shares under a systematic withdrawal
plan, it is a taxable transaction.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, you may not want to set up a systematic withdrawal plan if
you plan to buy shares on a regular basis. Shares sold under the plan may
also be subject to a Contingent Deferred Sales Charge. Please see "Contingent
Deferred Sales Charge" under "How Do I Sell Shares?"
You may discontinue a systematic withdrawal plan, change the amount and
schedule of withdrawal payments, or suspend one payment by notifying us by
mail or by phone at least seven business days before the end of the month
preceding a scheduled payment. Please see "How Do I Buy, Sell and Exchange
Shares? - Systematic Withdrawal Plan" in the SAI for more information.
ELECTRONIC FUND TRANSFERS
You may choose to have dividend and capital gain distributions or payments
under a systematic withdrawal plan sent directly to a checking or savings
account. If the account is with a bank that is a member of the Automated
Clearing House, the payments may be made automatically by electronic funds
transfer. If you choose this option, please allow at least fifteen days for
initial processing. We will send any payments made during that time to the
address of record on your account.
TELEFACTS(R)
From a touch-tone phone, you may call our TeleFACTS system (day or night) at
1-800/247-1753 to:
o obtain information about your account;
o obtain price and performance information about any Franklin Templeton
Fund;
o exchange shares (within the same class) between identically registered
Franklin Templeton Class A, B or C accounts; and
o request duplicate statements and deposit slips for Franklin Templeton
accounts.
You will need the code number for each class to use TeleFACTS. The code
number is 116 for Class A, 316 for Class B and 216 for Class C.
STATEMENTS AND REPORTS TO SHAREHOLDERS
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your
account, including additional purchases and dividend reinvestments. PLEASE
VERIFY THE ACCURACY OF YOUR STATEMENTS WHEN YOU RECEIVE THEM.
o Financial reports of the fund will be sent every six months. To reduce
fund expenses, we attempt to identify related shareholders within a
household and send only one copy of a report. Call Fund Information if you
would like an additional free copy of the fund's financial reports.
INSTITUTIONAL ACCOUNTS
Additional methods of buying, selling or exchanging shares of the fund may be
available to institutional accounts. Institutional investors may also be
required to complete an institutional account application. For more information,
call Institutional Services.
AVAILABILITY OF THESE SERVICES
The services above are available to most shareholders. If, however, your
shares are held by a financial institution, in a street name account, or
networked through the NSCC, the fund may not be able to offer these services
directly to you. Please contact your investment representative.
WHAT IF I HAVE QUESTIONS ABOUT MY ACCOUNT?
If you have any questions about your account, you may write to Investor
Services at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California
94403-7777. The fund, Distributors and the manager are also located at this
address. You may also contact us by phone at one of the numbers listed below.
HOURS OF OPERATION (PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
- ------------------------------------------------------------------------------
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plan Services 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with
high quality service. You will hear a regular beeping tone if your call is
being recorded.
GLOSSARY
USEFUL TERMS AND DEFINITIONS
BOARD - The Board of Directors of the fund
CD - Certificate of deposit
CLASS A , CLASS B AND CLASS C - The fund offers three classes of shares,
designated "Class A" , "Class B" and "Class C." The three classes have
proportionate interests in the fund's portfolio. They differ, however,
primarily in their sales charge structures and Rule 12b-1 plans.
CODE - Internal Revenue Code of 1986, as amended
CONTINGENCY PERIOd - For Class A shares, the 12 month period during which a
Contingent Deferred Sales Charge may apply. The contingency period is six
years for Class B shares and 18 months for Class C shares. The holding period
begins on the day you buy your shares. For example, if you buy shares on the
18th of the month, they will age one month on the 18th day of the next month
and each following month.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - A sales charge of 1% that may apply
if you sell your Class A or C shares within the Contingency Period. For Class
B, the maximum CDSC is 4% and declines to 0% after six years.
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Directors."
ELIGIBLE GOVERNMENTAL AUTHORity - Any state or local government or any
instrumentality, department, authority or agency thereof that has determined
the fund is a legally permissible investment and that can only buy shares of
the fund without paying sales charges.
FITCH - Fitch Investors Service, Inc.
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Templeton Capital Accumulator Fund, Inc., and Templeton Variable
Products
Series Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies
in the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
MARKET TIMERS - Market Timers generally include market timing or asset
allocation services, accounts administered so as to buy, sell or exchange
shares based on predetermined market indicators, or any person or group whose
transactions seem to follow a timing pattern or whose transactions include
frequent or large exchanges.
MOODY'S - Moody's Investors Service, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by
the number of shares outstanding.
NSCC - National Securities Clearing Corporation
NYSE - New York Stock Exchange
OFFERING PRICE - The public offering price is based on the Net Asset Value
per share of the class and includes the front-end sales charge. The maximum
front-end sales charge is 4.25% for Class A and 1% for Class C. There is no
front-end sales charge for Class B. We calculate the offering price to two
decimal places using standard rounding criteria.
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
TELEFACTS(R) - Franklin Templeton's automated customer servicing system
WE/OUR/US - Unless the context indicates a different meaning, these terms
refer to the fund and/or Investor Services, Distributors, or other wholly
owned subsidiaries of Resources.
FRANKLIN FEDERAL TAX-FREE INCOME FUND
Annual Report
Thank you for investing with Franklin Templeton. We encourage our investors to
maintain a long-term perspective, and to expect that mixed in with the good
years can be some bad years. It's important to remember that all securities
markets move both up and down, as do mutual fund share prices. We appreciate
your past support and look forward to serving your investment needs in the years
ahead.
Charles B. Johnson (right),
Chairman of Franklin Federal
Tax-Free Income Fund and
Thomas J. Kenny (left),
Director of Franklin Municipal
Bond Department.
CONTENTS
Shareholder Letter...................................... 1
Special Feature:
Q&A with Municipal
Bond Department......................................... 3
Manager's Discussion.................................... 8
Performance Summaries
Class I................................................ 11
Class II............................................... 13
Financial Highlights &
Statement of Investments................................ 15
Financial Statements.................................... 40
Notes to
Financial Statements.................................... 43
Independent
Auditors' Report........................................ 45
SHAREHOLDER LETTER
Dear Shareholder:
We are pleased to bring you Franklin Federal Tax-Free Income Fund's annual
report for the period ended April 30, 1998.
During the year under review, the U.S. economy continued on its path of moderate
growth, modest inflation and relatively stable-to-lower interest rates. Economic
growth was solid, as measured by the 1998 first quarter, annualized Gross
Domestic Product (GDP) gain of 4.8%. The Consumer Price Index (CPI), a widely
used measure of inflation, continued to trend downward. The CPI's annualized
increase for March 1998 was a surprisingly low 2.25%, considering the U.S.
economy is in its seventh consecutive year of expansion.
After peaking in the second quarter of 1997, interest rates declined due to
benign inflation and the presumption that the Asian monetary crises would slow
the U.S. economy. The Asian crises also contributed to a flight to quality into
U.S. Treasury bonds and U.S. dollar denominated assets. The 30-year Treasury
yield ended the reporting period at 5.95%, down from 6.95% on April 30, 1997.1
The yield on the Bond Buyer 40 Index, a representative municipal bond index,
declined from 5.89% on April 30, 1997, to 5.39% on April 30, 1998.2 The overall
interest rate decline resulted in a strong year for fixed-income securities in
1997, contributing to an increase in the fund's NAV and share price.
The favorable interest rate environment provided attractive opportunities for
issuers to refinance existing debt or issue new debt. Municipal supply in the
first quarter of 1998 was 70% higher than in the same period of 1997. Looking
forward, the recent economic environment should be beneficial for municipalities
and municipal bonds. Credit rating upgrades substantially outpaced downgrades
from national credit rating agencies during the reporting period.
We encourage you to discuss your financial goals with an investment
representative. He or she can address concerns about volatility and help you
diversify your investments and stay focused on the long term. Mutual funds offer
a level of diversification that is almost impossible for individual investors to
achieve on their own. Municipal bonds continue to be an attractive investment
for diversifying a heavily weighted stock portfolio. As always, we appreciate
your support, welcome your questions and comments, and look forward to serving
your investment needs in the years ahead.
Sincerely,
Charles B. Johnson
Chairman
Franklin Federal Tax-Free Income Fund
Thomas J. Kenny
Director
Franklin Municipal Bond Department
Q
&
A
SPECIAL FEATURE:
Q&A WITH FRANKLIN'S
MUNICIPAL BOND DEPARTMENT
Thomas J. Kenny, Director of Franklin Templeton's Municipal Bond Department, and
portfolio managers Sheila Amoroso and Bernie Schroer discuss the issues that
shaped the recent municipal bond market.
Q: HOW WOULD YOU DESCRIBE THE MUNICIPAL BOND MARKET'S RECENT PERFORMANCE?
TOM KENNY: Long-term interest rates trended lower in 1997, and remained in a
fairly narrow trading range during the early months of 1998. This lower interest
rate environment led to a substantial increase in the supply of municipal bonds
coming to market, both for new projects and refinancing purposes. Demand has not
kept pace with supply, which, in our opinion, has created some excellent buying
opportunities.
Q: RECENTLY, THERE HAS BEEN A LOT OF DISCUSSION ABOUT THE ASIAN MARKET
VOLATILITY. DO YOU THINK THE PROBLEMS THERE WILL HAVE ANY IMPACT ON THE U.S.
BOND MARKET THIS YEAR?
BERNIE SCHROER: The decline in Asia's currency and equity markets may help the
U.S. bond market. In 1997, we experienced a strong U.S. economy, which normally
would have pressured the Federal Reserve (the Fed) to raise interest rates,
causing bond prices to fall. Instead, the Fed left interest rates alone,
probably in part due to the Asian turmoil and the dampening effect it could have
on U.S. economic growth this year.
Q: HAVE THE RECENT TAX LAW CHANGES HAD ANY IMPACT ON THE MUNICIPAL BOND MARKET?
SHEILA AMOROSO: Changes in the tax law did not alter the tax advantages of
municipal bonds. Municipals still distribute income free from regular federal,
and in many cases, state income taxes.*
Q: WHAT ROLE CAN MUNICIPAL BONDS PLAY IN A DIVERSIFIED PORTFOLIO?
SHEILA: After three years of healthy returns due to historic stock market gains,
individuals have seen an increase in the percentage of equities in their
portfolios. As a result, many investors are beginning to re-examine asset
allocation. Municipal bonds generally enjoy low volatility while providing
tax-free income, which can offset some of the risks associated with investing in
a portfolio composed mainly of stocks. The chart on page 6 shows how adding
municipal bonds in different proportions to a stock portfolio has historically
lowered volatility in providing solid after-tax returns. In short, prudent
investors may be able to reduce their risk, and maintain their potential for
competitive return, by including municipal bonds in their portfolios.
*For investors subject to regular federal or state alternative minimum tax, all
or a portion of municipal bond interest and municipal bond fund dividends may be
subject to such tax, depending on the source. Fund distributions of capital
gains and of ordinary income from accrued market discount, if any, are generally
taxable.
"Franklin tax-free income funds can help investors diversify a heavily weighted
stock portfolio, while providing a convenient and effective way to participate
in the municipal bond market."
BERNIE: Municipal bonds remain a strong investment for investors looking for
tax-free income. Franklin tax-free income funds can help investors diversify a
heavily weighted stock portfolio, while providing a convenient and effective way
to participate in the municipal bond market.
Q: LOOKING AHEAD, WHAT DO YOU THINK MIGHT AFFECT THE MUNICIPAL BOND MARKET AND
THE FRANKLIN TAX-FREE INCOME FUNDS?
TOM: Municipal bonds generally share the same trends as U.S. government
securities, such as Treasury bonds. These securities are sensitive to a variety
of factors that affect interest rates in general, including the Federal
Reserve's monetary policy. During most of 1997, the Fed was biased toward
raising interest rates in order to stave off inflationary pressures as the
economy continued its solid growth. However, toward the end of the year and into
1998, the Fed appears to have adopted a more neutral stance for a couple of
reasons. First, although the economy is experiencing moderate growth, inflation
remains subdued. Also, the potential still exists for the Asian crisis to slow
the U.S. economy.
Regardless of changing market conditions, our focus will remain on providing
shareholders with high current income free from regular federal, and depending
on the fund, state income taxes.* Franklin has become the nation's largest
tax-free fund manager**, in part by adhering to a consistent, disciplined
investment philosophy, which historically has proved successful in both strong
and weak bond markets. Of course, past performance is no guarantee of future
results.
*For investors subject to regular federal or state alternative minimum tax, all
or a portion of municipal bond interest and municipal bond fund dividends may be
subject to such tax, depending on the source. Fund distributions of capital
gains and of ordinary income from accrued market discount, if any, are generally
taxable.
**Source: Strategic Insight, 11/97.
MANAGER'S DISCUSSION
YOUR FUND'S OBJECTIVE: FRANKLIN FEDERAL TAX-FREE INCOME FUND SEEKS TO PROVIDE
HIGH, CURRENT INCOME EXEMPT FROM REGULAR FEDERAL INCOME TAX THROUGH A NATIONALLY
DIVERSIFIED PORTFOLIO CONSISTING OF MUNICIPAL SECURITIES.1
When investing in the municipal market, we strive to purchase securities
offering long-term value. Prospects for value in the market are dynamic and can
change daily. In our vigilant search throughout the fund's fiscal year, we found
value in two key areas: insured securities and New York securities.
INSURED SECURITIES
Insured municipal bonds are insured against default by insurance companies. An
insurance company pledges to make all interest and principal payments when due,
if the issuer of the bond defaults on its obligations. Insured bonds usually
trade based on the insurer's credit rating rather than the rating of the
underlying issuer, since the insurance company is ultimately at risk for the
repayment of principal and interest. Some of the major municipal bond insurance
firms include MBIA and AMBAC Indemnity Corporation. Because of their lower risk
and the cost of insurance protection, insured bonds will pay slightly lower
yields. However, insured municipal bonds are generally considered among the
safest investments, as reflected in their high credit quality rating.
As individual state economies enjoyed healthy growth, state and local
governments witnessed an increase in their revenues. Voter resistance toward
higher taxes helped restrain government spending, causing government fiscal
positions and credit ratings to strengthen. As credit qualities rose, municipal
bond insurance became relatively cheap for state and local governments.
Furthermore, increased competition among the municipal insurance companies
contributed to lower insurance costs for issuers. Municipal bond insurance tends
to provide the greatest marketability for issuers, because it attracts the
widest variety of investors. Approximately 60% of the long-term new issues
during the past year have come with insurance, continuing the trend we have
experienced during the past few years.2 The fund's exposure to insured
securities reflected this trend, increasing from 17.5% of long-term assets on
April 30, 1997, to 22.5% at the end of the reporting period.3
The availability of insurance for new issues, as well as secondary securities,
contributed to a narrowing of quality spreads in the municipal market. The
sustained, low interest-rate environment created greater demand for higher
yielding, lower-quality securities. As the supply of these lower-quality
securities declined, the demand drove the prices of these securities higher. As
a result, insured securities offered attractive yields relative to other sectors
of the municipal market.
As illustrated by the chart, 51.2% of the fund's long-term investments were
invested in high-grade bonds at the close of the period. High-grade bonds rated
AAA or AA by Standard & Poor's, or Aaa or Aa by Moody's, two national credit
rating agencies, generally are considered to carry little credit risk.4
Increasing our emphasis on high-quality bonds can help protect the fund against
the risk of issuers defaulting on their interest payments or principal
repayments.
GRAPHIC MATERIAL 1 OMITTED - SEE APPENDIX AT END OF DOCUMENT
1. These dividends are generally subject to state and local income taxes, if
any. For investors subject to federal or state alternate minimum tax, a small
portion of this income may be subject to such tax. Distributions of capital
gains and of ordinary income from accrued market discount, if any, are generally
taxable.
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 16 of
this report.
2. Source: The Bond Buyer.
3. Fund shares are not insured by any U.S. or other government agency, are
subject to market risks and will fluctuate in value. Insurance relates only to
the payment of principal and interest on the portfolio's insured securities and
the terms of the insurance as outlined in the prospectus. No representation is
made as to any insurer's ability to meet its commitments. 4. This does not
indicate Standard & Poor's or Moody's rating of the fund.
Past performance is not predictive of future results.
NEW YORK SECURITIES
We also found value in New York securities, and at the end of the fund's
reporting period our exposure was 17.2% of total market value, up from 14.61% on
April 30, 1997. New York is generally one of the largest issuers of municipal
bonds, and has been the largest so far in 1998. Due to the large supply of
securities, the sector was priced attractively in the market.
Both New York City and New York state enjoyed improved financial positions. In
August 1997, Standard and Poor's upgraded the state's credit rating from A- to
A. New York City was recently upgraded by Moody's to a3, and is currently rated
A- by Fitch IBCA, and BBB+ by S&P(R).5 These positive factors contributed to New
York securities being one of the best performing sectors in the market
throughout the year under review.
The chart to the left shows that the fund was invested across a broad range of
sectors on April 30, 1998. Also, your fund held investments in all 50 states and
Puerto Rico. The fund had its largest holdings in securities issued in New York,
Illinois and Texas, as illustrated below.
Going forward, we believe municipal bond supply should moderate during the last
half of the year, and demand will remain solid. Most importantly, given the
fund's current taxable-equivalent distribution rate, municipals should provide
an attractive investment for fixed-income investors.
GRAPHIC MATERIAL 2 OMITTED - SEE APPENDIX AT END OF DOCUMENT
GRAPHIC MATERIAL 3 OMITTED - SEE APPENDIX AT END OF DOCUMENT
PERFORMANCE SUMMARY
CLASS I
Franklin Federal Tax-Free Income Fund - Class I share price, as measured by net
asset value, increased 35 cents, from $11.90 on April 30, 1997, to $12.25 on
April 30, 1998. During the 12-month reporting period, shareholders received
income distributions totaling 68.8 cents ($0.6880) per share. Distributions will
vary based on the earnings of the fund's portfolio, and past distributions are
not predictive of future trends.
Based on an annualization of April's monthly per-share dividend of 5.6 cents
($0.056) and the maximum offering price of $12.79 on April 30, 1998, your fund's
distribution rate was 5.25%. This tax-free rate is generally higher than the
after-tax return on a comparable taxable investment. For example, an investor in
the maximum federal income tax bracket of 39.6% would need to earn 8.69% from a
taxable investment of similar quality to match the fund's tax-free distribution
rate.
The chart on page 12 compares your fund's Class I shares' performance with that
of the unmanaged Lehman Brothers Municipal Bond Index. The index includes over
40,000 municipal securities from across the country, while your fund consists of
approximately 930 municipal bonds. Of course, such unmanaged market indices have
inherent performance differentials over any fund. They do not pay management
fees to cover salaries of securities analysts or portfolio managers, nor do they
pay commissions to buy and sell bonds. Unlike unmanaged indices, mutual funds
are never 100% invested because they need cash on hand to redeem shares. In
addition, the performance shown for the fund includes the maximum initial sales
charge, all fund expenses and account fees. If operating expenses such as
Franklin Federal Tax-Free Income Fund's had been applied to this index, the
index's performance would have been lower. Please remember that an index is
simply a measure of performance and one cannot invest in it directly.
Your fund's Class I shares' performance exceeded the rate of inflation, as
measured by the Consumer Price Index (CPI), keeping your purchasing power well
ahead of inflation -- a primary goal of any investment.
GRAPHIC MATERIAL 4 OMITTED - SEE APPENDIX AT END OF DOCUMENT
CLASS I
Periods ended 4/30/98
SINCE
INCEPTION
1-YEAR 5-YEAR 10-YEAR (10/17/83)
- --------------------------------------------------------------------------------
Cumulative Total Return1 8.92% 36.39% 121.20% 256.80%
Average Annual Total Return2 4.28% 5.49% 7.79% 8.80%
Distribution Rate3 5.25%
Taxable Equivalent Distribution Rate4 8.69 %
30-Day Standardized Yield5 4.39%
Taxable Equivalent Yield4 7.27%
1. Cumulative total return measures the change in value of an investment over
the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the current, maximum 4.25%
initial sales charge. See Note below.
3. Distribution rate is based on an annualization of April's 5.6 cent per share
monthly dividend and the maximum offering price of $12.79 on April 30, 1998.
4. Taxable equivalent distribution rate and yield assume the 1998 maximum
federal income tax rate of 39.6%.
5. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended April 30, 1998.
Note: Prior to July 1, 1994, fund shares were offered at a lower initial sales
charge with dividends reinvested at the offering price; thus actual total
returns would differ. Effective May 1, 1994, the fund eliminated the sales
charge on reinvested dividends and implemented a Rule 12b-1 plan, which affects
subsequent performance.
All total return calculations assume reinvestment of dividends and capital gains
at net asset value. Since markets can go down as well as up, investment return
and principal value will fluctuate with market conditions, and you may have a
gain or loss when you sell your shares.
CLASS II
Franklin Federal Tax-Free Income Fund - Class II share price, as measured by net
asset value, increased 34 cents, from $11.90 on April 30, 1997, to $12.24 on
April 30, 1998. During the 12-month reporting period, shareholders received
income distributions totaling 61.92 cents ($0.6192) per share. Distributions
will vary based on the earnings of the fund's portfolio, and past distributions
are not predictive of future trends.
Based on an annualization of April's monthly per-share dividend of 5.00 cents
($0.0500), plus an annual dividend adjustment of 0.12 cents ($0.0012), and the
maximum offering price of $12.36 on April 30, 1998, your fund's distribution
rate was 4.86%. This tax-free rate is generally higher than the after-tax return
on a comparable taxable investment. For example, an investor in the maximum
federal income tax bracket of 39.6% would need to earn 8.05% from a taxable
investment of similar quality to match the fund's tax-free distribution rate.
The chart on page 14 compares your fund's Class II shares' performance with that
of the unmanaged Lehman Brothers Municipal Bond Index. The index includes over
40,000 municipal securities from across the country, while your fund consists of
approximately 930 municipal bonds. Of course, such unmanaged market indices have
inherent performance differentials over any fund. They do not pay management
fees to cover salaries of securities analysts or portfolio managers, nor do they
pay commissions to buy and sell securities. Unlike unmanaged indices, mutual
funds are never 100% invested because they need cash on hand to redeem shares.
In addition, the performance shown for the fund includes the maximum initial
sales charge, all fund expenses and account fees. If operating expenses such as
Franklin Federal Tax-Free Income Fund's had been applied to this index, the
index's performance would have been lower. Please remember that an index is
simply a measure of performance and one cannot invest in it directly.
Your fund's Class II shares' performance exceeded the rate of inflation, as
measured by the Consumer Price Index (CPI), keeping your purchasing power well
ahead of inflation -- a primary goal of any investment.
GRAPHIC MATERIAL 7 OMITTED - SEE APPENDIX AT END OF DOCUMENT
GRAPHIC MATERIAL 8 OMITTED - SEE APPENDIX AT END OF DOCUMENT
GRAPHIC MATERIAL 9 OMITTED - SEE APPENDIX AT END OF DOCUMENT
CLASS II
Periods ended 4/30/98
SINCE
INCEPTION
1-YEAR (5/1/95)
- -----------------------------------------------------------------------------
Cumulative Total Return1 8.22% 22.68%
Average Annual Total Return2 6.15% 6.69%
Distribution Rate3 4.86%
Taxable Equivalent Distribution Rate4 8.05%
30-Day Standardized Yield5 3.95%
Taxable Equivalent Yield4 6.54%
1. Cumulative total return measures the change in value of an investment over
the periods indicated and does not include sales charges.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the 1.0% initial sales
charge and 1.0% contingent deferred sales charge (CDSC), applicable to shares
redeemed within 18 months of investment.
3. Distribution rate is based on an annualization of April's 5.12 cent per share
monthly dividend and the maximum offering price of $12.36 on April 30, 1998.
4. Taxable equivalent distribution rate and yield assume the 1998 maximum
federal income tax rate of 39.6%.
5. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended April 30, 1998.
All total return calculations assume reinvestment of dividends and capital gains
at net asset value. Since markets can go down as well as up, investment return
and principal value will fluctuate with market conditions, and you may have a
gain or loss when you sell your shares.
1. Source: Standard & Poor's(R) Micropal (Federal Reserve H15 Report).
2. Source: Standard & Poor's Micropal (Bond Buyer 40). Index is composed of 40
actively traded municipal bonds and does not represent the performance of any
Franklin Templeton fund. Investors cannot invest directly in this unmanaged
index.
FRANKLIN FEDERAL TAX-FREE INCOME FUND
Financial Highlights
<TABLE>
<CAPTION>
Year Ended April 30,
<S> <C> <C> <C> <C> <C>
CLASS I 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year................................. $11.90 $11.83 $11.73 $11.81 $12.24
--------------------------------------------
Income from investment operations:
Net investment income............................................. .69 .71 .74 .75 .77
Net realized and unrealized gains (losses)........................ .35 .07 .10 (.05) (.41)
---------------------------------------------
Total from investment operations................................... 1.04 .78 .84 .70 .36
Less distributions from net investment income...................... (.69) (.71) (.74) (.78) (.79)
---------------------------------------------
Net asset value, end of year....................................... $12.25 $11.90 $11.83 $11.73 $11.81
=============================================
Total return*...................................................... 8.92% 6.81% 7.33% 6.21% 2.58%
Ratios/supplemental data
Net assets, end of year (000's).................................... $7,022,961 $6,905,488 $7,012,601 $6,886,941 $6,804,262
Ratios to average net assets:
Expenses.......................................................... .59% .58% .57% .59% .52%
Net investment income............................................. 5.70% 6.00% 6.20% 6.47% 6.27%
Portfolio turnover rate............................................ 14.54% 16.43% 25.10% 19.88% 24.59%
</TABLE>
<TABLE>
<CAPTION>
CLASS II
Per share operating performance
(for a share outstanding throughout the year)
<S> <C> <C> <C>
Net asset value, beginning of year $11.90 $11.82 $11.73**
-------------------------------------
Income from investment operations:
Net investment income .63 .66 .68
Net realized and unrealized gains .33 .06 .09
-------------------------------------
Total from investment operations .96 .72 .77
Less distributions from net investment income (.62) (.64) (.68)
-------------------------------------
Net asset value, end of year $12.24 $11.90 $11.82
=====================================
Total return* 8.22% 6.28% 6.68%
Ratios/supplemental data
Net assets, end of year (000's) $135,195 $71,944 $34,110
Ratios to average net assets:
Expenses 1.17% 1.16% 1.15%
Net investment income 5.12% 5.42% 5.68%
Portfolio turnover rate 14.54% 16.43% 25.10%
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized. Prior to May 1, 1994, dividends from net
investment income were reinvested at the offering price.
**The Fund paid a dividend to shareholders of record on the beginning of
business, May 1, 1995 in the amount of $0.062 per share. The net asset value per
share at the beginning of period includes this dividend.
See notes to financial statements.
<TABLE>
<CAPTION>
FRANKLIN FEDERAL TAX-FREE INCOME FUND
Statement of Investments, April 30, 1998
PRINCIPAL
AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 97.4%
BONDS 95.3%
ALABAMA 1.5%
<S> <C> <C>
Alabama HFA, SFMR, Collateralized Home Mortgage, Series D-2, 5.75%, 10/01/23 .............. $ 5,400,000 $ 5,522,094
Alabama Water Pollution Control Authority, Revolving Fund, Series B,
Pre-Refunded, 7.75%, 8/15/12 .............................................................. 6,180,000 6,715,126
Birmingham GO, Street Improvement, Warrants, Pre-Refunded, 8.00%, 7/01/13 ................. 5,000,000 5,131,450
Citronelle IDB, PCR, Stauffer Chemical Project, Guaranteed by Imperial Chemical, Plc., Series
1982, 8.00%, 12/01/12 ..................................................................... 1,000,000 1,088,670
Courtland IDB, PCR, Refunding, Champion International Corp. Project, 6.15%, 6/01/19........ 5,000,000 5,321,250
Courtland IDBR, Refunding, Champion International Corp., Series A, 7.20%, 12/01/13......... 12,000,000 13,308,840
Fairfield IDB, Environmental Improvement Revenue, Refunding, USX
Corp. Projects, 5.45%, 9/01/14 ............................................................ 1,445,000 1,443,324
Jefferson County Sewer Revenue, Warrants, FGIC Insured,
Refunding, Series A, 5.625%, 2/01/22 ...................................................... 4,000,000 4,144,840
Refunding, Series A, 5.375%, 2/01/27 ...................................................... 19,000,000 19,096,900
Series D, 5.75%, 2/01/22 .................................................................. 15,995,000 16,730,130
Series D, 5.75%, 2/01/27 .................................................................. 19,715,000 20,621,101
Montgomery Medical Clinic Board, Health Care Facilities Revenue,
Refunding, Jackson Hospital
and Clinic, AMBAC Insured, 6.00%, 3/01/26 ................................................. 5,385,000 5,699,861
-----------
104,823,586
-----------
Alaska 2.0%
Alaska Industrial Development and Export Authority, Revolving Fund,
Series A, 7.95%, 4/01/10 .................................................................. 1,775,000 1,902,907
Alaska State HFC,
Collateralized Home Mortgage, Series A-1, 6.75%, 12/01/32 ................................. 3,560,000 3,781,290
Refunding, Mortgage, Series A, MBIA Insured, 6.00%, 12/01/15 .............................. 4,565,000 4,804,389
Refunding, Mortgage, Series A, MBIA Insured, 6.10%, 12/01/37 .............................. 34,000,000 35,759,500
Refunding, Series A, MBIA Insured, 5.875%, 12/01/24......................................... 17,875,000 18,583,565
Refunding, Series A, MBIA Insured, 5.875%, 12/01/30......................................... 11,600,000 11,989,528
Series A, Pre-Refunded, 6.60%, 12/01/23 ................................................... 8,000,000 8,788,160
Veterans Mortgage Program, MBIA Insured, 6.75%, 12/01/25.................................... 20,530,000 22,056,611
Anchorage Parking Authority Revenue, Refunding, 5th Avenue Garage Lease Project,
6.50%, 12/01/02 ........................................................................... 3,360,000 3,584,750
6.75%, 12/01/08 ........................................................................... 3,500,000 3,751,195
Valdez Marine Terminal Revenue, Refunding, BP Pipelines, Inc. Project,
Series A, 5.85%, 8/01/25 .................................................................. 25,000,000 25,634,000
Series C, 5.65%, 12/01/28 ................................................................. 500,000 507,040
-------
141,142,935
---------
Arizona .1%
Tempe IDA, Residential Care Facilities Revenue, Volunteers of
America Care Facilities, 9.00%, 6/01/18 ................................................... 5,540,000 5,660,440
---------
Arkansas 1.1%
Arkansas State Development Financing Authority, Driver's License Revenue, State Police Headquarters,
Wireless Data, FGIC Insured, 5.40%, 6/01/18 .............................................. 4,000,000 4,094,840
Desha County Residential Housing Facilities Board, SFMR, Refunding, 7.50%, 4/01/11 ........ 2,130,000 2,267,832
Independence County Public Health and Education Facilities Board,
Capital Revenue, Refunding & Improvement,
White River Control Project, Pre-Refunded, 8.00%, 6/01/09 ................................ 3,115,000 3,309,158
Jefferson County PCR, Refunding, Arkansas Power and Light Co. Project, 6.30%, 6/01/18 ..... 1,465,000 1,571,755
Pope County PCR, Refunding, Power and Light Co. Project, 6.30%,
12/01/16................................................................................... 2,600,000 2,760,056
11/01/20................................................................................... 60,000,000 62,634,600
University of Central Arkansas, AMBAC Insured,
Academic Facilities Revenue, Series B, 5.875%, 4/01/16 .................................... 250,000 265,505
Academic Facilities Revenue, Series B, 6.00%, 4/01/21 ..................................... 1,000,000 1,074,890
Athletic Facilities Revenue, Series C, 6.00%, 4/01/21 ..................................... 1,000,000 1,074,890
Athletic Facilities Revenue, Series C, 6.125%, 4/01/26 .................................... 825,000 882,783
Refunding, Housing System Revenue, Series A, 6.00%, 4/01/21 ............................... 1,000,000 1,074,890
---------
81,011,199
---------
Bonds (cont.)
California 6.2%
Alhambra COP, Clubhouse Facility Project, 11.25%
1/01/08 ................................................................................... $ 410,000 $ 420,197
1/01/09 ................................................................................... 455,000 466,279
1/01/10 ................................................................................... 500,000 512,350
Burbank RDA, Refunding, Tax Allocation, Series A, 6.25%, 12/01/24 ......................... 5,325,000 5,640,293
California Health Facilities, Financing Authority Revenue, Refunding, St. Francis Medical Center,
Series H, AMBAC Insured, 6.30%, 10/01/15 ................................................. 2,800,000 3,068,968
California State Educational Facilities Authority Revenue, 6.00%,
National University, Connie Lee Insured, 5/01/09 .......................................... 3,580,000 3,872,701
Pooled College and University Projects, Series B, 12/01/20 ................................ 6,025,000 6,310,465
California State GO,
6.00%, 5/01/18 ............................................................................ 535,000 564,473
5.90%, 4/01/23 ............................................................................ 1,200,000 1,250,256
FGIC Insured, 6.00%, 5/01/20 .............................................................. 850,000 905,412
FGIC Insured, Pre-Refunded, 6.00%, 8/01/19 ................................................ 11,000,000 12,117,930
FGIC Insured, Pre-Refunded, 6.00%, 5/01/20 ................................................ 11,650,000 12,801,486
Pre-Refunded, 6.00%, 5/01/18 .............................................................. 6,465,000 7,086,028
Pre-Refunded, 5.90%, 4/01/23 .............................................................. 10,550,000 11,411,302
Series 1994, 5.90%, 5/01/08 ............................................................... 3,070,000 3,325,271
California State GO, Veterans Bonds,
Series BC, 6.00%, 2/01/10 ................................................................. 1,000,000 1,021,500
Series BD, BE, and BF, 6.55%, 2/01/25 ..................................................... 18,745,000 19,155,516
California State Public Works Board, Lease Revenue, Various University of California Projects,
Series A, Pre-Refunded, 6.375%, 10/01/14 .................................................. 4,000,000 4,485,200
10/01/19 .................................................................................. 2,000,000 2,242,600
California Statewide Communities Development Authority Revenue, COP, Sutter Health Obligation Group,
MBIA Insured, 6.00%, 8/15/25 ............................................................. 14,750,000 15,708,898
Chino USD, COP, Refunding, FSA Insured, 5.90%, 9/01/15 .................................... 8,250,000 8,727,840
Coalinga Public Finance Authority Revenue, Series B, 6.25%, 9/15/07 ....................... 1,020,000 1,039,574
Commerce, Refuse to Energy Authority Revenue, Refunding, Series 1994, 8.75%, 7/01/10 ...... 1,000,000 1,189,120
Foothill/Eastern Transportation Corridor Agency, Toll Road Revenue, Senior Lien,
Series A, 6.50%, 1/01/32................................................................... 59,240,000 63,841,171
Forty-Niner Shops, Inc., Auxiliary Organization, California State Long
Beach Project, 6.875%, 4/01/07.............................................................. 1,090,000 1,164,752
4/01/12 ................................................................................... 1,565,000 1,653,031
Los Angeles County MTA, Sales Tax Revenue, Refunding, Proposition C-2, Series A,
Senior Subordinated Lien, AMBAC Insured, 5.00%, 7/01/23 .................................. 10,000,000 9,571,700
Los Angeles CRDA, Housing Revenue, Refunding, Series A, AMBAC Insured, 6.55%, 1/01/27 ..... 3,180,000 3,432,269
Los Angeles Department of Water and Power, Electric Plant Revenue,
Refunding, 6.40%, 11/01/31 ................................................................ 14,925,000 15,852,290
Refunding, MBIA Insured, 6.00%, 2/01/28 ................................................... 3,000,000 3,149,700
Second Issue, MBIA Insured, 6.40%, 11/01/31 ............................................... 10,500,000 11,243,190
Los Angeles GO, Series A, FGIC Insured, 6.20%, 9/01/14 .................................... 8,100,000 8,709,039
Los Angeles Regional Airport Improvements Corp., Lease Revenue, Refunding,
Facilities Sub-Lease, International Airport, 6.35%, 11/01/25 .............................. 18,500,000 20,096,365
United Airlines, Inc. Project, 6.875%, 11/15/12 ........................................... 8,400,000 9,226,308
Pomona Public Financing Authority Revenue, Series Q, MBIA Insured, 5.90%, 12/01/25 ........ 4,000,000 4,221,200
Sacramento County Airport Systems Revenue, Sub-Series D, MBIA Insured, 6.00%, 7/01/16 ..... 6,480,000 6,958,548
San Bernardino County COP, Medical Center Financing Project, Series A, 5.875%, 8/01/26 .... 33,315,000 34,920,117
San Francisco City and County RDA Revenue, George Moscone Convention Center, Lease
Revenue, 6.75%, 7/01/24 ................................................................... 7,080,000 7,909,351
San Francisco City and County RDA Revenue, Tax Allocation Redevelopment
Project, 6.50%, 8/01/22 ................................................................... 12,680,000 13,752,474
San Francisco City and County Sewer Revenue, Series A, FGIC Insured, 5.90%, 10/01/20 ...... 10,380,000 10,912,390
San Joaquin Hills Transportation Corridor Agency, Toll Road Revenue,
5.00%, 1/01/33 ............................................................................ 5,000,000 4,542,900
Pre-Refunded, 7.00%, 1/01/30 .............................................................. 16,785,000 18,914,681
Pre-Refunded, 6.75%, 1/01/32 .............................................................. 10,000,000 11,164,500
Bonds (cont.)
California (cont.)
University of California Revenues,
Hospital Facilities, U.C. Davis Medical Center, AMBAC Insured, 5.75%, 7/01/24 ............. $25,000,000 $ 26,134,750
Research Facilities, Series B, Pre-Refunded, 6.55%, 9/01/24 ............................... 26,780,000 29,908,172
Windsor RDA Revenue, Tax Allocation, Windsor Project, 7.00%, 9/01/24 ...................... 2,405,000 2,603,797
---------
443,206,354
---------
Colorado 4.1%
Colorado HFA, GO, Series A, 7.50%, 5/01/29 ................................................ 1,595,000 1,680,460
Colorado Post-Secondary Educational Facilities Authority Revenue, Refunding & Improvement,
University of Denver Project, MBIA Insured, 5.375%, 3/01/18 .............................. 6,000,000 6,084,060
Denver City and County Airport Revenue,
Series A, 8.875%, 11/15/12 ................................................................ 12,130,000 13,981,523
Series A, 7.50%, 11/15/23 ................................................................. 13,590,000 15,519,916
Series A, 8.50%, 11/15/23 ................................................................. 72,960,000 80,846,246
Series A, 8.00%, 11/15/25 ................................................................. 21,785,000 23,898,924
Series A, Pre-Refunded, 7.50%, 11/15/12 ................................................... 11,200,000 12,794,992
Series A, Pre-Refunded, 8.875%, 11/15/12 .................................................. 4,515,000 5,245,888
Series A, Pre-Refunded, 7.50%, 11/15/23 ................................................... 2,930,000 3,447,936
Series A, Pre-Refunded, 8.50%, 11/15/23 ................................................... 6,985,000 7,805,877
Series A, Pre-Refunded, 7.25%, 11/15/25 ................................................... 24,525,000 27,822,632
Series A, Pre-Refunded, 8.00%, 11/15/25 ................................................... 2,540,000 2,813,997
Series B, 7.25%, 11/15/23 ................................................................. 2,120,000 2,347,730
Series B, Pre-Refunded, 7.25%, 11/15/23 ................................................... 530,000 597,761
Series D, 7.75%, 11/15/21 ................................................................. 8,950,000 9,970,300
Series D, 7.00%, 11/15/25 ................................................................. 7,835,000 8,380,238
Series D, Pre-Refunded, 7.75%, 11/15/21 ................................................... 2,510,000 2,824,980
Series D, Pre-Refunded, 7.00%, 11/15/25 ................................................... 2,175,000 2,357,874
Denver City and County Special Facilities, Airport Revenue, United Airlines, Inc. Project, Series A,
6.875%, 10/01/32 .......................................................................... 47,980,000 51,969,057
Littleton MFR, Rental Housing, Riverpointe Project I, Series 1985, 8.00%, 12/01/22 ........ 16,105,000 16,525,179
----------
296,915,570
----------
Delaware
Delaware State EDA Revenue, Refunding, Water Development, Wilmington,
Series B, 6.45%, 12/01/07.................................................................. 1,160,000 1,327,504
Delaware State Housing Authority, Refunding, MFMR, Series D, 6.75%, 7/01/06 ............... 2,000,000 2,199,560
---------
3,527,064
---------
District of Columbia .6%
District of Columbia GO, Series E, MBIA Insured, 6.00%, 6/01/13 ........................... 4,000,000 4,256,040
District of Columbia HFA, MFHR, FHA Insured,
Mayfair Mansions Apartments, 8.85%, 2/01/31 ............................................... 6,110,000 6,310,897
Refunding, Series A, 7.10%, 9/01/12 ....................................................... 1,830,000 1,947,578
Refunding, Series A, 7.15%, 3/01/24 ....................................................... 6,575,000 6,968,448
District of Columbia HFA, SFMR, Refunding, Series B, 5.85%, 12/01/18 ...................... 2,830,000 2,904,089
District of Columbia Hospital Revenue, Washington Hospital Center Corp., Series A,
Pre-Refunded, 9.00%, 1/01/08 .............................................................. 3,955,000 4,471,009
District of Columbia Redevelopment Land Agency, Sports Arena, Special Tax
Revenue, 5.625%, 11/01/10 ................................................................. 1,240,000 1,259,456
District of Columbia Revenue,
Association of American Medical Colleges, Pre-Refunded, 7.50%, 2/15/20 .................... 5,685,000 6,098,015
Catholic University of America, 6.45%, 10/01/23 ........................................... 5,265,000 5,726,530
---------
39,942,062
---------
Florida 2.7%
Bay County Resource Recovery Revenue, Refunding, MBIA Insured, 6.50%, 7/01/07,
Series A................................................................................... 2,100,000 2,308,299
Series B................................................................................... 11,020,000 12,113,074
Broward County Resource Recovery Revenue, Broward Waste Energy Co., L.P.,
North Project, Series 1984, 7.95%, 12/01/08................................................ 40,950,000 44,214,534
Callaway/Bay County Waste Water Systems Revenue, Series A, FGIC Insured, 6.00%, 9/01/26 ... 1,000,000 1,089,160
Dunes Community Development District Revenue, Water and Sewer Project,
Pre-Refunded, 8.25%, 10/01/18 ............................................................. 3,800,000 3,942,728
Florida State Board Of Education, Capital Outlay, Public Education, Refunding,
Series 1992, 6.40%, 6/01/19 ............................................................... 22,475,000 24,121,519
Bonds (cont.)
Florida (cont.)
Florida State Department of General Services, Division of Facilities Management Revenue, Florida
Facilities Pool, Pre-Refunded, 8.125%, 9/01/17 ........................................... $ 2,000,000 $ 2,067,360
Florida State Department of Transportation, Right of Way Acquisition
and Bridge, 5.375%, 7/01/26................................................................ 10,000,000 10,017,100
Florida State Department of Transportation, Turnpike Revenue, Series A,
Pre-Refunded, 7.75%, 7/01/09............................................................... 7,125,000 7,571,880
Lakeland Retirement Community, First Mortgage Revenue, Carpenters Home
Estate Project, 9.50%, 9/01/06............................................................. 3,600,000 3,642,228
Manatee County IDR, Manatee Hospital and Health Systems, Inc.,
Pre-Refunded, 9.25%, 3/01/21............................................................... 6,500,000 7,451,730
Manatee County School Board COP, MBIA Insured, Pre-Refunded, 6.125%, 7/01/16 .............. 5,000,000 5,600,450
Santa Rosa County Health Facilities Authority Revenue, Refunding,
Gulf Breeze Hospital, Inc., Pre-Refunded, 8.70%, 10/01/14 ................................. 2,500,000 2,598,900
St. Augustine Water and Sewer Revenue, Refunding, Series A, MBIA Insured, 6.20%,
10/01/00 .................................................................................. 840,000 882,134
10/01/01 .................................................................................. 890,000 947,636
10/01/02 .................................................................................. 940,000 1,013,282
10/01/03 .................................................................................. 1,005,000 1,094,154
10/01/04 .................................................................................. 1,065,000 1,171,564
10/01/05 .................................................................................. 1,130,000 1,250,537
10/01/06 .................................................................................. 1,200,000 1,337,844
10/01/07 .................................................................................. 1,275,000 1,424,213
10/01/08 .................................................................................. 1,355,000 1,502,709
10/01/12 .................................................................................. 6,300,000 6,928,425
Sunrise Utility Systems Revenue, Refunding, AMBAC Insured, 5.20%, 10/01/22 ................ 2,000,000 1,975,380
Tampa Capital Improvement Program Revenue, Series A, 10/01/18,
Custodial Receipts, 5.805%................................................................. 37,250,000 37,490,263
8.25%...................................................................................... 11,010,000 11,177,352
----------
194,934,455
----------
Georgia 2.3%
Burke County Development Authority, PCR, Georgia Power Co., Plant Vogle Project, MBIA Insured,
Series 1984-1, 6.60%, 7/01/24 ............................................................. 105,000,000 109,490,850
Series 1984-7, 6.625%, 10/01/24 ........................................................... 8,025,000 8,409,558
Fulton County Development Authority, Special Facilities Revenue, Refunding,
Delta Air Lines, Inc. Project,
6.85%, 11/01/07 ........................................................................... 3,400,000 3,676,012
6.95%, 11/01/12 ........................................................................... 5,500,000 5,972,835
Gainsville and Hall County Hospital Authority Revenue Anticipation Certificates, Refunding,
Northeast Georgia Healthcare Project, MBIA Insured, 6.00%, 10/01/25 ....................... 7,975,000 8,456,531
Georgia Municipal Electric Authority Power Revenue,
Series B, 6.375%, 1/01/16 ................................................................. 14,000,000 14,897,680
Series EE, 6.40%, 1/01/23 ................................................................. 6,325,000 6,904,054
Georgia State HFA Revenue, Homeownership Opportunity Program, Series C, 6.60%, 12/01/23 ... 3,865,000 4,127,279
Monroe County Development Authority, PCR, Georgia Power Co., AMBAC Insured, 6.25%, 7/01/19 4,300,000 4,468,431
----------
166,403,230
----------
Hawaii 1.1%
Hawaii State Airports System Revenue,
FGIC Insured, 7.00%, 7/01/20 .............................................................. 1,000,000 1,087,300
Second Series, 7.00%, 7/01/07 ............................................................. 12,000,000 12,992,160
Second Series, 6.90%, 7/01/12 ............................................................. 500,000 577,285
Second Series, 7.00%, 7/01/18 ............................................................. 2,830,000 3,046,665
Hawaii State Department of Budget and Finance, Special Purposes Mortgage Revenue,
Hawaii Electric Light Co. Project, 7.20%, 12/01/14 ........................................ 200,000 212,190
Hawaii Electric Light Co. Project, Series A, 7.35%, 1/01/20 ............................... 1,000,000 1,060,000
Hawaii Electric Light Co. Project, Series A, MBIA Insured, 5.65%, 10/01/27 ................ 20,000,000 20,412,200
Kaiser Hospital, 6.25%, 3/01/21 ........................................................... 900,000 945,576
Refunding, Kapiolani Health Care System, 6.00%, 7/01/19 ................................... 2,600,000 2,735,434
Wahiawa General Hospital Project, 7.50%, 7/01/12 .......................................... 1,000,000 1,112,140
Hawaii State Department of Budget and Finance, Special Purposes Revenue,
6.00%, 7/01/11 ............................................................................ 1,000,000 1,073,030
6.20%, 7/01/16 ............................................................................ 2,000,000 2,146,280
6.25%, 7/01/21 ............................................................................ 6,250,000 6,726,375
Bonds (cont.)
Hawaii (cont.)
Hawaii State Department of Budget and Finance, Special Purposes Revenue, (cont.)
Refunding, The Queens Health System, Series A, 5.75%, 7/01/26 ............................. $ 5,800,000 $ 5,961,182
Hawaii State SFMR,
HFC, Series A, 7.00%, 7/01/11 ............................................................. 230,000 246,631
HFC, Series A, 7.10%, 7/01/24 ............................................................. 3,350,000 3,595,187
HFC, Series B, 6.90%, 7/01/16 ............................................................. 360,000 387,126
HFC, Series B, 7.00%, 7/01/31 ............................................................. 11,880,000 12,792,503
Housing and Development Corp., Purchase Revenue, Series A, 5.75%, 7/01/30 ................. 2,500,000 2,545,125
---------
79,654,389
---------
Idaho .1%
Idaho Housing Agency, Refunding, Series D-1, 6.45%, 7/01/19 ............................... 2,195,000 2,354,116
Idaho Housing Agency, SFMR, Senior Bond, Series B-1, FGIC Insured,
7.85%, 7/01/09 ............................................................................ 925,000 960,252
7.90%, 1/01/21 ............................................................................ 1,410,000 1,457,150
Power County PCR, Refunding, FMC Corp. Project, 5.625%, 10/01/14 .......................... 2,200,000 2,243,494
---------
7,015,012
---------
Illinois 6.2%
Bryant PCR, Refunding, Central Illinois Light Co. Project, 6.50%,
Series A, 2/01/18 ......................................................................... 7,200,000 7,721,424
Series C, 1/01/10 ......................................................................... 5,000,000 5,400,450
Chicago Board of Education, Chicago School Reform, MBIA Insured, 6.00%,
12/01/16................................................................................... 9,700,000 10,389,767
12/01/26................................................................................... 7,600,000 8,070,288
Chicago Board of Education, Chicago School Reform, Series A,
AMBAC Insured, 5.25%, 12/01/30............................................................. 8,830,000 8,574,813
Chicago COP, AMBAC Insured, 7.75%, 7/15/11 ................................................ 20,400,000 24,344,340
Chicago Gas Supply Revenue, Refunding, The Peoples Gas Light, Series A, 6.10%, 6/01/25 .... 12,000,000 12,710,280
Chicago-O'Hare International Airport Revenue, Special Facilities,
American Airlines, Inc. Project, 8.20%, 12/01/24 .......................................... 11,720,000 14,040,677
United Airlines, Inc. Project, 8.45%, 5/01/07 ............................................. 4,300,000 4,664,855
United Airlines, Inc. Project, 8.50%, 5/01/18 ............................................. 12,305,000 13,358,185
United Airlines, Inc. Project, Series A, 8.40%, 5/01/18 ................................... 450,000 477,887
United Airlines, Inc. Project, Series C, 8.20%, 5/01/18 ................................... 27,600,000 29,271,456
Chicago SFMR, Collateralized, Series A, 7.25%, 9/01/28 .................................... 4,000,000 4,545,760
Cook County, Orland Park School District No. 135, Refunding, FGIC Insured, 5.90%, 12/01/14 10,000,000 10,503,400
Cook County, Refunding, 11/15/22,
Capital Improvement, FGIC Insured, 5.875%, ................................................ 10,000,000 10,677,600
Series A, MBIA Insured, 5.625%, ........................................................... 20,000,000 20,589,600
Cook County School District No. 140, Tinley Park, Refunding, Series A, AMBAC
Insured, 6.00%, 12/01/15 .................................................................. 8,750,000 9,446,413
Illinois Development Finance Authority, PCR, Commonwealth Edison Co. Project,
Series 1991, 7.25%, 6/01/11 ............................................................... 7,500,000 8,103,525
Refunding, Central Illinois Public Services Co., Series A, 6.375%, 1/01/28 ................ 15,200,000 15,996,632
Refunding, Illinois Power Co. Project, Series A, 7.375%, 7/01/21 .......................... 26,550,000 30,484,445
Illinois HDA, Homeowner Mortgage, Series A-1, 6.85%, 8/01/17............................... 4,245,000 4,655,237
Illinois HDA, MF Program, Lawndale Redevelopment Project, 7.10%, 12/01/34 ................. 20,000,000 21,859,200
Refunding, Series A, 7.10%, 7/01/26 ....................................................... 12,915,000 13,793,607
Series 1, 6.625%, 9/01/12 ................................................................. 12,000,000 12,801,120
Series 1, 6.75%, 9/01/21 .................................................................. 7,550,000 8,027,387
Series C, 7.35%, 7/01/11 .................................................................. 2,265,000 2,384,705
Illinois HDA, RMR, Series B, 7.25%, 8/01/17 ............................................... 7,065,000 7,495,117
Illinois Health Facilities Authority Revenue,
Refunding, Edwards Hospital Project, Pre-Refunded, 7.00%, 2/15/22 ......................... 2,000,000 2,209,220
Refunding, Loyola University Health System, Series A, MBIA Insured, 5.625%, 7/01/18 ....... 9,195,000 9,435,725
Refunding, Northwestern Medical Facility Foundation, MBIA Insured, 5.125%, 11/15/28 ....... 7,500,000 7,139,175
Refunding, Servantcor, Series A, Pre-Refunded, 7.875%, 8/15/19 ............................ 1,000,000 1,067,370
Refunding, Servantcor, Series B, Pre-Refunded, 7.875%, 8/15/19 ............................ 3,000,000 3,202,110
Bonds (cont.)
Illinois (cont.)
Illinois Health Facilities Authority Revenue, (cont.)
Refunding, Westlake Community Hospital, 7.875%, 1/01/13 ................................... $ 6,200,000 $ 6,448,124
South Suburban Hospital, ETM, 7.00%, 2/15/18 .............................................. 4,200,000 5,030,256
South Suburban Hospital, Pre-Refunded, 7.00%, 2/15/18 ..................................... 2,800,000 3,092,908
Victory Health Services, Series A, 5.75%, 8/15/27 ......................................... 8,015,000 8,132,179
Illinois State COP, FSA Insured, 6.875%, 7/01/07 .......................................... 2,600,000 2,866,318
Illinois State Dedicated Tax Revenue, Civic Center, Series A,
AMBAC Insured, 6.00%, 12/15/15............................................................. 2,950,000 3,013,927
Metropolitan Pier and Exposition Authority, Dedicated State Tax Revenue, McCormick Place
Expansion Project, Series A, 6.50%,
6/15/22.................................................................................... 5,000 5,447
6/15/27.................................................................................... 555,000 604,140
FGIC Insured, 6/15/07 ..................................................................... 5,000 5,500
Metropolitan Pier and Exposition Authority, Hospitality Facilities Revenue, McCormick Place
Convention Center,
5.75%, 7/01/06 ............................................................................ 1,645,000 1,704,269
6.25%, 7/01/17 ............................................................................ 9,500,000 10,147,045
7.00%, 7/01/26 ............................................................................ 12,000,000 14,443,080
Onterie Center HFC, Mortgage Revenue, Refunding, Series A, MBIA Insured, 7.05%, 7/01/27 ... 4,350,000 4,654,674
Regional Transportation Authority, Series A, AMBAC Insured, 6.125%, 6/01/22 ............... 3,970,000 4,145,871
Southwestern Illinois Development Authority,
Anderson Hospital Project, Series A, 7.00%, 8/15/22 ....................................... 6,200,000 6,709,516
IDR, Spectrulite Consortium, Inc. Project, 6.20%, 2/01/05 ................................. 1,825,000 1,959,594
IDR, Spectrulite Consortium, Inc. Project, 6.625%, 2/01/10 ................................ 3,050,000 3,285,033
Private Activity Revenue, Glenmark Recovery, 8.50%, 8/01/10 ............................... 2,815,000 3,087,042
Solid Waste Disposal Revenue, LaCede Steel Co., 8.375%, 8/01/08 ........................... 4,985,000 5,498,555
Solid Waste Disposal Revenue, LaCede Steel Co., 8.50%, 8/01/20 ............................ 5,390,000 5,958,214
Upper River Valley Development Authority, Environmental Facilities Revenue, General Electric Co.
Project, 5.45%, 2/01/23 ................................................................... 3,600,000 3,561,084
Will County Exempt Facilities Revenue, Mobil Oil Refining Corp. Project, 6.00%, 2/01/27 ... 7,130,000 7,389,817
-----------
445,184,363
-----------
Indiana 1.1%
Carmel Industrial RDA, County Option, Income Tax Lease, Rent Revenue,
MBIA Insured, 5.25%, 1/01/18............................................................... 1,090,000 1,087,264
Hammond Industrial Sewer and Solid Waste Disposal Revenue, American Maize-Products Co.,
Project A, 8.00%, 12/01/24 ................................................................ 17,000,000 19,790,380
Hammond PCR, Stauffer Chemical Project, Guaranteed by Imperial Chemical, Plc.,
Series 1982, 8.00%, 11/01/12 .............................................................. 2,355,000 2,557,153
Indiana Bond Bank, Special Program, Series A, 8.375%, 2/01/18 ............................. 585,000 601,737
Indiana Health Facility Financing Authority, Hospital Revenue, Hancock Memorial
Hospital Project, Series 1990, Pre-Refunded, 8.30%, 8/15/20 ............................... 3,500,000 3,869,495
Indiana State Educational Facilities Authority Revenue,
Manchester College Project, 6.85%, 10/01/18................................................ 3,240,000 3,419,626
Indiana State Housing Financing Authority, SFMR, Refunding, Series A,
6.75%, 1/01/10 ............................................................................ 2,940,000 3,147,593
6.80%, 1/01/17 ............................................................................ 12,835,000 13,739,996
Indianapolis Local Public Improvement, Series D,
6.75%, 2/01/20 ............................................................................ 13,075,000 14,080,075
Refunding, 6.50%, 2/01/22 ................................................................. 4,625,000 4,632,261
Jasper County EDR, Georgia Pacific Corp. Project, 5.625%, 12/01/27 ........................ 2,500,000 2,487,375
Muncies Edit Building Corp., First Mortgage, Series A, AMBAC Insured, 6.60%, 12/01/17 ..... 2,000,000 2,179,940
Sullivan PCR, Refunding, Indiana-Michigan Power Co. Project, Series C, 5.95%, 5/01/09...... 6,000,000 6,271,500
77,864,395
Iowa .2%
Iowa Financing Authority, SFMR, Series F, 5.70%, 1/01/27 .................................. 10,780,000 11,011,123
----------
Kansas
Kansas State Development Financial Authority Revenue, Sisters of Charity Leavenworth,
MBIA Insured, 5.125%, 12/01/18 ............................................................ 2,000,000 1,971,160
---------
Kentucky 2.1%
Ashland PCR, Refunding, Ashland Oil, Inc. Project, 6.65%, 8/01/09 ......................... 3,900,000 4,204,395
Henderson County Solid Waste Disposal Revenue, MacMillan Bloedel Project, 7.00%, 3/01/25 .. 10,000,000 10,892,300
Jefferson County MFHR, Watterson Park Apartments Project, Series A, 6.35%, 11/15/11 ....... 4,870,000 5,131,422
Bonds (cont.)
Kentucky (cont.)
Kenton County Airport Board Revenue, Special Facilities, Delta Air Lines, Inc.,
7.80%, 12/01/15 ........................................................................... $20,000,000 $ 21,318,600
Project A, 7.50%, 2/01/20 ................................................................. 10,000,000 11,033,300
Project A, 7.125%, 2/01/21 ................................................................ 9,330,000 10,176,044
Project B, 7.25%, 2/01/22 ................................................................. 3,350,000 3,679,975
Kentucky Economic Development Financing Authority, Hospital Systems Revenue,
Refunding & Improvement, Appalachian Regional Facility,
5.80%, 10/01/12 ........................................................................... 1,000,000 1,025,890
5.85%, 10/01/17 ........................................................................... 5,615,000 5,764,921
Kentucky Housing Corp. Revenue,
Series A, 6.70%, 7/01/17 .................................................................. 780,000 829,117
Series B, 6.625%, 7/01/14 ................................................................. 4,910,000 5,194,387
Kentucky State Development Financing Authority, Hospital Revenue,
Claire Medical Center Project, Pre-Refunded, 7.125%, 9/01/21 .............................. 700,000 771,561
Kentucky State Property and Buildings Commission Revenue, Project No. 48,
Pre-Refunded, 8.00%, 8/01/08 .............................................................. 4,500,000 4,633,065
Mount Sterling Lease Revenue, Kentucky League Cities, Series A,
6.10%, 3/01/08 ............................................................................ 20,375,000 21,752,758
6.20%, 3/01/18 ............................................................................ 11,765,000 12,626,433
Pendleton County, Multi-County Lease Revenue, Kentucky Association of Counties
Leasing Trust, Series A, 6.50%, 3/01/19 ................................................... 27,160,000 29,580,771
----------
148,614,939
----------
Louisiana 2.1%
Bastrop PCR, Refunding, International Paper Co. Project, 6.90%, 3/01/07 ................... 2,000,000 2,176,060
Calcasieu Parish IDB, PCR, Refunding, Gulf States Utilities Co. Project, 6.75%, 10/01/12 .. 14,285,000 15,244,523
Calcasieu Parish Memorial Hospital Service District Revenue, Lake Charles Parish
Memorial Hospital Project, Series A, FSA Insured,
6.375%, 12/01/12 .......................................................................... 4,310,000 4,855,775
6.50%, 12/01/18 ........................................................................... 5,530,000 6,332,237
6.65%, 12/01/21 ........................................................................... 3,145,000 3,387,354
Calcasieu Parish Public Transportation Authority Mortgage Revenue, Refunding,
Series A, 7.75%, 6/01/12 .................................................................. 3,185,000 3,396,452
Series B, 6.375%, 11/01/02 ................................................................ 305,000 323,559
Series B, 6.875%, 11/01/12 ................................................................ 615,000 658,204
De Soto Parish Environmental Improvement Revenue, International Paper Co.
Project, Series A, 7.70%, 11/01/18......................................................... 2,500,000 2,924,625
East Baton Rouge Mortgage Financing Authority, SFM,
MBS, Series A, 6.80%, 10/01/28 ............................................................ 6,275,000 6,766,835
Series C, 7.00%, 4/01/32 .................................................................. 2,365,000 2,515,083
Series D, 7.10%, 4/01/32 .................................................................. 3,560,000 3,781,468
Lafayette Public Trust Finance Authority, SFMR, Refunding, Series A, 8.50%, 11/15/12 ...... 1,442,598 1,511,454
Louisiana HFA Mortgage Revenue, Refunding,
7.375%, 9/01/13 ........................................................................... 1,315,000 1,375,779
SF, Series B-2, 5.75%, 12/01/28 ........................................................... 2,890,000 2,953,985
Louisiana Office Facility Corp., Capital Facility Bonds, Statewide Lease, 7.75%, 12/01/10 . 3,400,000 3,748,738
Louisiana Public Facilities Authority Revenue, Refunding, MBIA Insured,
Alton Ochsner Medical Foundation Project, Series B, 6.50%, 5/15/22 ........................ 3,500,000 3,769,290
Xavier University of Louisiana Project, 5.25%, 9/01/27 .................................... 3,000,000 2,938,200
New Orleans GO, Refunding, AMBAC Insured,
6.125%, 10/01/16 .......................................................................... 10,275,000 11,027,438
6.20%, 10/01/21 ........................................................................... 8,050,000 8,603,357
Pointe Coupee Parish PCR, Refunding, Gulf States Utilities Co. Project, 6.70%, 3/01/13 .... 2,200,000 2,352,350
Quachita Parish Hospital Service District No. 1 Revenue, Glenwood Regional Medical
Center, Pre-Refunded, 7.50%, 7/01/21 ...................................................... 4,000,000 4,431,000
bTerrebonne Parish Hospital Service District No. 1, Hospital Revenue, Refunding, Terrebonne
General Medical Center Project, 5.375%, 4/01/23 .......................................... 2,500,000 2,457,750
West Feliciana Parish PCR, Gulf Systems Utilities Co. Project,
7.70%, 12/01/14 ........................................................................... 2,000,000 2,236,040
7.00%, 11/01/15 ........................................................................... 3,050,000 3,360,643
8.00%, 12/01/24 ........................................................................... 41,050,000 43,879,577
----------
147,007,776
----------
BONDS (CONT.)
MAINE .9%
Bucksport Solid Waste Disposal Revenue, Champion International Corp.
Project, 6.25%, 5/01/10 ................................................................... $ 5,000,000 $ 5,277,650
Maine Financial Authority, Solid Waste Recycling Facilities Revenue,
Great Northern Paper Co., Bowater Project, 7.75%, 10/01/22 ................................ 29,300,000 32,710,227
Maine State Health and Higher Education Facilities Authority Revenue,
FSA Insured, Series B, 7.00%, 7/01/24 ..................................................... 2,445,000 2,773,461
Maine State Housing Authority, Mortgage Purchase,
Series A-5, 6.20%, 11/15/16 ............................................................... 2,500,000 2,617,100
Series C, 6.55%, 11/15/12 ................................................................. 3,700,000 3,939,501
Series C, 6.65%, 11/15/24 ................................................................. 3,500,000 3,719,415
Series D, 6.45%, 11/15/07 ................................................................. 3,540,000 3,717,142
Series D, 6.70%, 11/15/15 ................................................................. 5,800,000 6,263,942
Rumford PCR, Refunding, Boise Cascade Corp. Project, 6.625%, 7/01/20 ...................... 4,800,000 5,189,424
---------
66,207,862
---------
MARYLAND 2.0%
Gaithersburg Hospital Facilities Improvement Revenue, Shady Grove Hospital,
Refunding & Improvement, FSA Insured, 6.00%, 9/01/21 ...................................... 10,110,000 10,639,562
Series A, Pre-Refunded, 8.25%, 9/01/21 .................................................... 43,225,000 49,276,932
Maryland State Community Development Administration, Department of Housing
and Community Development,
MFHR, Mortgage Insured, Series G, 6.55%, 5/15/19 .......................................... 5,595,000 5,917,384
SF, 7.25%, 4/01/27 ........................................................................ 965,000 1,017,129
Maryland State Health and Higher Educational Facilities Authority Revenue,
Hartford Memorial Hospital and Fallston General Hospital, 8.50%, 7/01/14 ................. 4,900,000 5,003,439
Montgomery County Housing Opportunity Community, SFMR, Refunding,
Series B, 6.625%, 7/01/28 ................................................................. 6,500,000 6,866,535
Takoma Park Hospital Facilities Revenue, Refunding, Washington Adventist
Hospital, Series A, 8.25%, 9/01/21,
Sub-Series 1, Pre-Refunded................................................................. 34,140,000 38,919,941
Sub-Series 2............................................................................... 20,125,000 22,489,486
----------
140,130,408
----------
MASSACHUSETTS 2.6%
Agawam Resource Recovery Revenue, Springfield Resource Recovery Project,
Series 1986, 8.50%, 12/01/08 .............................................................. 10,340,000 10,572,960
Massachusetts Health and Educational Facilities Authority Revenue, Notre Dame
Health Care Center, Series A, 7.875%, 10/01/22 ............................................ 2,310,000 2,482,904
Massachusetts State Consolidated Loan,
Series A, 7.50%, 6/01/04 .................................................................. 7,500,000 8,622,525
Series D, Pre-Refunded, 7.00%, 7/01/07..................................................... 1,325,000 1,452,584
Massachusetts State GO, Refunding, Series B, 6.50%, 8/01/08 ............................... 5,900,000 6,754,733
Massachusetts State Health and Educational Facilities Authority Revenue,
Framingham Union Hospital, Series B, Pre-Refunded, 8.50%, 7/01/20 ......................... 9,020,000 9,979,457
Melrose-Wakefield Hospital, Series B, Refunding, ETM, 6.35%, 7/01/06 ...................... 1,100,000 1,239,953
Sisters Providence Health System, Series A, Pre-Refunded, 6.50%, 11/15/08 ................. 1,000,000 1,115,010
Sisters Providence Health System, Series A, Pre-Refunded, 6.625%, 11/15/22 ................ 12,050,000 13,484,312
Massachusetts State HFA, HDA, Series D, FGIC Insured, 6.875%, 11/15/21 .................... 5,250,000 5,657,085
Massachusetts State HFA, Housing Projects, Refunding, Series A,
6.30%, 10/01/13 ........................................................................... 25,635,000 27,145,158
6.375%, 4/01/21 ........................................................................... 24,750,000 26,240,940
Massachusetts State HFA Revenue, SF, Series 41,
6.30%, 12/01/14 ........................................................................... 6,250,000 6,690,563
6.35%, 6/01/17 ............................................................................ 5,750,000 6,124,670
Massachusetts State HFA Revenue, SFMR, Series G, 8.10%, 12/01/14 .......................... 2,410,000 2,462,273
Massachusetts State Housing Facilities Authority, FGIC Insured,
Series C, 6.90%, 11/15/21 ................................................................. 9,715,000 10,294,791
Series D, 6.80%, 11/15/12 ................................................................. 250,000 271,090
Massachusetts State Industrial Finance Agency, Health Care Facilities Revenue,
Jewish Geriatric Services, Inc., Series B,
5.375%, 5/15/17 ........................................................................... 1,965,000 1,972,251
5.50%, 5/15/27 ............................................................................ 5,000,000 5,527,700
Massachusetts State Industrial Finance Agency Revenue, D. Youville Senior Care,
5.65%, 10/01/17 ........................................................................... 2,295,000 2,327,612
5.70%, 10/01/27 ........................................................................... 7,375,000 7,479,578
Massachusetts State Port Authority Revenue, Special Facilities, Bosfuel Project,
MBIA Insured, 5.75%, 7/01/39 .............................................................. 11,750,000 11,971,840
Bonds (cont.)
Massachusetts (cont.)
Plymouth County COP, Series A, 7.00%,
4/01/12.................................................................................... $10,000,000 $ 11,076,500
4/01/22.................................................................................... 5,000,000 5,049,300
---------
185,995,789
----------
MICHIGAN 1.6%
Battle Creek Tax Increment Finance Authority, Pre-Refunded, 7.40%, 5/01/16 ................ 2,000,000 2,337,920
Belding Area Schools, Refunding, FGIC Insured, 6.10%, 5/01/26 ............................. 3,805,000 4,077,514
Climax-Scotts Community Schools, Pre-Refunded, 6.35%, 5/01/23 ............................. 2,445,000 2,717,593
Detroit GO,
Refunding, Series B, 6.375%, 4/01/06 ...................................................... 7,265,000 7,884,632
Refunding, Series B, 6.25%, 4/01/09 ....................................................... 625,000 668,513
Series A, Pre-Refunded, 6.70%, 4/01/10 .................................................... 4,550,000 5,171,712
Detroit GO, Self-Insurance, Series A, 5.70%, 5/01/02 ...................................... 2,250,000 2,325,983
Detroit Sewage Disposal Revenue, Series A, MBIA Insured, 5.50%, 7/01/20 ................... 29,200,000 29,684,720
Detroit/Wayne County Stadium Authority, FGIC Insured, 5.25%, 2/01/27 ...................... 4,235,000 4,142,423
Kalamazoo EDC Revenue, Refunding, Limited Obligation, Friendship Village,
Series A, 6.25%, 5/15/27 .................................................................. 2,000,000 2,099,120
Michigan State Building Authority Revenue, Series II, 6.25%, 10/01/20 ..................... 15,650,000 16,509,185
Michigan State HDA, Limited Obligation Revenue, Fraser
Woods Project, FSA Insured, 6.625%, 9/15/19 ............................................... 2,500,000 2,677,825
Rental Housing Revenue, Refunding, Series A, 6.60%, 4/01/12 ............................... 5,000,000 5,399,150
Michigan State HDA, SFMR, Series A,
6.45%, 12/01/14 ........................................................................... 2,000,000 2,139,540
6.875%, 6/01/23 ........................................................................... 2,870,000 3,052,676
Michigan State HFA Revenue, Presbyterian Villages Obligation Group,
5.30%, 1/01/99 ............................................................................ 200,000 201,048
5.40%, 1/01/00 ............................................................................ 310,000 313,838
5.70%, 1/01/01 ............................................................................ 310,000 316,005
5.80%, 1/01/02 ............................................................................ 355,000 364,234
5.90%, 1/01/03 ............................................................................ 325,000 336,170
6.00%, 1/01/04 ............................................................................ 390,000 405,857
6.375%, 1/01/15 ........................................................................... 275,000 295,559
6.40%, 1/01/15 ............................................................................ 1,000,000 1,058,180
6.50%, 1/01/25 ............................................................................ 3,500,000 3,702,720
Michigan State HFA Revenue, Refunding, Series A,
Henry Ford Health, 5.25%, 11/15/25 ........................................................ 5,000,000 4,858,150
Hospital Genesys Regional Medical, 5.50%, 10/01/18 ........................................ 4,500,000 4,427,685
Hospital Genesys Regional Medical, 5.50%, 10/01/27 ........................................ 5,000,000 4,866,900
---------
112,034,852
---------
MINNESOTA 2.1%
Cloquet PCR, Refunding, Potlach Corp. Projects, 5.90%, 10/01/26............................ 9,100,000 9,509,591
Dakota County Housing, RDA, Limited Annual Appropriation Tax and Revenue,
Development Housing Facilities Project,
7.25%, 1/01/99 ............................................................................ 600,000 604,644
7.25%, 1/01/00 ............................................................................ 645,000 656,333
7.25%, 1/01/01 ............................................................................ 695,000 712,361
7.50%, 1/01/06 ............................................................................ 3,930,000 4,066,096
8.00%, 1/01/07 ............................................................................ 2,140,000 2,199,342
International Falls PCR, Refunding, Boise Cascade Corp. Project, 5.65%, 12/01/22 .......... 3,500,000 3,532,375
Minneapolis CDA and St. Paul Housing RDA, Homeownership Mortgage Revenue,
Joint Housing Program, FGIC Insured, 9.875%, 12/01/15 .................................... 5,000 5,004
Minnesota Agricultural and Economic Development Board Revenue, Refunding,
Health Care System, Fairview Hospital, Series A, MBIA Insured, 5.75%, 11/15/26 ........... 25,810,000 26,983,065
Minnesota State HFA, SFM, Series D-1,
6.45%, 7/01/11 ............................................................................ 3,505,000 3,746,495
6.50%, 1/01/17 ............................................................................ 1,380,000 1,467,865
BONDS (CONT.)
MINNESOTA (CONT.)
Minnesota State Higher Educational Facilities Authority Revenue, University
Saint Thomas, Series Four-P,
5.375%, 4/01/18 ........................................................................... $ 525,000 $ 525,567
5.40%, 4/01/23 ............................................................................ 580,000 579,176
Minnetonka MFR, Rental Housing, Ridgepointe Housing Project, Phase II, 8.00%, 5/15/22 ..... 11,230,000 11,506,820
Red Wing Housing, RDA, Jordan Tower II Project, 7.00%, 1/01/19 ............................ 1,500,000 1,592,910
bRochester Health Care Facilities Revenue, Mayo Foundation, Series A, 5.50%, 11/15/27 ...... 29,000,000 28,957,370
Roseville MFR, Rental Housing, Rosepointe No. 1 Project, 8.00%, 10/01/18 .................. 13,785,000 14,144,651
St. Louis Park EDA, Tax Increment Revenue, Refunding, FGIC Insured,
Pre-Refunded, 8.40%, 9/01/09 .............................................................. 6,000,000 6,857,580
St. Paul Port Authority,
Energy Park, Tax Increment Revenue, Refunding, Pre-Refunded, 8.00%, 12/01/07 .............. 3,500,000 3,652,810
IDR, Bandana Square, Series C, 7.70%, 12/01/00 ............................................ 230,000 228,852
IDR, Bandana Square, Series C, 7.70%, 12/01/01 ............................................ 255,000 252,738
IDR, Bandana Square, Series C, 7.70%, 12/01/02 ............................................ 270,000 268,515
IDR, Bandana Square, Series C, 7.70%, 12/01/07 ............................................ 1,690,000 1,499,368
IDR, Bandana Square, Series C, 7.80%, 12/01/12 ............................................ 3,465,000 2,939,914
IDR, Brown and Bigelow Co., Series 1979-2, 7.50%, 10/01/98 ................................ 445,000 445,009
IDR, Brown and Bigelow Co., Series 1979-2, 7.50%, 10/01/99 ................................ 480,000 480,326
IDR, Brown and Bigelow Co., Series 1979-2, 7.50%, 10/01/00 ................................ 515,000 515,613
IDR, Brown and Bigelow Co., Series 1979-2, 7.50%, 10/01/01 ................................ 550,000 550,919
IDR, Brown and Bigelow Co., Series 1979-2, 7.50%, 10/01/02 ................................ 595,000 596,255
IDR, Brown and Bigelow Co., Series 1979-2, 7.50%, 10/01/03 ................................ 640,000 641,613
IDR, Brown and Bigelow Co., Series 1979-2, 7.50%, 10/01/04 ................................ 685,000 686,987
IDR, Brown and Bigelow Co., Series 1979-2, 7.50%, 10/01/05 ................................ 740,000 747,430
IDR, Brown and Bigelow Co., Series 1979-2, 7.50%, 10/01/06 ................................ 795,000 803,117
IDR, Brown and Bigelow Co., Series 1979-2, 7.50%, 10/01/07 ................................ 855,000 863,730
IDR, Brown and Bigelow Co., Series 1979-2, 7.50%, 10/01/08 ................................ 915,000 924,342
IDR, Brown and Bigelow Co., Series 1979-2, 7.50%, 10/01/09 ................................ 670,000 676,841
IDR, Refunding, Common Bond Fund, Series C, Fort Road Medical Center, 7.95%, 9/01/01 ...... 140,000 138,635
IDR, Refunding, Common Bond Fund, Series C, Fort Road Medical Center, 7.95%, 9/01/02 ...... 155,000 153,982
IDR, Refunding, Common Bond Fund, Series C, Fort Road Medical Center, 7.95%, 9/01/10 ...... 1,705,000 1,485,055
IDR, Refunding, Common Bond Fund, Series F, Ideal Security Hardware Corp., 8.00%, 12/01/01 105,000 104,041
IDR, Refunding, Common Bond Fund, Series F, Ideal Security Hardware Corp., 8.00%, 12/01/02 115,000 114,327
IDR, Refunding, Common Bond Fund, Series F, Ideal Security Hardware Corp., 8.00%, 12/01/12 1,790,000 1,546,256
Washington County Housing RDA,
Housing Development Revenue, Orleans Apartments, Project A, 8.25%, 7/01/21 ................ 3,000,000 3,072,840
Housing Development Revenue, Raymie Johnson Apartments, Pre-Refunded, 7.70%, 12/01/19 ..... 5,210,000 5,880,058
Pooled Housing and Redevelopment, 7.20%, 1/01/22 .......................................... 5,885,000 6,294,066
---------
153,210,884
---------
MISSISSIPPI .7%
Claiborne County PCR, Refunding, Systems Energy Resources, Inc.,
7.30%, 5/01/25 ............................................................................ 5,700,000 6,028,491
6.20%, 2/01/26 ............................................................................ 36,500,000 37,427,100
Mississippi Home Corp., SFR, Refunding, Senior Series A, FGIC Insured, 9.25%, 3/01/12 ..... 1,385,000 1,482,809
Mississippi State Educational Facilities Authority Revenue, Private Nonprofit
Institutions of Higher Learning, Tougaloo College Project, Series A, 6.50%, 6/01/18 ....... 2,390,000 2,453,741
47,392,141
Missouri .3%
Hazelwood IDA, MFHR, Refunding, Lakes Apartments Project, Series A, 6.10%, 9/20/26 ........ 3,000,000 3,116,580
Missouri State Health and Educational Facilities Authority Revenue,
Series B, MBIA Insured, 6.25%, 2/15/12 .................................................... 5,000,000 5,336,300
Sisters of St. Mary's Health Care Project, BIG Insured, Pre-Refunded, 7.75%, 6/01/16 ...... 3,750,000 3,835,688
St. Louis Parking Facilities Revenue, Pre-Refunded, 6.625%, 12/15/21 ...................... 6,000,000 6,662,760
West Plains IDA, Hospital Revenue, Ozarks Medical Center Project, Series A,
Pre-Refunded 8.625%, 9/15/20 .............................................................. 3,550,000 3,945,754
---------
22,897,082
---------
BONDS (CONT.)
MONTANA .8%
Forsyth County PCR,
Puget Sound Power and Light Co. Project, AMBAC Insured, 6.80%, 3/01/22 .................... $10,000,000 $ 10,860,400
Refunding, The Montana Power Co. Colstrip Project, Series A, 6.125%, 5/01/23 .............. 3,250,000 3,389,458
Refunding, The Montana Power Co., Series B, AMBAC Insured, 5.90%, 12/01/23 ................ 4,225,000 4,492,147
Refunding, The Montana Power Co., Series B, MBIA Insured, 5.90%, 12/01/23 ................. 20,385,000 21,673,944
Montana State Health Facilities Authority Revenue, Montana Developmental
Center Project, 6.40%, 6/01/19 ............................................................ 2,000,000 2,156,040
Montana State Health Facilities Authority Revenue, Sisters of Charity Leavenworth,
MBIA Insured, 5.125%, 12/01/18 ............................................................ 5,000,000 4,909,400
Montana State Housing Board, Refunding, SF Program,
Series A, 6.50%, 12/01/22 ................................................................. 2,835,000 2,986,247
Series B-1, 6.25%, 12/01/21 ............................................................... 6,720,000 7,111,306
---------
57,578,942
---------
NEBRASKA .2%
Lancaster County Hospital Authority No. 1, Hospital Revenue, Bryan Memorial Project,
Series B, MBIA Insured, 5.375%, 6/01/22 ................................................... 6,500,000 6,502,535
Nebraska Investment Financial Authority, 7.00%, 11/01/09 .................................. 5,885,000 6,003,230
---------
12,505,765
---------
NEVADA 3.4%
Churchill County Health Care Facilities Revenue, Western Health Network,
Series A, MBIA Insured, 6.25%, 1/01/14..................................................... 2,000,000 2,158,100
Clark County Airport System Improvement Revenue, Pre-Refunded, 8.25%, 7/01/15 ............. 17,500,000 17,962,525
Clark County HFC, MFHR, FHA Insured, 7.75%, 7/01/23 ....................................... 5,075,000 5,261,100
Clark County IDR,
Nevada Power Co. Project, Series A, 5.90% 11/01/32 ........................................ 2,600,000 2,626,442
Refunding, Nevada Power Co. Project, Series B, 5.90%, 10/01/30 ............................ 15,000,000 15,134,700
Refunding, Nevada Power Co. Project, Series C, 7.20%, 10/01/22 ............................ 12,500,000 13,780,875
Southwest Gas Corp., Series A, 7.30%, 9/01/27 ............................................. 18,080,000 19,976,230
Southwest Gas Corp., Series A, 6.50%, 12/01/33 ............................................ 10,000,000 10,776,700
Southwest Gas Corp., Series B, 7.50%, 9/01/32 ............................................. 62,470,000 69,244,247
Humboldt County PCR, Refunding, Sierra Pacific Power Co., Series A,
AMBAC Insured, 6.30%, 7/01/22 ............................................................. 4,500,000 4,802,220
Nevada Housing Division, Multi-Unit Housing Revenue, Issue B, 6.55%, 10/01/25.............. 5,405,000 5,828,644
Nevada Housing Division, Refunding, Issue C-2, 6.75%, 10/01/26............................. 8,190,000 8,779,926
Nevada Housing Division, SF Program,
Issue A, FI/GML, 8.30%, 10/01/19 .......................................................... 2,950,000 3,210,898
Issue A-2, FI/GML, 8.375%, 10/01/19 ....................................................... 2,605,000 2,848,698
Refunding, Program A-1, 6.25%, 10/01/26 ................................................... 3,870,000 4,086,797
Nevada State Colorado River, Series 1994, Pre-Refunded, 6.50%, 7/01/24 .................... 15,915,000 17,729,628
Nevada State Municipal Bond Bank Project No. 40-41-A, ETM, 6.375%, 12/01/17 ............... 10,275,000 11,325,516
Reno RDA, Tax Allocation,
Downtown Redevelopment Project, Series C, Pre-Refunded, 7.75%, 9/01/05 .................... 2,695,000 2,951,375
Downtown Redevelopment Project, Series D, 7.625%, 9/01/16 ................................. 4,255,000 4,617,781
Downtown Redevelopment Project, Series D, Pre-Refunded, 7.625%, 9/01/16.................... 4,035,000 4,474,290
Refunding, Series A, 6.20%, 6/01/18 ....................................................... 3,000,000 3,096,630
Washoe County Gas and Water Facilities Revenue, Refunding, AMBAC Insured, 6.30%, 12/01/14 . 5,000,000 5,378,900
Washoe County Hospital Facility Revenue, Washoe Medical Center, Inc. Project,
Series A, AMBAC Insured, 6.25%, 6/01/13 ................................................... 9,295,000 10,126,345
----------
246,178,567
----------
NEW HAMPSHIRE 1.7%
Nashua Housing Authority, MFR, Refunding, Clocktower Project,
FGIC Insured, 6.25%, 6/20/33 .............................................................. 6,176,000 6,488,876
New Hampshire Higher Education and Health Facilities Authority Revenue,
Kendal at Hanover Project, Pre-Refunded, 8.00%, 10/01/19 .................................. 9,410,000 10,090,155
New Hampshire Catholic Charities, 5.80%, 8/01/22 .......................................... 1,000,000 1,008,110
Rivier College, 5.60%, 1/01/28 ............................................................ 4,590,000 4,437,658
St. Joseph Hospital, 7.50%, 1/01/16 ....................................................... 2,300,000 2,475,490
The Hitchcock Clinic, MBIA Insured, 6.00%, 7/01/27 ........................................ 4,275,000 4,516,837
New Hampshire State HFA,
MFHR, Series 1, 7.10%, 1/01/14 ............................................................ 4,920,000 5,204,081
SF Residential, Series A, 8.50%, 7/01/14 .................................................. 3,515,000 3,627,621
BONDS (CONT.)
NEW HAMPSHIRE (CONT.)
NEW HAMPSHIRE STATE HFA, (CONT.)
SFMR, Series E, 6.75%, 7/01/19 ............................................................ $ 6,360,000 $ 6,886,099
SFMR, Series E, 6.80%, 7/01/25 ............................................................ 4,755,000 5,147,573
New Hampshire State IDA, Pollution Control Public Service Co., 5/01/21,
Project A, 7.65%........................................................................... 6,870,000 7,316,275
Project B, 7.50%........................................................................... 50,690,000 53,992,454
Project C, 7.65%........................................................................... 7,450,000 7,933,952
---------
119,125,181
----------
NEW JERSEY .3%
Mercer County Improvement Authority, Refunding, Solid Waste, 5.75%, 9/15/16 ............... 2,500,000 2,640,850
New Jersey Health Care Facilities, Financing Authority Revenue,
Cathedral Health Service, Pre-Refunded, 7.25%, 2/15/21 .................................... 3,975,000 4,349,207
Community Memorial Hospital Association, Series C, Pre-Refunded, 8.00%, 7/01/14 ........... 900,000 923,733
Refunding, Cathedral Health Services, MBIA Insured, 5.25%, 8/01/21 ........................ 7,865,000 7,812,069
Zurbrugg Memorial Hospital Issue, Series C, 8.50%, 7/01/12 ................................ 4,150,000 4,214,242
---------
19,940,101
----------
NEW MEXICO .9%
Farmington PCR, Refunding, Public Service Co. of New Mexico, Series A,
AMBAC Insured, 6.375%, 12/15/22 ........................................................... 10,435,000 11,256,548
Lordsburg PCR, Refunding, Phelps Dodge Corp. Project, 6.50%, 4/01/13 ...................... 17,000,000 18,455,880
New Mexico State Mortgage Financial Authority, SFM, Refunding, Series A, 6.85%, 7/01/10 ... 13,875,000 14,782,564
University of New Mexico Revenue, Series 1989, Pre-Refunded, 7.90%, 6/01/19 ............... 17,000,000 18,023,400
----------
62,518,392
----------
NEW YORK 16.8%
MTA Revenue,
bCommuter Facilities, Series A, 5.25%, 7/01/28 ............................................ 5,000,000 4,809,450
Commuter Facilities, Series A, FGIC Insured, 6.00%, 7/01/16 ............................... 8,950,000 9,655,260
Commuter Facilities, Series A, FGIC Insured, 6.00%, 7/01/21 ............................... 9,225,000 9,876,008
Commuter Facilities, Series A, FGIC Insured, 6.10%, 7/01/26 ............................... 11,050,000 11,916,541
Commuter Facilities, Series C-1, FGIC Insured, 5.375%, 7/01/27 ............................ 10,000,000 10,011,700
Dedicated Tax Fund, Series A, MBIA Insured, 5.25%, 4/01/26 ................................ 11,125,000 10,948,224
Refunding, Transit Facilities, Series M, 6.00%, 7/01/14 ................................... 18,210,000 18,741,004
Service Contract, Transit Facilities, Series 6, Pre-Refunded, 7.00%, 7/01/09 .............. 3,000,000 3,293,550
Transit Facilities, Refunding, Service Contract, Series 8, 5.375%, 7/01/21 ................ 15,000,000 14,697,150
Transit Facilities, Series A, FSA Insured, 6.00%, 7/01/16 ................................. 3,630,000 3,913,031
Transit Facilities, Series A, FSA Insured, 6.10%, 7/01/21 ................................. 6,260,000 6,750,909
Transit Facilities, Series C-1, 5.625%, 7/01/27 ........................................... 10,800,000 10,901,520
New Rochelle IDA, Civic Facilities Revenue, College of New Rochelle Project,
6.625%, 7/01/12............................................................................ 1,245,000 1,320,447
New York City GO,
Refunding, Series B, 6.20%, 8/15/06 ....................................................... 1,500,000 1,634,340
Refunding, Series B, 6.30%, 8/15/08 ....................................................... 26,875,000 29,066,925
Refunding, Series B, 6.375%, 8/15/10 ...................................................... 21,740,000 23,542,463
Refunding, Series E, 5.75%, 2/15/09........................................................ 8,500,000 8,867,965
Refunding, Series F, 6.00%, 8/01/13 ....................................................... 14,000,000 15,054,760
Refunding, Series F, 5.25%, 8/01/15 ....................................................... 20,580,000 20,121,683
Refunding, Series H, 6.25%, 8/01/15 ....................................................... 13,035,000 13,881,493
Refunding, Series H, 6.125%, 8/01/25 ...................................................... 65,785,000 70,207,726
Refunding, Series H, Sub-Series H-1, 6.125%, 8/01/11 ...................................... 5,000,000 5,358,500
Refunding, Series J, 6.00%, 8/01/21 ....................................................... 28,260,000 29,524,635
Series A, 6.125%, 8/01/06 ................................................................. 14,500,000 15,636,800
Series A, 6.20%, 8/01/07 .................................................................. 21,810,000 23,484,790
Series A, 6.25%, 8/01/08 .................................................................. 4,390,000 4,726,494
Series A, 7.75%, 8/15/13.................................................................... 485,000 537,676
Series A, 7.75%, 8/15/14 .................................................................. 245,000 271,215
Series A, 6.25%, 8/01/16 .................................................................. 3,280,000 3,489,986
Series A, 7.75%, 8/15/17 .................................................................. 105,000 115,999
BONDS (CONT.)
NEW YORK (CONT.)
NEW YORK CITY GO, (CONT.)
Series A, 8.00%, 8/15/20 .................................................................. $ 5,000 $ 5,574
Series A, 8.00%, 8/15/21 .................................................................. 15,000 16,650
Series A, Pre-Refunded, 8.00%, 3/15/12 .................................................... 1,000,000 1,083,030
Series A, Pre-Refunded, 8.00%, 3/15/13 .................................................... 1,850,000 2,003,606
Series A, Pre-Refunded, 7.75%, 8/15/13..................................................... 4,325,000 4,846,768
Series A, Pre-Refunded, 8.00%, 3/15/14 .................................................... 13,400,000 14,512,602
Series A, Pre-Refunded, 8.00%, 3/15/15 .................................................... 1,115,000 1,207,578
Series A, Pre-Refunded, 8.00%, 3/15/16 .................................................... 3,000,000 3,249,090
Series A, Pre-Refunded, 6.25%, 8/01/16 .................................................... 1,720,000 1,863,138
Series A, Pre-Refunded, 8.00%, 3/15/17 .................................................... 11,660,000 12,628,130
Series A, Pre-Refunded, 7.75%, 8/15/17 .................................................... 3,180,000 3,558,452
Series B, 8.00%, 6/01/98................................................................... 15,000 15,043
Series B, 8.25%, 6/01/02 .................................................................. 205,000 229,122
Series B, 7.50%, 2/01/04 .................................................................. 10,000,000 11,060,300
Series B, 8.25%, 6/01/05 .................................................................. 1,000,000 1,202,110
Series B, 7.50%, 10/01/11 ................................................................. 190,000 200,826
Series B, 7.50%, 10/01/12 ................................................................. 630,000 665,627
Series B, 6.75%, 10/01/15 ................................................................. 50,000 54,603
Series B, 6.75%, 10/01/17 ................................................................. 1,300,000 1,411,007
Series B, 7.00%, 2/01/19 .................................................................. 15,000,000 16,352,550
Series B, 6.00%, 8/15/26 .................................................................. 2,000,000 2,082,280
Series B, ETM, 8.00%, 6/01/98.............................................................. 1,420,000 1,424,317
Series B, ETM, 8.00%, 6/01/01 ............................................................. 3,000,000 3,320,670
Series B, Pre-Refunded, 8.25%, 6/01/02 .................................................... 4,295,000 4,841,324
Series B, Pre-Refunded, 7.50%, 10/01/11 ................................................... 6,810,000 7,233,650
Series B, Pre-Refunded, 7.50%, 10/01/12 ................................................... 10,355,000 10,999,185
Series B, Pre-Refunded, 6.75%, 10/01/15 ................................................... 9,250,000 10,225,968
Series B, Sub-Series B-1, Pre-Refunded, 7.00%, 8/15/16..................................... 3,000,000 3,437,460
Series B-1, Pre-Refunded, 7.30%, 8/15/11 .................................................. 8,000,000 9,272,960
Series C, 7.25%, 8/15/24 .................................................................. 3,540,000 3,820,934
Series C, Pre-Refunded, 7.25%, 8/15/24 .................................................... 1,305,000 1,423,494
Series C, Sub-Series C-1, 7.00%, 8/01/17 .................................................. 145,000 159,396
Series C, Sub-Series C-1, 7.00%, 8/01/18 .................................................. 1,705,000 1,874,272
Series C, Sub-Series C-1, Pre-Refunded, 7.00%, 8/01/17 .................................... 1,785,000 1,988,454
Series D, 8.00%, 8/01/99 .................................................................. 1,760,000 1,843,442
Series D, 7.30%, 2/01/01 .................................................................. 2,860,000 3,065,434
Series D, 8.25%, 8/01/13 .................................................................. 145,000 162,758
Series D, 8.25%, 8/01/14 .................................................................. 85,000 95,273
Series D, 7.625%, 2/01/15 ................................................................. 700,000 777,693
Series D, 7.50%, 2/01/16 .................................................................. 255,000 282,407
Series D, 8.00%, 8/01/16 .................................................................. 50,000 55,703
Series D, 7.50%, 2/01/17 .................................................................. 865,000 956,093
Series D, 8.00%, 8/01/17 .................................................................. 100,000 111,374
Series D, 8.00%, 8/01/18 .................................................................. 50,000 55,687
Series D, 8.00%, 8/01/19 .................................................................. 30,000 33,412
Series D, 6.00%, 2/15/25 .................................................................. 31,300,000 32,605,210
Series D, ETM, 8.00%, 8/01/99 ............................................................. 240,000 251,765
Series D, ETM, 7.30%, 2/01/01 ............................................................. 2,140,000 2,304,010
Series D, Group B, 8.25%, 8/01/11.......................................................... 160,000 179,286
Series D, Group B, 8.25%, 8/01/12 ......................................................... 245,000 274,611
Series D, Pre-Refunded, 8.25%, 8/01/12 .................................................... 10,880,000 12,325,190
Series D, Pre-Refunded, 8.25%, 8/01/13 .................................................... 7,605,000 8,615,172
Series D, Pre-Refunded, 8.25%, 8/01/14 .................................................... 4,255,000 4,813,256
Series D, Pre-Refunded, 7.625%, 2/01/15 ................................................... 8,300,000 9,333,848
Series D, Pre-Refunded, 7.50%, 2/01/16 .................................................... 4,745,000 5,315,776
Series D, Pre-Refunded, 7.50%, 2/01/17 .................................................... 11,135,000 12,474,429
BONDS (CONT.)
NEW YORK (CONT.)
NEW YORK CITY GO, (CONT.)
Series E, 6.50%, 12/01/12 ................................................................. $ 135,000 $ 137,248
Series E, 6.00%, 8/01/26 .................................................................. 3,000,000 3,137,460
Series E, Pre-Refunded, 6.50%, 12/01/12 ................................................... 2,475,000 2,516,927
Series F, 8.20%, 11/15/04 ................................................................. 835,000 941,346
Series F, 6.50%, 2/15/07 .................................................................. 4,185,000 4,574,163
Series F, 6.50%, 2/15/08 .................................................................. 1,220,000 1,339,353
Series F, 6.60%, 2/15/10 .................................................................. 10,070,000 11,051,523
Series F, 8.25%, 11/15/15 ................................................................. 160,000 180,747
Series F, 8.25%, 11/15/17 ................................................................. 200,000 226,004
Series F, Pre-Refunded, 8.20%, 11/15/04 ................................................... 4,500,000 5,134,725
Series F, Pre-Refunded, 6.50%, 2/15/07 .................................................... 3,865,000 4,328,491
Series F, Pre-Refunded, 6.50%, 2/15/08 .................................................... 6,320,000 7,077,894
Series F, Pre-Refunded, 6.60%, 2/15/10 .................................................... 5,930,000 6,675,342
Series F, Pre-Refunded, 8.25%, 11/15/15 ................................................... 1,840,000 2,102,513
Series F, Pre-Refunded, 8.25%, 11/15/17 ................................................... 2,300,000 2,628,141
Series G, 6.00%, 10/15/26 ................................................................. 15,335,000 16,018,941
Series H, 7.10%, 2/01/12 .................................................................. 330,000 360,637
Series H, 7.20%, 2/01/14 .................................................................. 1,040,000 1,140,454
Series H, 7.00%, 2/01/16 .................................................................. 340,000 370,780
Series H, Pre-Refunded, 7.10%, 2/01/12 .................................................... 2,670,000 2,949,816
Series H, Pre-Refunded, 7.20%, 2/01/14 .................................................... 8,960,000 9,929,562
Series H, Pre-Refunded, 7.00%, 2/01/16 .................................................... 3,660,000 4,031,087
Series H, Sub-Series H-1, 6.125%, 8/01/09 ................................................. 11,750,000 12,540,305
Series I, 6.25%, 4/15/13 .................................................................. 36,610,000 39,208,578
Series I, 6.25%, 4/15/27 .................................................................. 7,000,000 7,496,860
New York City Health and Hospital Authority Local Government Revenue, Series A,
6.00%, 2/15/07 ............................................................................ 5,010,000 5,273,977
6.30%, 2/15/20 ............................................................................ 18,235,000 19,112,104
New York City IDA, Industrial Development Revenue, Brooklyn Navy Yard Cogeneration Partners,
5.65%, 10/01/28 ........................................................................... 5,000,000 4,999,650
5.75%, 10/01/36 ........................................................................... 5,750,000 5,800,428
New York City Municipal Water Finance Authority, Water and Sewer System Revenue,
Series A, 7.10%, 6/15/12 .................................................................. 2,455,000 2,680,516
Series A, 7.00%, 6/15/15 .................................................................. 4,980,000 5,407,931
Series B, 5.875%, 6/15/26 ................................................................. 6,500,000 6,819,540
Series B, 5.75%, 6/15/29 .................................................................. 15,000,000 15,617,400
Series B, MBIA Insured, 5.75%, 6/15/26 .................................................... 3,000,000 3,160,620
Series B, Pre-Refunded, 7.00%, 6/15/19 .................................................... 2,965,000 3,019,941
New York State Dormitory Authority Lease Revenue, State University Dormitory
Facilities, 5.50%, 7/01/27 ................................................................ 8,915,000 9,016,720
New York State Dormitory Authority Revenue,
City University General Resources, Series 2, MBIA Insured, 6.25%, 7/01/19 ................. 4,000,000 4,240,080
City University System Consolidation, Series 1, 5.375%, 7/01/24 ........................... 23,000,000 22,601,870
City University System Consolidation, Third Issue-1, 5.25%, 7/01/25 ....................... 10,000,000 9,608,000
City University System, Third Generation Resources, Series 2, 6.00%, 7/01/20 .............. 16,860,000 17,601,166
Mental Health Services Facilities, Series A, 6.00%, 8/15/17 ............................... 18,000,000 19,037,880
Mental Health Services Facilities, Series A, 5.75%, 2/15/27 ............................... 5,000,000 5,120,550
Our Lady Nursing Home, FHA Insured, 5.90%, 8/01/20 ........................................ 6,750,000 7,077,375
Refunding, City University System, Third Generation Resources, Series 2, 6.00%, 7/01/26 ... 5,500,000 5,728,690
Refunding, City University System, Third Generation Resources, Series 2,
Pre-Refunded, 6.00%, 7/01/26 .............................................................. 14,150,000 15,678,766
Refunding, State University Educational Facilities, Series B, 7.375%, 5/15/14 ............. 4,240,000 4,556,262
Refunding, State University Educational Facilities, Series B, 7.00%, 5/15/16 .............. 2,000,000 2,129,160
Saint Barnabas Hospital, 5.35%, 8/01/17 ................................................... 5,500,000 5,533,990
Second Hospital, Interfaith Medical Center, Series D, 5.30%, 2/15/19 ...................... 5,000,000 4,852,500
Second Hospital, Interfaith Medical Center, Series D, 5.40%, 2/15/28 ...................... 8,000,000 7,814,000
State University Educational Facilities, Pre-Refunded, 6.00%, 5/15/18 ..................... 5,000,000 5,534,750
BONDS (CONT.)
NEW YORK (CONT.)
New York State Energy Research and Development Authority, Electric Facilities Revenue, Series A,
Long Island Light, 7.15%, 6/01/20 ......................................................... $17,500,000 $ 19,127,500
Long Island Light, 7.15%, 2/01/22 ......................................................... 1,500,000 1,639,500
Refunding, Consolidated Edison Co., Inc., 6.10%, 8/15/20 .................................. 8,500,000 9,084,715
New York State HFA, Refunding, Health Facilities, New York City, Series A, 5.90%, 5/01/05 . 14,070,000 14,877,055
New York State HFA, Refunding, Housing Project Mortgage, Series A, FSA Insured,
6.10%, 11/01/15 ........................................................................... 5,475,000 5,798,189
6.125%, 11/01/20 .......................................................................... 4,230,000 4,471,025
New York State HFA, Service Contract Revenue,
Refunding, Series C, 5.875%, 9/15/14 ...................................................... 4,675,000 4,828,106
Refunding, Series C, 6.125%, 3/15/20 ...................................................... 25,500,000 26,561,565
Refunding, Series C, 5.50%, 9/15/22 ....................................................... 17,505,000 17,503,600
Series A, 6.375%, 9/15/14 ................................................................. 25,000 26,890
Series A, 6.375%, 9/15/16 ................................................................. 3,785,000 4,048,739
Series A, Pre-Refunded, 6.375%, 9/15/14 ................................................... 3,130,000 3,507,697
Series A, Pre-Refunded, 6.50%, 3/15/25 .................................................... 10,000,000 11,384,800
New York State Medical Care Facilities, Financial Agency Revenue,
Hospital and Nursing Home, FSA Mortgage Insured, 6.50%, 2/15/34 ........................... 6,980,000 7,494,635
Hospital Mortgage, Series A, AMBAC Insured, Pre-Refunded, 6.50%, 8/15/29 .................. 7,600,000 8,591,192
Refunding, Hospital and Nursing Home, FSA Mortgage Insured, 6.40%, 8/15/14 ................ 10,800,000 11,824,704
The Hospital for Special Surgery, Series A, 6.375%, 8/15/24 ............................... 12,500,000 13,513,875
bNew York State Tollway Authority, General Revenue, Series D, 5.375%, 1/01/27 .............. 5,000,000 4,981,450
New York State Tollway Authority, Service Contract Revenue, Local Highway and Bridge,
6.25%, 4/01/14 ............................................................................ 11,600,000 12,433,112
5.75%, 4/01/16 ............................................................................ 13,200,000 13,601,148
New York State Urban Development Corp., Correctional Capital Facilities,
Series 5, 6.10%, 1/01/12................................................................... 7,685,000 8,123,122
New York State Urban Development Corp. Revenue, Youth Facilities, 6.00%, 4/01/17 .......... 11,720,000 12,332,604
Warren and Washington Counties IDA Revenue, Refunding, Adirondack Resource
Recovery Project, Series A, 7.90%, 12/15/07 ............................................... 4,490,000 4,669,465
-------------
1,201,107,694
-------------
NORTH CAROLINA 2.6%
Charlotte-Mecklenberg Hospital Authority, Health Care System Revenue,
5.90%, 1/15/16 ............................................................................ 7,010,000 7,428,567
Pre-Refunded, 5.90%, 1/15/16 .............................................................. 2,890,000 3,171,631
Series A, 5.875%, 1/15/26 ................................................................. 5,000,000 5,226,850
North Carolina Eastern Municipal Power Agency, Power System Revenue,
Refunding, Series A, 6.50%, 1/01/17 ....................................................... 25,700,000 27,284,919
Refunding, Series A, 6.50%, 1/01/24 ....................................................... 3,250,000 3,284,320
Refunding, Series B, 6.25%, 1/01/12 ....................................................... 6,875,000 7,119,819
Refunding, Series B, 6.00%, 1/01/22 ....................................................... 1,250,000 1,314,988
Refunding, Series B, 6.25%, 1/01/23 ....................................................... 39,030,000 42,395,557
Refunding, Series B, FGIC Insured, 6.25%, 1/01/23 ......................................... 4,000,000 4,315,440
Refunding, Series B, MBIA Insured, 5.80%, 1/01/16 ......................................... 11,175,000 11,811,081
Refunding, Series B, MBIA Insured, 5.875%, 1/01/21 ........................................ 13,325,000 14,052,545
Series B, 6.00%, 1/01/05 .................................................................. 1,355,000 1,430,799
Series D, 5.875%, 1/01/13 ................................................................. 7,440,000 7,613,873
Series G, 5.75%, 12/01/16 ................................................................. 14,420,000 14,586,407
North Carolina Municipal Power Agency No. 1, Catawba Electric Revenue, Refunding,
5.75%, 1/01/15 ............................................................................ 12,435,000 12,479,144
Series 1982, 6.25%, 1/01/17 ............................................................... 15,620,000 16,495,501
Wake County IPC, Financing Authority Revenue, Carolina Power and Light, 6.90%, 4/01/09 .... 5,000,000 5,323,550
---------
185,334,991
---------
NORTH DAKOTA .4%
Dickinson Health Care Facilities Revenue, BHS Long-Term Care, Inc., 7.625%, 2/15/20 ....... 7,750,000 8,177,258
Ellendale MFHR, Ellendale Manor Apartments Project, 9.75%, 7/01/16 ........................ 310,000 310,831
BONDS (CONT.)
NORTH DAKOTA (CONT.)
Mercer County PCR, Basin Electric Power Corp.,
Second Series, AMBAC Insured, 6.05%, 1/01/19 .............................................. $ 9,130,000 $ 9,835,475
Series E, 7.00%, 1/01/19 .................................................................. 11,540,000 12,050,299
Wahpeton MFHR, Evergreen Apartments Project, 9.75%, 7/01/16 ............................... 757,000 759,104
---------
31,132,967
---------
OHIO 1.6%
Dayton Special Facilities Revenue, Refunding, Emery Air Freight Corp.,
Emery Worldwide Air, Inc., Series E, 6.05%, 10/01/09 ...................................... 4,000,000 4,320,280
Emery Worldwide Air, Inc., Series F, 6.05%, 10/01/09 ...................................... 2,750,000 2,970,193
bSeries A, 5.625%, 2/01/18 ................................................................ 6,000,000 6,120,900
Franklin County Convention Facilities Authority, Tax and Lease Revenue
Anticipation Bonds, MBIA Insured, 5.00%, 12/01/27 ......................................... 7,500,000 7,165,500
Franklin County Nursing Home, First Mortgage Revenue, Volunteers of
America Care Facilities Project, 8.75%, 11/01/18 .......................................... 2,775,000 2,862,218
Montgomery County Health Systems Revenue,
Franciscan Facility, Series B-2, 8.10%, 7/01/01 ........................................... 1,800,000 1,916,010
Franciscan Medical Center-Dayton, 5.50%, 7/01/18 .......................................... 1,995,000 1,973,274
Refunding, Franciscan at Saint Leonard, 5.50%, 7/01/18 .................................... 3,625,000 3,589,874
Series B-2, 8.10%, 7/01/18 ................................................................ 3,705,000 4,416,323
Series B-2, Pre-Refunded, 8.10%, 7/01/18 .................................................. 8,295,000 10,364,520
Montgomery County Hospital Revenue, Refunding, Grandview Hospital and Medical Center,
5.50%, 12/01/10 ........................................................................... 1,300,000 1,322,217
5.60%, 12/01/11 ........................................................................... 1,000,000 1,021,310
5.65%, 12/01/12 ........................................................................... 925,000 947,061
Ohio HFA, Residential Mortgage Revenue,
Series A-1, GNMA Secured, 5.40%, 9/01/29 .................................................. 5,870,000 5,825,623
Series C, 5.75%, 9/01/28 .................................................................. 7,760,000 7,940,886
Ohio State Air Quality Development Authority Revenue,
Refunding, Dayton Power and Light Co. Project, 6.10%, 9/01/30 ............................. 12,000,000 12,807,000
Toledo Edison, Series B, 8.00%, 5/15/19 ................................................... 6,325,000 6,769,142
Ohio State EDR, Good Samaritan Medical Center, Series 1990-3, 7.875%, 12/01/10 ............ 1,550,000 1,644,457
Ohio State Solid Waste Disposal Revenue, USG Corp. Project, 5.65%, 3/01/33 ................ 5,330,000 5,329,467
Ohio State Water Development Authority Revenue, Refunding, Dayton Power,
Series A, 6.40%, 8/15/27................................................................... 3,250,000 3,506,945
Ohio State Water Development Facilities Authority, PCR, Toledo Edison,
Series A, 8.00%, 5/15/19................................................................... 10,000,000 10,702,200
University of Cincinnati COP, University Center Project, MBIA Insured, 5.125%, 6/01/24 .... 10,500,000 10,227,000
-----------
113,742,400
-----------
OKLAHOMA 1.2%
Canadian County HFA, SFMR, Series A,
7.70%, 9/01/05 ............................................................................ 1,390,000 1,452,550
7.80%, 9/01/12 ............................................................................ 2,905,000 3,041,884
Oklahoma State Turnpike System Authority, First Senior Revenue,
7.875%, 1/01/21 ........................................................................... 610,000 636,285
Pre-Refunded, 7.875%, 1/01/21 ............................................................. 19,090,000 19,959,931
Stillwater Medical Center Authority Revenue,
Series A, 6.10%, 5/15/09 .................................................................. 3,440,000 3,600,201
Series B, 6.35%, 5/15/12 .................................................................. 1,235,000 1,310,409
Series B, 6.50%, 5/15/19 .................................................................. 3,390,000 3,635,538
Tulsa County Home Financial Authority, Mortgage Revenue, Series D,
GNMA Insured, 6.95%, 12/01/22 ............................................................. 530,000 561,381
Tulsa County Municipal Airport Revenue, American Airlines, Inc.,
7.35%, 12/01/11 ........................................................................... 4,000,000 4,454,000
6.25%, 6/01/20............................................................................. 18,530,000 19,674,228
7.375%, 12/01/20 .......................................................................... 11,000,000 11,896,940
Tulsa County Parking Authority, Series B,
6.90%, 12/01/07 ........................................................................... 3,000,000 3,298,830
7.00%, 12/01/14 ........................................................................... 5,500,000 5,970,910
Tulsa Housing Assistance Corp. Revenue, First Lien, Refunding, 6.80%, 7/01/11 ............. 2,740,000 2,912,072
BONDS (CONT.)
OKLAHOMA (CONT.)
Tulsa Industrial Authority, Hospital Revenue, St. John Medical Center
Project, Series A, 6.25%, 2/15/14 ......................................................... $ 2,000,000 $ 2,147,720
Valley View Hospital Authority Revenue, Refunding, Valley View
Regional Medical Center, 6.00%, 8/15/14 ................................................... 4,000,000 4,117,040
---------
88,669,919
---------
OREGON .2%
Oregon State Department of Administrative Services COP, Series A,
AMBAC Insured, 5.80%, 5/01/24.............................................................. 5,000,000 5,291,300
Oregon State EDR, Georgia Pacific Corp. Project,
Refunding, Series 183, 5.70%, 12/01/25 .................................................... 3,500,000 3,520,440
Series CLVII, 6.35%, 8/01/25 .............................................................. 5,500,000 5,790,840
---------
14,602,580
----------
PENNSYLVANIA 3.5%
Allegheny County Hospital Development Authority Revenue, Refunding, University
of Pittsburgh Health Center, Series A, MBIA Insured, 5.625%, 4/01/27 ..................... 6,550,000 6,707,855
Allegheny County IDA Revenue, Environmental Improvement, 6.70%, 12/01/20 .................. 5,250,000 5,692,103
Beaver County IDA, PCR, Ohio Edison Co., Beaver Valley Project, Series A, 7.75%, 9/01/24 .. 14,250,000 15,056,123
Cambria County HDA, Hospital Revenue, Conemaugh Valley Memorial Hospital, Refunding, Series B,
6.30%, 7/01/08 ............................................................................ 9,600,000 10,319,904
6.375%, 7/01/18 ........................................................................... 10,740,000 11,399,436
Pre-Refunded, 8.875%, 7/01/18 ............................................................. 3,000,000 3,082,890
Delaware County IDA Revenue, Refunding, Philadelphia Electric,
Series 1991, 7.375%, 4/01/21 .............................................................. 6,500,000 7,052,500
Delaware River Port Authority Revenue, Pennsylvania and New Jersey,
Series 1995, FGIC Insured, 5.50%, 1/01/26 ................................................. 5,000,000 5,127,600
Delaware Valley Regional Finance Authority, Local Government Revenue,
Series B, AMBAC Insured, 5.60%, 7/01/17 ................................................... 5,000,000 5,315,650
Lancaster County Solid Waste Management Authority, Resource Recovery
System Revenue, Series A, Pre-Refunded, 8.50%, 12/15/10 ................................... 22,500,000 23,059,350
Lehigh County IDA, PCR, Refunding, Pennsylvania Power and Light Co. Project,
Series A, MBIA Insured, 6.15%, 8/01/29 .................................................... 4,000,000 4,324,480
Montgomery County Higher Education and Health Authority, Hospital Revenue,
Pre-Refunded, Jeanes Health System Project, 8.75%, 7/01/20 ............................... 5,500,000 6,106,980
Pennsylvania EDA, Financing Authority Revenue, Macmillan, L.P. Project, 7.60%, 12/01/20 ... 5,000,000 5,445,650
Pennsylvania EDA, Financing Resources Recovery Revenue,
Colver Project, Series D, 7.125%, 12/01/15 ................................................ 13,500,000 15,011,190
Pennsylvania State Financial Authority Revenue, Refunding, Municipal
Capital Improvements Program, 6.60%, 11/01/09 ............................................. 33,280,000 36,450,253
Pennsylvania State HFA,
Refunding, Rental Housing, FGIC Insured, 6.40%, 7/01/12 ................................... 10,590,000 11,299,318
SFM, Series 1991, 7.15%, 4/01/15 .......................................................... 3,635,000 3,851,828
Pennsylvania State Higher Educational Facilities Authority, College and University Revenues,
Lycoming College, Pre-Refunded, 8.375%, 10/01/18 ......................................... 2,000,000 2,075,680
Pennsylvania State Pooled Finance Authority, Lease Revenue, Capital Improvement,
Series B, MBIA Insured, 8.00%, 11/01/09 ................................................... 4,445,000 4,656,626
Philadelphia Gas Works Revenue,
Series 13, Pre-Refunded, 7.70%, 6/15/21 ................................................... 2,850,000 3,179,090
Series A, 6.375%, 7/01/26 ................................................................. 3,950,000 4,147,026
Philadelphia GO, Refunding, Series A, 11.50%,
8/01/98 ................................................................................... 1,545,000 1,570,894
8/01/99 ................................................................................... 2,400,000 2,595,000
8/01/00 ................................................................................... 1,000,000 1,140,230
Philadelphia Hospital and Higher Education Facilities Authority Revenue,
Albert Einstein Medical Center, 7.50%, 4/01/99 ............................................ 3,955,000 4,057,790
Mortgage, North Philadelphia Health Systems, Series A, FHA Secured, 5.30%, 1/01/18 ........ 3,330,000 3,281,782
Mortgage, North Philadelphia Health Systems, Series A, FHA Secured, 5.35%, 1/01/23 ........ 5,780,000 5,686,248
Mortgage, North Philadelphia Health Systems, Series A, FHA Secured, 5.375%, 1/01/28 ....... 3,765,000 3,701,635
Philadelphia Hospitals and Higher Education Facilities Authority Revenue,
Temple University Hospital, 5.875%, 11/15/23 .............................................. 5,000,000 5,128,150
Philadelphia Housing RDA Revenue, Sub-Series 2-B, 8.625%, 8/01/26 ......................... 3,690,000 3,741,918
Philadelphia Municipal Authority, Gas Works Lease Revenue, 7.50%, 5/01/01 ................. 1,000,000 1,047,930
Philadelphia School District, Series B, AMBAC Insured, 5.375%, 4/01/19 .................... 7,000,000 7,016,800
Philadelphia Water and Sewer Revenue, Series 10, ETM, 7.35%, 9/01/04 ...................... 10,790,000 12,198,095
South Fork Municipal Authority, Hospital Revenue, Conemaugh Valley Memorial
Hospital Project, Series A, MBIA Insured, 5.75%, 7/01/26 ................................. 5,000,000 5,198,450
Westmoreland County IDA Revenue, Refunding, Citizens General Hospital Project,
Series A, 8.25%, 7/01/13 .................................................................. 3,000,000 3,044,670
---------
248,771,124
---------
BONDS (CONT.)
PUERTO RICO 1.0%
Puerto Rico Commonwealth Highway and Transportation Authority Revenue, Series Y, 7/01/36,
5.00%...................................................................................... $59,000,000 $ 55,377,990
5.50%...................................................................................... 7,000,000 7,235,900
Puerto Rico Commonwealth Urban Renewal and Housing Corp., Refunding, 7.875%, 10/01/04 ..... 3,200,000 3,413,120
Puerto Rico Electric Power Authority Revenue, Refunding, Pre-Refunded,
Series M, 8.00%, 7/01/08................................................................... 2,000,000 2,053,240
Puerto Rico Municipal Finance Agency, Series A, Pre-Refunded, 8.25%, 7/01/08 .............. 5,000,000 5,134,600
---------
73,214,850
---------
RHODE ISLAND 1.4%
Providence Special Obligation Tax Increment, Series A, 7.65%, 6/01/16 ..................... 9,900,000 11,124,729
Rhode Island Clean Water Financial Agency Revenue, Drinking Water Providence,
Series A, AMBAC Insured, 6.70%, 1/01/15 ................................................... 2,200,000 2,446,312
Rhode Island Housing and Mortgage Finance Corp., Homeownership Opportunity,
Series 2, 7.75%, 4/01/22................................................................... 1,895,000 1,981,981
Series 10-A, 6.50%, 10/01/22 .............................................................. 20,200,000 21,427,958
Series 10-A, 6.50%, 4/01/27 ............................................................... 13,085,000 13,859,239
Series 13, 6.70%, 10/01/15 ................................................................ 7,400,000 7,986,376
Series 13, 6.85%, 4/01/27 ................................................................. 3,705,000 4,007,328
Series 15-A, 6.85%, 10/01/24 .............................................................. 15,000,000 16,076,700
Series 16-A, 6.375%, 10/01/26.............................................................. 2,720,000 2,877,787
Series 17-A, 6.25%, 4/01/17 ............................................................... 2,320,000 2,442,728
Rhode Island Port Authority and Economic Development Corp., Refunding,
Shepard Building Project, Series B, AMBAC Insured,
Pre-Refunded, 6.75%, 6/01/25 ............................................................. 3,000,000 3,400,830
Rhode Island State Health and Educational Building Corp. Revenue,
Health Facilities, Tockwotton Home, Pre-Refunded, 7.25%, 4/15/17 .......................... 3,000,000 3,351,150
Roger William Realty, Elmhurst Nursing Home, FHA Insured, 7.50%, 8/01/29 .................. 940,000 978,634
St. Antoine Residence, 6.70%, 11/15/12 .................................................... 2,320,000 2,515,553
St. Antoine Residence, 6.75%, 11/15/18 .................................................... 2,750,000 2,973,163
---------
97,450,468
---------
SOUTH CAROLINA 1.1%
Berkeley County School District COP, Berkeley School Facilities Group, Inc.,
AMBAC Insured, 6.30%, 2/01/16 ............................................................. 1,800,000 1,952,784
Piedmont Municipal Power Agency, South Carolina Electric Revenue, Refunding,
6.55%, 1/01/16 ............................................................................ 18,115,000 18,154,310
6.60%, 1/01/21 ............................................................................ 25,505,000 25,562,131
Series A, 5.75%, 1/01/24 .................................................................. 3,150,000 3,149,685
Series A, AMBAC Insured, 5.75%, 1/01/24 ................................................... 5,050,000 5,051,768
Richland County PCR, Refunding, Union Camp Corp. Project, Series C, 6.55%, 11/01/20 ....... 3,000,000 3,245,550
South Carolina State Housing, Finance and Development Authority, Mortgage
Revenue, Series A-2, AMBAC Insured, 5.80%, 7/01/27 ........................................ 6,405,000 6,669,078
South Carolina State Public Service Authority Revenue, Refunding, Series A,
AMBAC Insured 6.375%, 7/01/21 ............................................................. 12,765,000 13,558,728
Spartanburg County Health Services District, Inc., Hospital Revenue, Series A,
MBIA Insured, 5.50%, 4/15/27 .............................................................. 3,000,000 3,034,320
---------
80,378,354
---------
SOUTH DAKOTA .4%
Lawrence County PCR, Refunding, Black Hills Power and Light Co. Project, 6.70%, 6/01/10 ... 5,000,000 5,425,950
South Dakota State HDA, Homeownership Mortgage,
Series A, 6.30%, 5/01/17 .................................................................. 4,130,000 4,355,828
Series A, 7.15%, 5/01/27 .................................................................. 10,580,000 11,165,920
Series B, 7.10%, 5/01/17 .................................................................. 3,115,000 3,292,088
Series D, 6.65%, 5/01/14 .................................................................. 3,480,000 3,771,102
Series G, 7.125%, 5/01/14 ................................................................. 3,435,000 3,769,844
---------
31,780,732
---------
TENNESSEE .8%
Franklin IDB, MFHR, Refunding, Landings Apartment Project, Series
A, FSA Insured, 6.00%, 10/01/26 ........................................................... 2,000,000 2,091,200
Hamilton County IDB, MFHR, Patten Towers Apartments, Series A,
6.125%, 8/01/05 ........................................................................... 2,515,000 2,619,750
6.30%, 8/01/07 ............................................................................ 1,000,000 1,048,370
BONDS (CONT.)
TENNESSEE (CONT.)
Knox County Health, Educational and Housing Facilities Board, MFHR, GNMA Secured,
East Towne Village Project, 8.20%, 7/01/28 ................................................ $ 4,750,000 $ 4,930,833
Memphis-Shelby County Airport Authority, Special Facilities and Project
Revenue, Federal Express Corp.,
7.875%, 9/01/09 ........................................................................... 14,690,000 16,431,940
6.75%, 9/01/12 ............................................................................ 6,520,000 7,111,234
Metropolitan Government Nashville & Davidson County, Health and Educational
Board Revenue, Multi Modal Health Facility,
Asset Guaranty Insurance Co. Insured, 5.50%, 5/01/23 ..................................... 995,000 1,002,612
Metropolitan Nashville Airport Authority Revenue, Series C, FGIC Insured, 6.60%, 7/01/15 .. 1,940,000 2,091,572
Mount Pleasant IDR, PCR, Stauffer Chemical Co. Project, 8.00%, 12/01/12 ................... 1,990,000 2,164,523
Nashville and Davidson County Revenue, IDB, Refunding & Improvement,
Osco Treatment, Inc., 6.00%, 5/01/03....................................................... 5,000,000 5,209,350
bShelby County Health Educational and Housing Facility Board Hospital Revenue,
MBIA Insured, 5.00%, 4/01/18 .............................................................. 5,000,000 4,810,650
Tennessee HDA, Homeownership Program,
Series 1992, 6.80%, 7/01/17 ............................................................... 2,360,000 2,502,780
Series P, 7.70%, 7/01/16 .................................................................. 4,580,000 4,734,438
Tennessee State Local Development Authority Revenue, Community Provider
Pooled Loan Program, 6.45%, 10/01/14 ...................................................... 2,275,000 2,451,790
---------
59,201,042
---------
TEXAS 6.7%
Austin Combined Utility System Revenue, Series A, Pre-Refunded, 8.00%, 11/15/16 ........... 18,100,000 19,981,857
Austin Utility System Revenue, Refunding, FGIC Insured, 6.25%, 5/15/16 .................... 11,310,000 12,259,361
Bexar County Health Facilities Development Corp. Revenue, FSAInsured,
Incarnate Word Facility, 6.00%, 11/15/15................................................... 4,500,000 4,806,045
Refunding, Incarnate Word Health Services, 6.10%, 11/15/23 ................................ 8,300,000 8,926,484
Bexar County HFC, MFHR, Sunpark Apartments Project, 6.875%, 12/01/12 ...................... 1,725,000 1,800,745
Bexar Metropolitan Water District, Water Works Systems Revenue, Refunding,
MBIA Insured, 5.875%, 5/01/22.............................................................. 5,000,000 5,225,250
Brazos River Authority, Collateralized, PCR, Texas Utilities Electric Co. Project, Series A,
8.25%, 1/01/19 ............................................................................ 15,000,000 15,650,250
bRefunding, AMBAC Insured, 5.55%, 5/01/33 ................................................. 23,965,000 24,027,069
Brazos River Authority Revenue, Refunding, Houston Industries Inc. Project,
Series C, AMBAC Insured, 5.125%, 5/01/19 ................................................. 12,000,000 11,765,520
Dallas-Fort Worth International Airport Facilities, Improvement Corp.
Revenue, American Airlines, Inc.,
8.00%, 11/01/24 ........................................................................... 99,000,000 107,863,470
Refunding, 6.00%, 11/01/14 ................................................................ 29,400,000 31,188,990
El Paso HFC, SFMR, Series A, 8.75%, 10/01/11 .............................................. 4,325,000 4,672,990
Fort Worth Higher Education Financial Corp., Higher Education Revenue,
Texas Christian University Project, 5.00%, 3/15/27 ........................................ 4,000,000 3,761,520
Grand Prairie Health Facilities Development Corp., Hospital Revenue, Refunding,
Dallas/Ft. Worth Medical Center Project, AMBAC Insured, 6.875%, 11/01/10 .................. 2,700,000 3,066,714
Gulf Coast Waste Disposal Authority, Environmental Improvement Revenue,
Refunding, UXS Corp. Projects, 5.50%, 9/01/17 ............................................. 3,250,000 3,242,038
Harris County IDR, Marine Terminal Revenue, Refunding, 6.95%, 2/01/22 ..................... 20,250,000 22,010,130
Harris County Toll Road Revenue, Multiple Mode, Senior Lien, Pre-Refunded, Series D,
8.25%, 8/15/07 ............................................................................ 4,000,000 4,167,480
8.30%, 8/15/17 ............................................................................ 5,000,000 5,210,000
Houston Water and Sewer System Revenue, Refunding,
Junior Lien, Series A, MBIA Insured, Pre-Refunded, 6.20%, 12/01/20 ........................ 22,500,000 24,854,625
Series B, 6.375%, 12/01/14 ................................................................ 21,000,000 22,447,740
Joshua ISD, Refunding, Series B, 6.125%, 2/15/26 .......................................... 20,000 20,201
Lower Neches Valley Authority IDC Revenue, Refunding,
Mobil Oil Refunding Corp., 5.55%, 3/01/33 ................................................. 2,500,000 2,499,775
Lubbock HFC, SFMR, Refunding, MBS Program, Series A, GNMA Secured, 6.125%, 12/01/17 ....... 1,000,000 1,053,380
Matagorda County Navigation District No. 1, PCR, Collateralized, Refunding,
Central Power and Light Co. Project, MBIA Insured, 6.10%, 7/01/28 ......................... 25,300,000 26,479,233
Houston Lighting and Power Co., 6.00%, 7/01/28 ............................................ 19,200,000 20,013,312
Houston Lighting and Power Co., Series A, AMBAC Insured, 6.70%, 3/01/27 ................... 5,500,000 5,934,170
Matagorda County Navigation District No. 1 Revenue, Refunding, Houston
Industries Inc. Project, Series A, MBIA Insured, 5.25%,
11/01/29 ................................................................................. 7,500,000 7,199,100
Mesquite HFC, SFMR, Series 1983, 10.75%, 9/01/14 .......................................... 1,010,000 1,042,704
North Central Health Facilities Development Corp. Revenue, Health Resources
Systems, Series B, MBIA Insured, 5.125%, 2/15/22 .......................................... 5,985,000 5,796,652
Nueces River Authority Environmental Improvement Revenue, Refunding,
Asarco Inc. Project, 5.60%, 1/01/27 ....................................................... 4,000,000 4,006,440
BONDS (CONT.)
TEXAS (CONT.)
Port Corpus Christi Industrial Development Corp. Revenue, Refunding, Valero, 5.40%, 4/01/18,
Series B................................................................................... $ 4,000,000 $ 3,937,480
Series C................................................................................... 6,000,000 5,906,220
Red River Pollution Control Authority, Refunding, West Texas Utilities
Co. Project, MBIA Insured, 6.00%, 6/01/20 ................................................. 5,000,000 5,318,350
Sabine River Authority PCR, Refunding,
Southwestern Electric Power Co., MBIA Insured, 6.10%, 4/01/18 ............................. 4,000,000 4,282,080
Texas Utilities Electric Co. Project, 6.55%, 10/01/22 ..................................... 7,700,000 8,325,086
San Antonio Electric and Gas Revenue, Refunding, 5.50%, 2/01/20 ........................... 10,000,000 10,260,100
San Antonio Water Revenue, Senior Lien, MBIA Insured,
6.50%, 5/15/10 ............................................................................ 2,795,000 3,043,336
Pre-Refunded, 6.50%, 5/15/10 .............................................................. 1,440,000 1,574,640
Tarrant County Health Facilities Development Corp., Health Services Revenue, Texas Health
Resources System, Series A, MBIA Insured, 5.00%, 2/15/26 ................................. 10,000,000 9,454,500
Tarrant County Health Facilities Development Corp., Hospital Revenue,
Ft. Worth Osteopathic Hospital, MBIA Insured, 5.25%, 5/15/28 .............................. 5,010,000 4,877,035
Texas Housing Agency, Residential Development Mortgage Revenue, Series D, 8.35%,
1/01/08 ................................................................................... 1,335,000 1,399,334
7/01/08 ................................................................................... 2,885,000 3,024,028
Texas Water Development Board Revenue, State Revolving Fund, 6.00%, 7/15/13 ............... 2,500,000 2,657,450
Texas Water Resources Finance Authority Revenue, 7.625%, 8/15/08 .......................... 2,365,000 2,456,715
Travis County HFC, SFMR, Refunding, Series A, 6.95%, 10/01/27 ............................. 3,735,000 4,082,019
Tyler Health Facilities Development Corp., Hospital Revenue, Refunding, East Texas
Medical Center Project, Series A, MBIA Insured, 5.50%, 11/01/17 .......................... 1,735,000 1,763,055
---------
483,334,673
---------
U.S. TERRITORIES .1%
Virgin Islands HFA Mortgage Revenue, Series B, GNMA Secured, Pre-Refunded, 8.10%, 12/01/18 690,000 720,312
bVirgin Islands Public Financing Authority Revenue, Refunding, Subordinated Lien,
Fund Loan Notes, Series D, 5.50%,
10/01/01................................................................................... 1,755,000 1,773,708
10/01/02................................................................................... 1,700,000 1,716,320
10/01/03................................................................................... 1,850,000 1,867,002
---------
6,077,342
---------
UTAH 1.3%
Carbon County, Solid Waste Disposal Revenue, Refunding, Laidlaw, Inc. Project,
Series A, 7.50%, 2/01/10 .................................................................. 5,050,000 5,709,278
Intermountain Power Agency, Power Supply Revenue,
Refunding, Series A, 6.15%, 7/01/14 ....................................................... 25,000,000 27,150,500
Refunding, Series B, 7.75%, 7/01/20 ....................................................... 34,805,000 35,696,704
Second Crossover, Series 86-C, 5.75%, 7/01/20 ............................................. 5,500,000 5,502,145
Salt Lake City College Revenue, Westminster College Project,
5.70%, 10/01/17 ........................................................................... 1,000,000 1,008,530
5.75%, 10/01/27 ........................................................................... 1,000,000 1,010,070
Utah State HFA, Refunding, Series A, 6.50%, 5/01/19 ....................................... 2,945,000 3,078,261
Utah State HFA, SFM,
Refunding, 6.80%, 1/01/12 ................................................................. 1,590,000 1,694,129
Series A, 8.50%, 7/01/19 .................................................................. 355,000 364,177
Series B, 6.55%, 7/01/19 .................................................................. 3,450,000 3,712,338
Series B, 6.55%, 7/01/26 .................................................................. 3,655,000 3,901,676
Series C-1, 6.80%, 7/01/12 ................................................................ 255,000 271,700
Series C-1, 8.375%, 7/01/19 ............................................................... 1,880,000 1,888,742
Series D, 8.60%, 7/01/19 .................................................................. 295,000 295,738
Series E-1, 6.65%, 7/01/20 ................................................................ 2,510,000 2,680,404
Series G-1, 8.10%, 7/01/16 ................................................................ 860,000 882,326
---------
94,846,718
---------
VERMONT .1%
Vermont HFA, SF, Series 5, 7.00%, 11/01/27 ................................................ 9,400,000 10,090,148
BONDS (CONT.)
VIRGINIA .5%
Danville IDA Revenue, Regional Medical Center, FGIC Insured, 6.50%,
10/01/19................................................................................... $ 5,885,000 $ 6,433,305
10/01/24................................................................................... 5,840,000 6,384,113
Henrico County IDA, Public Facilities Lease Revenue, Regional Jail Project, 6.00%, 8/01/15 7,250,000 7,662,598
Richmond Public Utility Revenue, Refunding, Series A, 5.125%, 1/15/28 ..................... 5,510,000 5,302,328
Virginia State HDA, Commonwealth Mortgage,
Series C, Sub-Series C-6, 6.25%, 1/01/15 .................................................. 5,120,000 5,354,547
Series H, Sub-Series H-2, 6.55%, 1/01/17 .................................................. 4,755,000 5,134,687
---------
36,271,578
---------
WASHINGTON 2.5%
Chelan County PUD No. 1, Cheland Hydro Consolidated System Revenue,
Series A, 5.65%, 7/01/32................................................................... 5,000,000 5,040,750
Pierce County EDC, Refunding, Solid Waste-Steilacoom Revenue, 6.60%, 8/01/22 .............. 32,480,000 34,491,811
Port Moses Lake Public Corp., Washington PCR, Union Carbide Corp.,
7.50%, 8/01/04 ............................................................................ 2,100,000 2,100,588
7.875%, 8/01/06 ........................................................................... 1,000,000 1,030,260
SeaTac GO, Series 1994, 6.50%, 12/01/13 ................................................... 2,760,000 3,025,015
Seattle Municipality, Metropolitan Seattle Sewer Revenue,
Refunding, Series V, 6.20%, 1/01/32 ....................................................... 9,680,000 10,080,849
Series W, MBIA Insured, 6.25%, 1/01/21 .................................................... 2,500,000 2,660,350
Seattle Special Obligation, Chinatown International District, 5.90%, 8/01/26 .............. 4,810,000 5,003,410
Snohomish County USD No. 6, 6.50%, 12/01/11 ............................................... 7,000,000 7,995,540
University of Washington Alumni Association, Lease Revenue, Medical
Center Roosevelt II, 6.30%, 8/15/14 ....................................................... 4,000,000 4,369,400
Washington State Public Power Supply System Revenue,
Nuclear Project No. 1, Refunding, Series A,
6.05%, 7/01/12 ............................................................................ 35,355,000 37,540,293
MBIA Insured, 6.25%, 7/01/17 .............................................................. 19,965,000 21,237,769
Washington State Public Power Supply System Revenue, Nuclear Project No. 2, Series A,
6.25%, 7/01/12 ............................................................................ 3,200,000 3,436,512
Refunding, 6.00%, 7/01/09 ................................................................. 18,330,000 19,731,878
Refunding, 6.30%, 7/01/12 ................................................................. 7,700,000 8,598,051
Washington State Public Power Supply System Revenue, Nuclear Project No. 3,
Refunding, Series B, 5.50%, 7/01/18 ....................................................... 10,050,000 10,053,819
----------
176,396,295
----------
WEST VIRGINIA .8%
Braxton County Solid Waste Disposal Revenue, Weyerhaeuser Co. Project,
6.50%, 4/01/25 ............................................................................ 3,500,000 3,790,920
Refunding, 5.40%, 5/01/25 ................................................................. 10,000,000 9,787,200
Putnam County PCR, Refunding, FMC Corp. Project, 5.625%, 10/01/13 ......................... 1,700,000 1,733,609
Taylor County PCR, Union Carbide Corp., 7.625%, 8/01/05 ................................... 2,400,000 2,802,240
West Virginia State Hospital Financing Authority Revenue, Refunding &
Improvement, Logan General Hospital Project, 7.25%, 7/01/20.............................. 7,000,000 6,894,440
West Virginia State Housing Development Fund, Housing Finance, Series D,
7.00%, 5/01/17 ............................................................................ 6,000,000 6,412,800
7.05%, 11/01/24 ........................................................................... 9,000,000 9,635,130
West Virginia State, Series A, FGIC Insured, 5.20%, 11/01/26 .............................. 10,000,000 9,796,100
West Virginia State Water Development Authority Revenue, Loan Program II,
Series A, Pre-Refunded, 8.625%, 11/01/28 .................................................. 5,000,000 5,215,100
---------
56,067,539
---------
WISCONSIN 1.0%
Janesville IDR, Simmons Manufacturing Co., 7.00%, 10/15/17 ................................ 2,200,000 2,323,376
Madison Industrial Gas and Electric Co. Project, Series A, 6.75%, 4/01/27 ................. 4,220,000 4,567,179
Wisconsin Housing and EDA, Homeownership Revenue,
Refunding, Series A, 6.10%, 11/01/10 ...................................................... 9,190,000 9,799,481
Series 1, 6.75%, 9/01/15 .................................................................. 10,230,000 10,944,361
Series 1, 6.75%, 9/01/17 .................................................................. 3,000,000 3,203,700
Series A, 6.90%, 3/01/16 .................................................................. 1,985,000 2,174,925
Series A, 6.45%, 3/01/17 .................................................................. 5,500,000 5,867,565
Series A, 7.10%, 3/01/23 .................................................................. 10,580,000 11,289,389
Series B, 7.05%, 11/01/22 ................................................................. 3,000,000 3,214,140
BONDS (CONT.)
WISCONSIN (CONT.)
Wisconsin State Health and Educational Facilities Authority Revenue, Mercy Health Systems
Corp., AMBAC Insured, 6.125%,
8/15/13 ................................................................................... $ 6,500,000 $ 7,006,805
8/15/17 ................................................................................... 7,500,000 8,033,250
---------
68,424,171
---------
WYOMING .3%
Wyoming CDA, Housing Revenue, Refunding, Series 6, 6.10%, 12/01/28 ........................ 11,540,000 12,088,842
Wyoming CDA, MF Mortgage, Series A,
6.90%, 6/01/12 ............................................................................ 1,425,000 1,490,849
6.95%, 6/01/24 ............................................................................ 3,530,000 3,707,487
Wyoming CDA, SFM,
Series A, 7.25%, 6/01/21 .................................................................. 2,500,000 2,696,724
Series G, 7.375%, 6/01/17 ................................................................. 1,295,000 1,369,902
---------
21,353,804
Total Bonds (Cost $6,377,095,789).......................................................... 6,819,855,407
-------------
ZERO COUPON BONDS 2.1%
Calcasieu Parish, Louisiana, Memorial Hospital Service District Revenue, Lake Charles
Parish Memorial Hospital Project, Series A, 12/01/22 ..................................... 11,040,000 7,261,338
Chicago RMR, Refunding, Series B, MBIA Insured, 10/01/09 .................................. 10,705,000 4,867,884
Coldwater, Michigan, Community Schools, MBIA Insured, Pre-Refunded, 5/01/18 ............... 5,935,000 1,967,214
Colorado Springs Airport Revenue, Series C,
1/01/03 ................................................................................... 1,660,000 1,305,921
1/01/05.................................................................................... 1,610,000 1,127,836
1/01/07.................................................................................... 1,675,000 1,039,353
1/01/08 ................................................................................... 800,000 465,391
1/01/11.................................................................................... 1,450,000 693,811
Cook County, Illinois, Community Consolidated School District No. 54, Schaumburg Township,
Series B, FGIC Insured, Pre-Refunded,
1/01/07 ................................................................................... 3,505,000 2,222,905
1/01/08 ................................................................................... 4,800,000 2,848,655
1/01/09 ................................................................................... 4,380,000 2,430,111
1/01/10 ................................................................................... 5,760,000 2,994,853
Florida State Mid-Bay Bridge Authority Revenue, Series A, Senior Lien, AMBAC Insured,
10/01/23................................................................................... 5,000,000 1,266,100
10/01/24................................................................................... 3,000,000 715,980
Harrison, Michigan, Community Schools, AMBAC Insured, 5/01/20 ............................. 6,000,000 1,621,200
Jefferson County, Kentucky, Capital Projects Corp., Lease Revenue, Refunding, Series A,
8/15/07 ................................................................................... 1,640,000 1,059,013
8/15/08 ................................................................................... 4,505,000 2,719,938
8/15/09.................................................................................... 4,580,000 2,595,393
8/15/10.................................................................................... 4,620,000 2,474,611
8/15/13.................................................................................... 6,825,000 3,138,475
8/15/14 ................................................................................... 6,860,000 2,950,965
8/15/16.................................................................................... 7,005,000 2,682,984
8/15/17.................................................................................... 7,115,000 2,576,056
Metropolitan Pier and Exposition Authority, Illinois, Dedicated State Tax Revenue,
McCormick Place Expansion Project, Series A, FGIC Insured,
6/15/08 ................................................................................... 8,500,000 5,209,990
6/15/09 ................................................................................... 11,000,000 6,389,020
6/15/10 ................................................................................... 8,000,000 4,372,880
6/15/11 ................................................................................... 9,690,000 4,974,942
6/15/12.................................................................................... 250,000 209,924
Pre-Refunded, 6/15/12 ..................................................................... 11,550,000 10,081,994
Miami, Dade County Special Obligation, Series B, Subordinated Lien, MBIA Insured,10/01/34 . 5,500,000 736,120
Owensboro, Kentucky, Electric Light and Power Revenue, Series B, AMBAC Insured, 1/01/08 ... 5,250,000 3,330,284
Zero Coupon Bonds (cont.)
San Joaquin Hills, California, Transportation Corridor Agency, Toll Road Revenue,
Refunding, Series A, 1/15/21 .............................................................. $50,000,000 $ 31,694,500
Senior Lien, Pre-Refunded, 1/01/23 ........................................................ 7,000,000 1,932,000
Shreveport, Louisiana, Water and Sewer Revenue, Series B, FGIC Insured,
12/01/07................................................................................... 490,000 289,912
12/01/08 .................................................................................. 2,530,000 1,396,686
12/01/09 .................................................................................. 4,080,000 2,106,300
12/01/10................................................................................... 5,630,000 2,711,914
Spring, Texas, ISD, Refunding, FGIC Insured, Pre-Refunded, 8/15/08 ........................ 7,000,000 3,507,140
University of Illinois Revenues, AMBAC Insured, 4/01/10 ................................... 14,250,000 7,869,420
Washington State Public Power Supply System Revenue, Nuclear Project No. 3, Refunding, Series B,
Nuclear Project No. 2, Series A, 7/01/13 .................................................. 11,000,000 4,919,860
Nuclear Project No. 3, Series B, 7/01/12 .................................................. 6,400,000 3,039,423
Nuclear Project No. 3, Series B, 7/01/14 .................................................. 15,000,000 6,312,300
-----------
Total Zero Coupon Bonds (Cost $104,239,858)................................................ 154,110,596
-----------
Total Long Term Investments (Cost $6,481,335,647) ......................................... 6,973,966,003
aShort Term Investments .1%
Burke County Development Authority, PCR, Georgia Power Co. Vogtle, Fourth Series,
Daily VRDN and Put, 4.05%, 9/01/25 ........................................................ 2,900,000 2,900,000
New York City Municipal Water Financing Authority, Water and Sewer Systems Revenue,
Series C, FGIC Insured, Daily VRDN and Put, 4.20%, 6/15/23 ............................... 200,000 200,000
Northeastern Hospital and Educational Authority Health Care Revenue, Wyoming Valley Health Care,
Series A, Refunding, AMBAC Insured, Weekly VRDN and Put, 4.10%, 1/01/24 .................. 1,100,000 1,100,000
Uinta County PCR, Refunding, Chevron USA Inc. Proj., Letter of Credit from
Chevron Corp., Daily VRDN and Put, 4.10%, 8/15/20 ......................................... 2,400,000 2,400,000
--------------
Total Short Term Investments (Cost $6,600,000) ............................................ 6,600,000
--------------
Total Investments (Cost $6,487,935,647) 97.5% ............................................. 6,980,566,003
Other Assets, less Liabilities 2.5% ....................................................... 177,589,587
---------------
Net Assets 100.0% ......................................................................... $7,158,155,590
===============
</TABLE>
See glossary of terms on page 39.
aVariable rate demand notes (VRDNs) are tax-exempt obligations which contain a
floating or variable interest rate adjustment formula and an unconditional right
of demand to receive payment of the principal balance plus accrued interest at
specified dates. bSufficient collateral has been segregated for securities
traded on a when-issued or delayed delivery basis.
FRANKLIN FEDERAL TAX-FREE INCOME FUND Statement of Investments, April 30, 1998
(cont.)
Glossary of Terms
AMBAC - American Municipal Bond Assurance Corp.
BIG - Bond Investors Guaranty Insurance Co. (Acquired by MBIA in 1989 and no
longer does business under this name.)
CDA - Community Development Authority/Agency
COP - Certificate of Participation
CRDA - Community Redevelopment Authority/Agency
EDA - Economic Development Authority
EDC - Economic Development Corp.
EDR - Economic Development Revenue
ETM - Escrow to Maturity
FGIC - Financial Guaranty Insurance Co.
FHA - Federal Housing Authority/Agency
FI/GML - Federally Insured or Guaranteed Mortgage Loans
FSA - Financial Security Assistance (Some of the securities shown as FSA
Insured were originally insured by Capital Guaranty Insurance Co.
(CGIC) which was acquired by FSA in 1995 and no longer does business
under this name.)
GNMA - Government National Mortgage Association
GO - General Obligation
HDA - Housing Development Authority/Agency
HFA - Housing Finance Authority/Agency
HFC - Housing Finance Corp.
IDA - Industrial Development Authority/Agency
IDB - Industrial Development Board
IDC - Industrial Development Corp.
IDBR - Industrial Development Board Revenue
IDR - Industrial Development Revenue
IPC - Industrial Pollution Control
ISD - Independent School District
L.P. - Limited Partnership
MBIA - Municipal Bond Investors Assurance Corp.
MBS - Mortgage-Backed Securities
MF - Multi-Family
MFHR - Multi-Family Housing Revenue
MFMR - Multi-Family Mortgage Revenue
MFR - Multi-Family Revenue
MTA - Metropolitan Transit Authority
PCR - Pollution Control Revenue
PUD - Public Utility District
RDA - Redevelopment Authority/Agency
RMR - Residential Mortgage Revenue
SF - Single Family
SFM - Single Family Mortgage
SFMR - Single Family Mortgage Revenue
SFR - Single Family Revenue
USD - Unified School District
FRANKLIN FEDERAL TAX-FREE INCOME FUND
Financial Statements
<TABLE>
<CAPTION>
Statement of Assets and Liabilities
April 30, 1998
Assets:
<S> <C>
Investments in securities, at value (cost $6,487,935,647) $6,980,566,003
Cash 54,436,058
Receivables:
Investment securities sold 87,160,955
Capital shares sold 5,931,810
Interest 128,792,746
------------
Total assets 7,256,887,572
-------------
Liabilities:
Payables:
Investment securities purchased 81,326,565
Capital shares redeemed 4,225,826
Affiliates 4,405,693
Shareholders 8,447,610
Other liabilities 326,288
--------------
Total liabilities 98,731,982
--------------
Net assets, at value $7,158,155,590
==============
Net assets consist of:
Undistributed net investment income $ 5,570,212
Net unrealized appreciation 492,630,356
Accumulated net realized loss (25,878,831)
Capital shares 6,685,833,853
--------------
Net assets, at value $7,158,155,590
==============
Class I:
Net asset value per share ($7,022,960,760 / 573,422,438 shares outstanding)* $12.25
==============
Maximum offering price per share ($12.25 / 95.75%) $12.79
==============
Class II:
Net asset value per share ($135,194,830 / 11,042,906 shares outstanding)* $12.24
==============
Maximum offering price per share ($12.24 / 99%) $12.36
==============
</TABLE>
*Redemption price is equal to net asset value less any applicable contingent
deferred sales charge.
Statements of Operations (cont.)
for the year ended April 30, 1998
Investment income:
Interest $447,218,775
--------------
Expenses:
Management fees (Note 3) $32,368,130
Distribution fees (Note 3)
Class I 5,098,992
Class II 660,809
Transfer agent fees (Note 3) 2,646,361
Custodian fees 74,874
Reports to shareholders 778,124
Registration and filing fees 201,388
Professional fees 127,345
Directors' fees and expenses 132,568
Other 274,853
-----------
Total expenses 42,363,444
--------------
Net investment income 404,855,331
--------------
Realized and unrealized gains:
Net realized gain from investments 42,732,886
Net unrealized appreciation on investments 156,385,279
--------------
Net realized and unrealized gain 199,118,165
--------------
Net increase in net assets resulting from operations $603,973,496
==============
Statements of Changes in Net Assets
for the years ended April 30, 1998 and 1997
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
- --------------------------------------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income $ 404,855,331 $ 422,168,480
Net realized gain (loss) from investments 42,732,886 (3,427,474)
Net unrealized appreciation on investments 156,385,279 44,923,895
---------------------------
Net increase in net assets resulting from operations 603,973,496 463,664,901
Distributions to shareholders from:
Net investment income:
Class I (396,082,048) (418,463,139)
Class II (5,046,130) (2,758,091)
--------------------------------
Total distributions to shareholders (401,128,178) (421,221,230)
Capital share transactions: (Note 2)
Class I (83,120,865) (149,230,534)
Class II 60,999,749 37,508,022
-------------------------------
Total capital share transactions (22,121,116) (111,722,512)
Net increase (decrease) in net assets . 180,724,202 (69,278,841)
Net assets:
Beginning of year 6,977,431,388 7,046,710,229
-------------------------------
End of year $7,158,155,590 $6,977,431,388
===============================
Undistributed net investment income included in net assets
End of year $ 5,570,212 $ 1,843,059
===============================
</TABLE>
FRANKLIN FEDERAL TAX-FREE INCOME FUND
Notes to Financial Statements
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Federal Tax-Free Income Fund (the Fund) is registered under the
Investment Company Act of 1940 as a diversified, open-end investment company.
The Fund seeks to provide tax-free income. The following summarizes the Fund's
significant accounting policies.
a. Security Valuation
Tax-free bonds generally trade in the over-the-counter market and are valued
within the range of the latest quoted bid and asked prices. In the absence of a
sale or reported bid and asked prices, information with respect to bond and note
transactions, quotations from bond dealers, market transactions in comparable
securities, and various relationships between securities are used to determine
the value of the security. 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 Directors. Securities for
which market quotations are not readily available are valued at fair value as
determined by management in accordance with procedures established by the Board
of Directors.
b. Income Taxes
No provision has been made for income taxes because the Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and
distribute all of its taxable income.
c. Security Transactions, Investment Income, Expenses and Distributions
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Interest income and estimated expenses are accrued daily. Bond discount and
premium are amortized on an income tax basis. Distributions to shareholders are
recorded on the ex-dividend date.
Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class.
d. 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.
2. CAPITAL STOCK
The Fund offers two classes of shares: Class I and Class II. The shares have the
same rights except for their initial sales load, distribution fees, voting
rights on matters affecting a single class and the exchange privilege of each
class.
At April 30, 1998, there were 10 billion shares of no par value stock
authorized, of which 3 billion each were designated as Class I and Class II.
Transactions in the Fund's shares were as follows:
<TABLE>
<CAPTION>
Year Ended April 30,
------------------------------------------------------------
1998 1997
------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------------
Class I Shares:
<S> <C> <C> <C> <C>
Shares sold 114,214,913 $1,390,939,797 82,507,276 $ 981,902,405
Shares issued in reinvestment of distributions 13,093,027 159,083,079 13,756,253 163,131,977
Shares redeemed (134,063,708) (1,633,143,741) (108,778,728) (1,294,264,916)
--------------------------------------------------------------
Net decrease (6,755,768) $ (83,120,865) (12,515,199) $ (149,230,534)
==============================================================
Class II Shares:
Shares sold 5,941,310 $ 72,517,830 3,562,296 $ 42,300,025
Shares issued in reinvestment of distributions 259,109 3,154,246 144,321 1,713,499
Shares redeemed (1,202,566) (14,672,327) (546,174) (6,505,502)
--------------------------------------------------------------
Net increase 4,997,853 $ 60,999,749 3,160,443 $ 37,508,022
==============================================================
</TABLE>
3. TRANSACTIONS WITH AFFILIATES
Certain officers and directors of the Fund are also officers or directors of
Franklin/Templeton Distributors, Inc. (Distributors), Franklin Advisers, Inc.
(Advisers), Franklin/Templeton Investor Services, Inc. (Investor Services), and
Franklin Templeton Services, Inc. (FT Services), the Fund's principal
underwriter, investment manager, transfer agent, and administrative manager,
respectively.
The Fund pays an investment management fee to Advisers based on the average net
assets of the Fund as follows:
ANNUALIZED FEE RATE MONTH-END NET ASSETS
--------------------------------------------------------------------
0.625% First $100 million
0.50% Over $100 million, up to and including $250 million
0.45% Over $250 million, up to and including $10 billion
Fees are further reduced on net assets over $10 billion.
Under an agreement with Advisers, FT Services provides administrative services
to the Fund. The fee is paid by Advisers based on average daily net assets, and
is not an additional expense of the Fund.
The Fund reimburses Distributors up to 0.10% and 0.65% per year of the average
daily net assets of Class I and Class II, respectively, for costs incurred in
marketing the Fund's shares.
Distributors paid net commissions on sales of the Fund shares, and received
contingent deferred sales charges for the year of $977,359 and $23,704,
respectively.
The Fund paid transfer agent fees of $2,646,361, of which $2,428,103 was paid to
Investor Services.
4. INCOME TAXES
At April 30, 1998, the Fund had tax basis capital losses of $25,878,831 which
may be carried over to offset future capital gains. Such losses expire as
follows:
Capital loss carryovers expiring in: 2003....... $22,451,357
2005....... 3,427,474
-------------
$25,878,831
=============
At April 30, 1998, the net unrealized appreciation based on the cost of
investments for income tax purposes of $492,630,356 was as follows:
Unrealized appreciation............. $498,531,208
Unrealized depreciation............. (5,900,852)
-------------
Net unrealized appreciation......... $492,630,356
=============
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the year
ended April 30, 1998 aggregated $1,014,522,038 and $1,095,776,729, respectively.
6. CREDIT RISK
The Fund has investments in excess of 10% of its total net assets in the state
of New York. Such concentration may subject the Fund more significantly to
economic changes occurring within that state.
FRANKLIN FEDERAL TAX-FREE INCOME FUND
Independent Auditors' Report
To the Shareholders and Board of Directors
Of the Franklin Federal Tax-Free Income Fund
We have audited the accompanying statement of assets and liabilities of the
Franklin Federal Tax-Free Income Fund, including the Fund's statement of
investments as of April 30, 1998, and the related statement of operations 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 April
30, 1998, 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 the
Fund as of April 30, 1998, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended, and its financial highlights for each of the periods presented, in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
San Francisco, California
June 3, 1998
FRANKLIN FEDERAL TAX-FREE INCOME FUND
Tax Information
Under Section 852(b)(5)(A) of the Internal Revenue Code, the Fund hereby
designates 100% of the distributions paid from net investment income as
exempt-interest dividends for the fiscal year ended April 30, 1998.
Franklin Federal Tax-Free Income Fund
Annual Report
April 30, 1998.
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 credit quality breakdown of the Franklin
Federal Tax-Free Income Fund based on total long-term investments as of
4/30/98.
AAA 37.3%
AA 13.9%
A 20.0%
BBB 25.8%
Below Investment Grade 3.0%
GRAPHIC MATERIAL (2)
This chart shows the portfolio breakdown by sector based on the percentage of
total long-term investments on 4/30/98 for the Franklin Federal Tax-Free
Income Fund.
Utilities 25.2%
Housing 13.8%
Prerefunded 13.8%
Transportation 12.7%
General Obligation 9.1%
Hospitals 8.1%
Industrial 5.7%
Other Revenue 4.1%
Education 2.8%
Certificates of Participation 2.5%
Health Care 1.5%
Tax Allocation 0.6%
Sales Tax 0.1%
GRAPHIC MATERIAL (3)
This map shows the top three state holdings of the Franklin Federal Tax-Free
Income Fund based on total market value on 4/30/98.
New York 17.2%
Illinois 7.1%
Texas 7.0%
GRAPHIC MATERIAL (4)
This chart shows the dividend distributions for Franklin Federal Tax-Free
Income Fund's Class I from 5/1/97 to 4/30/98.
May 5.8 cents
June 5.8 cents
July 5.8 cents
August 5.8 cents
September 5.8 cents
October 5.8 cents
November 5.8 cents
December 5.8 cents
January 5.6 cents
February 5.6 cents
March 5.6 cents
April 5.6 cents
Total 68.8 cents
GRAPHIC MATERIAL (5)
This chart shows in bar format the comparison between Franklin Federal
Tax-Free Income Fund's Class I distribution rate of 5.25% and the taxable
equivalent rate of 8.69% on 4/30/98.
GRAPHIC MATERIAL (6)
The following line graph compares the performance of the Franklin Federal
Tax-Free Income Fund's Class I shares to that of the Lehman Brothers
Municipal Bond Index, and to the Consumer Price Index based on a $10,000
investment from 5/1/88 to 4/30/98.
Date Franklin Federal Tax-Free Lehman Brothers CPI
Income Fund-Class I Municipal Bond
Index
5/1/88 9,572 10,000 10,000
5/31/88 9,614 -0.29% 9,971 0.34% 10,034
6/30/88 9,805 1.46% 10,117 0.43% 10,077
7/31/88 9,847 0.65% 10,182 0.42% 10,119
8/31/88 9,916 0.09% 10,191 0.42% 10,162
9/30/88 10,148 1.81% 10,376 0.67% 10,230
10/31/88 10,381 1.76% 10,559 0.33% 10,264
11/30/88 10,269 -0.92% 10,461 0.08% 10,272
12/31/88 10,441 1.02% 10,568 0.17% 10,289
1/31/89 10,606 2.07% 10,787 0.50% 10,341
2/28/89 10,537 -1.14% 10,664 0.41% 10,383
3/31/89 10,510 -0.24% 10,638 0.58% 10,444
4/30/89 10,729 2.37% 10,890 0.65% 10,511
5/31/89 10,911 2.08% 11,117 0.57% 10,571
6/30/89 11,036 1.36% 11,268 0.24% 10,597
7/31/89 11,114 1.36% 11,421 0.24% 10,622
8/31/89 11,076 -0.98% 11,310 0.16% 10,639
9/30/89 11,028 -0.30% 11,276 0.32% 10,673
10/31/89 11,127 1.22% 11,413 0.48% 10,724
11/30/89 11,286 1.75% 11,613 0.24% 10,750
12/31/89 11,387 0.82% 11,708 0.16% 10,767
1/31/90 11,308 -0.47% 11,653 1.03% 10,878
2/28/90 11,440 0.89% 11,757 0.47% 10,929
3/31/90 11,410 0.03% 11,760 0.55% 10,990
4/30/90 11,309 -0.72% 11,676 0.16% 11,007
5/31/90 11,588 2.18% 11,930 0.23% 11,032
6/30/90 11,692 0.88% 12,035 0.54% 11,092
7/31/90 11,890 1.48% 12,213 0.38% 11,134
8/31/90 11,671 -1.45% 12,036 0.92% 11,237
9/30/90 11,641 0.06% 12,043 0.84% 11,331
10/31/90 11,769 1.81% 12,261 0.60% 11,399
11/30/90 12,004 2.01% 12,508 0.22% 11,424
12/31/90 12,016 0.44% 12,563 0.00% 11,424
1/31/91 12,211 1.34% 12,731 0.60% 11,493
2/28/91 12,266 0.87% 12,842 0.15% 11,510
3/31/91 12,333 0.04% 12,847 0.15% 11,527
4/30/91 12,554 1.34% 13,019 0.15% 11,544
5/31/91 12,644 0.89% 13,135 0.30% 11,579
6/30/91 12,667 -0.10% 13,122 0.29% 11,613
7/31/91 12,870 1.22% 13,282 0.15% 11,630
8/31/91 12,995 1.32% 13,457 0.29% 11,664
9/30/91 13,190 1.30% 13,632 0.44% 11,715
10/31/91 13,270 0.90% 13,755 0.15% 11,733
11/30/91 13,341 0.28% 13,794 0.29% 11,767
12/31/91 13,606 2.15% 14,090 0.07% 11,775
1/31/92 13,639 0.23% 14,123 0.15% 11,793
2/29/92 13,650 0.03% 14,127 0.36% 11,835
3/31/92 13,708 0.04% 14,132 0.51% 11,895
4/30/92 13,837 0.89% 14,258 0.14% 11,912
5/31/92 14,038 1.18% 14,426 0.14% 11,929
6/30/92 14,240 1.68% 14,669 0.36% 11,972
7/31/92 14,721 3.00% 15,109 0.21% 11,997
8/31/92 14,526 -0.98% 14,961 0.28% 12,030
9/30/92 14,537 0.65% 15,058 0.28% 12,064
10/31/92 14,339 -0.98% 14,910 0.35% 12,106
11/30/92 14,683 1.79% 15,177 0.14% 12,123
12/31/92 14,905 1.02% 15,332 -0.07% 12,115
1/31/93 15,087 1.16% 15,510 0.49% 12,174
2/28/93 15,471 3.62% 16,072 0.35% 12,217
3/31/93 15,403 -1.06% 15,901 0.35% 12,259
4/30/93 15,524 1.01% 16,062 0.28% 12,294
5/31/93 15,621 0.56% 16,152 0.14% 12,311
6/30/93 15,872 1.67% 16,421 0.14% 12,328
7/31/93 15,893 0.13% 16,443 0.00% 12,328
8/31/93 16,160 2.08% 16,785 0.28% 12,363
9/30/93 16,324 1.14% 16,976 0.21% 12,389
10/31/93 16,356 0.19% 17,008 0.41% 12,440
11/30/93 16,284 -0.88% 16,859 0.07% 12,448
12/31/93 16,582 2.11% 17,214 0.00% 12,448
1/31/94 16,721 1.14% 17,411 0.27% 12,482
2/28/94 16,434 -2.59% 16,960 0.34% 12,524
3/31/94 15,931 -4.07% 16,269 0.34% 12,567
4/30/94 15,966 0.85% 16,408 0.14% 12,584
5/31/94 16,082 0.87% 16,551 0.07% 12,593
6/30/94 16,019 -0.61% 16,450 0.34% 12,636
7/31/94 16,246 1.83% 16,751 0.27% 12,670
8/31/94 16,308 0.35% 16,809 0.40% 12,721
9/30/94 16,148 -1.47% 16,562 0.27% 12,755
10/31/94 15,918 -1.78% 16,267 0.07% 12,764
11/30/94 15,645 -1.81% 15,973 0.13% 12,781
12/31/94 15,962 2.20% 16,324 0.00% 12,781
1/31/95 16,367 2.86% 16,791 0.40% 12,832
2/28/95 16,761 2.91% 17,280 0.40% 12,883
3/31/95 16,897 1.15% 17,478 0.33% 12,926
4/30/95 16,957 0.12% 17,499 0.33% 12,968
5/31/95 17,353 3.19% 18,058 0.20% 12,994
6/30/95 17,297 -0.87% 17,901 0.20% 13,020
7/31/95 17,432 0.95% 18,071 0.00% 13,020
8/31/95 17,598 1.27% 18,300 0.26% 13,054
9/30/95 17,690 0.63% 18,415 0.20% 13,080
10/31/95 17,916 1.45% 18,682 0.33% 13,123
11/30/95 18,189 1.66% 18,993 -0.07% 13,114
12/31/95 18,373 0.96% 19,175 -0.07% 13,105
1/31/96 18,451 0.76% 19,321 0.59% 13,182
2/29/96 18,378 -0.68% 19,189 0.32% 13,225
3/31/96 18,213 -1.28% 18,944 0.52% 13,293
4/30/96 18,200 -0.28% 18,891 0.39% 13,345
5/31/96 18,219 -0.04% 18,883 0.19% 13,371
6/30/96 18,408 1.09% 19,089 0.06% 13,379
7/31/96 18,548 0.91% 19,263 0.19% 13,404
8/31/96 18,561 -0.02% 19,259 0.19% 13,429
9/30/96 18,797 1.40% 19,528 0.32% 13,472
10/31/96 18,985 1.13% 19,749 0.32% 13,515
11/30/96 19,270 1.83% 20,110 0.19% 13,541
12/31/96 19,237 -0.42% 20,026 0.00% 13,541
1/31/97 19,284 0.19% 20,064 0.32% 13,585
2/28/97 19,460 0.92% 20,249 0.31% 13,627
3/31/97 19,279 -1.33% 19,979 0.25% 13,661
4/30/97 19,439 0.84% 20,147 0.12% 13,677
5/31/97 19,682 1.51% 20,451 -0.06% 13,669
6/30/97 19,877 1.07% 20,670 0.12% 13,685
7/31/97 20,338 2.77% 21,243 0.12% 13,702
8/31/97 20,218 -0.94% 21,043 0.19% 13,728
9/30/97 20,449 1.19% 21,293 0.25% 13,762
10/31/97 20,580 0.64% 21,430 0.25% 13,796
11/30/97 20,695 0.59% 21,556 -0.06% 13,788
12/31/97 20,963 1.46% 21,871 -0.12% 13,772
1/31/98 21,126 1.03% 22,096 0.19% 13,798
2/28/98 21,154 0.03% 22,103 0.19% 13,824
3/31/98 21,199 0.09% 22,123 0.19% 13,850
4/30/98 21,174 -0.45% 22,023 0.18% 13,875
Total 111.74% 120.23% 38.75%
Return
GRAPHIC MATERIAL (7)
This chart shows in bar format the comparison between Franklin Federal
Tax-Free Income Fund's Class II distribution rate of 4.86% and the taxable
equivalent rate of 8.05% on 4/30/98.
GRAPHIC MATERIAL (8)
This chart shows the dividend distributions for Franklin Federal Tax-Free
Income Fund's Class II from 5/1/97 to 4/30/98.
May 5.21 cents
June 5.21 cents
July 5.27 cents
August 5.27 cents
September 5.27 cents
October 5.19 cents
November 5.19 cents
December 5.19 cents
January 5.00 cents
February 5.00 cents
March 5.00 cents
April 5.12 cents
Total 61.92 cents
GRAPHIC MATERIAL (9)
The following line graph compares the performance of the Franklin Federal
Tax-Free Income Fund's Class II shares to that of the Lehman Brothers
Municipal Bond Index, and to the Consumer Price Index based on a $10,000
investment from 5/1/95 to 4/30/98.
Date Franklin Federal Lehman Brothers CPI
Tax-Free Income Municipal Bond
Fund-Class II Index
5/1/95 9,898 10,000
10,000
5/31/95 10,127 3.19% 10,319 0.20% 10,020
6/30/95 10,090 -0.87% 10,229 0.20% 10,040
7/31/95 10,163 0.95% 10,326 0.00% 10,040
8/31/95 10,254 1.27% 10,458 0.26% 10,066
9/30/95 10,303 0.63% 10,523 0.20% 10,086
10/31/95 10,430 1.45% 10,676 0.33% 10,120
11/30/95 10,574 1.66% 10,853 -0.07% 10,112
12/31/95 10,685 0.96% 10,957 -0.07% 10,105
1/31/96 10,725 0.76% 11,041 0.59% 10,165
2/29/96 10,677 -0.68% 10,966 0.32% 10,198
3/31/96 10,576 -1.28% 10,825 0.52% 10,251
4/30/96 10,557 -0.28% 10,795 0.39% 10,291
5/31/96 10,563 -0.04% 10,791 0.19% 10,310
6/30/96 10,667 1.09% 10,908 0.06% 10,316
7/31/96 10,743 0.91% 11,008 0.19% 10,336
8/31/96 10,745 -0.02% 11,005 0.19% 10,356
9/30/96 10,885 1.40% 11,159 0.32% 10,389
10/31/96 10,989 1.13% 11,286 0.32% 10,422
11/30/96 11,140 1.83% 11,492 0.19% 10,442
12/31/96 11,124 -0.42% 11,444 0.00% 10,442
1/31/97 11,146 0.19% 11,466 0.32% 10,475
2/28/97 11,233 0.92% 11,571 0.31% 10,508
3/31/97 11,134 -1.33% 11,417 0.25% 10,534
4/30/97 11,220 0.84% 11,513 0.12% 10,547
5/31/97 11,355 1.51% 11,687 -0.06% 10,540
6/30/97 11,461 1.07% 11,812 0.12% 10,553
7/31/97 11,722 2.77% 12,139 0.12% 10,565
8/31/97 11,648 -0.94% 12,025 0.19% 10,586
9/30/97 11,766 1.19% 12,168 0.25% 10,612
10/31/97 11,835 0.64% 12,246 0.25% 10,639
11/30/97 11,905 0.59% 12,318 -0.06% 10,632
12/31/97 12,044 1.46% 12,498 -0.12% 10,619
1/31/98 12,142 1.03% 12,627 0.19% 10,640
2/28/98 12,151 0.03% 12,631 0.19% 10,660
3/31/98 12,171 0.09% 12,642 0.19% 10,680
4/30/98 12,143 -0.45% 12,585 0.18% 10,699
Total Return 21.43% 25.85% 6.99%
EVERY SHAREHOLDER'S VOTE IS IMPORTANT
PLEASE SIGN, DATE AND RETURN YOUR
PROXY TODAY
Please detach at perforation before mailing.
PROXY PROXY
SPECIAL SHAREHOLDERS' MEETING OF
FRANKLIN ARKANSAS MUNICIPAL BOND FUND
JUNE 23, 1999
The undersigned hereby revokes all previous proxies for his shares and
appoints Rupert H. Johnson, Jr., Harmon E. Burns, and Deborah R. Gatzek, and
each of them, proxies of the undersigned with full power of substitution to
vote all shares of Franklin Arkansas Municipal Bond Fund (the "Arkansas
Fund") that the undersigned is entitled to vote at the Arkansas Fund's
Special Meeting to be held at 777 Mariners Island Boulevard, San Mateo, CA
94404 at 1:30 p.m., Pacific time on June 23, 1999, including any adjournment
thereof, upon such business as may properly be brought before the Meeting.
IMPORTANT: PLEASE SEND IN YOUR PROXY TODAY.
YOU ARE URGED TO DATE AND SIGN THIS PROXY AND RETURN IT PROMPTLY. THIS WILL
SAVE THE EXPENSE OF FOLLOW-UP LETTERS TO SHAREHOLDERS WHO HAVE NOT RESPONDED.
NOTE: Please sign exactly as your name
appears on the proxy. If signing for
estates, trusts or corporations, title
or capacity should be stated. If shares
are held jointly, each holder must sign.
_______________________________________
Signature
_______________________________________
Signature
_______________________________________
Date
(Please see reverse side)
EVERY SHAREHOLDER'S VOTE IS IMPORTANT
PLEASE SIGN, DATE AND RETURN YOUR
PROXY TODAY
Please detach at perforation before mailing.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES OF THE FRANKLIN
MUNICIPAL SECURITIES TRUST, ON BEHALF OF ITS SERIES, FRANKLIN ARKANSAS
MUNICIPAL BOND FUND. IT WILL BE VOTED AS SPECIFIED. IF NO SPECIFICATION IS
MADE, THIS PROXY SHALL BE VOTED IN FAVOR OF PROPOSAL 1, REGARDING THE
REORGANIZATION OF THE FRANKLIN ARKANSAS MUNICIPAL BOND FUND PURSUANT TO THE
AGREEMENT AND PLAN OF REORGANIZATION WITH FRANKLIN FEDERAL TAX-FREE INCOME
FUND. IF ANY OTHER MATTERS PROPERLY COME BEFORE THE MEETING ABOUT WHICH THE
PROXYHOLDERS WERE NOT AWARE PRIOR TO THE TIME OF THE SOLICITATION,
AUTHORIZATION IS GIVEN THE PROXYHOLDERS TO VOTE IN ACCORDANCE WITH THE VIEWS
OF MANAGEMENT ON SUCH MATTERS. MANAGEMENT IS NOT AWARE OF ANY SUCH MATTERS.
THE BOARD OF TRUSTEES RECOMMENDS A VOTE FOR PROPOSAL 1.
1. To approve an Agreement and Plan of FOR AGAINST ABSTAIN
Reorganization by Franklin Municipal
Securities Trust, on behalf of its [_] [_] [_]
series, Franklin Arkansas Municipal
Bond Fund ("Arkansas Fund") and
Franklin Federal Tax-Free Income
Fund, that provides for the acquisition
of substantially all of the assets of
Arkansas Fund in exchange for shares
of Franklin Federal Tax-Free Income
Fund-Class A, the distribution of such
shares to the shareholders of Arkansas
Fund, and the dissolution of Arkansas
Fund (the "Reorganization").
2. To grant the proxyholders the authority GRANT WITHHOLD
to vote upon any other business which may
legally come before the Special Meeting [_] [_]
or any adjournment thereof.
IMPORTANT: PLEASE SIGN AND MAIL IN YOUR PROXY...TODAY
PLEASE SIGN AND PROMPTLY RETURN IN THE ACCOMPANYING ENVELOPE. NO POSTAGE
REQUIRED IF MAILED IN THE U.S.
EVERY SHAREHOLDER'S VOTE IS IMPORTANT
PLEASE SIGN, DATE AND RETURN YOUR
PROXY TODAY
Please detach at perforation before mailing.
PROXY PROXY
SPECIAL SHAREHOLDERS' MEETING OF
FRANKLIN HAWAII MUNICIPAL BOND FUND
JUNE 23, 1999
The undersigned hereby revokes all previous proxies for his shares and
appoints Rupert H. Johnson, Jr., Harmon E. Burns, and Deborah R. Gatzek, and
each of them, proxies of the undersigned with full power of substitution to
vote all shares of Franklin Hawaii Municipal Bond Fund (the "Hawaii Fund")
that the undersigned is entitled to vote at the Hawaii Fund's Special Meeting
to be held at 777 Mariners Island Boulevard, San Mateo, CA 94404 at 1:30
p.m., Pacific time on June 23, 1999, including any adjournment thereof, upon
such business as may properly be brought before the Meeting.
IMPORTANT: PLEASE SEND IN YOUR PROXY TODAY.
YOU ARE URGED TO DATE AND SIGN THIS PROXY AND RETURN IT PROMPTLY. THIS WILL
SAVE THE EXPENSE OF FOLLOW-UP LETTERS TO SHAREHOLDERS WHO HAVE NOT RESPONDED.
NOTE: Please sign exactly as your name
appears on the proxy. If signing for
estates, trusts or corporations, title
or capacity should be stated. If shares
are held jointly, each holder must sign.
_______________________________________
Signature
_______________________________________
Signature
_______________________________________
Date
(Please see reverse side)
EVERY SHAREHOLDER'S VOTE IS IMPORTANT
PLEASE SIGN, DATE AND RETURN YOUR
PROXY TODAY
Please detach at perforation before mailing.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES OF THE FRANKLIN
MUNICIPAL SECURITIES TRUST, ON BEHALF OF ITS SERIES, FRANKLIN HAWAII
MUNICIPAL BOND FUND. IT WILL BE VOTED AS SPECIFIED. IF NO SPECIFICATION IS
MADE, THIS PROXY SHALL BE VOTED IN FAVOR OF PROPOSAL 1, REGARDING THE
REORGANIZATION OF THE FRANKLIN HAWAII MUNICIPAL BOND FUND PURSUANT TO THE
AGREEMENT AND PLAN OF REORGANIZATION WITH FRANKLIN FEDERAL TAX-FREE INCOME
FUND. IF ANY OTHER MATTERS PROPERLY COME BEFORE THE MEETING ABOUT WHICH THE
PROXYHOLDERS WERE NOT AWARE PRIOR TO THE TIME OF THE SOLICITATION,
AUTHORIZATION IS GIVEN THE PROXYHOLDERS TO VOTE IN ACCORDANCE WITH THE VIEWS
OF MANAGEMENT ON SUCH MATTERS. MANAGEMENT IS NOT AWARE OF ANY SUCH MATTERS.
THE BOARD OF TRUSTEES RECOMMENDS A VOTE FOR PROPOSAL 1.
1. To approve an Agreement and Plan of FOR AGAINST ABSTAIN
Reorganization by Franklin Municipal
Securities Trust, on behalf of its [_] [_] [_]
series, Franklin Hawaii Municipal Bond
Fund ("Hawaii Fund") and Franklin
Federal Tax-Free Income Fund, that
provides for the acquisition of
substantially all of the assets of
Hawaii Fund in exchange for shares
of Franklin Federal Tax-Free Income
Fund-Class A, the distribution of such
shares to the shareholders of Hawaii
Fund, and the dissolution of Hawaii
Fund (the "Reorganization")
2. To grant the proxyholders the authority GRANT WITHHOLD
to vote upon any other business which may
legally come before the Special Meeting [_] [_]
of any adjournment thereof.
IMPORTANT: PLEASE SIGN AND MAIL IN YOUR PROXY...TODAY
PLEASE SIGN AND PROMPTLY RETURN IN THE ACCOMPANYING ENVELOPE. NO POSTAGE
REQUIRED IF MAILED IN THE U.S.
EVERY SHAREHOLDER'S VOTE IS IMPORTANT
PLEASE SIGN, DATE AND RETURN YOUR
PROXY TODAY
Please detach at perforation before mailing.
PROXY PROXY
SPECIAL SHAREHOLDERS' MEETING OF
FRANKLIN WASHINGTON MUNICIPAL BOND FUND
JUNE 23, 1999
The undersigned hereby revokes all previous proxies for his shares and
appoints Rupert H. Johnson, Jr., Harmon E. Burns, and Deborah R. Gatzek, and
each of them, proxies of the undersigned with full power of substitution to
vote all shares of Franklin Washington Municipal Bond Fund (the "Washington
Fund") that the undersigned is entitled to vote at the Washington Fund's
Special Meeting to be held at 777 Mariners Island Boulevard, San Mateo, CA
94404 at 1:30 p.m., Pacific time on June 23, 1999, including any adjournment
thereof, upon such business as may properly be brought before the Meeting.
IMPORTANT: PLEASE SEND IN YOUR PROXY TODAY.
YOU ARE URGED TO DATE AND SIGN THIS PROXY AND RETURN IT PROMPTLY. THIS WILL
SAVE THE EXPENSE OF FOLLOW-UP LETTERS TO SHAREHOLDERS WHO HAVE NOT RESPONDED.
NOTE: Please sign exactly as your name
appears on the proxy. If signing for
estates, trusts or corporations, title
or capacity should be stated. If shares
are held jointly, each holder must sign.
_______________________________________
Signature
_______________________________________
Signature
_______________________________________
Date
(Please see reverse side)
EVERY SHAREHOLDER'S VOTE IS IMPORTANT
PLEASE SIGN, DATE AND RETURN YOUR
PROXY TODAY
Please detach at perforation before mailing.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES OF THE FRANKLIN
MUNICIPAL SECURITIES TRUST, ON BEHALF OF ITS SERIES, FRANKLIN WASHINGTON
MUNICIPAL BOND FUND. IT WILL BE VOTED AS SPECIFIED. IF NO SPECIFICATION IS
MADE, THIS PROXY SHALL BE VOTED IN FAVOR OF PROPOSAL 1, REGARDING THE
REORGANIZATION OF THE FRANKLIN WASHINGTON MUNICIPAL BOND FUND PURSUANT TO THE
AGREEMENT AND PLAN OF REORGANIZATION WITH FRANKLIN FEDERAL TAX-FREE INCOME
FUND. IF ANY OTHER MATTERS PROPERLY COME BEFORE THE MEETING ABOUT WHICH THE
PROXYHOLDERS WERE NOT AWARE PRIOR TO THE TIME OF THE SOLICITATION,
AUTHORIZATION IS GIVEN THE PROXYHOLDERS TO VOTE IN ACCORDANCE WITH THE VIEWS
OF MANAGEMENT ON SUCH MATTERS. MANAGEMENT IS NOT AWARE OF ANY SUCH MATTERS.
THE BOARD OF TRUSTEES RECOMMENDS A VOTE FOR PROPOSAL 1.
1. To approve an Agreement and Plan of FOR AGAINST ABSTAIN
Reorganization by Franklin Municipal
Securities Trust, on behalf of its [_] [_] [_]
series, Franklin Washington Municipal
Bond Fund ("Washington Fund") and
Franklin Federal Tax-Free Income Fund,
that provides for the acquisition of
substantially all of the assets of
Washington Fund in exchange for shares
of Franklin Federal Tax-Free Income
Fund-Class A, the distribution of such
shares to the shareholders of Washington
Fund, and the dissolution of Washington
Fund (the "Reorganization").
2. To grant the proxyholders the authority GRANT WITHHOLD
to vote upon any other business which
may legally come before the Special [_] [_]
Meeting or any adjournment thereof.
IMPORTANT: PLEASE SIGN AND MAIL IN YOURPROXY...TODAY
PLEASE SIGN AND PROMPTLY RETURN IN THE ACCOMPANYING ENVELOPE. NO POSTAGE
REQUIRED IF MAILED IN THE U.S.
STATEMENT OF ADDITIONAL INFORMATION
FOR
FRANKLIN FEDERAL TAX-FREE INCOME FUND
Dated April 22, 1999
Acquisition of the Assets of the
FRANKLIN ARKANSAS MUNICIPAL BOND FUND,
FRANKLIN HAWAII MUNICIPAL BOND FUND and
FRANKLIN WASHINGTON MUNICIPAL BOND FUND
(each are series of Franklin Municipal Securities Trust)
By and in exchange for shares of the
FRANKLIN FEDERAL TAX-FREE INCOME FUND
This Statement of Additional Information (SAI) relates specifically to
the proposed delivery of substantially all of the assets of the Franklin
Arkansas Municipal Bond Fund, the Franklin Hawaii Municipal Bond Fund and the
Franklin Washington Municipal Bond Fund (together, the "Municipal Funds") for
Class A shares of Franklin Federal Tax-Free Income Fund.
This SAI consists of this Cover Page and the following documents. Each
of these documents is attached to and is legally considered to be a part of
this SAI:
1. Statement of Additional Information of Franklin Federal
Tax-Free Income Fund dated September 1, 1998, as supplemented
April 1, 1999
2. Semi-Annual Report of Franklin Federal Tax-Free Income Fund
for the fiscal period ended October 31, 1998.
3. Annual Report of Franklin Municipal Securities Trust
(relating to the Municipal Funds) for the fiscal year ended
May 31, 1998.
4. Semi-Annual Report of Franklin Municipal Securities Trust
(relating to the Municipal Funds) for the fiscal period ended
November 30, 1998.
This SAI is not a Prospectus; you should read this SAI in conjunction
with the Joint Prospectus/Proxy Statement dated April 22, 1999, relating to
the above-referenced transaction. You can request a copy of the Joint
Prospectus/Proxy Statement by calling 1-800/DIAL BEN(R) or by writing to
Franklin Federal Tax-Free Income Fund, 777 Mariners Island Boulevard, P.O.
Box 7777, San Mateo, CA 94403-7777.
o 116*SA1
- --------------------------------------------------------------------------------
SHARE CLASS REDESIGNATION
EFFECTIVE JANUARY 1, 1999
Class A - Formerly Class I
Class B - New Share Class
Class C - Formerly Class II
- --------------------------------------------------------------------------------
SUPPLEMENT DATED APRIL 1, 1999
TO THE STATEMENT OF ADDITIONAL INFORMATION OF
FRANKLIN FEDERAL TAX-FREE INCOME FUND
DATED SEPTEMBER 1, 1998
The Statement of Additional Information is amended as follows:
I. As of January 1, 1999, the fund offers three classes of shares: Class A,
Class B and Class C. Before January 1, 1999, Class A shares were designated
Class I and Class C shares were designated Class II. All references in the
Statement of Additional Information to Class I shares are replaced with Class A,
and all references to Class II shares are replaced with Class C.
II. The following is added to the "Officers and "Directors" section:
As of November 25, 1998, the officers and Board members, as a group, owned of
record and beneficially the following shares of the fund: approximately 68 Class
A shares, or less than 1% of the total outstanding Class A shares of the fund.
III. The first sentence in the section "Additional Information on Exchanging
Shares," found under "How Do I Buy, Sell and Exchange Shares?," is replaced with
the following:
If you request the exchange of the total value of your account, declared but
unpaid income dividends and capital gain distributions will be reinvested in the
fund and exchanged into the new fund at Net Asset Value when paid.
IV. The following is added to the section "Additional Information on Selling
Shares," found under "How Do I Buy, Sell and Exchange Shares?":
The contingent deferred sales charge will generally be waived for redemptions of
Class A shares by investors who purchased $1 million or more without an initial
sales charge if the Securities Dealer of record waived it commission in
connection with the purchase.
V. In the section "The Rule 12b-1 Plans," found under "The Fund's Underwriter,"
(a) the first sentence is replaced with the following:
Each class has a separate distribution or "Rule 12b-1" plan that was adopted
pursuant to Rule 12b-1 of the 1940 Act.
(b) the following paragraphs are added after the section "The Class I Plan":
THE CLASS B PLAN. Under the Class B plan, the fund pays Distributors up to 0.50%
per year of the class' average daily net assets, payable quarterly, to pay
Distributors or others for providing distribution and related services and
bearing certain expenses. All distribution expenses over this amount will be
borne by those who have incurred them. The fund may also pay a servicing fee of
up to 0.15% per year of the class' average daily net assets, payable quarterly.
This fee may be used to pay Securities Dealers or others for, among other
things, helping to establish and maintain customer accounts and records, helping
with requests to buy and sell shares, receiving and answering correspondence,
monitoring dividend payments from the fund on behalf of customers, and similar
servicing and account maintenance activities.
The expenses relating to the Class B plan are also used to pay Distributors for
advancing the commission costs to Securities Dealers with respect to the initial
sale of Class B shares. Further, the expenses relating to the Class B plan may
be used by Distributors to pay third party financing entities that have provided
financing to Distributors in connection with advancing commission costs to
Securities Dealers.
(c) and the section "The Class I and Class II Plans" is renamed "The Class A, B
and C Plans."
VI. Under "Miscellaneous Information,"
(a) the seventh paragraph is replaced with the following:
The fund offers three classes of shares: Franklin Federal Tax-Free Income Fund,
Franklin Federal Tax-Free Income Fund Series, Franklin Federal Tax-Free Income
Fund - Class A; Franklin Federal Tax-Free Income Fund, Franklin Federal Tax-Free
Income Fund Series, Franklin Federal Tax-Free Income Fund - Class B; and
Franklin Federal Tax-Free Income Fund, Franklin Federal Tax-Free Income Fund
Series, Franklin Federal Tax-Free Income Fund - Class C.
(b) and the following is added:
The Information Services & Technology division of Resources established a Year
2000 Project Team in 1996. This team has already begun making necessary software
changes to help the computer systems that service the fund and its shareholders
to be Year 2000 compliant. After completing these modifications, comprehensive
tests are conducted in one of Resources' U.S. test labs to verify their
effectiveness. Resources continues to seek reasonable assurances from all major
hardware, software or data-services suppliers that they will be Year 2000
compliant on a timely basis. Resources is also beginning to develop a
contingency plan, including identification of those mission critical systems for
which it is practical to develop a contingency plan. However, in an operation as
complex and geographically distributed as Resources' business, the alternatives
to use of normal systems, especially mission critical systems, or supplies of
electricity or long distance voice and data lines are limited.
VII. In the "Useful Terms and Definitions" section, the definitions of "Class I
and Class II" and "Offering Price" are replaced with the following:
CLASS A, CLASS B AND CLASS C - The fund offers three classes of shares,
designated "Class A," "Class B" and "Class C." The three classes have
proportionate interests in the fund's portfolio. They differ, however, primarily
in their sales charge structures and Rule 12b-1 plans.
OFFERING PRICE - The public offering price is based on the Net Asset Value per
share of the class and includes the front-end sales charge. The maximum
front-end sales charge is 4.25% for Class A and 1% for Class C. There is no
front-end sales charge for Class B. We calculate the offering price to two
decimal places using standard rounding criteria.
Please keep this supplement for future reference.
FRANKLIN
FEDERAL TAX-FREE
INCOME FUND
STATEMENT OF
ADDITIONAL INFORMATION
SEPTEMBER 1, 1998
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/DIAL BEN(R)
TABLE OF CONTENTS
How Does the Fund
Invest Its Assets? ........................................... 2
Investment Restrictions ....................................... 5
Officers and Directors ........................................ 6
Investment Management
and Other Services ........................................... 10
How Does the Fund Buy
Securities for Its Portfolio? ................................ 11
How Do I Buy, Sell
and Exchange Shares? ......................................... 12
How Are Fund Shares Valued?.................................... 14
Additional Information on
Distributions and Taxes ...................................... 15
The Fund's Underwriter ........................................ 18
How Does the Fund
Measure Performance? ......................................... 19
Miscellaneous Information ..................................... 22
Financial Statements .......................................... 23
Useful Terms and Definitions .................................. 23
Appendix
Description of Ratings ....................................... 24
- --------------------------------------------------------------------------------
When reading this SAI, you will see certain terms beginning with capital
letters. This means the term is explained under "Useful Terms and Definitions."
- --------------------------------------------------------------------------------
The fund is a diversified, open-end management investment company. The
Prospectus, dated September 1, 1998, which we may amend from time to time,
contains the basic information you should know before investing in the fund.
For a free copy, call 1-800/DIAL BEN.
THIS SAI IS NOT A PROSPECTUS. IT CONTAINS INFORMATION IN ADDITION TO AND IN
MORE DETAIL THAN SET FORTH IN THE PROSPECTUS. THIS SAI IS INTENDED TO PROVIDE
YOU WITH ADDITIONAL INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF
THE FUND, AND SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS.
- --------------------------------------------------------------------------------
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
O ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
O ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK;
O ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
- --------------------------------------------------------------------------------
HOW DOES THE FUND INVEST ITS ASSETS?
WHAT IS THE FUND'S GOAL?
The investment goal of the fund is to provide investors with as high a level
of interest income exempt from federal income taxes as is consistent with
prudent investing, while seeking preservation of shareholders' capital. This
goal is fundamental, which means that it may not be changed without
shareholder approval.
The following gives more detailed information about the fund's investment
policies and the types of securities that it may buy. Please read this
information together with the section "How Does the Fund Invest Its Assets?"
in the Prospectus.
MORE INFORMATION ABOUT
THE KINDS OF SECURITIES THE FUND BUYS
The fund tries to achieve its investment goal by attempting to invest all of
its assets in tax-free municipal securities. The issuer's bond counsel
generally gives the issuer an opinion on the tax-exempt status of a municipal
security when the security is issued.
Below is a description of various types of municipal and other securities
that the fund may buy. Other types of municipal securities may become
available that are similar to those described below and in which the fund may
also invest, if consistent with its investment goal and policies.
TAX ANTICIPATION NOTES are issued to finance short-term working capital needs
of municipalities in anticipation of various seasonal tax revenues, which
will be used to pay the notes. They are usually general obligations of the
issuer, secured by the taxing power for the payment of principal and interest.
REVENUE ANTICIPATION NOTES are similar to tax anticipation notes except they
are issued in expectation of the receipt of other kinds of revenue, such as
federal revenues available under the Federal Revenue Sharing Program.
BOND ANTICIPATION NOTES are normally issued to provide interim financing
until long-term financing can be arranged. Proceeds from long-term bond
issues then provide the money for the repayment of the notes.
CONSTRUCTION LOAN NOTES are issued to provide construction financing for
specific projects. After successful completion and acceptance, many projects
receive permanent financing through the Federal Housing Administration under
the Federal National Mortgage Association or the Government National Mortgage
Association.
TAX-EXEMPT COMMERCIAL PAPER typically represents a short-term obligation (270
days or less) issued by a municipality to meet working capital needs.
MUNICIPAL BONDS meet longer-term capital needs and generally have maturities
from one to 30 years when issued. They have two principal classifications:
general obligation bonds and revenue bonds.
GENERAL OBLIGATION BONDS. Issuers of general obligation bonds include states,
counties, cities, towns and regional districts. The proceeds of these
obligations are used to fund a wide range of public projects, including
construction or improvement of schools, highways and roads. The basic
security behind general obligation bonds is the issuer's pledge of its full
faith, credit and taxing power for the payment of principal and interest. The
taxes that can be levied for the payment of debt service may be limited or
unlimited as to the rate or amount of special assessments.
REVENUE BONDS. The full faith, credit and taxing power of the issuer do not
secure revenue bonds. Instead, the principal security for a revenue bond is
generally the net revenue derived from a particular facility, group of
facilities, or, in some cases, the proceeds of a special excise tax or other
specific revenue source. Revenue bonds are issued to finance a wide variety
of capital projects, including: electric, gas, water and sewer systems;
highways, bridges and tunnels; port and airport facilities; colleges and
universities; and hospitals. The principal security behind these bonds may
vary. For example, housing finance authorities have a wide range of security,
including partially or fully insured mortgages, rent subsidized and/or
collateralized mortgages, and/or the net revenues from housing or other
public projects. Many bonds provide additional security in the form of a debt
service reserve fund that may be used to make principal and interest
payments. Some authorities have further security in the form of state
assurances (although without obligation) to make up deficiencies in the debt
service reserve fund.
TAX-EXEMPT INDUSTRIAL DEVELOPMENT REVENUE BONDS are issued by or on behalf of
public authorities to finance various privately operated facilities for
business, manufacturing, housing, sports and pollution control, as well as
public facilities such as airports, mass transit systems, ports and parking.
The payment of principal and interest is solely dependent on the ability of
the facility's user to meet its financial obligations and the pledge, if any,
of the facility or other property as security for payment.
VARIABLE OR FLOATING RATE SECURITIES. The fund may invest in variable or
floating rate securities, including variable rate demand notes, which have
interest rates that change either at specific intervals (variable rate), from
daily up to monthly, or whenever a benchmark rate changes (floating rate).
The interest rate adjustments are designed to help stabilize the security's
price. Variable or floating rate securities may include a demand feature,
which may be unconditional. The demand feature allows the holder to demand
prepayment of the principal amount before maturity, generally on no more than
30 days' notice. The holder receives the principal amount plus any accrued
interest either from the issuer or by drawing on a bank letter of credit, a
guarantee or insurance issued with respect to the security.
MUNICIPAL LEASE OBLIGATIONS. The fund may invest in municipal lease
obligations, including certificates of participation. The Board reviews the
fund's municipal lease obligations to assure that they are liquid investments
based on various factors reviewed by Advisers and monitored by the Board.
These factors include (a) the credit quality of the obligations and the
extent to which they are rated or, if unrated, comply with existing criteria
and procedures followed to ensure that they are comparable in quality to the
ratings required for the fund to invest, including an assessment of the
likelihood of the lease being canceled, taking into account how essential the
leased property is and the term of the lease compared to the useful life of
the leased property; (b) the size of the municipal securities market, both in
general and with respect to municipal lease obligations; and (c) the extent
to which the type of municipal lease obligations held by the fund trade on
the same basis and with the same degree of dealer participation as other
municipal securities of comparable credit rating or quality.
Since annual appropriations are required to make lease payments, municipal
lease obligations generally are not subject to constitutional limitations on
the issuance of debt and may allow an issuer to increase government
liabilities beyond constitutional debt limits. When faced with increasingly
tight budgets, local governments have more discretion to curtail lease
payments under a municipal lease obligation than they do to curtail payments
on other municipal securities. If not enough money is appropriated to make
the lease payments, the leased property may be repossessed as security for
holders of the municipal lease obligations. If this happens, there is no
assurance that the property's private sector or re-leasing value will be
enough to make all outstanding payments on the municipal lease obligations or
that the payments will continue to be tax-free.
While cancellation risk is inherent to municipal lease obligations, the fund
believes that this risk may be reduced, although not eliminated, by its
policies on the quality of securities in which it may invest. Keeping in mind
that the fund can invest in municipal lease obligations without percentage
limits, as of April 30, 1998, the fund held 6.58% of its net assets in
municipal lease obligations.
CALLABLE BONDS. The fund may invest in callable bonds, which allow the issuer
to repay some or all of the bonds ahead of schedule. If a bond is called, the
fund will receive the principal amount, the accrued interest, and a small
additional payment as a call premium. Advisers may sell a callable bond
before its call date, if it believes the bond is at its maximum premium
potential.
An issuer is more likely to call its bonds when interest rates are falling,
because the issuer can issue new bonds with lower interest payments. If a
bond is called, the fund may have to replace it with a lower-yielding
security. If the fund originally paid a premium for the bond because it had
appreciated in value from its original issue price, the fund also may not be
able to recover the full amount it paid for the bond. One way for the fund to
protect itself from call risk is to buy bonds with call protection. Call
protection is an assurance that the bond will not be called for a specific
time period, typically five to 10 years from when the bond is issued.
When pricing callable bonds, each bond is marked-to-market daily based on the
bond's call date. Thus, the call of some or all of the fund's callable bonds
may impact the fund's Net Asset Value. Based on a number of factors,
including certain portfolio management strategies used by Advisers, the fund
believes it has reduced the risk of an adverse impact on its Net Asset Value
from calls of callable bonds. In light of the fund's pricing policies and
certain amortization procedures required by the IRS, the fund does not expect
to suffer any material adverse impact related to the value at which it has
carried the bonds in connection with calls of bonds purchased at a premium.
As with any investment strategy, however, there is no guarantee that a call
may not have a more substantial impact than anticipated.
ESCROW-SECURED OR DEFEASED BONDS are created when an issuer refunds, before
maturity, an outstanding bond issue that is not immediately callable (or
pre-refunds), and sets aside funds for redemption of the bonds at a future
date. The issuer uses the proceeds from a new bond issue to buy high grade,
interest bearing debt securities, generally direct obligations of the U.S.
government. These securities are then deposited in an irrevocable escrow
account held by a trustee bank to secure all future payments of principal and
interest on the pre-refunded bond. Escrow-secured bonds often receive a
triple A or equivalent rating from Fitch, Moody's or S&P.
STRIPPED MUNICIPAL SECURITIES. Municipal securities may be sold in "stripped"
form. Stripped municipal securities represent separate ownership of principal
and interest payments on municipal securities.
ZERO-COUPON SECURITIES. The fund may invest in zero-coupon and delayed
interest securities. Zero-coupon securities make no periodic interest
payments, but are sold at a deep discount from their face value. The buyer
recognizes a rate of return determined by the gradual appreciation of the
security, which is redeemed at face value on a specified maturity date. The
discount varies depending on the time remaining until maturity, as well as
market interest rates, liquidity of the security, and the issuer's perceived
credit quality. The discount, in the absence of financial difficulties of the
issuer, typically decreases as the final maturity date approaches. If the
issuer defaults, the fund may not receive any return on its investment.
Because zero-coupon securities bear no interest and compound semiannually at
the rate fixed at the time of issuance, their value is generally more
volatile than the value of other fixed-income securities. Since zero-coupon
bondholders do not receive interest payments, zero-coupon securities fall
more dramatically than bonds paying interest on a current basis when interest
rates rise. When interest rates fall, zero-coupon securities rise more
rapidly in value, because the bonds reflect a fixed rate of return.
An investment in zero-coupon and delayed interest securities may cause the
fund to recognize income and make distributions to shareholders before it
receives any cash payments on its investment. To generate cash to satisfy
distribution requirements, the fund may have to sell portfolio securities
that it otherwise would have continued to hold or to use cash flows from
other sources such as the sale of fund shares.
CONVERTIBLE AND STEP COUPON BONDS. The fund may invest a portion of its
assets in convertible and step coupon bonds. Convertible bonds are
zero-coupon securities until a predetermined date, at which time they convert
to a specified coupon security. The coupon on step coupon bonds changes
periodically during the life of the security based on predetermined dates
chosen when the security is issued.
U.S. GOVERNMENT OBLIGATIONS are issued by the U.S. Treasury or by agencies
and instrumentalities of the U.S. government and are backed by the full faith
and credit of the U.S. government. They include Treasury bills, notes and
bonds.
COMMERCIAL PAPER is a promissory note issued by a corporation to finance its
short-term credit needs. The fund may invest in taxable commercial paper only
for temporary defensive purposes.
MORE INFORMATION ABOUT SOME OF THE FUND'S OTHER INVESTMENT STRATEGIES AND
PRACTICES
WHEN-ISSUED TRANSACTIONS. Municipal securities are frequently offered on a
"when-issued" basis. When so offered, the price, which is generally expressed
in yield terms, is fixed at the time the commitment to buy is made, but
delivery and payment take place at a later date. During the time between
purchase and settlement, no payment is made by the fund to the issuer and no
interest accrues to the fund. If the other party to the transaction fails to
deliver or pay for the security, the fund could miss a favorable price or
yield opportunity, or could experience a loss.
When the fund makes the commitment to buy a municipal security on a
when-issued basis, it records the transaction and reflects the value of the
security in the determination of its Net Asset Value. The fund believes that
its Net Asset Value or income will not be negatively affected by its purchase
of municipal securities on a when-issued basis. The fund will not engage in
when-issued transactions for investment leverage purposes.
Although the fund will generally buy municipal securities on a when-issued
basis with the intention of acquiring the securities, it may sell the
securities before the settlement date if it is considered advisable. When the
fund is the buyer, it will maintain cash or liquid securities, with an
aggregate value equal to the amount of its purchase commitments, in a
segregated account with its custodian bank until payment is made. If assets
of the fund are held in cash pending the settlement of a purchase of
securities, the fund will not earn income on those assets.
ILLIQUID INVESTMENTS. The fund may invest up to 10% of its net assets in
illiquid securities. Illiquid securities are generally securities that cannot
be sold within seven days in the normal course of business at approximately
the amount at which the fund has valued them.
DIVERSIFICATION. The fund is a diversified fund. As a fundamental policy, the
fund will not buy a security if, with respect to 75% of its total assets,
more than 5% would be in the securities of any single issuer. This limitation
does not apply to investments issued or guaranteed by the U.S. government or
its instrumentalities. For the purpose of determining diversification, each
political subdivision, agency, or instrumentality, each multi-state agency of
which a state is a member, and each public authority that issues private
activity bonds on behalf of a private entity, is considered a separate
issuer. Escrow-secured or defeased bonds are not generally considered an
obligation of the original municipality when determining diversification. For
securities backed only by the assets or revenues of a particular
instrumentality, facility or subdivision, the entity is considered the
issuer. If the creating government or other entity guarantees a security, the
guarantee is considered a separate security and is treated as an issue of the
government or other entity. A guarantee of a security is not considered a
security issued by the guarantor, however, if the value of all securities
issued or guaranteed by that guarantor, and owned by the fund, does not
exceed 10% of the fund's total assets.
The fund intends to meet certain diversification requirements for tax
purposes. These requirements are discussed under "Additional Information on
Distributions and Taxes."
The fund may invest more than 25% of its assets in municipal securities that
finance similar types of projects, such as hospitals, housing, industrial
development, transportation or pollution control. A change that affects one
project, such as proposed legislation on the financing of the project, a
shortage of the materials needed for the project, or a declining need for the
project, would likely affect all similar projects.
SECURITIES TRANSACTIONS. The frequency of portfolio transactions, usually
referred to as the portfolio turnover rate, varies from year to year,
depending on market conditions. While short-term trading increases portfolio
turnover and may increase costs, the execution costs for municipal securities
are substantially less than for equivalent dollar values of equity securities.
INVESTMENT RESTRICTIONS
The fund has adopted the following restrictions as fundamental policies.
These restrictions may not be changed without the approval of a majority of
the outstanding voting securities of the fund. Under the 1940 Act, this means
the approval of (i) more than 50% of the outstanding shares of the fund or
(ii) 67% or more of the shares of the fund present at a shareholder meeting
if more than 50% of the outstanding shares of the fund are represented at the
meeting in person or by proxy, whichever is less. The fund MAY NOT:
1. Borrow money or mortgage or pledge any of its assets, except that borrowings
for temporary or emergency purposes may be made in an amount up to 5% of the
total asset value.
2. Buy any securities on "margin" or sell any securities "short."
3. Lend any of its funds or other assets, except by the purchase of a portion of
an issue of publicly distributed bonds, debentures, notes or other debt
securities, or to the extent the entry into a repurchase agreement may be deemed
a loan. Although such loans are not presently intended, this prohibition will
not preclude the fund from loaning securities to broker-dealers or other
institutional investors if at least 102% cash collateral is pledged and
maintained by the borrower provided such security loans may not be made if, as a
result, the aggregate of such loans exceeds 10% of the value of the fund's total
assets at the time of the most recent loan.
4. Act as underwriter of securities issued by other persons except insofar as
the fund may be technically deemed an underwriter under the federal securities
laws in connection with the disposition of portfolio securities.
5. Purchase the securities of any issuer which would result in owning more than
10% of the voting securities of such issuer.
6. Purchase from or sell to its officers and directors, or any firm of which any
officer or director is a member, as principal, any securities, but may deal with
such persons or firms as brokers and pay a customary brokerage commission;
retain securities of any issuer if, to the knowledge of the fund, one or more of
its officers, directors or investment advisor, own beneficially more than 1/2 of
1% of the securities of such issuer and all such officers and directors together
own beneficially more than 5% of such securities.
7. Acquire, lease or hold real estate, except such as may be necessary or
advisable for the maintenance of its offices.
8. Invest in commodities and commodity contracts, "puts," "calls," "straddles,"
"spreads" or any combination thereof, or interests in oil, gas or other mineral
exploration or development programs. The fund may, however, write covered call
options listed for trading on a national securities exchange and purchase call
options to the extent necessary to cancel call options previously written. At
present there are no options listed for trading on a national securities
exchange covering the types of securities which are appropriate for investment
by the fund and, therefore, there are no option transactions available for the
fund. In addition, pursuant to the regulations under the Corporate Securities
Laws of the State of California, the fund would have to limit its writing of
call options to 25% of its net assets, unless it received an exemption from the
Commissioner of Corporations, should such option transactions become available.
9. Invest in companies for the purpose of exercising control or management.
10. Purchase securities of other investment companies, except in connection with
a merger, consolidation, acquisition or reorganization; except to the extent the
fund invests its uninvested daily cash balances in shares of Franklin Tax-Exempt
Money Fund and other tax-exempt money market funds in the Franklin Templeton
Group of Funds provided i) its purchases and redemptions of such money market
fund shares may not be subject to any purchase or redemption fees, ii) its
investments may not be subject to duplication of management fees, nor to any
charge related to the expense of distributing the fund's shares (as determined
under Rule 12b-1, as amended under the federal securities laws) and iii)
provided aggregate investments by the fund in any such money market fund do not
exceed (A) the greater of (i) 5% of the fund's total net assets or (ii) $2.5
million, or (B) more than 3% of the outstanding shares of any such money market
fund.
11. Invest more than 25% of assets in securities of any industry. For purposes
of this limitation, tax-exempt securities issued by governments or political
subdivisions of governments are not considered to be part of any industry.
If a bankruptcy or other extraordinary event occurs concerning a particular
security owned by the fund, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. In this case, the fund
intends to dispose of the investment as soon as practicable while maximizing the
return to shareholders.
If a percentage restriction is met at the time of investment, a later
increase or decrease in the percentage due to a change in the value or
liquidity of portfolio securities or the amount of assets will not be
considered a violation of any of the foregoing restrictions.
OFFICERS AND DIRECTORS
The Board has the responsibility for the overall management of the fund,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of the fund who are responsible for
administering the fund's day-to-day operations. The affiliations of the
officers and Board members and their principal occupations for the past five
years are shown below. Members of the Board who are considered "interested
persons" of the fund under the 1940 Act are indicated by an asterisk (*).
POSITIONS AND OFFICES
NAME, AGE AND ADDRESS WITH THE FUND PRINCIPAL OCCUPATION
DURING THE PAST FIVE YEARS
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Frank H. Abbott, III (77) Director
1045 Sansome Street
San Francisco, CA 94111
President and Director, Abbott Corporation (an investment company); director
or trustee, as the case may be, of 27 of the investment companies in the
Franklin Templeton Group of Funds; and FORMERLY, Director, MotherLode Gold
Mines Consolidated (gold mining) and Vacu-Dry Co. (food processing).
Harris J. Ashton (66) Director
191 Clapboard Ridge Road
Greenwich, CT 06830
Director, RBC Holdings, Inc. (a bank holding company) and Bar-S Foods (a meat
packing company); director or trustee, as the case may be, of 49 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers).
* Harmon E. Burns (53) Vice President
777 Mariners Island Blvd. and Director
San Mateo, CA 94404
Executive Vice President and Director, Franklin Resources, Inc., Franklin
Templeton Distributors, Inc. and Franklin Templeton Services, Inc.; Executive
Vice President, Franklin Advisers, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; and officer and/or director or trustee, as the case
may be, of most of the other subsidiaries of Franklin Resources, Inc. and of
53 of the investment companies in the Franklin Templeton Group of Funds.
Robert F. Carlson (70) Director
2120 Lambeth Way
Carmichael, CA 95608
Member and past President, Board of Administration, California Public
Employees Retirement Systems (CALPERS); former member and past Chairman of
the Board, Sutter Community Hospitals, Sacramento, CA; former member,
Corporate Board, Blue Shield of California; former Chief Counsel, California
Department of Transportation; and director or trustee, as the case may be, of
nine of the investment companies in the Franklin Templeton Group of Funds.
S. Joseph Fortunato (66) Director
Park Avenue at Morris County
P.O. Box 1945
Morristown, NJ 07962-1945
Member of the law firm of Pitney, Hardin, Kipp & Szuch; director or trustee,
as the case may be, of 51 of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, Director, General Host Corporation
(nursery and craft centers).
* Charles B. Johnson (65) Chairman of
777 Mariners Island Blvd. the Board
San Mateo, CA 94404 and Director
President, Chief Executive Officer and Director, Franklin Resources, Inc.;
Chairman of the Board and Director, Franklin Advisers, Inc., Franklin
Advisory Services, Inc., Franklin Investment Advisory Services, Inc. and
Franklin Templeton Distributors, Inc.; Director, Franklin/Templeton Investor
Services, Inc. and Franklin Templeton Services, Inc.;
officer and/or director or trustee, as the case may be, of most of the other
subsidiaries of Franklin Resources, Inc. and of 50 of the investment
companies in the Franklin Templeton Group of Funds; and FORMERLY, Director,
General Host Corporation (nursery and craft centers).
* Rupert H. Johnson, Jr. (58) President
777 Mariners Island Blvd. and Director
San Mateo, CA 94404
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers,
Inc.; Senior Vice President and Director, Franklin Advisory Services, Inc.
and Franklin Investment Advisory Services, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; and officer and/or director or trustee, as the case
may be, of most of the other subsidiaries of Franklin Resources, Inc. and of
53 of the investment companies in the Franklin Templeton Group of Funds.
Frank W.T. LaHaye (69) Director
20833 Stevens Creek Blvd.
Suite 102
Cupertino, CA 95014
General Partner, Miller & LaHaye, which is the General Partner of Peregrine
Ventures II (venture capital firm); Chairman of the Board and Director,
Quarterdeck Corporation (software firm); Director, Digital Transmission
Systems, Inc. (wireless communications); director or trustee, as the case may
be, of 27 of the investment companies in the Franklin Templeton Group of
Funds; and FORMERLY, Director, Fischer Imaging Corporation (medical imaging
systems) and General Partner, Peregrine Associates, which was the General
Partner of Peregrine Ventures (venture capital firm).
Gordon S. Macklin (70) Director
8212 Burning Tree Road
Bethesda, MD 20817
Director, Fund American Enterprises Holdings, Inc., MCI Communications
Corporation, MedImmune, Inc. (biotechnology), Spacehab, Inc. (aerospace
services) and Real 3D (software); director or trustee, as the case may be, of
49 of the investment companies in the Franklin Templeton Group of Funds; and
FORMERLY, Chairman, White River Corporation (financial services) and
Hambrecht and Quist Group (investment banking), and President, National
Association of Securities Dealers, Inc.
Martin L. Flanagan (38) Vice President
777 Mariners Island Blvd. and Chief
San Mateo, CA 94404 Financial Officer
Senior Vice President and Chief Financial Officer, Franklin Resources, Inc.;
Executive Vice President and Director, Templeton Worldwide, Inc.; Executive
Vice President, Chief Operating Officer and Director, Templeton Investment
Counsel, Inc.; Executive Vice President and Chief Financial Officer, Franklin
Advisers, Inc.; Chief Financial Officer, Franklin Advisory Services, Inc. and
Franklin Investment Advisory Services, Inc.; President and Director, Franklin
Templeton Services, Inc.; Senior Vice President and Chief Financial Officer,
Franklin/Templeton Investor Services, Inc.; officer and/or director of some
of the other subsidiaries of Franklin Resources, Inc.; and officer and/or
director or trustee, as the case may be, of 53 of the investment companies in
the Franklin Templeton Group of Funds.
Deborah R. Gatzek (49) Vice President
777 Mariners Island Blvd. and Secretary
San Mateo, CA 94404
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior
Vice President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Vice
President, Franklin Advisory Services, Inc.; Vice President, Chief Legal
Officer and Chief Operating Officer, Franklin Investment Advisory Services,
Inc.; and officer of 53 of the investment companies in the Franklin Templeton
Group of Funds.
Thomas J. Kenny (35) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Executive Vice President, Franklin Advisers, Inc.; and officer of eight of
the investment companies in the Franklin Templeton Group of Funds.
Diomedes Loo-Tam (59) Treasurer and
777 Mariners Island Blvd. Principal
San Mateo, CA 94404 Accounting
Officer
Senior Vice President, Franklin Templeton Services, Inc.; and officer of 32
of the investment companies in the Franklin Templeton Group of Funds.
Edward V. McVey (61) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 28 of the investment
companies in the Franklin Templeton Group of Funds.
R. Martin Wiskemann (71) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Senior Vice President, Portfolio Manager and Director, Franklin Advisers,
Inc.; Senior Vice President, Franklin Management, Inc.; Vice President and
Director, ILA Financial Services, Inc.; and officer and/or director or
trustee, as the case may be, of 15 of the investment companies in the
Franklin Templeton Group of Funds.
The table above shows the officers and Board members who are affiliated with
Distributors and Advisers. As of June 1, 1998, nonaffiliated members of the
Board are paid $1,100 per month plus $1,050 per meeting attended. As shown
above, the nonaffiliated Board members also serve as directors or trustees of
other investment companies in the Franklin Templeton Group of Funds. They may
receive fees from these funds for their services. The fees payable to
nonaffiliated Board members by the fund are subject to reductions resulting
from fee caps limiting the amount of fees payable to Board members who serve
on other boards within the Franklin Templeton Group of Funds. The following
table provides the total fees paid to nonaffiliated Board members by the fund
and by other funds in the Franklin Templeton Group of Funds.
<TABLE>
<CAPTION>
NUMBER OF BOARDS
TOTAL FEES IN THE FRANKLIN
TOTAL FEES RECEIVED FROM THE TEMPLETON GROUP
RECEIVED FRANKLIN TEMPLETON OF FUNDS ON WHICH
NAME FROM THE FUND*** GROUP OF FUNDS**** EACH SERVES*****
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Frank H. Abbott, III ........................... $22,800 $165,937 27
Harris J. Ashton ................................ 21,850 344,642 49
Robert F. Carlson* .............................. 6,650 17,680 9
S. Joseph Fortunato ............................. 21,850 361,562 51
David W. Garbellano**............................ 7,600 91,317 N/A
Frank W.T. LaHaye ............................... 22,800 141,433 27
Gordon S. Macklin ............................... 21,850 337,292 49
</TABLE>
*Appointed January 15, 1998.
**Deceased, September 27, 1997.
***For the fiscal year ended April 30, 1998, during which time fees at the rate
of $950 per month plus $950 per meeting attended were in effect.
****For the calendar year ended December 31, 1997.
*****We base the number of boards on the number of registered investment
companies in the Franklin Templeton Group of Funds. This number does not include
the total number of series or funds within each investment company for which the
Board members are responsible. The Franklin Templeton Group of Funds currently
includes 54 registered investment companies, with approximately 170 U.S. based
funds or series.
Nonaffiliated members of the Board are reimbursed for expenses incurred in
connection with attending board meetings, paid pro rata by each fund in the
Franklin Templeton Group of Funds for which they serve as director or
trustee. No officer or Board member received any other compensation,
including pension or retirement benefits, directly or indirectly from the
fund or other funds in the Franklin Templeton Group of Funds. Certain
officers or Board members who are shareholders of Resources may be deemed to
receive indirect remuneration by virtue of their participation, if any, in
the fees paid to its subsidiaries.
As of June 2, 1998, the officers and Board members, as a group, owned of
record and beneficially the following shares of the fund: approximately 36
Class I shares, or less than 1% of the total outstanding Class I shares of
the fund. Many of the Board members also own shares in other funds in the
Franklin Templeton Group of Funds. Charles B. Johnson and Rupert H. Johnson,
Jr. are brothers.
INVESTMENT MANAGEMENT
AND OTHER SERVICES
INVESTMENT MANAGER AND SERVICES PROVIDED. The fund's investment manager is
Advisers. Advisers provides investment research and portfolio management
services, including the selection of securities for the fund to buy, hold or
sell and the selection of brokers through whom the fund's portfolio
transactions are executed. Advisers' extensive research activities include,
as appropriate, traveling to meet with issuers and to review project sites.
Advisers' activities are subject to the review and supervision of the Board
to whom Advisers renders periodic reports of the fund's investment
activities. Advisers and its officers, directors and employees are covered by
fidelity insurance for the protection of the fund.
Advisers and its affiliates act as investment manager to numerous other
investment companies and accounts. Advisers may give advice and take action
with respect to any of the other funds it manages, or for its own account,
that may differ from action taken by Advisers on behalf of the fund.
Similarly, with respect to the fund, Advisers is not obligated to recommend,
buy or sell, or to refrain from recommending, buying or selling any security
that Advisers and access persons, as defined by the 1940 Act, may buy or sell
for its or their own account or for the accounts of any other fund. Advisers
is not obligated to refrain from investing in securities held by the fund or
other funds that it manages. Of course, any transactions for the accounts of
Advisers and other access persons will be made in compliance with the fund's
Code of Ethics. Please see "Miscellaneous Information - Summary of Code of
Ethics."
MANAGEMENT FEES. Under its management agreement, the fund pays Advisers a
management fee equal to a monthly rate of 5/96 of 1% of the value of net
assets up to and including $100 million; 1/24 of 1% of the value of net
assets in excess of $100 million up to $250 million; 9/240 of 1% of the value
of net assets in excess of $250 million up to $10 billion; 11/300 of 1% of
the value of net assets in excess of $10 billion up to $12.5 billion; 7/200
of 1% of the value of net assets in excess of $12.5 billion up to $15
billion; 1/30 of 1% of the value of net assets in excess of $15 billion up to
$17.5 billion; 19/600 of 1% of the value of net assets in excess of $17.5
billion up to $20 billion; and 3/100 of 1% of the value of net assets in
excess of $20 billion. The fee is computed at the close of business on the
last business day of each month. Each class pays its proportionate share of
the management fee.
For the fiscal years ended April 30, 1998, 1997 and 1996, management fees
totaling $32,368,130, $31,921,470 and $32,164,702, respectively, were paid to
Advisers.
MANAGEMENT AGREEMENT. The management agreement is in effect until March 31,
1999. It may continue in effect for successive annual periods if its
continuance is specifically approved at least annually by a vote of the Board
or by a vote of the holders of a majority of the fund's outstanding voting
securities, and in either event by a majority vote of the Board members who
are not parties to the management agreement or interested persons of any such
party (other than as members of the Board), cast in person at a meeting
called for that purpose. The management agreement may be terminated without
penalty at any time by the Board or by a vote of the holders of a majority of
the fund's outstanding voting securities on 30 days' written notice to
Advisers, or by Advisers on 30 days' written notice to the fund, and will
automatically terminate in the event of its assignment, as defined in the
1940 Act.
ADMINISTRATIVE SERVICES. Under an agreement with Advisers, FT Services
provides certain administrative services and facilities for the fund. These
include preparing and maintaining books, records, and tax and financial
reports, and monitoring compliance with regulatory requirements. FT Services
is a wholly owned subsidiary of Resources.
Under its administration agreement, Advisers pays FT Services a monthly
administration fee equal to an annual rate of 0.15% of the fund's average
daily net assets up to $200 million, 0.135% of average daily net assets over
$200 million up to $700 million, 0.10% of average daily net assets over $700
million up to $1.2 billion, and 0.075% of average daily net assets over $1.2
billion. During the fiscal year ended April 30, 1998, and the period from
October 1, 1996 through April 30, 1997, administration fees totaling
$5,913,469 and $3,407,436, respectively, were paid to FT Services. The fee is
paid by Advisers. It is not a separate expense of the fund.
SHAREHOLDER SERVICING AGENT. Investor Services, a wholly owned subsidiary of
Resources, is the fund's shareholder servicing agent and acts as the fund's
transfer agent and dividend-paying agent. Investor Services is compensated on
the basis of a fixed fee per account. The fund may also reimburse Investor
Services for certain out-of-pocket expenses, which may include payments by
Investor Services to entities, including affiliated entities, that provide
sub-shareholder services, recordkeeping and/or transfer agency services to
beneficial owners of the fund. The amount of reimbursements for these
services per benefit plan participant fund account per year may not exceed
the per account fee payable by the fund to Investor Services in connection
with maintaining shareholder accounts.
CUSTODIAN. Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, New York 10286, acts as custodian of the securities and other assets of
the fund. The custodian does not participate in decisions relating to the
purchase and sale of portfolio securities.
AUDITOR. Coopers & Lybrand L.L.P., 333 Market Street, San Francisco,
California 94105, is the fund's independent auditor. During the fiscal year
ended April 30, 1998, the auditor's services consisted of rendering an
opinion on the financial statements of the fund included in the fund's
Annual Report to Shareholders for the fiscal year ended April 30, 1998.
HOW DOES THE FUND
BUY SECURITIES FOR ITS PORTFOLIO?
- ------------------------------------------------------------------------------
Since most purchases by the fund are principal transactions at net prices,
the fund incurs little or no brokerage costs. The fund deals directly with
the selling or buying principal or market maker without incurring charges for
the services of a broker on its behalf, unless it is determined that a better
price or execution may be obtained by using the services of a broker.
Purchases of portfolio securities from underwriters will include a commission
or concession paid by the issuer to the underwriter, and purchases from
dealers will include a spread between the bid and ask prices. As a general
rule, the fund does not buy bonds in underwritings where it is given no
choice, or only limited choice, in the designation of dealers to receive the
commission. The fund seeks to obtain prompt execution of orders at the most
favorable net price. Transactions may be directed to dealers in return for
research and statistical information, as well as for special services
provided by the dealers in the execution of orders.
It is not possible to place a dollar value on the special executions or on
the research services Advisers receives from dealers effecting transactions
in portfolio securities. The allocation of transactions in order to obtain
additional research services permits Advisers to supplement its own research
and analysis activities and to receive the views and information of
individuals and research staffs of other securities firms. As long as it is
lawful and appropriate to do so, Advisers and its affiliates may use this
research and data in their investment advisory capacities with other clients.
If the fund's officers are satisfied that the best execution is obtained, the
sale of fund shares, as well as shares of other funds in the Franklin
Templeton Group of Funds, may also be considered a factor in the selection of
broker-dealers to execute the fund's portfolio transactions.
If purchases or sales of securities of the fund and one or more other
investment companies or clients supervised by Advisers are considered at or
about the same time, transactions in these securities will be allocated among
the several investment companies and clients in a manner deemed equitable to
all by Advisers, taking into account the respective sizes of the funds and
the amount of securities to be purchased or sold. In some cases this
procedure could have a detrimental effect on the price or volume of the
security so far as the fund is concerned. In other cases it is possible that
the ability to participate in volume transactions may improve execution and
reduce transaction costs to the fund.
During the fiscal years ended April 30, 1998, 1997 and 1996, the fund paid no
brokerage commissions.
As of April 30, 1998, the fund did not own securities of its regular
broker-dealers.
HOW DO I BUY, SELL AND EXCHANGE SHARES?
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ADDITIONAL INFORMATION ON BUYING SHARES
The fund continuously offers its shares through Securities Dealers who have
an agreement with Distributors. Securities Dealers may at times receive the
entire sales charge. A Securities Dealer who receives 90% or more of the
sales charge may be deemed an underwriter under the Securities Act of 1933,
as amended.
Banks and financial institutions that sell shares of the fund may be required
by state law to register as Securities Dealers. Financial institutions or
their affiliated brokers may receive an agency transaction fee in the
percentages indicated in the table under "How Do I Buy Shares? - Purchase
Price of Fund Shares" in the Prospectus.
When you buy shares, if you submit a check or a draft that is returned unpaid
to the fund we may impose a $10 charge against your account for each returned
item.
Under agreements with certain banks in Taiwan, Republic of China, the fund's
shares are available to these banks' trust accounts without a sales charge.
The banks may charge service fees to their customers who participate in the
trusts. A portion of these service fees may be paid to Distributors or one of
its affiliates to help defray expenses of maintaining a service office in
Taiwan, including expenses related to local literature fulfillment and
communication facilities.
Class I shares of the fund may be offered to investors in Taiwan through
securities advisory firms known locally as Securities Investment Consulting
Enterprises. In conformity with local business practices in Taiwan, Class I
shares may be offered with the following schedule of sales charges:
SALES
SIZE OF PURCHASE - U.S. DOLLARS CHARGE
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Under $30,000................................... 3%
$30,000 but less than $100,000.................. 2%
$100,000 but less than $400,000................. 1%
$400,000 or more................................ 0%
OTHER PAYMENTS TO SECURITIES DEALERS. Distributors may pay the following
commissions, out of its own resources, to Securities Dealers who initiate and
are responsible for purchases of Class I shares of $1 million or more: 0.75%
on sales of $1 million to $2 million, plus 0.60% on sales over $2 million to
$3 million, plus 0.50% on sales over $3 million to $50 million, plus 0.25% on
sales over $50 million to $100 million, plus 0.15% on sales over $100
million. These breakpoints are reset every 12 months for purposes of
additional purchases.
Distributors and/or its affiliates provide financial support to various
Securities Dealers that sell shares of the Franklin Templeton Group of Funds.
This support is based primarily on the amount of sales of fund shares. The
amount of support may be affected by: total sales; net sales; levels of
redemptions; the proportion of a Securities Dealer's sales and marketing
efforts in the Franklin Templeton Group of Funds; a Securities Dealer's
support of, and participation in, Distributors' marketing programs; a
Securities Dealer's compensation programs for its registered representatives;
and the extent of a Securities Dealer's marketing programs relating to the
Franklin Templeton Group of Funds. Financial support to Securities Dealers
may be made by payments from Distributors' resources, from Distributors'
retention of underwriting concessions and, in the case of funds that have
Rule 12b-1 plans, from payments to Distributors under such plans. In
addition, certain Securities Dealers may receive brokerage commissions
generated by fund portfolio transactions in accordance with the NASD's rules.
Distributors routinely sponsors due diligence meetings for registered
representatives during which they receive updates on various Franklin
Templeton Funds and are afforded the opportunity to speak with portfolio
managers. Invitation to these meetings is not conditioned on selling a
specific number of shares. Those who have shown an interest in the Franklin
Templeton Funds, however, are more likely to be considered. To the extent
permitted by their firm's policies and procedures, registered
representatives' expenses in attending these meetings may be covered by
Distributors.
LETTER OF INTENT. You may qualify for a reduced sales charge when you buy
Class I shares, as described in the Prospectus. At any time within 90 days
after the first investment that you want to qualify for a reduced sales
charge, you may file with the fund a signed shareholder application with the
Letter of Intent section completed. After the Letter is filed, each
additional investment will be entitled to the sales charge applicable to the
level of investment indicated on the Letter. Sales charge reductions based on
purchases in more than one Franklin Templeton Fund will be effective only
after notification to Distributors that the investment qualifies for a
discount. Your holdings in the Franklin Templeton Funds acquired more than 90
days before the Letter is filed will be counted towards completion of the
Letter, but they will not be entitled to a retroactive downward adjustment in
the sales charge. Any redemptions you make during the 13 month period will be
subtracted from the amount of the purchases for purposes of determining
whether the terms of the Letter have been completed. If the Letter is not
completed within the 13 month period, there will be an upward adjustment of
the sales charge, depending on the amount actually purchased (less
redemptions) during the period. If you execute a Letter before a change in
the sales charge structure of the fund, you may complete the Letter at the
lower of the new sales charge structure or the sales charge structure in
effect at the time the Letter was filed.
As mentioned in the Prospectus, five percent (5%) of the amount of the total
intended purchase will be reserved in Class I shares of the fund registered
in your name until you fulfill the Letter. If the amount of your total
purchases, less redemptions, equals the amount specified under the Letter,
the reserved shares will be deposited to an account in your name or delivered
to you or as you direct. If the amount of your total purchases, less
redemptions, exceeds the amount specified under the Letter and is an amount
that would qualify for a further quantity discount, a retroactive price
adjustment will be made by Distributors and the Securities Dealer through
whom purchases were made pursuant to the Letter (to reflect such further
quantity discount) on purchases made within 90 days before and on those made
after filing the Letter. The resulting difference in Offering Price will be
applied to the purchase of additional shares at the Offering Price applicable
to a single purchase or the dollar amount of the total purchases. If the
amount of your total purchases, less redemptions, is less than the amount
specified under the Letter, you will remit to Distributors an amount equal to
the difference in the dollar amount of sales charge actually paid and the
amount of sales charge that would have applied to the aggregate purchases if
the total of the purchases had been made at a single time. Upon remittance,
the reserved shares held for your account will be deposited to an account in
your name or delivered to you or as you direct. If within 20 days after
written request the difference in sales charge is not paid, the redemption of
an appropriate number of reserved shares to realize the difference will be
made. In the event of a total redemption of the account before fulfillment of
the Letter, the additional sales charge due will be deducted from the
proceeds of the redemption, and the balance will be forwarded to you.
REINVESTMENT DATE. Shares acquired through the reinvestment of dividends will
be purchased at the Net Asset Value determined on the business day following
the dividend record date (sometimes known as the "ex-dividend date"). The
processing date for the reinvestment of dividends may vary and does not
affect the amount or value of the shares acquired.
ADDITIONAL INFORMATION ON EXCHANGING SHARES
If you request the exchange of the total value of your account, declared but
unpaid income dividends and capital gain distributions will be exchanged into
the new fund and will be invested at Net Asset Value. Backup withholding and
information reporting may apply. Information regarding the possible tax
consequences of an exchange is included in the tax section in this SAI and in
the Prospectus.
If a substantial number of shareholders should, within a short period, sell
their shares of the fund under the exchange privilege, the fund might have to
sell portfolio securities it might otherwise hold and incur the additional
costs related to such transactions. On the other hand, increased use of the
exchange privilege may result in periodic large inflows of money. If this
occurs, it is the fund's general policy to initially invest this money in
short-term, tax-exempt municipal securities, unless it is believed that
attractive investment opportunities consistent with the fund's investment
goal exist immediately. This money will then be withdrawn from the
short-term, tax-exempt municipal securities and invested in portfolio
securities in as orderly a manner as is possible when attractive investment
opportunities arise.
The proceeds from the sale of shares of an investment company are generally
not available until the seventh day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange
until that seventh day. The sale of fund shares to complete an exchange will
be effected at Net Asset Value at the close of business on the day the
request for exchange is received in proper form. Please see "May I Exchange
Shares for Shares of Another Fund?" in the Prospectus.
ADDITIONAL INFORMATION ON SELLING SHARES
SYSTEMATIC WITHDRAWAL PLAN. There are no service charges for establishing or
maintaining a systematic withdrawal plan. Payments under the plan will be
made from the redemption of an equivalent amount of shares in your account,
generally on the 25th day of the month in which a payment is scheduled. If
the 25th falls on a weekend or holiday, we will process the redemption on the
next business day.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust
the shares in your account if payments exceed distributions received from the
fund. This is especially likely to occur if there is a market decline. If a
withdrawal amount exceeds the value of your account, your account will be
closed and the remaining balance in your account will be sent to you. Because
the amount withdrawn under the plan may be more than your actual yield or
income, part of the payment may be a return of your investment.
The fund may discontinue a systematic withdrawal plan by notifying you in
writing and will automatically discontinue a systematic withdrawal plan if
all shares in your account are withdrawn or if the fund receives notification
of the shareholder's death or incapacity.
THROUGH YOUR SECURITIES DEALER. If you sell shares through your Securities
Dealer, it is your dealer's responsibility to transmit the order to the fund
in a timely fashion. Any loss to you resulting from your dealer's failure to
do so must be settled between you and your Securities Dealer.
REDEMPTIONS IN KIND. The fund has committed itself to pay in cash (by check)
all requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the
value of the fund's net assets at the beginning of the 90-day period. This
commitment is irrevocable without the prior approval of the SEC. In the case
of redemption requests in excess of these amounts, the Board reserves the
right to make payments in whole or in part in securities or other assets of
the fund, in case of an emergency, or if the payment of such a redemption in
cash would be detrimental to the existing shareholders of the fund. In these
circumstances, the securities distributed would be valued at the price used
to compute the fund's net assets and you may incur brokerage fees in
converting the securities to cash. The fund does not intend to redeem
illiquid securities in kind. If this happens, however, you may not be able to
recover your investment in a timely manner.
GENERAL INFORMATION
If dividend checks are returned to the fund marked "unable to forward" by the
postal service, we will consider this a request by you to change your
dividend option to reinvest all distributions. The proceeds will be
reinvested in additional shares at Net Asset Value until we receive new
instructions.
Distribution or redemption checks sent to you do not earn interest or any
other income during the time the checks remain uncashed. Neither the fund nor
its affiliates will be liable for any loss caused by your failure to cash
such checks. The fund is not responsible for tracking down uncashed checks,
unless a check is returned as undeliverable.
In most cases, if mail is returned as undeliverable we are required to take
certain steps to try to find you free of charge. If these attempts are
unsuccessful, however, we may deduct the costs of any additional efforts to
find you from your account. These costs may include a percentage of the
account when a search company charges a percentage fee in exchange for its
location services.
All checks, drafts, wires and other payment mediums used to buy or sell
shares of the fund must be denominated in U.S. dollars. We may, in our sole
discretion, either (a) reject any order to buy or sell shares denominated in
any other currency or (b) honor the transaction or make adjustments to your
account for the transaction as of a date and with a foreign currency exchange
factor determined by the drawee bank.
SPECIAL SERVICES. Investor Services may pay certain financial institutions
that maintain omnibus accounts with the fund on behalf of numerous beneficial
owners for recordkeeping operations performed with respect to such owners.
For each beneficial owner in the omnibus account, the fund may reimburse
Investor Services an amount not to exceed the per account fee that the fund
normally pays Investor Services. These financial institutions may also charge
a fee for their services directly to their clients.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
HOW ARE FUND SHARES VALUED?
- ------------------------------------------------------------------------------
We calculate the Net Asset Value per share as of the close of the NYSE,
normally 1:00 p.m. Pacific time, each day that the NYSE is open for trading.
As of the date of this SAI, the fund is informed that the NYSE observes the
following holidays: New Year's Day, Martin Luther King Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
For the purpose of determining the aggregate net assets of the fund, cash and
receivables are valued at their realizable amounts. Interest is recorded as
accrued. Over-the-counter portfolio securities are valued within the range of
the most recent quoted bid and ask prices. Portfolio securities that are
traded both in the over-the-counter market and on a stock exchange are valued
according to the broadest and most representative market as determined by
Advisers. Municipal securities generally trade in the over-the-counter market
rather than on a securities exchange. In the absence of a sale or reported
bid and ask prices, information with respect to bond and note transactions,
quotations from bond dealers, market transactions in comparable securities,
and various relationships between securities are used to determine the value
of municipal securities.
Generally, trading in U.S. government securities and money market instruments
is substantially completed each day at various times before the close of the
NYSE. The value of these securities used in computing the Net Asset Value of
each class is determined as of such times. Occasionally, events affecting the
values of these securities may occur between the times at which they are
determined and the close of the NYSE that will not be reflected in the
computation of the Net Asset Value. If events materially affecting the values
of these securities occur during this period, the securities will be valued
at their fair value as determined in good faith by the Board.
Other securities for which market quotations are readily available are valued
at the current market price, which may be obtained from a pricing service,
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 issues. Securities and other assets
for which market prices are not readily available are valued at fair value as
determined following procedures approved by the Board. With the approval of
the Board, the fund may use a pricing service, bank or Securities Dealer to
perform any of the above described functions.
ADDITIONAL INFORMATION
ON DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
DISTRIBUTIONS OF NET INVESTMENT INCOME. By meeting certain requirements of
the Code, the fund has qualified and continues to qualify to pay
"exempt-interest dividends" to shareholders. These dividends are derived from
interest income exempt from regular federal income tax, and are not subject
to regular federal income tax when they are distributed. In addition, to the
extent that exempt-interest dividends are derived from interest on
obligations of a state or its political subdivisions, or from interest on
qualifying U.S. territorial obligations (including qualifying obligations of
Puerto Rico, the U.S. Virgin Islands or Guam), they will also be exempt from
that state's personal income taxes. A state generally does not grant tax-free
treatment to interest on state and municipal securities of other states.
At the end of each calendar year, the fund will provide you with the
percentage of any dividends paid that may qualify for tax-free treatment on
your personal income tax return. You should consult with your personal tax
advisor to determine the application of your state and local laws to these
distributions. Corporate shareholders should consult with their corporate tax
advisors about whether any of their distributions may be exempt from
corporate income or franchise taxes.
The fund may earn taxable income on any temporary investments, on the
discount from stripped obligations or their coupons, on income from
securities loans or other taxable transactions, on the excess of short-term
capital gains over long-term capital losses earned by the fund ("net
short-term capital gain"), or on ordinary income derived from the sale of
market discount bonds. Any distributions by the fund from such income will be
taxable to you as ordinary income, whether you take them in cash or
additional shares.
From time to time, the fund may buy a tax-exempt bond in the secondary market
for a price that is less than the principal amount of the bond. This discount
is called market discount if it exceeds a de minimis amount of discount under
the Code. For market discount bonds purchased after April 30, 1993, a portion
of the gain on sale or disposition (not to exceed the accrued portion of
market discount at the time of the sale) is treated as ordinary income rather
than capital gain. Any distribution by the fund of market discount income
will be taxable as ordinary income to you. The fund may elect in any fiscal
year not to distribute to you its taxable ordinary income and to pay a
federal income or excise tax on this income at the fund level. In any case,
the amount of market discount, if any, is expected to be small.
DISTRIBUTIONS OF CAPITAL GAINS. The fund may derive capital gains and losses
in connection with sales or other dispositions of its portfolio securities.
Distributions derived from the excess of net short-term capital gain over net
long-term capital loss will be taxable to you as ordinary income.
Distributions paid from long-term capital gains realized by the fund will be
taxable to you as long-term capital gain, regardless of how long you have
held your shares in the fund. Any net short-term or long-term capital gains
realized by the fund (net of any capital loss carryovers) generally will be
distributed once each year, and may be distributed more frequently, if
necessary, in order to reduce or eliminate federal excise or income taxes on
the fund.
Gains from securities sold by the fund that are held for more than one year
will be taxable at a maximum rate of 20% for individual investors in the 28%
or higher federal income tax brackets, and at a maximum rate of 10% for
individual investors in the 15% federal income tax bracket. Gains from
securities sold by the fund before January 1, 1998, are taxable at different
rates depending on the length of time the fund held such assets.
For "qualified 5-year gains," the maximum capital gains tax rate is 18% for
individuals in the 28% or higher federal income tax brackets and 8% for
individuals in the 15% federal income tax bracket. For individuals in the 15%
bracket, qualified 5-year gains are net gains on securities held for more
than 5 years that are sold after December 31, 2000. For individuals who are
subject to tax at higher rates, qualified 5-year gains are net gains on
securities that are purchased after December 31, 2000 and are held for more
than 5 years. Taxpayers subject to tax at the higher rates may also make an
election for shares held on January 1, 2001 to recognize gain on their shares
in order to qualify such shares as qualified 5-year property.
Additional information on reporting capital gain distributions on your
personal income tax returns is available in Franklin Templeton's Tax
Information Handbook. Please call Fund Information to request a copy.
Questions about your personal tax reporting should be addressed to your
personal tax advisor.
CERTAIN DISTRIBUTIONS PAID IN JANUARY. Distributions of taxable income, if
any, which are declared in October, November or December to shareholders of
record in such month, and paid to you in January of the following year, will
be treated for tax purposes as if they had been received by you on December
31 of the year in which they were declared. The fund will report this income
to you on your Form 1099-DIV for the year in which these distributions were
declared. You will receive a Form 1099-DIV only for calendar years in which
the fund has made a distribution to you of taxable ordinary income or capital
gain.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS. The fund will inform you of
the amount and character of your distributions at the time they are paid, and
will shortly after the close of each calendar year advise you of the tax status
for federal income tax purposes of such distributions, including the portion of
the distributions that on average comprise taxable income or interest income
that is a tax preference item under the alternative minimum tax. If you have not
held fund shares for a full year, you may have designated as taxable, tax-exempt
or as a tax preference a percentage of income that is not equal to the actual
amount of such income earned during the period of your investment in the fund.
TAXES
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY. The fund has elected
to be treated as a regulated investment company under Subchapter M of the
Code, has qualified as such for its most recent fiscal year, and intends to
so qualify during the current fiscal year. The Board reserves the right not
to maintain the qualification of the fund as a regulated investment company
if it determines such course of action to be beneficial to shareholders. In
such case, the fund will be subject to federal, and possibly state, corporate
taxes on its taxable income and gains, and distributions to you will be taxed
as ordinary dividend income to the extent of the fund's available earnings
and profits.
In order to qualify as a regulated investment company for tax purposes, the
fund must meet certain specific requirements, including:
o The fund must maintain a diversified portfolio of securities, wherein no
security (other than U.S. government securities and securities of other
regulated investment companies) can exceed 25% of the fund's total assets,
and, with respect to 50% of the fund's total assets, no investment (other
than cash and cash items, U.S. government securities and securities of
other regulated investment companies) can exceed 5% of the fund's total
assets or 10% of the outstanding voting securities of the issuer;
o The fund must derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loans, and gains from the
sale or disposition of stock, securities or foreign currencies, or other
income derived with respect to its business of investing in such stock,
securities, or currencies; and
o The fund must distribute to its shareholders at least 90% of its investment
company taxable income (i.e., net investment income plus net short-term
capital gains) and net tax-exempt income for each of its fiscal years.
EXCISE TAX DISTRIBUTION REQUIREMENTS. The Code requires the fund to
distribute at least 98% of its taxable ordinary income earned during the
calendar year and 98% of its capital gain net income earned during the twelve
month period ending October 31 (in addition to undistributed amounts from the
prior year) to you by December 31 of each year in order to avoid federal
excise taxes. The fund intends to declare and pay sufficient dividends in
December (or in January that are treated by you as received in December) but
does not guarantee and can give no assurances that its distributions will be
sufficient to eliminate all such taxes.
REDEMPTION OF FUND SHARES. Redemptions and exchanges of fund shares are
taxable transactions for federal and state income tax purposes. The tax law
requires that you recognize a gain or loss in an amount equal to the
difference between your tax basis and the amount you received in exchange for
your shares, subject to the rules described below. If you hold your shares as
a capital asset, the gain or loss that you realize will be capital gain or
loss, and will be long-term for federal income tax purposes if you have held
your shares for more than one year at the time of redemption or exchange. Any
loss incurred on the redemption or exchange of shares held for six months or
less will be disallowed to the extent of any exempt-interest dividends
distributed to you with respect to your shares in the fund and any remaining
loss will be treated as a long-term capital loss to the extent of any
long-term capital gains distributed to you by the fund on those shares.
All or a portion of any loss that you realize upon the redemption of your
fund shares will be disallowed to the extent that you buy other shares in the
fund (through reinvestment of dividends or otherwise) within 30 days before
or after your share redemption. Any loss disallowed under these rules will be
added to your tax basis in the new shares you buy.
DEFERRAL OF BASIS. All or a portion of the sales charge that you paid for
your shares in the fund will be excluded from your tax basis in any of the
shares sold within 90 days of their purchase (for the purpose of determining
gain or loss upon the sale of such shares) if you reinvest the sales proceeds
in the fund or in another of the Franklin Templeton Funds, and the sales
charge that would otherwise apply to your reinvestment is reduced or
eliminated. The portion of the sales charge excluded from your tax basis in
the shares sold will equal the amount that the sales charge is reduced on
your reinvestment. Any portion of the sales charge excluded from your tax
basis in the shares sold will be added to the tax basis of the shares you
acquire from your reinvestment.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS. Because the fund's income is
derived primarily from interest rather than dividends, no portion of its
distributions will generally be eligible for the corporate dividends-received
deduction. None of the dividends paid by the fund for the most recent fiscal
year qualified for such deduction, and it is anticipated that none of the
current year's dividends will so qualify.
TREATMENT OF PRIVATE ACTIVITY BOND INTEREST. The interest on bonds issued to
finance essential state and local government operations is generally
tax-exempt, and distributions paid from this interest income will generally
qualify as an exempt-interest dividend. Interest on certain non-essential or
"private activity bonds" (including those for housing and student loans)
issued after August 7, 1986, while still exempt from regular federal income
tax, constitutes a preference item for taxpayers in determining their
alternative minimum tax under the Code and under the income tax provisions of
several states. Private activity bond interest could subject you to or
increase your liability under federal and state alternative minimum taxes,
depending on your individual or corporate tax position.
Consistent with the fund's investment goal, the fund may acquire such private
activity bonds if, in Advisers' opinion, such bonds represent the most
attractive investment opportunity then available to the fund. Persons who are
defined in the Code as "substantial users" (or persons related to such users)
of facilities financed by private activity bonds should consult with their
tax advisors before buying shares in the fund.
INVESTMENTS IN ORIGINAL ISSUE DISCOUNT (OID) AND MARKET DISCOUNT BONDS. To
the extent the fund invests in zero coupon bonds, bonds issued or acquired at
a discount, delayed interest bonds, or bonds that provide for payment of
interest-in-kind (PIK), the fund may have to recognize income and make
distributions to you before its receipt of cash payments. Zero coupon and
delayed interest bonds are normally issued at a discount and are therefore
generally subject to tax reporting as OID obligations. The fund is required
to accrue as income a portion of the discount at which these securities were
issued, and to distribute such income each year (as ordinary dividends) in
order to maintain its qualification as a regulated investment company and to
avoid income reporting and excise taxes at the fund level. PIK bonds are
subject to similar tax rules concerning the amount, character and timing of
income required to be accrued by the fund. Bonds acquired in the secondary
market for a price less than their stated redemption price, or revised issue
price in the case of a bond having OID, are said to have been acquired with
market discount. For these bonds, the fund may elect to accrue market
discount on a current basis, in which case the fund will be required to
distribute any such accrued discount. If the fund does not elect to accrue
market discount into income currently, gain recognized on sale will be
recharacterized as ordinary income instead of capital gain to the extent of
any accumulated market discount on the obligation.
DEFAULTED OBLIGATIONS. The fund may be required to accrue income on defaulted
obligations and to distribute such income to you even though it is not
currently receiving interest or principal payments on such obligations. In
order to generate cash to satisfy these distribution requirements, the fund
may be required to sell portfolio securities that it otherwise would have
continued to hold or to use cash flows from other sources such as the sale of
fund shares.
THE FUND'S UNDERWRITER
Pursuant to an underwriting agreement, Distributors acts as principal
underwriter in a continuous public offering of the fund's shares. The
underwriting agreement will continue in effect for successive annual periods
if its continuance is specifically approved at least annually by a vote of
the Board or by a vote of the holders of a majority of the fund's outstanding
voting securities, and in either event by a majority vote of the Board
members who are not parties to the underwriting agreement or interested
persons of any such party (other than as members of the Board), cast in
person at a meeting called for that purpose. The underwriting agreement
terminates automatically in the event of its assignment and may be terminated
by either party on 90 days' written notice.
Distributors pays the expenses of the distribution of fund shares, including
advertising expenses and the costs of printing sales material and
prospectuses used to offer shares to the public. The fund pays the expenses
of preparing and printing amendments to its registration statements and
prospectuses (other than those necessitated by the activities of
Distributors) and of sending prospectuses to existing shareholders.
In connection with the offering of the fund's shares, aggregate underwriting
commissions for the fiscal years ended April 30, 1998, 1997 and 1996, were
$12,768,187, $12,215,933 and $17,594,884, respectively. After allowances to
dealers, Distributors retained $811,334, $785,459 and $1,143,252 in net
underwriting discounts and commissions and received $23,704, $30,800 and
$11,378 in connection with redemptions or repurchases of shares for the
respective years. Distributors may be entitled to reimbursement under the
Rule 12b-1 plan for each class, as discussed below. Except as noted,
Distributors received no other compensation from the fund for acting as
underwriter.
THE RULE 12B-1 PLANS
Class I and Class II have separate distribution plans or "Rule 12b-1 plans"
that were adopted pursuant to Rule 12b-1 of the 1940 Act.
THE CLASS I PLAN. Under the Class I plan, the fund may pay up to a maximum of
0.10% per year of Class I's average daily net assets, payable quarterly, for
expenses incurred in the promotion and distribution of Class I shares.
In implementing the Class I plan, the Board has determined that the annual
fees payable under the plan will be equal to the sum of: (i) the amount
obtained by multiplying 0.10% by the average daily net assets represented by
Class I shares of the fund that were acquired by investors on or after May 1,
1994, the effective date of the plan ("New Assets"), and (ii) the amount
obtained by multiplying 0.05% by the average daily net assets represented by
Class I shares of the fund that were acquired before May 1, 1994 ("Old
Assets"). These fees will be paid to the current Securities Dealer of record
on the account. In addition, until such time as the maximum payment of 0.10%
is reached on a yearly basis, up to an additional 0.01% will be paid to
Distributors under the plan so long as the Fund's assets exceed $4 billion,
or should the fund's assets fall below $4 billion, up to an additional 0.02%
could be paid to Distributors. The payments made to Distributors will be used
by Distributors to defray other marketing expenses that have been incurred in
accordance with the plan, such as advertising.
The fee is a Class I expense. This means that all Class I shareholders,
regardless of when they purchased their shares, will bear Rule 12b-1 expenses
at the same rate. The initial rate will be at least 0.06% (0.05% plus 0.01%)
of the average daily net assets of Class I and, as Class I shares are sold on
or after May 1, 1994, will increase over time. Thus, as the proportion of
Class I shares purchased on or after May 1, 1994, increases in relation to
outstanding Class I shares, the expenses attributable to payments under the
plan will also increase (but will not exceed 0.10% of average daily net
assets). While this is the currently anticipated calculation for fees payable
under the Class I plan, the plan permits the Board to allow the fund to pay a
full 0.10% on all assets at any time. The approval of the Board would be
required to change the calculation of the payments to be made under the Class
I plan.
THE CLASS II PLAN. Under the Class II plan, the fund pays Distributors up to
0.50% per year of Class II's average daily net assets, payable quarterly, for
distribution and related expenses. These fees may be used to compensate
Distributors or others for providing distribution and related services and
bearing certain Class II expenses. All distribution expenses over this amount
will be borne by those who have incurred them without reimbursement by the
fund.
Under the Class II plan, the fund also pays an additional 0.15% per year of
Class II's average daily net assets, payable quarterly, as a servicing fee.
THE CLASS I AND CLASS II PLANS. In addition to the payments that Distributors
or others are entitled to under each plan, each plan also provides that to
the extent the fund, Advisers or Distributors or other parties on behalf of
the fund, Advisers or Distributors make payments that are deemed to be for
the financing of any activity primarily intended to result in the sale of
shares of each class within the context of Rule 12b-1 under the 1940 Act,
then such payments shall be deemed to have been made pursuant to the plan.
The terms and provisions of each plan relating to required reports, term, and
approval are consistent with Rule 12b-1.
In no event shall the aggregate asset-based sales charges, which include
payments made under each plan, plus any other payments deemed to be made
pursuant to a plan, exceed the amount permitted to be paid under the rules of
the NASD.
To the extent fees are for distribution or marketing functions, as
distinguished from administrative servicing or agency transactions, certain
banks will not be entitled to participate in the plans as a result of
applicable federal law prohibiting certain banks from engaging in the
distribution of mutual fund shares. These banking institutions, however, are
permitted to receive fees under the plans for administrative servicing or for
agency transactions. If you are a customer of a bank that is prohibited from
providing these services, you would be permitted to remain a shareholder of
the fund, and alternate means for continuing the servicing would be sought.
In this event, changes in the services provided might occur and you might no
longer be able to avail yourself of any automatic investment or other
services then being provided by the bank. It is not expected that you would
suffer any adverse financial consequences as a result of any of these changes.
Each plan has been approved in accordance with the provisions of Rule 12b-1.
The plans are renewable annually by a vote of the Board, including a majority
vote of the Board members who are not interested persons of the fund and who
have no direct or indirect financial interest in the operation of the plans,
cast in person at a meeting called for that purpose. It is also required that
the selection and nomination of such Board members be done by the
non-interested members of the Board. The plans and any related agreement may
be terminated at any time, without penalty, by vote of a majority of the
non-interested Board members on not more than 60 days' written notice, by
Distributors on not more than 60 days' written notice, by any act that
constitutes an assignment of the management agreement with Advisers or by
vote of a majority of the outstanding shares of the class. Distributors or
any dealer or other firm may also terminate their respective distribution or
service agreement at any time upon written notice.
The plans and any related agreements may not be amended to increase
materially the amount to be spent for distribution expenses without approval
by a majority of the outstanding shares of the class, and all material
amendments to the plans or any related agreements shall be approved by a vote
of the non-interested members of the Board, cast in person at a meeting
called for the purpose of voting on any such amendment.
Distributors is required to report in writing to the Board at least quarterly
on the amounts and purpose of any payment made under the plans and any
related agreements, as well as to furnish the Board with such other
information as may reasonably be requested in order to enable the Board to
make an informed determination of whether the plans should be continued.
For the fiscal year ended April 30, 1998, Distributors had eligible
expenditures of $6,009,935 and $979,971 for advertising, printing, and
payments to underwriters and broker-dealers pursuant to the Class I and Class
II plans, respectively, of which the fund paid Distributors $5,085,757 and
$569,003 under the Class I and Class II plans.
HOW DOES THE FUND
MEASURE PERFORMANCE?
Performance quotations are subject to SEC rules. These rules require the use
of standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the fund be accompanied
by certain standardized performance information computed as required by the
SEC. Average annual total return and current yield quotations used by the
fund are based on the standardized methods of computing performance mandated
by the SEC. If a Rule 12b-1 plan is adopted, performance figures reflect fees
from the date of the plan's implementation. An explanation of these and other
methods used by the fund to compute or express performance follows.
Regardless of the method used, past performance does not guarantee future
results, and is an indication of the return to shareholders only for the
limited historical period used.
TOTAL RETURN
AVERAGE ANNUAL TOTAL RETURN. Average annual total return is determined by
finding the average annual rates of return over the periods indicated below
that would equate an initial hypothetical $1,000 investment to its ending
redeemable value. The calculation assumes the maximum front-end sales charge
is deducted from the initial $1,000 purchase, and income dividends and
capital gain distributions are reinvested at Net Asset Value. The quotation
assumes the account was completely redeemed at the end of each period and the
deduction of all applicable charges and fees. If a change is made to the
sales charge structure, historical performance information will be restated
to reflect the maximum front-end sales charge currently in effect.
The average annual total return for Class I for the one-, five- and ten-year
periods ended April 30, 1998, was 4.28%, 5.49% and 7.79%, respectively. The
average annual total return for Class II for the one-year period ended April
30, 1998, and for the period from inception (May 1, 1995) through April 30,
1998, was 6.15% and 6.69%, respectively.
These figures were calculated according to the SEC formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of each period at the end of each period
CUMULATIVE TOTAL RETURN. Like average annual total return, cumulative total
return assumes the maximum front-end sales charge is deducted from the
initial $1,000 purchase, and income dividends and capital gain distributions
are reinvested at Net Asset Value. Cumulative total return, however, is based
on the actual return for a specified period rather than on the average return
over the periods indicated above. The cumulative total return for Class I for
the one-, five- and ten-year periods ended April 30, 1998, was 4.28%, 30.63%
and 111.74%, respectively. The cumulative total return for Class II for the
one-year period ended April 30, 1998, and for the period from inception (May
1, 1995) through April 30, 1998, was 6.15% and 21.43%, respectively.
YIELD
CURRENT YIELD. Current yield of each class shows the income per share earned
by the fund. It is calculated by dividing the net investment income per share
of each class earned during a 30-day base period by the applicable maximum
Offering Price per share on the last day of the period and annualizing the
result. Expenses accrued for the period include any fees charged to all
shareholders of the class during the base period. The yield for each class
for the 30-day period ended April 30, 1998, was 4.39% for Class I and 3.95%
for Class II.
These figures were obtained using the following SEC formula:
6
Yield = 2 [(a-b + 1) - 1]
---
cd
where:
a = interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that
were entitled to receive dividends
d = the maximum Offering Price per share on the last day of the period
TAXABLE-EQUIVALENT YIELD. The fund may also quote a taxable-equivalent yield
for each class that shows the before-tax yield that would have to be earned
from a taxable investment to equal the yield for the class.
Taxable-equivalent yield is computed by dividing the portion of the class'
yield that is tax-exempt by one minus the highest applicable federal income
tax rate and adding the product to the portion of the class' yield that is
not tax-exempt, if any. The taxable-equivalent yield for each class for the
30-day period ended April 30, 1998, was 7.27% for Class I and 6.54% for Class
II.
As of April 30, 1998, the federal income tax rate upon which the
taxable-equivalent yield quotations are based was 39.6%. From time to time,
as any changes to the rate become effective, taxable-equivalent yield
quotations advertised by the fund will be updated to reflect these changes.
The fund expects updates may be necessary as tax rates are changed by the
federal government. The advantage of tax-free investments, like the fund,
will be enhanced by any tax rate increases. Therefore, the details of
specific tax increases may be used in sales material for the fund.
CURRENT DISTRIBUTION RATE
Current yield and taxable-equivalent yield, which are calculated according to
a formula prescribed by the SEC, are not indicative of the amounts which were
or will be paid to shareholders. Amounts paid to shareholders are reflected
in the quoted current distribution rate or taxable-equivalent distribution
rate. The current distribution rate is usually computed by annualizing the
dividends paid per share by a class during a certain period and dividing that
amount by the current maximum Offering Price. The current distribution rate
differs from the current yield computation because it may include
distributions to shareholders from sources other than interest, if any, and
is calculated over a different period of time. The current distribution rate
for each class for the 30-day period ended April 30, 1998, was 5.25% for
Class I and 4.86% for Class II.
A taxable-equivalent distribution rate shows the taxable distribution rate
equivalent to the class' current distribution rate. The advertised
taxable-equivalent distribution rate will reflect the most current federal
tax rate available to the fund. The taxable-equivalent distribution rate for
each class for the 30-day period ended April 30, 1998, was 8.69% for Class I
and 8.05% for Class II.
VOLATILITY
Occasionally statistics may be used to show the fund's volatility or risk.
Measures of volatility or risk are generally used to compare the fund's Net
Asset Value or performance to a market index. One measure of volatility is
beta. Beta is the volatility of a fund relative to the total market, as
represented by an index considered representative of the types of securities
in which the fund invests. A beta of more than 1.00 indicates volatility
greater than the market and a beta of less than 1.00 indicates volatility
less than the market. Another measure of volatility or risk is standard
deviation. Standard deviation is used to measure variability of Net Asset
Value or total return around an average over a specified period of time. The
idea is that greater volatility means greater risk undertaken in achieving
performance.
OTHER PERFORMANCE QUOTATIONS
The fund may also quote the performance of shares without a sales charge.
Sales literature and advertising may quote a current distribution rate,
yield, cumulative total return, average annual total return and other
measures of performance as described elsewhere in this SAI with the
substitution of Net Asset Value for the public Offering Price.
The fund may include in its advertising or sales material information
relating to investment goals and performance results of funds belonging to
the Franklin Templeton Group of Funds. Resources is the parent company of the
advisors and underwriter of the Franklin Templeton Group of Funds.
COMPARISONS
To help you better evaluate how an investment in the fund may satisfy your
investment goal, advertisements and other materials about the fund may
discuss certain measures of fund performance as reported by various financial
publications. Materials may also compare performance (as calculated above) to
performance as reported by other investments, indices, and averages. These
comparisons may include, but are not limited to, the following examples:
a) Salomon Brothers Broad Bond Index or its component indices - measures
yield, price and total return for Treasury, agency, corporate and mortgage
bonds.
b) Lehman Brothers Aggregate Bond Index or its component indices - measures
yield, price and total return for Treasury, agency, corporate, mortgage and
Yankee bonds.
c) IBC's Money Fund Report(R) - industry averages for 7-day annualized and
compounded yields of taxable, tax-free, and government money funds.
d) Lehman Brothers Municipal Bond Index or its component indices - measures
yield, price and total return for the municipal bond market.
e) Bond Buyer 20 Index - an index of municipal bond yields based upon yields
of 20 general obligation bonds maturing in 20 years.
f) Bond Buyer 40 Index - an index composed of the yield to maturity of 40
bonds. The index attempts to track the new-issue market as closely as
possible, so it changes bonds twice a month, adding all new bonds that meet
certain requirements and deleting an equivalent number according to their
secondary market trading activity. As a result, the average par call date,
average maturity date, and average coupon rate can and have changed over
time. The average maturity generally has been about 29-30 years.
g) Financial publications: THE WALL STREET JOURNAL, AND BUSINESS WEEK,
Financial World, Forbes, Fortune, and MONEY MAGAZINES - provide performance
statistics over specified time periods.
h) Salomon Brothers Composite High Yield Index or its component indices -
measures yield, price and total return for the Long-Term High-Yield Index,
Intermediate-Term High-Yield Index, and Long-Term Utility High-Yield Index.
i) Historical data supplied by the research departments of CS First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch,
Lehman Brothers and Bloomberg, L.P.
j) Morningstar - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect
Morningstar's assessment of the historical risk-adjusted performance of a
fund over specified time periods relative to other funds within its category.
k) Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income Fund
Performance Analysis - measure total return and average current yield for the
mutual fund industry and rank individual mutual fund performance over
specified time periods, assuming reinvestment of all distributions, exclusive
of any applicable sales charges.
From time to time, advertisements or information for the fund may include a
discussion of certain attributes or benefits to be derived from an investment
in the fund. The advertisements or information may include symbols,
headlines, or other material that highlights or summarizes the information
discussed in more detail in the communication.
Advertisements or sales material issued by the fund may also discuss or be
based upon information in a recent issue of the Special Report on Tax Freedom
Day published by the Tax Foundation, a Washington, D.C. based nonprofit
research and public education organization. The report illustrates, among
other things, the annual amount of time the average taxpayer works to satisfy
his or her tax obligations to the federal, state and local taxing authorities.
Advertisements or information may also compare the fund's performance to the
return on CDs or other investments. You should be aware, however, that an
investment in the fund involves the risk of fluctuation of principal value, a
risk generally not present in an investment in a CD issued by a bank. For
example, as the general level of interest rates rise, the value of the fund's
fixed-income investments, as well as the value of its shares that are based
upon the value of such portfolio investments, can be expected to decrease.
Conversely, when interest rates decrease, the value of the fund's shares can
be expected to increase. CDs are frequently insured by an agency of the U.S.
government. An investment in the fund is not insured by any federal, state or
private entity.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not
be identical to the formula used by the fund to calculate its figures. In
addition, there can be no assurance that the fund will continue its
performance as compared to these other averages.
MISCELLANEOUS INFORMATION
The fund may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis in order to
have a projected amount available in the future to fund a child's college
education. (Projected college cost estimates are based upon current costs
published by the College Board.) The Franklin Retirement Planning Guide leads
you through the steps to start a retirement savings program. Of course, an
investment in the fund cannot guarantee that these goals will be met.
The fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin, one of the
oldest mutual fund organizations, has managed mutual funds for over 50 years
and now services more than 3 million shareholder accounts. In 1992, Franklin,
a leader in managing fixed-income mutual funds and an innovator in creating
domestic equity funds, joined forces with Templeton, a pioneer in
international investing. The Mutual Series team, known for its value-driven
approach to domestic equity investing, became part of the organization four
years later. Together, the Franklin Templeton Group has over $236 billion in
assets under management for more than 6 million U.S. based mutual fund
shareholder and other accounts. The Franklin Templeton Group of Funds offers
119 U.S. based open-end investment companies to the public. The fund may
identify itself by its NASDAQ symbol or CUSIP number.
Franklin is a leader in the tax-free mutual fund industry and manages more
than $49 billion in municipal bond assets for over three quarters of a
million investors. According to Research and Ratings Review, Franklin had one
of the largest staffs of municipal securities analysts in the industry, as of
March 31, 1997.
Under current tax laws, municipal securities remain one of the few
investments offering the potential for tax-free income. In 1998, taxes could
cost almost $47 on every $100 earned from a fully taxable investment (based
on the maximum combined 39.6% federal tax rate and the highest state tax rate
of 12% for 1998). Franklin tax-free funds, however, offer tax relief through
a professionally managed portfolio of tax-free securities selected based on
their yield, quality and maturity. An investment in a Franklin tax-free fund
can provide you with the potential to earn income free of federal taxes and,
depending on the fund, state and local taxes as well, while supporting state
and local public projects. Franklin tax-free funds may also provide tax-free
compounding, when dividends are reinvested. An investment in Franklin's
tax-free funds can grow more rapidly than similar taxable investments.
Municipal securities are generally considered to be creditworthy, second in
quality only to securities issued or guaranteed by the U.S. government and
its agencies. The market price of such securities, however, may fluctuate.
This fluctuation will have a direct impact on the Net Asset Value of an
investment in the fund.
Currently, there are more mutual funds than there are stocks listed on the
NYSE. While many of them have similar investment goals, no two are exactly
alike. As noted in the Prospectus, shares of the fund are generally sold
through Securities Dealers. Investment representatives of such Securities
Dealers are experienced professionals who can offer advice on the type of
investment suitable to your unique goals and needs, as well as the types of
risks associated with such investment.
The fund offers two classes of shares: Franklin Federal Tax-Free Income Fund,
Franklin Federal Tax-Free Income Fund Series, Franklin Federal Tax-Free
Income Fund - Class I and Franklin Federal Tax-Free Income Fund, Franklin
Federal Tax-Free Income Fund Series, Franklin Federal Tax-Free Income Fund -
Class II.
From time to time, the number of fund shares held in the "street name"
accounts of various Securities Dealers for the benefit of their clients or in
centralized securities depositories may exceed 5% of the total shares
outstanding. To the best knowledge of the fund, no other person holds
beneficially or of record more than 5% of the outstanding shares of any class.
In the event of disputes involving multiple claims of ownership or authority
to control your account, the fund has the right (but has no obligation) to:
(a) freeze the account and require the written agreement of all persons
deemed by the fund to have a potential property interest in the account,
before executing instructions regarding the account; (b) interplead disputed
funds or accounts with a court of competent jurisdiction; or (c) surrender
ownership of all or a portion of the account to the IRS in response to a
Notice of Levy.
SUMMARY OF CODE OF ETHICS. Employees of the Franklin Templeton Group who are
access persons under the 1940 Act are permitted to engage in personal
securities transactions subject to the following general restrictions and
procedures: (i) the trade must receive advance clearance from a compliance
officer and must be completed by the close of the business day following the
day clearance is granted; (ii) copies of all brokerage confirmations and
statements must be sent to a compliance officer; (iii) all brokerage accounts
must be disclosed on an annual basis; and (iv) access persons involved in
preparing and making investment decisions must, in addition to (i), (ii) and
(iii) above, file annual reports of their securities holdings each January
and inform the compliance officer (or other designated personnel) if they own
a security that is being considered for a fund or other client transaction or
if they are recommending a security in which they have an ownership interest
for purchase or sale by a fund or other client.
FINANCIAL STATEMENTS
The audited financial statements contained in the Annual Report to
Shareholders of the fund, for the fiscal year ended April 30, 1998, including
the auditor's report, are incorporated herein by reference.
USEFUL TERMS AND DEFINITIONS
1940 ACT - Investment Company Act of 1940, as amended
ADVISERS - Franklin Advisers, Inc., the fund's investment manager
BOARD - The Board of Directors of the fund
CD - Certificate of deposit
CLASS I AND CLASS II - The fund offers two classes of shares, designated
"Class I" and "Class II." The two classes have proportionate interests in the
fund's portfolio. They differ, however, primarily in their sales charge
structures and Rule 12b-1 plans.
CODE - Internal Revenue Code of 1986, as amended
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the fund's principal
underwriter
FITCH - Fitch Investors Service, Inc.
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Templeton Capital Accumulator Fund, Inc., and Templeton Variable
Products Series Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies
in the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
MOODY'S - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by
the number of shares outstanding.
NYSE - New York Stock Exchange
OFFERING PRICE - The public offering price is based on the Net Asset Value
per share of the class and includes the front-end sales charge. The maximum
front-end sales charge is 4.25% for Class I and 1% for Class II. We calculate
the offering price to two decimal places using standard rounding criteria.
PROSPECTUS - The prospectus for the fund dated September 1, 1998, which we
may amend from time to time
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
WE/OUR/US - Unless a different meaning is indicated by the context, these
terms refer to the fund and/or Investor Services, Distributors, or other
wholly owned subsidiaries of Resources.
APPENDIX
DESCRIPTION OF RATINGS
MUNICIPAL BOND RATINGS
MOODY'S
Aaa: Municipal bonds rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally
stable margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa: Municipal bonds rated Aa are judged to be high quality by all standards.
Together with the Aaa group, they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large, fluctuation of protective elements may be of
greater amplitude, or there may be other elements present that make the
long-term risks appear somewhat larger.
A: Municipal bonds rated A possess many favorable investment attributes and
are considered upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
that suggest a susceptibility to impairment sometime in the future.
Baa: Municipal bonds rated Baa are considered medium-grade obligations. They
are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any
great length of time. These bonds lack outstanding investment characteristics
and, in fact, have speculative characteristics as well.
Ba: Municipal bonds rated Ba are judged to have predominantly speculative
elements and their future cannot be considered well assured. Often the
protection of interest and principal payments may be very moderate and,
thereby, not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B: Municipal bonds rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Municipal bonds rated Caa are of poor standing. These issues may be in
default or there may be present elements of danger with respect to principal
or interest.
Con.(-): Municipal bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally.
These are bonds secured by (a) earnings of projects under construction, (b)
earnings of projects unseasoned in operation experience, (c) rentals that
begin when facilities are completed, or (d) payments to which some other
limiting condition attaches. Parenthetical rating denotes probable credit
stature upon the completion of construction or the elimination of the basis
of the condition.
S&P
AAA: Municipal bonds rated AAA are the highest-grade obligations. They
possess the ultimate degree of protection as to principal and interest. In
the market, they move with interest rates and, hence, provide the maximum
safety on all counts.
AA: Municipal bonds rated AA also qualify as high-grade obligations, and in
the majority of instances differ from AAA issues only in a small degree.
Here, too, prices move with the long-term money market.
A: Municipal bonds rated A are regarded as upper medium-grade. They have
considerable investment strength but are not entirely free from adverse
effects of changes in economic and trade conditions. Interest and principal
are regarded as safe. They predominantly reflect money rates in their market
behavior but also, to some extent, economic conditions.
BBB: Municipal bonds rated BBB are regarded as having an adequate capacity to
pay principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds
in this category than for bonds in the A category.
BB, B, CCC, CC: Municipal bonds rated BB, B, CCC and CC are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity
to pay interest and repay principal in accordance with the terms of the
obligations. BB indicates the lowest degree of speculation and CC the highest
degree of speculation. While these bonds will likely have some quality and
protective characteristics, they are outweighed by large uncertainties or
major risk exposures to adverse conditions.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
FITCH
AAA: Municipal bonds rated AAA are considered to be investment grade and of
the highest credit quality. The obligor has an exceptionally strong ability
to pay interest and repay principal that is unlikely to be affected by
reasonably foreseeable events.
AA: Municipal bonds rated AA are considered to be investment grade and of
very high credit quality. The obligor's ability to pay interest and repay
principal is very strong although not quite as strong as bonds rated AAA and
not significantly vulnerable to foreseeable future developments.
A: Municipal bonds rated A are considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB: Municipal bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore impair timely payment. The likelihood that the ratings
of these bonds will fall below investment grade is higher than for bonds with
higher ratings.
BB: Municipal bonds rated BB are considered speculative. The obligor's
ability to pay interest and repay principal may be affected over time by
adverse economic changes. Business and financial alternatives can be
identified, however, that could assist the obligor in satisfying its debt
service
requirements.
B: Municipal bonds rated B are considered highly speculative. While bonds in
this class are currently meeting debt service requirements, the probability
of continued timely payment of principal and interest reflects the obligor's
limited margin of safety and the need for reasonable business and economic
activity throughout the life of the issue.
CCC: Municipal bonds rated CCC have certain identifiable characteristics
which, if not remedied, may lead to default. The ability to meet obligations
requires an advantageous business and economic environment.
Plus (+) or minus (-) signs are used with a rating symbol to indicate the
relative position of a credit within the rating category. Plus or minus signs
are not used with the AAA category.
MUNICIPAL NOTE RATINGS
MOODY'S
Moody's ratings for state, municipal and other short-term obligations will be
designated Moody's Investment Grade ("MIG"). This distinction is in
recognition of the differences between short-term credit risk and long-term
risk. Factors affecting the liquidity of the borrower are uppermost in
importance in short-term borrowing; factors of the first importance in
long-term borrowing risk are of lesser importance in the short run. Symbols
used will be as follows:
MIG 1: Notes are of the best quality enjoying strong protection from
established cash flows of funds for their servicing or from established and
broad-based access to the market for refinancing, or both.
MIG 2: Notes are of high quality, with margins of protection ample, although
not so large as in the preceding group.
MIG 3: Notes are of favorable quality, with all security elements accounted
for, but lacking the undeniable strength of the preceding grades. Market
access for refinancing, in particular, is likely to be less well established.
MIG 4: Notes are of adequate quality, carrying specific risk but having
protection and not distinctly or predominantly speculative.
S&P
Until June 29, 1984, S&P used the same rating symbols for notes and bonds.
After June 29, 1984, for new municipal note issues due in three years or
less, the ratings below will usually be assigned. Notes maturing beyond three
years will most likely receive a bond rating of the type recited above.
SP-1: Issues carrying this designation have a very strong or strong capacity
to pay principal and interest. Issues determined to possess overwhelming
safety characteristics will be given a "plus" (+) designation.
SP-2: Issues carrying this designation have a satisfactory capacity to pay
principal and interest.
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's commercial paper ratings, which are also applicable to municipal
paper investments permitted to be made by the fund, are opinions of the
ability of issuers to repay punctually their promissory obligations not
having an original maturity in excess of nine months. Moody's employs the
following designations, all judged to be investment grade, to indicate the
relative repayment capacity of rated issuers:
P-1 (PRIME-1): Superior capacity for repayment.
P-2 (PRIME-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment
is very strong. A "plus" (+) designation indicates an even stronger
likelihood of timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
The relative degree of safety, however, is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects
of changes in circumstances than obligations carrying the higher designations.
FITCH
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, CDs, medium-term notes, and municipal and investment notes.
The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
F-1+: Exceptionally strong credit quality. Regarded as having the strongest
degree of assurance for timely payment.
F-1: Very strong credit quality. Reflect an assurance of timely payment only
slightly less in degree than issues rated F-1+.
F-2: Good credit quality. A satisfactory degree of assurance for timely
payment, but the margin of safety is not as great as for issues assigned F-1+
and F-1 ratings.
F-3: Fair credit quality. Have characteristics suggesting that the degree of
assurance for timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment grade.
F-5: Weak credit quality. Have characteristics suggesting a minimal degree of
assurance for timely payment and are vulnerable to near-term adverse changes
in financial and economic conditions.
D: Default. Actual or imminent payment default.
LOC: The symbol LOC indicates that the rating is based on a letter of credit
issued by a commercial bank.
Semi
Annual Report
October 31, 1998
Franklin Federal
Tax-Free Income Fund
Thank you for investing with Franklin Templeton. We encourage our investors to
maintain a long-term perspective and remember that all securities markets move
both up and down, as do mutual fund share prices. We appreciate your past
support and look forward to serving your investment needs in the years ahead.
(PICTURE OMITTED)
Charles B. Johnson (right),
Chairman
Franklin Federal
Tax-Free Income Fund
Thomas J. Kenny (left),
Director
Franklin Municipal
Bond Department
Contents
Shareholder Letter ............. 1
Special Feature:
Franklin's Municipal
Bond Department ................. 5
Manager's Discussion ........... 8
Performance Summaries
Class I ...................... 11
Class II ...................... 13
Financial Highlights &
Statement of Investments ........ 15
Financial Statements 48
Notes to
Financial Statements 51
Shareholder Letter
Dear Shareholder:
It's a pleasure to bring you Franklin Federal Tax-Free Income Fund's semiannual
report for the period ended October 31, 1998.
During the six-month reporting period, the Asian financial crisis spread to
other emerging markets around the world, which began to negatively affect U.S.
corporate earnings. After a six-year-long expansion, the U.S. economy started to
slow. The gross domestic product (GDP) for first quarter 1998 posted a robust
5.5% annualized rate, followed by a more moderate, 1.8% annualized rate for the
second quarter; the third quarter GDP was annualized at 3.9%. The modest growth
reflected weak Asian demand for goods and a business inventory buildup. A higher
U.S. trade deficit resulted, as Asian countries tried exporting their way out of
their economic turmoil. For the first six months of this year, America's trade
deficit was running at an annualized rate of $158 billion, far surpassing last
year's imbalance of $110 billion. Clearly, the American consumer continues to
drive our economy through relatively strong purchases of retail goods, durable
goods, and new and existing homes. Looking forward, the consumer may well
dictate the U.S. economy's direction.
During the reporting period, the yield on the benchmark 30-year U.S. Treasury
bond continued its downward trend and hit record lows. The 30-year Treasury
began the reporting period yielding 5.95% on April 30, 1998, and ended the
period yielding 5.15% on October 31, 1998. On October 5, 1998, the 30-year
Treasury yield fell to 4.70%, its all-time low. Falling yields reflected the
30-year Treasury bond's popularity among investors fleeing deteriorating foreign
stock markets. Bond price and yield move in an inverse relationship, so the
rising price of the 30-year Treasury led to a corresponding yield decline.
Responding to the global financial problems, the Federal Reserve Board (the Fed)
gradually eased monetary policy in September and October. The Fed's monetary
policy panel, the Federal Open Market Committee, twice cut the federal funds
target rate by 0.25%, to 5.00%, hoping to stimulate growth. The Fed's move
attempted to provide liquidity to the financial system, and make it easier for
major corporations to obtain favorable lending from banks. The tempered economic
activities combined with a period of benign inflation precipitated the low
interest-rate environment.
Issuers of municipal bonds took advantage of low interest rates during the
six-month period by refinancing outstanding, higher interest-rate debt.
Additionally, many municipalities experienced solid fiscal conditions due to the
strong economy. In fact, credit rating upgrades exceeded downgrades by a
four-to-one ratio. Borrowing for new projects increased, such that the supply of
new municipal bond issues in 1998 could approach record levels. Demand did not
keep pace with the increased supply, causing municipal bonds to underperform
compared with their taxable counterparts. At the end of the reporting period,
the yield on 30-year, AAA-rated, insured municipal bonds stood at 94% of the
yield on a 30-year Treasury bond, which in our opinion, creates an attractive
investment opportunity in the municipal bond market. For those investors in the
39.6% tax bracket, the taxable equivalent yield on an average municipal bond was
7.95% versus 5.15% for the 30-year Treasury bond.*
*Source: Bloomberg, October 31, 1998.
Our investment philosophy remains disciplined and focused, as we strive to offer
our shareholders high, current tax-free income and relatively low-price
volatility. The outlook for the municipal bond market should remain positive,
given the stable U.S. economy, low inflation environment, budget surplus, strong
dollar, and the economic and market uncertainty facing many of the world's
regions.
Municipal bond funds continue to be an attractive investment for those investors
seeking tax-free income as well as providing an opportunity to diversify risk in
their portfolio. We encourage you to discuss your financial goals with an
investment representative. He or she can address concerns about volatility and
help you diversify your investments and stay focused on the long term. Mutual
funds offer a level of diversification that is almost impossible for individual
investors to achieve on their own. As always, we appreciate your support,
welcome your questions and comments and look forward to serving your investment
needs in the years ahead.
Sincerely,
/s/ Charles B. Johnson
Charles B. Johnson
Chairman
Franklin Federal Tax-Free Income Fund
/s/ Thomas J. Kenny
Thomas J. Kenny
Director
Franklin Municipal Bond Department
Franklin's Municipal
Bond Department
The Municipal Bond Department Today
Franklin is currently the nation's largest
tax-free fund manager. With a team of 11 portfolio managers and 22 research
analysts, we manage more than $50 billion of municipal assets in 43 funds for
over 886,000 tax-free fund shareholder accounts.
Our Investment Philosophy
The investment objective of Franklin's tax-free funds
is to provide a high level of current, tax-free income while preserving
shareholders' capital. Following a disciplined investment approach, we conduct a
stringent credit analysis to search for what we believe to be undervalued
situations, and generally purchase current coupon bonds at prices we consider
favorable. We also acknowledge that our investors in general are risk-averse;
therefore, we do not invest in exotic derivatives, nor leverage or hedge our
portfolios, which would increase the funds' volatility.
Furthermore, Franklin positions its funds with a long-term investment horizon.
We purchase a major portion of our municipal bonds in the new-issue market and
incorporate a buy-and-hold strategy, attempting to reduce portfolio turnover and
thus, avoid capital gain distributions. We expect our funds to distribute a
relatively high level of tax-free income, and attempt to maximize risk-adjusted
total return performance.
Research and Analysis
Franklin has one of the industry's largest research departments. Along with the
portfolio managers, the research department's main mission is to identify the
best municipal buying opportunities.
Our analysts specialize in their individual fields and focus on investment
sectors, not geographic regions. With the use of proprietary databases, our
analysts can provide fast and reliable analysis to portfolio managers about any
bond issue being considered. Each year analysts visit a number of sites to get a
perspective of our financed projects. They meet with management teams and
municipal officials to discuss newly found potential opportunities and problems.
Our municipal bond team often takes on the role similar to that played by
investment bankers. Many of our competitors routinely turn away from issues that
may be unattractive on the surface; at Franklin, we pride ourselves in proposing
changes to these issues, and work to make them acceptable to our criteria. These
situations often provide us with excellent investment return.
The ability and willingness to work with issuers and our reputation for talented
analysts also make us a preferred client to receive the "first call" on issues
many brokerage houses underwrite. Lastly, our research analysts have made
significant efforts to improve municipal markets. With their involvement and
leadership, they have been working with attorney and issuer groups and industry
regulators to strengthen the municipal bond industry.
(PICTURE OMITTED)
Franklin Municipal Bond Team
Manager's Discussion
Your Fund's Goal: Franklin Federal Tax-Free Income Fund seeks to provide high,
current income exempt from regular federal income tax through a nationally
diversified portfolio consisting of municipal securities.1
GRAPHIC MATERIAL 1 OMITTED - SEE APPENDIX AT END OF DOCUMENT
For the first three quarters of 1998, the municipal bond market experienced near
record supply. As mentioned in our previous report, municipal bond insurance
covered over 50% of new issues. Benefiting from increased competition among
insurers and many municipalities' improved financial strength, municipal bond
insurance became relatively inexpensive and provided issuers improved
marketability. Many state and local governments experienced record revenues, as
well as budget surpluses, which enabled them to borrow for infrastructure
financing. As of third quarter 1998, over $220 billion of new issues came to
market, a 40% increase over 1997.
This supply weighed heavily on the municipal bond market. Although demand
remained steady in this market, it was not sufficient to meet the increased
supply, causing municipal bonds to underperform compared with their taxable
counterparts. At the same time, global market weakness caused many investors to
seek the safe haven of U.S. Treasuries, pushing their prices higher and hence,
yields lower. By the end of the reporting period, there was little difference
between long-term municipal yields and Treasury yields, as the chart on page 10
shows. On May 1, 1998, the beginning of the six-month reporting period, the Bond
Buyer Municipal 40 Index was yielding 5.37%, and the 30-year Treasury yield was
5.94%. The index ended the reporting period yielding 5.13%, while the 30-year
Treasury yield stood at 5.15%. Such a slim margin between municipal bond yields
and Treasury yields created an attractive taxable equivalent rate for the fund.
1. These dividends are generally subject to state and local income taxes, if
any. For investors subject to federal or state alternative minimum tax, a small
portion of this income may be subject to such tax. Distributions of capital
gains and of ordinary income from accrued market discount, if any, are generally
taxable.
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 17 of
this report.
The large supply in the municipal bond market provided Franklin Federal Tax-Free
Income Fund the flexibility to diversify its assets. Although New York and
California are generally the largest issuers of municipal bonds, we seek to
maintain a portfolio diversified among the states. During the reporting period,
the number of portfolio positions increased from 930 to 983 and included
investments in all 50 states. As opportunities arose, we added to our holdings
in Texas, Illinois, Wisconsin and Colorado. Taking advantage of ample supply in
the insured sector, we boosted the amount of insured securities to 23.5%, from
21.8%, over the six-month reporting period.
New York issues remain our largest single-state sector, at 17.1% of total
long-term investments. New York state and New York City recorded 1998
fiscal-year budget surpluses. The improved fiscal performance contributed to New
York City's municipal securities' credit rating upgrade. As of October 31, 1998,
all three national credit rating agencies now give A ratings for New York City's
obligations.
GRAPHIC MATERIAL 2 OMITTED - SEE APPENDIX AT END OF DOCUMENT
GRAPHIC MATERIAL 3 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Going forward, our outlook for Franklin Federal Tax-Free Income Fund is
positive. We believe municipal bond supply should remain robust, and we expect
relatively strong demand due to the attractiveness of municipal bonds versus
other fixed-income investments. The fund should continue to produce a steady
source of tax-free income for investors.
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of October 31, 1998, the end of the reporting period. However,
market and economic conditions are changing constantly, which can be expected to
affect our strategies and the fund's portfolio composition. Although historical
performance is no guarantee of future results, these insights may help you
understand our investment and management philosophy.
Performance Summary
Class I
Franklin Federal Tax-Free Income Fund - Class I share price, as measured by net
asset value, increased 17 cents, from $12.25 on April 30, 1998, to $12.42 on
October 31, 1998. During the six-month reporting period, shareholders received
income distributions totaling 33.6 cents ($0.336) per share. Distributions will
vary based on the earnings of the fund's portfolio, and past distributions are
not predictive of future trends.
Based on an annualization of October's monthly per-share dividend of 5.6 cents
($0.056) and the maximum offering price of $12.97 on October 31, 1998, your
fund's distribution rate was 5.18%. This tax-free rate is generally higher than
the after-tax return on a comparable taxable investment. For example, an
investor in the maximum federal income tax bracket would need to earn 8.58% from
a taxable investment to match the fund's tax-free distribution rate.
GRAPHIC MATERIAL 4 OMITTED - SEE APPENDIX AT END OF DOCUMENT
GRAPHIC MATERIAL 5 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Performance
Class I
Periods ended 10/31/98
Since
Inception
1-Year 5-Year 10-Year (10/7/83)
- ----------------------------------------------------------------------------
Cumulative Total Return1 7.20% 34.88% 112.50% 271.73%
Average Annual Total Return2 2.67% 5.26% 7.36% 8.79%
Distribution Rate3 5.18%
Taxable Equivalent Distribution Rate4 8.58%
30-Day Standardized Yield5 4.03%
Taxable Equivalent Yield4 6.67%
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the current, maximum 4.25%
initial sales charge. Prior to July 1, 1994, fund shares were offered at a lower
initial sales charge with dividends reinvested at the offering price; thus
actual total returns would differ.
3. Distribution rate is based on an annualization of October's 5.6 cent per
share monthly dividend and the maximum offering price of $12.97 on October 31,
1998.
4. Taxable equivalent distribution rate and yield assume the 1998 maximum
federal income tax rate of 39.6%.
5. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended October 31, 1998.
Effective May 1, 1994, the fund eliminated the sales charge on reinvested
dividends and implemented a Rule 12b-1 plan, which affects subsequent
performance. All total return calculations assume reinvestment of dividends and
capital gains at net asset value. Since markets can go down as well as up,
investment return and principal value will fluctuate with market conditions, and
you may have a gain or loss when you sell your shares.
Class II
Franklin Federal Tax-Free Income Fund - Class II share price, as measured by net
asset value, increased 18 cents, from $12.24 on April 30, 1998, to $12.42 on
October 31, 1998. During the six-month reporting period, shareholders received
income distributions totaling 30.04 cents ($0.3004) per share. Distributions
will vary based on the earnings of the fund's portfolio, and past distributions
are not predictive of future trends.
Based on an annualization of October's monthly per-share dividend of 5.01 cents
($0.0501) and the maximum offering price of $12.55 on October 31, 1998, your
fund's distribution rate was 4.79%. This tax-free rate is generally higher than
the after-tax return on a comparable taxable investment. For example, an
investor in the maximum federal income tax bracket would need to earn 7.93% from
a taxable investment to match the fund's tax-free distribution rate.
GRAPHIC MATERIAL 6 OMITTED - SEE APPENDIX AT END OF DOCUMENT
GRAPHIC MATERIAL 7 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Performance
Class II
Periods ended 10/31/98
Since
Inception
1-Year 3-Year (5/1/95)
- --------------------------------------------------------------------------
Cumulative Total Return1 6.67% 21.05% 27.55%
Average Annual Total Return2 4.64% 6.22% 6.88%
Distribution Rate3 4.79%
Taxable Equivalent Distribution Rate4 7.93%
30-Day Standardized Yield5 3.61%
Taxable Equivalent Yield4 5.98%
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the 1.0% initial sales
charge and the 1.0% contingent deferred sales charge, as applicable.
3. Distribution rate is based on an annualization of October's 5.01 cent per
share monthly dividend and the maximum offering price of $12.55 on October 31,
1998.
4. Taxable equivalent distribution rate and yield assume the 1998 maximum
federal income tax rate of 39.6%.
5. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended October 31, 1998.
All total return calculations assume reinvestment of dividends and capital gains
at net asset value. Since markets can go down as well as up, investment return
and principal value will fluctuate with market conditions, and you may have a
gain or loss when you sell your shares.
Past performance is not predictive of future results.
<TABLE>
<CAPTION>
FRANKLIN FEDERAL TAX-FREE INCOME FUND
Financial Highlights
Class I
------------------------------------------------------------------
Six Months Ended
October 31, 1998 Year Ended April 30,
--------------------------------------------------
(unaudited) 1998 1997 1996 1995 1994
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance
(for a share outstanding throughout the period)
Net asset value, beginning of period ......... $12.25 $11.90 $11.83 $11.73 $11.81 $12.24
------------------------------------------------------------------
Income from investment operations:
Net investment income ....................... .34 .69 .71 .74 .75 .77
Net realized and unrealized gains (losses) .. .17 .35 .07 .10 (.05) (.41)
------------------------------------------------------------------
Total from investment operations ............. .51 1.04 .78 .84 .70 .36
Less distributions from net investment income (.34) (.69) (.71) (.74) (.78) (.79)
------------------------------------------------------------------
Net asset value, end of period ............... $12.42 $12.25 $11.90 $11.83 $11.73 $11.81
==================================================================
Total Return* ................................ 4.19% 8.92% 6.81% 7.33% 6.21% 2.58%
Ratios/Supplemental Data
Net assets, end of period (000's) ............ $7,133,824 $7,022,961 $6,905,488 $7,012,601 $6,886,941 $6,804,262
Ratios to average net assets:
Expenses .................................... .58%** .59% .58% .57% .59% .52%
Net investment income ....................... 5.46%** 5.70% 6.00% 6.20% 6.47% 6.27%
Portfolio turnover rate ...................... 6.54% 14.54% 16.43% 25.10% 19.88% 24.59%
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized. Prior to May 1, 1994, dividends from net
investment income were reinvested at the offering price.
**Annualized.
<TABLE>
<CAPTION>
Class II
-------------------------------------------------------------
Six Months Ended
October 31, 1998 Year Ended April 30,
-------------------------------------
(unaudited) 1998 1997 1996***
-------------------------------------------------------------
Per Share Operating Performance
(for a share outstanding throughout the period)
<S> <C> <C> <C> <C>
Net asset value, beginning of period ................ $12.24 $11.90 $11.82 $11.73
-------------------------------------------------------------
Income from investment operations:
Net investment income .............................. .30 .63 .66 .68
Net realized and unrealized gains .................. .18 .33 .06 .09
-------------------------------------------------------------
Total from investment operations .................... .48 .96 .72 .77
Less distributions from net investment income ....... (.30) (.62) (.64) (.68)
-------------------------------------------------------------
Net asset value, end of period ...................... $12.42 $12.24 $11.90 $11.82
=============================================================
Total Return* ....................................... 3.97% 8.22% 6.28% 6.68%
Ratios/Supplemental Data
Net assets, end of period (000's) ................... $176,317 $135,195 $71,944 $34,110
Ratios to average net assets:
Expenses ........................................... 1.16%** 1.17% 1.16% 1.15%
Net investment income .............................. 4.88%** 5.12% 5.42% 5.68%
Portfolio turnover rate ............................. 6.54% 14.54% 16.43% 25.10%
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
**Annualized.
***The Fund paid a dividend to shareholders of record on the beginning of
business, May 1, 1995 in the amount of $0.062 per share. The net asset value at
the beginning of period includes this dividend.
<TABLE>
<CAPTION>
FRANKLIN FEDERAL TAX-FREE INCOME FUND
Statement of Investments, October 31, 1998 (unaudited)
PRINCIPAL
AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
aLong Term Investments 97.7%
Bonds 95.5%
Alabama 1.3%
<S> <C> <C>
Alabama HFA, SFMR, Collateralized Home Mortgage, Series D-2, 5.75%, 10/01/23 ..................... $ 5,400,000 $ 5,571,936
Alabama Water Pollution Control Authority, Revolving Fund Loan, Series B, Pre-Refunded, 7.75%, 8/15/12 5,925,000 6,389,402
Anniston Regional Medical Center Board, Series A, AMBAC Insured, 5.125%, 6/01/28 ................. 7,000,000 7,002,730
Citronelle IDB, PCR, Stauffer Chemical Project, Guaranteed by Imperial Chemical, Plc., Series 1982, 8.00%,
12/01/12 ......................................................................................... 1,000,000 1,073,370
Courtland IDB, PCR, Champion International Corp. Project, Refunding, 6.15%, 6/01/19 .............. 5,000,000 5,310,800
Courtland IDBR, Champion International Corp., Refunding, Series A, 7.20%, 12/01/13 ............... 12,000,000 13,212,600
Fairfield IDB, Environmental Improvement Revenue, USX Corp. Projects, Refunding, 5.45%, 9/01/14 .. 1,445,000 1,469,319
Jefferson County Sewer Revenue, Warrants,
Refunding, Series A, FGIC Insured, 5.625%, 2/01/22 ............................................... 4,000,000 4,280,200
Series D, FGIC Insured, 5.75%, 2/01/22 ........................................................... 15,995,000 17,330,742
Series D, FGIC Insured, 5.75%, 2/01/27 ........................................................... 19,715,000 21,361,400
Mc Intosh IDB, Environmental Improvement Revenue, CIBA Specialty, Refunding, Series C, 5.375%, 6/01/28 5,000,000 5,062,150
Montgomery Medical Clinic Board, Health Care Facilities Revenue, Jackson Hospital and Clinic, Refunding,
AMBAC Insured, 6.00%, 3/01/26 .................................................................... 5,385,000 5,894,367
-----------
93,959,016
-----------
Alaska 1.9%
Alaska Industrial Development and Export Authority, Revolving Fund, Series A, 7.95%, 4/01/10 ..... 1,775,000 1,888,369
Alaska State HFC,
Collateralized Home Mortgage, Series A-1, 6.75%, 12/01/32 ........................................ 3,400,000 3,609,134
Mortgage, Refunding, Series A, MBIA Insured, 6.00%, 12/01/15 ..................................... 4,290,000 4,546,070
Refunding, Series A, MBIA Insured, 5.875%, 12/01/24 .............................................. 17,875,000 18,711,908
Refunding, Series A, MBIA Insured, 5.875%, 12/01/30 .............................................. 11,600,000 12,092,072
Refunding, Series A, MBIA Insured, 6.10%, 12/01/37 ............................................... 34,000,000 35,952,960
Series A, Pre-Refunded, 6.60%, 12/01/23 .......................................................... 8,000,000 8,903,120
Veterans Mortgage Program, MBIA Insured, 6.75%, 12/01/25 ......................................... 20,530,000 22,039,776
Anchorage Parking Authority Revenue, 5th Avenue Garage Lease Project, Refunding,
6.50%, 12/01/02 .................................................................................. 3,360,000 3,616,570
6.75%, 12/01/08 .................................................................................. 3,500,000 3,783,045
Valdez Marine Terminal Revenue, BP Pipelines, Inc. Project, Refunding, Series A, 5.85%, 8/01/25 .. 25,000,000 25,955,000
-----------
141,098,024
-----------
Arizona .4%
Maricopa County IDA, Health Facilities Revenue, Mayo Clinic Hospital, 5.25%, 11/15/37 ............ 20,000,000 20,241,400
Phoenix Civic Improvement Corporation Airport Revenue, Senior Lien, Series B, FSA Insured, 5.00%, 8,500,000 8,462,175
-----------
7/01/25 28,703,575
-----------
Arkansas 1.4%
Arkansas State Development Financing Authority, Driver's License Revenue, State Police Headquarters,
Wireless Data, FGIC Insured, 5.40%, 6/01/18 ...................................................... 4,000,000 4,166,920
Desha County Residential Housing Facilities Board, SFMR, Refunding, 7.50%, 4/01/11 ............... 1,940,000 2,066,236
Independence County Public Health and Education Facilities Board, Capital Revenue, White River Control Project,
Refunding & Improvement, Pre-Refunded, 8.00%, 6/01/09 ............................................ 3,115,000 3,265,174
Jefferson County PCR,
Arkansas Power and Light Co. Project, Refunding, 6.30%, 6/01/18 .................................. 1,465,000 1,587,049
Entergy Arkansas Inc. Project, Refunding, 5.60%, 10/01/17 ........................................ 5,000,000 5,082,000
Little River County Revenue, Georgia-Pacific Corporate Project, Refunding, 5.60%, 10/01/26 ....... 13,000,000 13,041,340
Arkansas (cont.)
Pope County PCR, Power and Light Co. Project, Refunding, 6.30%,
12/01/16 ......................................................................................... $ 2,600,000 $ 2,813,954
11/01/20 ......................................................................................... 60,000,000 62,688,600
Pulaski County,
Health Facilities Board Revenue Catholic Health Initiatives, Series A, 5.00%, 12/01/28 ........... 1,500,000 1,461,240
Public Facilities Board, MFR, Refunding, Series A, GNMA Insured, 5.45%, 12/20/18 ................. 1,000,000 1,012,630
University of Central Arkansas,
Academic Facilities Revenue, Series B, AMBAC Insured, 5.875%, 4/01/16 ............................ 250,000 275,203
Academic Facilities Revenue, Series C, AMBAC Insured, 6.00%, 4/01/21 ............................. 1,000,000 1,108,620
Athletic Facilities Revenue, Series C, AMBAC Insured, 6.00%, 4/01/21 ............................. 1,000,000 1,108,620
Athletic Facilities Revenue, Series C, AMBAC Insured, 6.125%, 4/01/26 ............................ 825,000 911,130
Housing System Revenue, Refunding, Series A, AMBAC Insured, 6.00%, 4/01/21 ....................... 1,000,000 1,108,620
-----------
101,697,336
-----------
California 4.9%
Alhambra COP, Clubhouse Facility Project, 11.25%
1/01/08 .......................................................................................... 410,000 418,688
1/01/09 .......................................................................................... 455,000 464,564
1/01/10 .......................................................................................... 500,000 510,470
Burbank RDA, Tax Allocation, Refunding, Series A, 6.25%, 12/01/24 ................................ 5,325,000 5,740,084
California Health Facilities, Financing Authority Revenue, St. Francis Medical Center, Refunding, Series H, AMBAC
Insured, 6.30%, 10/01/15 ......................................................................... 2,800,000 3,182,256
California State Educational Facilities Authority Revenue,
National University, Connie Lee Insured, 6.00%, 5/01/09 .......................................... 3,580,000 3,996,891
Pooled College and University Projects, Series B, 6.00%, 12/01/20 ................................ 6,025,000 6,482,719
California State GO,
6.00%, 5/01/18 ................................................................................... 535,000 590,587
5.90%, 4/01/23 ................................................................................... 1,200,000 1,300,740
FGIC Insured, 6.00%, 5/01/20 ..................................................................... 850,000 936,547
FGIC Insured, Pre-Refunded, 6.00%, 5/01/20 ....................................................... 11,650,000 13,099,027
Series 1994, 5.90%, 5/01/08 ...................................................................... 3,070,000 3,436,773
Veterans Bonds, Series BC, 6.00%, 2/01/10 ........................................................ 1,000,000 1,015,780
Veterans Bonds, Series BD, BE, and BF, 6.55%, 2/01/25 ............................................ 14,700,000 14,941,668
California State Public Works Board, Lease Revenue, Various University of California Projects, Series A, 6.375%,
10/01/14 ......................................................................................... 4,000,000 4,592,880
10/01/19 ......................................................................................... 2,000,000 2,296,440
California Statewide Communities Development Authority Revenue, COP, Sutter Health Obligation Group,
MBIA Insured, 6.00%, 8/15/25 ..................................................................... 14,750,000 16,329,873
Chino USD, COP, Refunding, FSA Insured, 5.90%, 9/01/15 ........................................... 8,250,000 9,094,800
Coalinga Public Finance Authority Revenue, Series B, 6.25%, 9/15/07 .............................. 1,020,000 1,044,378
Commerce, Refuse to Energy Authority Revenue, Refunding, Series 1994, 8.75%, 7/01/10 ............. 1,000,000 1,184,950
Foothill/Eastern Transportation Corridor Agency, Toll Road Revenue, Senior Lien, Series A, 6.50%, 59,240,000 66,583,983
1/01/32
Forty-Niner Shops, Inc., Auxiliary Organization, California State Long Beach Project, 6.875%,
4/01/07 .......................................................................................... 1,090,000 1,222,795
4/01/12 .......................................................................................... 1,565,000 1,755,664
Los Angeles County Metropolitan Transportation Authority, Sales Tax Revenue, Proposition C, Refunding,
Second Series A, AMBAC Insured, 5.00%, 7/01/23 ................................................... 10,000,000 9,971,200
California (cont.)
Los Angeles CRDA, Housing Revenue, Refunding, Series A, AMBAC Insured, 6.55%, 1/01/27 ............ $ 3,180,000 $ 3,451,731
Los Angeles Department of Water and Power, Electric Plant Revenue, Refunding, MBIA Insured, 6.00%, 3,000,000 3,203,880
2/01/28
Los Angeles Regional Airport Improvements Corp., Lease Revenue,
Facilities Sub-Lease, International Airport, Refunding, 6.35%, 11/01/25 .......................... 18,500,000 20,263,605
United Airlines, Inc. Project, Refunding, 6.875%, 11/15/12 ....................................... 8,400,000 9,245,292
Pomona Public Financing Authority Revenue, Series Q, MBIA Insured, 5.90%, 12/01/25 ............... 4,000,000 4,379,000
Sacramento County Airport Systems Revenue, Sub-Series D, MBIA Insured, 6.00%, 7/01/16 ............ 6,480,000 7,285,464
San Bernardino County COP, Medical Center Financing Project, Series A, MBIA Insured, 5.875%, 8/01/26 33,315,000 36,322,012
San Francisco City and County RDA Revenue,
George Moscone Convention Center, Lease Revenue, 6.75%, 7/01/24 .................................. 7,075,000 8,102,007
Tax Allocation Redevelopment Project, 6.50%, 8/01/22 ............................................. 12,680,000 14,700,812
San Francisco City and County Sewer Revenue, Series A, FGIC Insured, 5.90%, 10/01/20 ............. 10,380,000 11,247,041
San Joaquin Hills Transportation Corridor Agency, Toll Road Revenue,
5.00%, 1/01/33 ................................................................................... 5,000,000 4,840,650
Pre-Refunded, 7.00%, 1/01/30 ..................................................................... 16,785,000 19,188,948
University of California Revenues,
Hospital - U.C. Medical Center, AMBAC Insured, 5.75%, 7/01/24 .................................... 25,000,000 27,080,250
Research Facilities, Series B, Pre-Refunded, 6.55%, 9/01/24 ...................................... 11,780,000 13,419,658
Windsor RDA Revenue, Tax Allocation, Windsor Project, 7.00%, 9/01/24 ............................. 2,405,000 2,661,998
-----------
355,586,105
-----------
Colorado 4.8%
Colorado Health Facilities Authority Revenue,
Catholic Health Initiatives, Series A, 5.00%, 12/01/28 ........................................... 3,035,000 2,956,576
Kaiser Permanente, Series A, 5.35%, 11/01/16 ..................................................... 13,250,000 13,398,003
Series B, 5.35%, 8/01/15 ......................................................................... 20,200,000 20,763,580
Colorado HFA, GO, Series A, 7.50%, 5/01/29 ....................................................... 1,595,000 1,675,611
Colorado Post-Secondary Educational Facilities Authority Revenue, University of Denver Project,
Refunding & Improvement, MBIA Insured, 5.375%, 3/01/18 ........................................... 6,000,000 6,256,500
Colorado Springs Utilities Revenue, System Improvement, Series A, Subordinate Lien., 5.00%, 11/15/27 20,000,000 19,818,000
Denver City and County Airport Revenue,
Series A, 8.875%, 11/15/12 ....................................................................... 12,130,000 13,836,934
Series A, 7.50%, 11/15/23 ........................................................................ 13,590,000 15,572,237
Series A, 8.50%, 11/15/23 ........................................................................ 72,960,000 79,924,032
Series A, 8.00%, 11/15/25 ........................................................................ 20,305,000 22,048,184
Series A, 8.00%, 11/15/25 ........................................................................ 1,480,000 1,626,076
Series A, Pre-Refunded, 7.50%, 11/15/12 .......................................................... 11,200,000 12,950,224
Series A, Pre-Refunded, 8.875%, 11/15/12 ......................................................... 4,515,000 5,252,661
Series A, Pre-Refunded, 7.50%, 11/15/23 .......................................................... 2,930,000 3,512,045
Series A, Pre-Refunded, 8.50%, 11/15/23 .......................................................... 6,985,000 7,771,930
Series A, Pre-Refunded, 7.25%, 11/15/25 .......................................................... 16,465,000 18,918,779
Series A, Pre-Refunded, 7.25%, 11/15/25 .......................................................... 8,060,000 9,261,182
Series A, Pre-Refunded, 8.00%, 11/15/25 .......................................................... 2,020,000 2,227,979
Series A, Pre-Refunded, 8.00%, 11/15/25 .......................................................... 520,000 582,743
Series B, 7.25%, 11/15/23 ........................................................................ 2,120,000 2,344,911
Series B, Pre-Refunded, 7.25%, 11/15/23 .......................................................... 530,000 605,764
Series D, 7.75%, 11/15/21 ........................................................................ 8,950,000 9,913,647
Colorado (cont.)
Denver City and County Airport Revenue, (cont.)
Series D, 7.00%, 11/15/25 ........................................................................ $ 7,835,000 $ 8,352,032
Series D, Pre-Refunded, 7.75%, 11/15/21 .......................................................... 2,510,000 2,839,889
Denver City and County Special Facilities, Airport Revenue, United Airlines, Inc. Project, 47,980,000 51,855,345
Series A, 6.875%, 10/01/32
Littleton MFR, Rental Housing, Riverpointe Project I, Series 1985, 8.00%, 12/01/22 ............... 16,105,000 16,486,689
-----------
350,751,553
-----------
Connecticut
Meriden Housing Authority MFR, Connecticut Baptist Housing Project, GNMA Insured, 5.80%, 8/20/39 . 2,870,000 2,975,645
-----------
Delaware
Delaware State EDA Revenue, Water Development, Wilmington, Refunding, Series B, 6.45%, 12/01/07 .. 1,160,000 1,340,995
Delaware State Housing Authority, MFMR, Refunding, Series D, 6.75%, 7/01/06 ...................... 2,000,000 2,217,580
-----------
3,558,575
-----------
Florida 2.0%
Bay County Resource Recovery Revenue, Refunding,
Series A, MBIA Insured, 6.50%, 7/01/07 ........................................................... 2,100,000 2,332,239
Series B, MBIA Insured, 6.50%, 7/01/07 ........................................................... 11,020,000 12,238,702
Broward County Resource Recovery Revenue, Broward Waste Energy Co., L.P., North Project, Series 1984, 7.95%,
12/01/08 ......................................................................................... 40,950,000 43,675,223
Callaway/Bay County Waste Water Systems Revenue, Series A, FGIC Insured, 6.00%, 9/01/26 .......... 1,000,000 1,108,560
Florida State Board Of Education, Capital Outlay, Public Education, Refunding, Series 1992, 6.40%, 22,475,000 24,347,842
6/01/19
Florida State Department of Transportation,
Right of Way Acquisition and Bridge, 5.375%, 7/01/26 ............................................. 10,000,000 10,317,000
Turnpike Revenue, Series A, Pre-Refunded, 7.75%, 7/01/09 ......................................... 7,125,000 7,485,739
Lakeland Retirement Community, First Mortgage Revenue, Carpenters Home Estate Project, 9.50%, 9/01/06 3,330,000 3,330,000
Manatee County IDR, Manatee Hospital and Health Systems, Inc., Pre-Refunded, 9.25%, 3/01/21 ...... 6,500,000 7,423,260
Manatee County School Board COP, MBIA Insured, Pre-Refunded, 6.125%, 7/01/16 ..................... 5,000,000 5,768,450
bSouth Miami Florida Health Facilities Authority Hospital Revenue, Baptist Health System Obligation Group,
MBIA Insured, 5.00%, 11/15/28 .................................................................... 7,000,000 6,924,680
St. Augustine Water and Sewer Revenue, Refunding, Series A, MBIA Insured, 6.20%,
10/01/00 ......................................................................................... 840,000 884,024
10/01/01 ......................................................................................... 890,000 956,634
10/01/02 ......................................................................................... 940,000 1,028,322
10/01/03 ......................................................................................... 1,005,000 1,117,741
10/01/04 ......................................................................................... 1,065,000 1,199,084
10/01/05 ......................................................................................... 1,130,000 1,286,019
10/01/06 ......................................................................................... 1,200,000 1,381,692
10/01/07 ......................................................................................... 1,275,000 1,463,024
10/01/08 ......................................................................................... 1,355,000 1,539,822
10/01/12 ......................................................................................... 6,300,000 7,114,653
Sunrise Utilities System Revenue, Refunding, AMBAC Insured, 5.20%, 10/01/22 ...................... 2,000,000 2,052,520
-----------
144,975,230
-----------
Georgia 2.3%
Burke County Development Authority, PCR, Georgia Power Co., Plant Vogle Project,
Series 1984-1, MBIA Insured, 6.60%, 7/01/24 ...................................................... 105,000,000 108,851,400
Series 1984-7, MBIA Insured, 6.625%, 10/01/24 .................................................... 8,025,000 8,371,439
Georgia (cont.)
Fulton County Development Authority, Special Facilities Revenue, Delta Airlines, Inc. Project,
5.45%, 5/01/23 ................................................................................... $ 3,000,000 $ 2,956,110
Refunding, 6.85%, 11/01/07 ....................................................................... 3,400,000 3,701,546
Refunding, 6.95%, 11/01/12 ....................................................................... 5,500,000 5,994,945
Gainsville and Hall County Hospital Authority Revenue Anticipation Certificates, Northeast
Georgia Healthcare Project, Refunding, MBIA Insured, 6.00%, 10/01/25 ............................. 7,975,000 8,725,607
Georgia Municipal Electric Authority Power Revenue,
Series B, 6.375%, 1/01/16 ........................................................................ 14,000,000 14,979,720
Series EE, 6.40%, 1/01/23 ........................................................................ 6,325,000 7,034,792
Georgia State HFA Revenue, Homeownership Opportunity Program, Series C, 6.60%, 12/01/23 .......... 3,635,000 3,875,746
Monroe County Development Authority, PCR, Georgia Power Co., AMBAC Insured, 6.25%, 7/01/19 ....... 4,300,000 4,477,074
-----------
168,968,379
-----------
Hawaii 1.2%
Hawaii State Airports System Revenue,
FGIC Insured, 7.00%, 7/01/20 ..................................................................... 1,000,000 1,095,810
Second Series, 7.00%, 7/01/07 .................................................................... 12,000,000 13,066,680
Second Series, 6.90%, 7/01/12 .................................................................... 500,000 599,795
Second Series, 7.00%, 7/01/18 .................................................................... 2,830,000 3,046,580
Hawaii State Department of Budget and Finance,
Special Purposes Mortgage Revenue, Hawaii Electric Light Co. Project, 7.20%, 12/01/14 ............. 200,000 210,560
Special Purposes Mortgage Revenue, Hawaii Electric Light Co. Project, Series A, 7.35%, 1/01/20 ... 1,000,000 1,051,540
Special Purposes Mortgage Revenue, Hawaii Electric Light Co. Project, Series A, MBIA Insured, 5.65%,
10/01/27 ......................................................................................... 20,000,000 21,794,400
Special Purposes Mortgage Revenue, Kaiser Hospital, 6.25%, 3/01/21 ............................... 900,000 948,510
Special Purposes Mortgage Revenue, Kapiolani Health Care System, Refunding, 6.00%, 7/01/19 ....... 2,600,000 2,762,500
Special Purposes Mortgage Revenue, Wahiawa General Hospital Project, 7.50%, 7/01/12 .............. 1,000,000 1,090,800
Special Purposes Revenue, 6.00%, 7/01/11 ......................................................... 1,000,000 1,094,710
Special Purposes Revenue, 6.20%, 7/01/16 ......................................................... 2,000,000 2,177,060
Special Purposes Revenue, 6.25%, 7/01/21 ......................................................... 6,250,000 6,818,813
Special Purposes Revenue, The Queens Health System, Refunding, Series A, 5.75%, 7/01/26 .......... 5,800,000 6,115,926
Special Purposes Revenue, The Queens Health System, Series B, MBIA Insured, 5.25%, 7/01/23 ....... 5,000,000 5,153,700
Special Purposes Revenue, The Queens Health System, Series B, MBIA Insured, 5.00%, 7/01/28 ....... 3,250,000 3,272,653
Hawaii State SFMR,
HFC, Series A, 7.00%, 7/01/11 .................................................................... 230,000 245,332
HFC, Series A, 7.10%, 7/01/24 .................................................................... 3,350,000 3,573,747
HFC, Series B, 6.90%, 7/01/16 .................................................................... 245,000 261,964
HFC, Series B, 7.00%, 7/01/31 .................................................................... 8,055,000 8,618,608
Housing and Development Corp., Purchase Revenue, Series A, 5.75%, 7/01/30 ........................ 2,500,000 2,580,225
-----------
85,579,913
-----------
Idaho .1%
Idaho Housing Agency,
Refunding, Series D-1, 6.45%, 7/01/19 ............................................................ 2,190,000 2,347,461
SFMR, Senior Bond, Series B-1, FGIC Insured, 7.85%, 7/01/09 ...................................... 745,000 768,155
SFMR, Senior Bond, Series B-1, FGIC Insured, 7.90%, 1/01/21 ...................................... 1,120,000 1,151,786
Power County PCR, FMC Corp. Project, Refunding, 5.625%, 10/01/14 ................................. 2,200,000 2,280,696
-----------
6,548,098
-----------
Illinois 7.2%
Bryant PCR, Central Illinois Light Co. Project, Refunding,
Series A, 6.50%, 2/01/18 ......................................................................... $ 7,200,000 $ 7,738,056
Series C, 6.50%, 1/01/10 ......................................................................... 5,000,000 5,418,450
Chicago Board of Education, Chicago School Reform,
MBIA Insured, 6.00%, 12/01/16 .................................................................... 9,700,000 10,720,537
MBIA Insured, 6.00%, 12/01/26 .................................................................... 7,600,000 8,334,692
Series A, AMBAC Insured, 5.25%, 12/01/27 ......................................................... 10,000,000 10,125,300
Series A, AMBAC Insured, 5.25%, 12/01/30 ......................................................... 8,830,000 8,925,717
Chicago COP, AMBAC Insured, 7.75%, 7/15/11 ....................................................... 20,000,000 24,318,000
Chicago Gas Supply Revenue, The Peoples Gas Light, Refunding, Series A, 6.10%, 6/01/25 ........... 12,000,000 12,911,880
Chicago GO, Lakefront Millennium Parking Facilities, 5.125%, 1/01/28 ............................. 26,345,000 26,126,337
Chicago SFMR, Collateralized, Series A, 7.25%, 9/01/28 ........................................... 3,800,000 4,316,458
Chicago Wastewater Transmission Revenue, Refunding, FGIC Insured, 5.125%, 1/01/25 ................ 5,000,000 5,008,700
Chicago-O'Hare International Airport Revenue, Special Facilities, United Airlines, Inc. Project,
8.45%, 5/01/07 ................................................................................... 4,300,000 4,620,264
8.50%, 5/01/18 ................................................................................... 12,305,000 13,228,367
8.20%, 12/01/24 .................................................................................. 11,720,000 14,083,572
Series A, 8.40%, 5/01/18 ......................................................................... 450,000 471,528
Series C, 8.20%, 5/01/18 ......................................................................... 27,600,000 28,893,888
Cook County,
Capital Improvement, Refunding, FGIC Insured, 5.90%, 12/01/14 .................................... 10,000,000 10,998,700
Orland Park School District No. 135, Refunding, FGIC Insured, 5.875%, 11/15/22 ................... 10,000,000 11,312,800
Refunding, Series A, MBIA Insured, 5.625%, 11/15/22 .............................................. 20,000,000 21,042,000
Tinley Park School District No.140, Refunding, Series A, AMBAC Insured, 6.00%, 12/01/15 .......... 8,750,000 9,727,025
Illinois Development Finance Authority, PCR,
Central Illinois Public Service Co., Refunding, Series A, 6.375%, 1/01/28 ........................ 15,200,000 16,223,720
Commonwealth Edison Co. Project, Series 1991, 7.25%, 6/01/11 ..................................... 7,500,000 8,089,575
Illinois Power Co. Project, Refunding, Series A, 7.375%, 7/01/21 ................................. 26,550,000 30,827,205
Illinois Development Finance Authority Revenue, Provena Health, Series A, MBIA Insured, 5.50%, 5/15/21 13,240,000 13,732,263
Illinois Educational Facilities Authority Revenues, Midwestern University, Series B, MBIA-IBC Insured,
5.50%, 5/15/28 ................................................................................... 6,250,000 6,487,875
Illinois HDA,
Homeowner Mortgage, Series A-1, 6.85%, 8/01/17 ................................................... 4,245,000 4,646,832
MF Program, Lawndale Redevelopment Project, 7.10%, 12/01/34 ...................................... 20,000,000 22,026,800
MF Program, Refunding, Series A, 7.10%, 7/01/26 .................................................. 12,915,000 13,980,746
MF Program, Series 1, 6.625%, 9/01/12 ............................................................ 12,000,000 12,850,680
MF Program, Series 1, 6.75%, 9/01/21 ............................................................. 7,550,000 8,057,662
MF Program, Series C, 7.35%, 7/01/11 ............................................................. 2,265,000 2,378,975
RMR, Series B, 7.25%, 8/01/17 .................................................................... 7,065,000 7,478,091
Illinois Health Facilities Authority Revenue,
Edwards Hospital Project, Refunding, Pre-Refunded, 7.00%, 2/15/22 ................................ 2,000,000 2,234,140
Hospital Sisters Services Incorporated, Series A, MBIA Insured, 5.00%, 6/01/18 ................... 10,000,000 9,791,800
Loyola University Health System, Refunding, Series A, MBIA Insured, 5.625%, 7/01/18 .............. 9,195,000 9,774,193
Methodist Medical Center, Refunding, MBIA Insured, 5.25%, 11/15/21 ............................... 2,885,000 2,938,171
Northwestern Medical Facility Foundation, Refunding, MBIA Insured, 5.125%, 11/15/28 .............. 7,500,000 7,471,350
Servantcor, Refunding, Series A, Pre-Refunded, 7.875%, 8/15/19 ................................... 1,000,000 1,056,400
Servantcor, Refunding, Series B, Pre-Refunded, 7.875%, 8/15/19 ................................... 3,000,000 3,169,200
Illinois (cont.)
Illinois Health Facilities Authority Revenue, (cont.)
South Suburban Hospital, ETM, 7.00%, 2/15/18 ..................................................... $ 4,200,000 $ 5,186,496
South Suburban Hospital, Pre-Refunded, 7.00%, 2/15/18 ............................................ 2,800,000 3,127,796
Victory Health Services, Series A, 5.75%, 8/15/27 ................................................ 8,015,000 8,249,759
Westlake Community Hospital, Refunding, 7.875%, 1/01/13 .......................................... 6,200,000 6,356,054
Illinois State COP Department of Central Management, 6.875%, 7/01/07 ............................. 2,600,000 2,896,842
Illinois State Dedicated Tax Revenue, Pre-Refunded, Civic Center, Series A,
6.00%, 12/15/15 .................................................................................. 2,105,000 2,176,886
AMBAC Insured, 6.00%, 12/15/15 ................................................................... 845,000 886,768
Metropolitan Pier and Exposition Authority,
Dedicated State Tax Revenue, McCormick Place Expansion Project, Series A, 6.50%, 6/15/22 ......... 5,000 5,472
Dedicated State Tax Revenue, McCormick Place Expansion Project, Series A, 6.50%, 6/15/27 ......... 555,000 606,626
Dedicated State Tax Revenue, McCormick Place Expansion Project, Series A, FGIC Insured, 6.50%, 6/15/07 5,000 5,594
Hospitality Facilities Revenue, McCormick Place Convention Center, 5.75%, 7/01/06 ................ 1,645,000 1,764,740
Hospitality Facilities Revenue, McCormick Place Convention Center, 6.25%, 7/01/17 ................ 9,500,000 10,332,865
Hospitality Facilities Revenue, McCormick Place Convention Center, 7.00%, 7/01/26 ................ 12,000,000 14,983,080
Onterie Center HFC, Mortgage Revenue, Refunding, Series A, MBIA Insured, 7.05%, 7/01/27 .......... 4,350,000 4,661,069
Regional Transportation Authority, Series A, AMBAC Insured, 6.125%, 6/01/22 ...................... 3,970,000 4,208,915
Southwestern Illinois Development Authority,
Anderson Hospital Project, Series A, 7.00%, 8/15/22 .............................................. 6,200,000 6,688,932
IDR, Spectrulite Consortium, Inc. Project, 6.20%, 2/01/05 ........................................ 1,825,000 1,978,629
IDR, Spectrulite Consortium, Inc. Project, 6.625%, 2/01/10 ....................................... 3,050,000 3,317,943
Private Activity Revenue, Glenmark Recovery, 8.50%, 8/01/10 ...................................... 2,815,000 3,054,388
Solid Waste Disposal Revenue, LaCede Steel Co., 8.375%, 8/01/08 .................................. 4,695,000 5,127,973
Solid Waste Disposal Revenue, LaCede Steel Co., 8.50%, 8/01/20 ................................... 5,390,000 5,896,337
Upper River Valley Development Authority, Environmental Facilities Revenue, General Electric Co. Project,
5.45%, 2/01/23 ................................................................................... 3,600,000 3,694,104
Will County Exempt Facilities Revenue, Mobil Oil Refining Corp. Project, 6.00%, 2/01/27 .......... 7,130,000 7,516,945
-----------
524,262,162
-----------
Indiana 1.2%
Carmel Industrial RDA, County Option, Income Tax Lease, Rent Revenue, MBIA Insured, 5.25%, 1/01/18 1,090,000 1,114,787
East Chicago Industrial Solid Waste Disposal Revenue, USG Corp. Project, 5.50%, 9/01/28 .......... 5,250,000 5,144,055
Hammond Industrial Sewer and Solid Waste Disposal Revenue, American Maize-Products Co., Project A, 8.00%,
12/01/24 ......................................................................................... 17,000,000 20,012,230
Hammond PCR, Stauffer Chemical Project, Guaranteed by Imperial Chemical, Series 1982, 8.00%, 11/01/12 2,355,000 2,520,345
Indiana Bond Bank, Special Program, Series A, 8.375%, 2/01/18 .................................... 560,000 568,445
Indiana Health Facility Financing Authority, Hospital Revenue, Hancock Memorial Hospital Project, Series 1990,
Pre-Refunded, 8.30%, 8/15/20 ..................................................................... 3,500,000 3,849,860
Indiana State Educational Facilities Authority Revenue, Manchester College Project, 6.85%, 10/01/18 3,240,000 3,438,288
Indiana State Housing Financing Authority, SFMR, Refunding, Series A,
6.75%, 1/01/10 ................................................................................... 2,940,000 3,135,451
6.80%, 1/01/17 ................................................................................... 12,835,000 13,691,736
Indianapolis Local Public Improvement,
Refunding, Series D, 6.50%, 2/01/22 .............................................................. 4,625,000 4,635,591
Series D, 6.75%, 2/01/20 ......................................................................... 13,075,000 14,527,633
Jasper County EDR, Georgia Pacific Corp. Project, 5.625%, 12/01/27 ............................... 2,500,000 2,521,425
Indiana (cont.)
Monroe County, MFR Housing, Country View, Series A, GNMA Insured, 5.75%, 4/01/33 ................. $ 2,000,000 $ 2,026,600
Muncies Edit Building Corp., First Mortgage, Series A, AMBAC Insured, 6.60%, 12/01/17 ............ 2,000,000 2,229,880
Sullivan PCR, Indiana-Michigan Power Co. Project, Refunding, Series C, 5.95%, 5/01/09 ............ 6,000,000 6,352,740
-----------
85,769,066
-----------
Iowa .2%
Iowa Financing Authority, SFMR, Series F, 5.70%, 1/01/27 ......................................... 10,780,000 11,126,793
-----------
Kansas .1%
Kansas State Development Financial Authority Revenue, Sisters of Charity Leavenworth, MBIA Insured, 5.125%,
12/01/18 ......................................................................................... 2,000,000 2,035,060
Newton Hospital Revenue, Newton Healthcare Corp., Refunding, Series A,
5.70%, 11/15/18 .................................................................................. 1,575,000 1,592,955
5.75%, 11/15/24 .................................................................................. 1,500,000 1,513,620
-----------
5,141,635
-----------
Kentucky 2.0%
Ashland PCR, Ashland Oil, Inc. Project, Refunding, 6.65%, 8/01/09 ................................ 3,900,000 4,217,772
Henderson County Solid Waste Disposal Revenue, MacMillan Bloedel Project, 7.00%, 3/01/25 ......... 10,000,000 10,900,500
Jefferson County MFHR, Watterson Park Apartments Project, Series A, 6.35%, 11/15/11 .............. 4,870,000 5,176,859
Kenton County Airport Board Revenue, Special Facilities, Delta Airlines, Inc.,
7.80%, 12/01/15 .................................................................................. 20,000,000 21,091,400
Project A, 7.50%, 2/01/20 ........................................................................ 10,000,000 10,943,600
Project A, 7.125%, 2/01/21 ....................................................................... 9,330,000 10,089,182
Project B, 7.25%, 2/01/22 ........................................................................ 3,350,000 3,650,797
Kentucky Economic Development Financing Authority, Hospital Systems Revenue, Appalachian Regional Facility,
Refunding & Improvement,
5.80%, 10/01/12 .................................................................................. 1,000,000 1,044,080
5.85%, 10/01/17 .................................................................................. 5,615,000 5,837,522
Kentucky Housing Corp. Revenue,
Series A, 6.70%, 7/01/17 ......................................................................... 485,000 515,613
Series B, 6.625%, 7/01/14 ........................................................................ 4,910,000 5,196,008
Kentucky State Development Financing Authority, Hospital Revenue, Claire Medical Center Project, Pre-Refunded,
7.125%, 9/01/21 .................................................................................. 700,000 776,321
Mount Sterling Lease Revenue, Kentucky League Cities, Series A,
6.10%, 3/01/08 ................................................................................... 20,375,000 22,078,554
6.20%, 3/01/18 ................................................................................... 11,765,000 12,702,553
Pendleton County, Multi-County Lease Revenue, Kentucky Association of Counties Leasing Trust, Series A, 6.50%,
3/01/19 .......................................................................................... 27,160,000 29,685,608
-----------
143,906,369
-----------
Louisiana 2.1%
Bastrop PCR, International Paper Co. Project, Refunding, 6.90%, 3/01/07 .......................... 2,000,000 2,174,540
Calcasieu Parish IDB, PCR, Gulf States Utilities Co. Project, Refunding, 6.75%, 10/01/12 ......... 14,285,000 15,313,806
Calcasieu Parish Memorial Hospital Service District Revenue, Lake Charles Parish Memorial Hospital Project,
Series A, FSA Insured,
6.375%, 12/01/12 ................................................................................. 4,310,000 5,022,745
6.50%, 12/01/18 .................................................................................. 5,530,000 6,541,879
Louisiana (cont.)
Calcasieu Parish Public Transportation Authority Mortgage Revenue, Refunding,
6.65%, 12/01/21 .................................................................................. $ 3,145,000 $ 3,435,441
Series A, 7.75%, 6/01/12 ......................................................................... 2,675,000 2,843,980
Series B, 6.375%, 11/01/02 ....................................................................... 255,000 270,285
Series B, 6.875%, 11/01/12 ....................................................................... 600,000 641,550
De Soto Parish Environmental Improvement Revenue, International Paper Co. Project, Series A, 7.70%, 2,500,000 2,898,500
11/01/18
East Baton Rouge Mortgage Financing Authority, SFM,
MBS, Series A, 6.80%, 10/01/28 ................................................................... 6,055,000 6,519,055
Series C, 7.00%, 4/01/32 ......................................................................... 2,130,000 2,268,131
Series D, 7.10%, 4/01/32 ......................................................................... 2,850,000 3,024,335
Hammond Tangipahoa Home Mortgage Authority Revenue, University Facilities Incorporate Project, MBIA Insured,
5.50%, 7/15/27 ................................................................................... 3,250,000 3,350,490
Jefferson Parish Hospital, Service District No. 001, Hospital Revenue, West Jefferson Medical Center, Series A,
FSA Insured, 5.00%, 1/01/21 ...................................................................... 1,500,000 1,456,665
Lafayette Public Trust Financing Authority SFMR, Refunding, Series A, 8.50%, 11/15/12 ............ 1,253,961 1,304,132
Louisiana HFA Mortgage Revenue,
Refunding, 7.375%, 9/01/13 ....................................................................... 1,120,000 1,173,368
SF, Refunding, Series B-2, 5.75%, 12/01/28 ....................................................... 2,890,000 2,979,937
Louisiana Office Facility Corp., Capital Facility Bonds, Statewide Lease, 7.75%, 12/01/10 ........ 3,400,000 3,752,954
Louisiana Public Facilities Authority Revenue,
Alton Ochsner Medical Foundation Project, Refunding, Series B, MBIA Insured, 6.50%, 5/15/22 ...... 3,500,000 3,811,115
Xavier University of Louisiana Project, Refunding, MBIA Insured, 5.25%, 9/01/27 .................. 3,000,000 3,061,890
New Orleans GO, Refunding, AMBAC Insured,
6.125%, 10/01/16 ................................................................................. 10,275,000 11,216,909
6.20%, 10/01/21 .................................................................................. 8,050,000 8,803,319
Pointe Coupee Parish PCR, Gulf States Utilities Co. Project, Refunding, 6.70%, 3/01/13 ........... 2,200,000 2,365,902
Quachita Parish Hospital Service District No. 1 Revenue, Glenwood Regional Medical Center, Pre-Refunded,
7.50%, 7/01/21 ................................................................................... 4,000,000 4,448,360
Terrebonne Parish Hospital Service District No. 1, Hospital Revenue, Terrebonne General Medical Center Project,
Refunding, 5.375%, 4/01/23 ....................................................................... 2,500,000 2,578,450
West Feliciana Parish PCR, Gulf Systems Utilities Co. Project,
7.70%, 12/01/14 .................................................................................. 2,000,000 2,230,420
7.00%, 11/01/15 .................................................................................. 3,050,000 3,371,531
Refunding, 8.00%, 12/01/24 ....................................................................... 41,050,000 43,384,103
-----------
150,243,792
-----------
Maine .9%
Bucksport Solid Waste Disposal Revenue, Champion International Corp. Project, 6.25%, 5/01/10 ..... 5,000,000 5,290,650
Maine Financial Authority, Solid Waste Recycling Facilities Revenue, Great Northern Paper Co., Bowater Project,
7.75%, 10/01/22 .................................................................................. 29,300,000 32,709,348
Maine Health and Higher Educational Facilities Authority Revenue, Series B, FSA Insured,
7.00%, 7/01/24 ................................................................................... 20,000 23,230
Pre-Refunded, 7.00%, 7/01/24 ..................................................................... 2,425,000 2,835,456
Maine State Housing Authority, Mortgage Purchase,
Series A-5, 6.20%, 11/15/16 ...................................................................... 2,500,000 2,628,425
Series C, 6.55%, 11/15/12 ........................................................................ 3,700,000 3,935,690
Series C, 6.65%, 11/15/24 ........................................................................ 3,500,000 3,716,580
Maine (cont.)
Maine State Housing Authority, Mortgage Purchase, (cont.)
Series D, 6.45%, 11/15/07 ........................................................................ $ 3,540,000 $ 3,726,664
Series D, 6.70%, 11/15/15 ........................................................................ 5,800,000 6,304,890
Rumford PCR, Boise Cascade Corp. Project, Refunding, 6.625%, 7/01/20 ............................. 4,800,000 5,257,104
-----------
66,428,037
-----------
Maryland 1.7%
Gaithersburg Hospital Facilities Revenue, Shady Grove Hospital, Refunding and Improvement,
Series A, Pre-Refunded, 8.25%, 9/01/21 ........................................................... 43,225,000 49,356,466
Series C, Pre-Refunded, 6.00%, 9/01/21 ........................................................... 10,110,000 11,134,851
Maryland State Community Development Administration, Department of Housing and Community Development,
MFHR, Series G, Mortgage Insured, 6.55%, 5/15/19 ................................................. 5,475,000 5,803,664
SF, 7.25%, 4/01/27 ............................................................................... 965,000 1,014,784
Maryland State Health & Higher Educational Facilities Authority Revenue,
Anne Arundel Medical Center, FSA Insured, 5.125%, 7/01/33 ........................................ 8,000,000 8,101,120
Johns Hopkins Medicine, MBIA Insured, 5.00%, 7/01/19 ............................................. 3,000,000 3,014,580
Montgomery County Housing Opportunity Community, SFMR, Refunding, Series B, 6.625%, 7/01/28 ...... 6,500,000 6,865,300
Takoma Park Hospital Facilities Revenue, Washington Adventist Hospital,
Refunding, Series A, Sub-Series 1, 8.25%, 9/01/21 ................................................ 20,125,000 22,356,661
Refunding, Series A, Sub-Series 1, 8.25%, 9/01/21 ................................................ 10,930,000 12,480,421
Series A, Sub-Series 2, 8.25%, 9/01/21 ........................................................... 5,000,000 5,701,950
-----------
125,829,797
-----------
Massachusetts 2.5%
Agawam Resource Recovery Revenue, Springfield Resource Recovery Project, Series 1986, 8.50%, 12/01/08 10,340,000 10,471,732
Massachusetts Health and Educational Facilities Authority Revenue, Notre Dame Health Care Center, Series A,
7.875%, 10/01/22 ................................................................................. 2,310,000 2,497,480
Massachusetts State Consolidated Loan, Series A, 7.50%, 6/01/04 .................................. 7,500,000 8,676,975
Massachusetts State GO, Refunding, Series B, 6.50%, 8/01/08 ...................................... 5,900,000 6,990,851
Massachusetts State Health and Educational Facilities Authority Revenue,
Framingham Union Hospital, Series B, Pre-Refunded, 8.50%, 7/01/20 ................................ 9,020,000 9,910,094
Melrose-Wakefield Hospital, ETM, Refunding, Series B, 6.35%, 7/01/06 ............................. 1,100,000 1,254,979
Sisters Providence Health System, Series A, Pre-Refunded, 6.50%, 11/15/08 ........................ 1,000,000 1,138,510
Sisters Providence Health System, Series A, Pre-Refunded, 6.625%, 11/15/22 ....................... 12,050,000 13,799,299
Massachusetts State HFA,
HDA, Series D, FGIC Insured, 6.875%, 11/15/21 .................................................... 5,250,000 5,658,398
Housing Projects, Refunding, Series A, 6.30%, 10/01/13 ........................................... 25,635,000 27,286,919
Housing Projects, Refunding, Series A, 6.375%, 4/01/21 ........................................... 24,750,000 26,417,408
Massachusetts State HFA Revenue, SF, Series 41,
6.30%, 12/01/14 .................................................................................. 6,250,000 6,706,750
6.35%, 6/01/17 ................................................................................... 5,750,000 6,141,000
Massachusetts State Housing Facilities Authority,
Series C, FGIC Insured, 6.90%, 11/15/21 .......................................................... 9,715,000 10,624,130
Series D, FGIC Insured, 6.80%, 11/15/12 .......................................................... 250,000 271,050
Massachusetts State Industrial Finance Agency, Health Care Facilities Revenue,
Jewish Geriatric Services, Inc., Series B,
5.375%, 5/15/17 .................................................................................. $ 1,965,000 $ 2,011,787
7.00%, 4/01/22 ................................................................................... 5,000,000 5,531,000
Massachusetts (cont.)
Massachusetts State Industrial Finance Agency Revenue, D. Youville Senior Care,
5.65%, 10/01/17 .................................................................................. $ 2,295,000 $ 2,374,246
5.70%, 10/01/27 .................................................................................. 7,375,000 7,628,995
Massachusetts State Port Authority Revenue, Special Facilities, Bosfuel Project, MBIA Insured, 5.75%, 11,750,000 12,351,365
7/01/39
Plymouth County COP, Series A,
7.00%, 4/01/12 ................................................................................... 10,000,000 11,100,100
5.50%, 5/15/27 ................................................................................... 5,000,000 5,149,000
-----------
183,992,068
-----------
Michigan 2.0%
Battle Creek Tax Increment Finance Authority, Pre-Refunded, 7.40%, 5/01/16 ....................... 2,000,000 2,369,920
Belding Area Schools GO,
FGIC Insured, 6.10%, 5/01/26 ..................................................................... 810,000 895,820
Pre-Refunded, FGIC Insured, 6.10%, 5/01/26 ....................................................... 2,995,000 3,420,949
Detroit GO,
Refunding, Series B, 6.375%, 4/01/06 ............................................................. 7,265,000 8,117,620
Refunding, Series B, 6.25%, 4/01/09 .............................................................. 625,000 687,413
Self-Insurance, Series A, 5.70%, 5/01/02 ......................................................... 2,250,000 2,366,753
Series A, Pre-Refunded, 6.70%, 4/01/10 ........................................................... 4,550,000 5,287,510
Detroit Sewage Disposal Revenue, Series A, MBIA Insured, 5.50%, 7/01/20 .......................... 29,200,000 30,635,180
Detroit/Wayne County Stadium Authority, FGIC Insured, 5.25%, 2/01/27 ............................. 4,235,000 4,315,296
Kalamazoo EDC Revenue, Limited Obligation, Friendship Village, Refunding, Series A, 6.25%, 5/15/27 2,000,000 2,105,580
Kalamazoo Hospital Finance Authority, Hospital Facility Revenue, Bronson Methodist Hospital, Refunding,
MBIA Insured, 5.50%, 5/15/28 ..................................................................... 4,180,000 4,357,692
Michigan State Building Authority Revenue, Series II, 6.25%, 10/01/20 ............................ 15,650,000 16,729,537
Michigan State HDA,
Rental Housing Revenue, Refunding, Series A, 6.60%, 4/01/12 ...................................... 5,000,000 5,407,500
SFMR, Series A, 6.45%, 12/01/14 .................................................................. 2,000,000 2,140,540
SFMR, Series A, 6.875%, 6/01/23 .................................................................. 2,200,000 2,338,248
Michigan State HFA Revenue,
Henry Ford Health, Refunding,Series A, 5.25%, 11/15/25 ........................................... 4,000,000 4,029,760
Hospital Genesys Regional Medical, Refunding, Series A, 5.50%, 10/01/18 .......................... 4,500,000 4,542,750
Hospital Genesys Regional Medical, Refunding, Series A, 5.50%, 10/01/27 .......................... 5,000,000 5,025,400
Presbyterian Villages Obligation Group, 5.30%, 1/01/99 ........................................... 200,000 200,286
Presbyterian Villages Obligation Group, 5.40%, 1/01/00 ........................................... 310,000 313,233
Presbyterian Villages Obligation Group, 5.70%, 1/01/01 ........................................... 310,000 316,526
Presbyterian Villages Obligation Group, 5.80%, 1/01/02 ........................................... 355,000 365,682
Presbyterian Villages Obligation Group, 5.90%, 1/01/03 ........................................... 325,000 337,565
Presbyterian Villages Obligation Group, 6.00%, 1/01/04 ........................................... 390,000 408,233
Presbyterian Villages Obligation Group, 6.375%, 1/01/15 .......................................... 275,000 296,175
Presbyterian Villages Obligation Group, 6.40%, 1/01/15 ........................................... 1,000,000 1,070,670
Presbyterian Villages Obligation Group, 6.50%, 1/01/25 ........................................... 3,500,000 3,746,260
Michigan State Hospital Finance Authority Revenue,
Oakwood Obligation Group, Refunding, Series A, FSA Insured, 5.125%, 8/15/25 ...................... 2,000,000 1,995,500
Oakwood Obligation Group, Refunding, Series A, FSA Insured, 5.00%, 8/15/31 ....................... 3,180,000 3,085,045
St. John's Hospital and Medical Center, AMBAC Insured, 5.25%, 5/15/26 ............................ 22,860,000 23,201,986
Michigan (cont.)
Michigan State Housing Development Authority, Limited Obligation Revenue Bonds, 6.625%, 9/15/19 .. $ 2,500,000 $ 2,685,475
-----------
142,796,104
-----------
Minnesota 2.0%
Agricultural and EDR, Health Care System, Fairview Hospital, Refunding, Series A, MBIA Insured, 25,810,000 28,325,185
5.75%, 11/15/26
Cloquet PCR, Potlach Corp. Projects, Refunding, 5.90%, 10/01/26 .................................. 9,100,000 9,682,127
Dakota County Housing, RDA, Limited Annual Appropriation Tax and Revenue, Development Housing Facilities Project,
7.25%, 1/01/99 ................................................................................... 600,000 601,326
7.25%, 1/01/00 ................................................................................... 645,000 654,901
7.25%, 1/01/01 ................................................................................... 695,000 712,264
7.50%, 1/01/06 ................................................................................... 3,930,000 4,067,825
8.00%, 1/01/07 ................................................................................... 2,140,000 2,186,695
International Falls PCR, Boise Cascade Corp. Project, Refunding, 5.65%, 12/01/22 ................. 3,500,000 3,472,525
Minneapolis CDA and St. Paul Housing RDA, Homeownership Mortgage Revenue, Joint Housing Program,
FGIC Insured, 9.875%, 12/01/15 ................................................................... 5,000 5,005
Minnesota State HFA, SFM, Series D-1,
6.45%, 7/01/11 ................................................................................... 3,415,000 3,644,864
6.50%, 1/01/17 ................................................................................... 1,355,000 1,441,883
Minnesota State Higher Educational Facilities Authority Revenue, University Saint Thomas, Series Four-P,
5.375%, 4/01/18 .................................................................................. 525,000 535,658
5.40%, 4/01/23 ................................................................................... 580,000 590,678
Minnetonka MFHR, Ridgepointe II Project, Refunding, Series A, 5.95%, 10/20/33 .................... 11,075,000 11,026,159
Red Wing Housing, RDA, Jordan Tower II Project, 7.00%, 1/01/19 ................................... 1,500,000 1,632,885
Rochester Health Care Facilities Revenue, Mayo Foundation, Series A, 5.50%, 11/15/27 ............. 29,000,000 30,517,280
Roseville MFHR, Rosepointe I Project, Refunding, Series A, 5.95%, 10/20/33 ....................... 8,695,000 8,656,655
St. Louis Park EDA, Tax Increment Revenue, Refunding, FGIC Insured, Pre-Refunded, 8.40%, 9/01/09 . 6,000,000 6,866,280
St. Paul Port Authority,
Energy Park, Tax Increment Revenue, Refunding, Pre-Refunded, 8.00%, 12/01/07 ..................... 3,500,000 3,582,950
IDR, Bandana Square, Series C, 7.70%, 12/01/00 ................................................... 230,000 229,397
IDR, Bandana Square, Series C, 7.70%, 12/01/01 ................................................... 255,000 253,559
IDR, Bandana Square, Series C, 7.70%, 12/01/02 ................................................... 270,000 269,390
IDR, Bandana Square, Series C, 7.70%, 12/01/07 ................................................... 1,690,000 1,512,229
IDR, Bandana Square, Series C, 7.80%, 12/01/12 ................................................... 3,465,000 2,964,793
IDR, Brown and Bigelow Co., Series 1979-2, 7.50%, 10/01/99 ....................................... 480,000 480,490
IDR, Brown and Bigelow Co., Series 1979-2, 7.50%, 10/01/00 ....................................... 515,000 516,118
IDR, Brown and Bigelow Co., Series 1979-2, 7.50%, 10/01/01 ....................................... 550,000 551,788
IDR, Brown and Bigelow Co., Series 1979-2, 7.50%, 10/01/02 ....................................... 595,000 597,523
IDR, Brown and Bigelow Co., Series 1979-2, 7.50%, 10/01/03 ....................................... 640,000 643,309
IDR, Brown and Bigelow Co., Series 1979-2, 7.50%, 10/01/04 ....................................... 685,000 689,137
IDR, Brown and Bigelow Co., Series 1979-2, 7.50%, 10/01/05 ....................................... 740,000 747,777
IDR, Brown and Bigelow Co., Series 1979-2, 7.50%, 10/01/06 ....................................... 795,000 803,355
IDR, Brown and Bigelow Co., Series 1979-2, 7.50%, 10/01/07 ....................................... 855,000 863,986
IDR, Brown and Bigelow Co., Series 1979-2, 7.50%, 10/01/08 ....................................... 915,000 924,617
IDR, Brown and Bigelow Co., Series 1979-2, 7.50%, 10/01/09 ....................................... 670,000 677,042
IDR, Common Bond Fund, Fort Road Medical Center, Refunding, Series C, 7.95%, 9/01/01 ............. 140,000 139,090
IDR, Common Bond Fund, Fort Road Medical Center, Refunding, Series C, 7.95%, 9/01/02 ............. 155,000 154,481
IDR, Common Bond Fund, Fort Road Medical Center, Refunding, Series C, 7.95%, 9/01/10 ............. 1,705,000 1,497,382
Minnesota (cont.)
St. Paul Port Authority, (cont.)
IDR, Common Bond Fund, Ideal Security Hardware Corp., Refunding, Series F, 8.00%, 12/01/01 ....... $ 105,000 $ 104,381
IDR, Common Bond Fund, Ideal Security Hardware Corp., Refunding, Series F, 8.00%, 12/01/02 ....... 115,000 114,702
IDR, Common Bond Fund, Ideal Security Hardware Corp., Refunding, Series F, 8.00%, 12/01/12 ....... 1,790,000 1,558,768
Washington County Housing RDA,
Housing Development Revenue, Orleans Apartments, Project A, 8.25%, 7/01/21 ....................... 3,000,000 3,071,640
Housing Development Revenue, Raymie Johnson Apartments, Pre-Refunded, 7.70%, 12/01/19 ............ 5,210,000 5,911,527
Pooled Housing and Redevelopment, 7.20%, 1/01/22 ................................................. 5,885,000 6,311,604
-----------
149,791,230
-----------
Mississippi 1.2%
Claiborne County PCR, Systems Energy Resources, Inc., Refunding,
7.30%, 5/01/25 ................................................................................... 5,700,000 6,000,504
6.20%, 2/01/26 ................................................................................... 36,500,000 37,729,685
bMississippi Business Finance Corporation PCR, Systems Energy Resources Inc. Project, 5.875%, 4/01/22 40,000,000 39,999,600
Mississippi Home Corp., SFR, Refunding, Senior Series A, FGIC Insured, 9.25%, 3/01/12 ............ 1,260,000 1,340,451
Mississippi State Educational Facilities Authority Revenue, Private Nonprofit Institutions of Higher Learning,
Tougaloo College Project, Series A, 6.50%, 6/01/18 ............................................... 2,335,000 2,436,106
-----------
87,506,346
-----------
Missouri .3%
Hazelwood IDA, MFHR, Lakes Apartments Project, Refunding, Series A, 6.10%, 9/20/26 ............... 3,000,000 3,158,910
Missouri State Health and Educational Facilities Authority Revenue, Series B, MBIA Insured, 6.25%, 5,000,000 5,407,550
2/15/12
St. Louis Parking Facilities Revenue, Pre-Refunded, 6.625%, 12/15/21 ............................. 6,000,000 6,766,920
Taney County IDA, Hospital Revenue, The Skaggs Community Hospital Association, 5.40%, 5/15/28 .... 4,000,000 4,027,240
West Plains IDA, Hospital Revenue, Ozarks Medical Center Project, Series A, Pre-Refunded, 8.625%, 3,510,000 3,855,665
9/15/20
-----------
23,216,285
-----------
Montana .8%
Forsyth County PCR,
Puget Sound Power and Light Co. Project, AMBAC Insured, 6.80%, 3/01/22 ........................... 10,000,000 10,952,800
The Montana Power Co. Colstrip Project, Refunding, Series A, 6.125%, 5/01/23 ..................... 3,250,000 3,459,690
The Montana Power Co., Refunding, Series B, AMBAC Insured, 5.90%, 12/01/23 ....................... 4,225,000 4,586,111
The Montana Power Co., Refunding, Series B, MBIA Insured, 5.90%, 12/01/23 ........................ 20,385,000 22,127,306
Montana State Health Facilities Authority Revenue,
Montana Developmental Center Project, 6.40%, 6/01/19 ............................................. 2,000,000 2,173,200
Sisters of Charity Leavenworth, MBIA Insured, 5.125%, 12/01/18 ................................... 5,000,000 5,067,050
Montana State Housing Board, SF Program, Refunding,
Series A, 6.50%, 12/01/22 ........................................................................ 2,835,000 2,992,116
Series B-1, 6.25%, 12/01/21 ...................................................................... 6,720,000 7,145,040
-----------
58,503,313
-----------
Nebraska .2%
Lancaster County Hospital Authority No. 1, Hospital Revenue, Bryan Memorial Project, Series B, MBIA Insured,
5.375%, 6/01/22 .................................................................................. 6,500,000 6,746,740
Nebraska Investment Financial Authority, 7.00%, 11/01/09 ......................................... 5,580,000 5,689,089
-----------
12,435,829
-----------
Nevada 3.1%
Churchill County Health Care Facilities Revenue, Western Health Network, Series A, MBIA Insured, $ 2,000,000 $ 2,203,840
6.25%, 1/01/14
Clark County HFC, MFHR, FHA Insured, 7.75%, 7/01/23 .............................................. 5,065,000 5,243,744
Clark County IDR,
Nevada Power Co. Project, Refunding, Series B, 5.90%, 10/01/30 ................................... 15,000,000 15,318,900
Nevada Power Co. Project, Refunding, Series C, 7.20%, 10/01/22 ................................... 12,500,000 13,807,000
Nevada Power Co. Project, Series A, 5.90%, 11/01/32 .............................................. 2,600,000 2,663,102
Southwest Gas Corp., Series A, 7.30%, 9/01/27 .................................................... 18,080,000 20,002,627
Southwest Gas Corp., Series A, 6.50%, 12/01/33 ................................................... 10,000,000 10,862,500
Southwest Gas Corp., Series B, 7.50%, 9/01/32 .................................................... 62,470,000 69,312,964
Humboldt County PCR, Sierra Pacific Power Co., Refunding, Series A, AMBAC Insured, 6.30%, 7/01/22 4,500,000 4,862,430
Nevada Housing Division,
Issue C-2, Refunding, 6.75%, 10/01/26 ............................................................ 8,190,000 8,765,020
Multi-Unit Housing Revenue, Issue B, 6.55%, 10/01/25 ............................................. 5,405,000 5,876,424
SF Program, Issue A, FI/GML, 8.30%, 10/01/19 ..................................................... 2,655,000 2,894,959
SF Program, Issue A-2, FI/GML, 8.375%, 10/01/19 .................................................. 2,045,000 2,243,651
SF Program, Program A-1, Refunding, 6.25%, 10/01/26 .............................................. 3,870,000 4,102,355
Nevada State Colorado River, Series 1994, Pre-Refunded, 6.50%, 7/01/24 ........................... 15,915,000 18,081,350
Nevada State Municipal Bond Bank Project No. 40-41-A, ETM, 6.375%, 12/01/17 ...................... 10,275,000 11,348,840
Reno RDA, Tax Allocation,
Downtown Redevelopment Project, Series C, Pre-Refunded, 7.75%, 9/01/05 ........................... 2,695,000 2,943,668
Downtown Redevelopment Project, Series D, 7.625%, 9/01/16 ........................................ 4,255,000 4,737,134
Downtown Redevelopment Project, Series D, Pre-Refunded, 7.625%, 9/01/16 .......................... 4,035,000 4,492,206
Refunding, Series A, 6.20%, 6/01/18 .............................................................. 3,000,000 3,141,210
Washoe County Gas and Water Facilities Revenue, Refunding, AMBAC Insured, 6.30%, 12/01/14 ........ 5,000,000 5,448,900
Washoe County Hospital Facility Revenue, Washoe Medical Center, Inc. Project, Series A, AMBAC Insured,
6.25%, 6/01/13 ................................................................................... 9,295,000 10,380,470
-----------
228,733,294
-----------
New Hampshire 1.6%
Nashua Housing Authority, MFR, Clocktower Project, Refunding, FGIC Insured, 6.25%, 6/20/33 ....... 6,154,000 6,556,964
New Hampshire Higher Education and Health Facilities Authority Revenue,
Kendal at Hanover Project, Pre-Refunded, 8.00%, 10/01/19 ......................................... 9,250,000 9,836,728
New Hampshire Catholic Charities, 5.80%, 8/01/22 ................................................. 1,000,000 1,013,460
Rivier College, 5.60%, 1/01/28 ................................................................... 4,590,000 4,608,544
St. Joseph Hospital, 7.50%, 1/01/16 .............................................................. 2,300,000 2,464,749
The Hitchcock Clinic, MBIA Insured, 6.00%, 7/01/27 ............................................... 4,275,000 4,694,549
New Hampshire State HFA,
MFHR, Series 1, 7.10%, 1/01/14 ................................................................... 4,920,000 5,208,214
SFMR, Series E, 6.75%, 7/01/19 ................................................................... 5,675,000 6,128,262
SFMR, Series E, 6.80%, 7/01/25 ................................................................... 4,245,000 4,583,411
New Hampshire State IDA, Pollution Control Public Service Co.,
Project A, 7.65%, 5/01/21 ........................................................................ 6,870,000 7,299,787
Project B, 7.50%, 5/01/21 ........................................................................ 50,690,000 53,808,449
Project C, 7.65%, 5/01/21 ........................................................................ 7,450,000 7,916,072
-----------
114,119,189
-----------
New Jersey .4%
Mercer County Improvement Authority, Solid Waste, Refunding, 5.75%, 9/15/16 ...................... $ 2,500,000 $ 2,701,275
New Jersey Health Care Facilities, Financing Authority Revenue,
Cathedral Health Services, Pre-Refunded, 7.25%, 2/15/21 .......................................... 3,975,000 4,362,920
Cathedral Health Services, Refunding, MBIA Insured, 5.25%, 8/01/21 ............................... 7,865,000 8,162,218
Hackensack University Medical Center, Refunding, Series B, MBIA Insured, 5.20%, 1/01/28 .......... 7,000,000 7,149,100
Zurbrugg Memorial Hospital, Series C, 8.50%, 7/01/12 ............................................. 4,150,000 4,123,772
-----------
26,499,285
-----------
New Mexico .8%
Farmington PCR, Public Service Co. of New Mexico, Refunding, Series A, AMBAC Insured, 6.375%, 12/15/22 10,435,000 11,413,907
Lordsburg PCR, Phelps Dodge Corp. Project, Refunding, 6.50%, 4/01/13 ............................. 17,000,000 18,538,670
New Mexico State Mortgage Financial Authority, SFM, Refunding, Series A, 6.85%, 7/01/10 .......... 11,265,000 11,977,286
University of New Mexico Revenue, Series 1989, Pre-Refunded, 7.90%, 6/01/19 ...................... 17,000,000 17,799,850
-----------
59,729,713
-----------
New York 17.1%
Long Island Power Authority, Electric Systems Revenue, General Series A,
5.25%, 12/01/26 .................................................................................. 8,095,000 8,157,574
5.50%, 12/01/29 .................................................................................. 20,165,000 20,816,330
MTA Revenue,
Commuter Facilities, Series A, 5.25%, 7/01/28 .................................................... 5,000,000 5,078,150
Commuter Facilities, Series A, FGIC Insured, 6.00%, 7/01/16 ...................................... 8,950,000 9,987,753
Commuter Facilities, Series A, FGIC Insured, 6.00%, 7/01/21 ...................................... 9,225,000 10,567,422
Commuter Facilities, Series A, FGIC Insured, 6.10%, 7/01/26 ...................................... 11,050,000 12,730,263
Commuter Facilities, Series C-1, FGIC Insured, 5.375%, 7/01/27 ................................... 10,000,000 10,356,400
Dedicated Tax Fund, Series A, MBIA Insured, 5.25%, 4/01/26 ....................................... 11,125,000 11,357,068
Transit Facilities, Refunding, Series M, 6.00%, 7/01/14 .......................................... 18,210,000 19,463,941
Transit Facilities, Series A, FSA Insured, 6.00%, 7/01/16 ........................................ 3,630,000 4,043,348
Transit Facilities, Series A, FSA Insured, 6.10%, 7/01/21 ........................................ 6,260,000 7,211,896
Transit Facilities, Series C-1, 5.625%, 7/01/27 .................................................. 10,800,000 11,362,680
Transit Facilities, Service Contract, Refunding, Series 8, 5.375%, 7/01/21 ....................... 15,000,000 15,409,350
New Rochelle IDA, Civic Facilities Revenue, College of New Rochelle Project, 6.625%, 7/01/12 ..... 1,245,000 1,330,395
New York City GO,
ETM, Series B, 8.00%, 6/01/01 .................................................................... 3,000,000 3,325,620
ETM, Series D, 8.00%, 8/01/99 .................................................................... 1,805,000 1,870,576
ETM, Series D, 7.30%, 2/01/01 .................................................................... 4,620,000 4,984,610
Group B, Series D, 8.25%, 8/01/11 ................................................................ 15,000 16,811
Group B, Series D, 8.25%, 8/01/12 ................................................................ 30,000 33,622
Refunding, Series B, 6.20%, 8/15/06 .............................................................. 1,500,000 1,684,740
Refunding, Series E, 6.00%, 8/01/26 .............................................................. 2,765,000 2,992,864
Refunding, Series F, 6.00%, 8/01/13 .............................................................. 14,000,000 15,343,860
Refunding, Series F, 5.25%, 8/01/15 .............................................................. 20,580,000 20,981,310
Refunding, Series H, 6.25%, 8/01/15 .............................................................. 13,035,000 14,535,589
Refunding, Series H, 6.125%, 8/01/25 ............................................................. 65,785,000 72,031,944
Refunding, Series J, 6.00%, 8/01/21 .............................................................. 28,260,000 30,736,706
Series A, 6.125%, 8/01/06 ........................................................................ 14,500,000 16,065,420
Series A, 6.20%, 8/01/07 ......................................................................... 21,030,000 23,494,295
New York (cont.)
New York City GO, (cont.)
Series A, 6.25%, 8/01/08 ......................................................................... $ 4,390,000 $ 4,879,792
Series A, 7.75%, 8/15/13 ......................................................................... 105,000 116,460
Series A, 7.75%, 8/15/14 ......................................................................... 120,000 132,964
Series A, 6.25%, 8/01/16 ......................................................................... 3,280,000 3,539,415
Series A, 7.75%, 8/15/17 ......................................................................... 15,000 16,629
Series A, Pre-Refunded, 6.20%, 8/01/07 ........................................................... 780,000 878,662
Series A, Pre-Refunded, 8.00%, 3/15/12 ........................................................... 1,000,000 1,075,760
Series A, Pre-Refunded, 8.00%, 3/15/13 ........................................................... 1,850,000 1,990,156
Series A, Pre-Refunded, 7.75%, 8/15/13 ........................................................... 4,705,000 5,280,751
Series A, Pre-Refunded, 8.00%, 3/15/14 ........................................................... 13,400,000 14,415,184
Series A, Pre-Refunded, 7.75%, 8/15/14 ........................................................... 125,000 140,296
Series A, Pre-Refunded, 8.00%, 3/15/15 ........................................................... 1,115,000 1,199,472
Series A, Pre-Refunded, 8.00%, 3/15/16 ........................................................... 3,000,000 3,227,280
Series A, Pre-Refunded, 6.25%, 8/01/16 ........................................................... 1,720,000 1,891,140
Series A, Pre-Refunded, 8.00%, 3/15/17 ........................................................... 11,660,000 12,543,362
Series A, Pre-Refunded, 7.75%, 8/15/17 ........................................................... 3,270,000 3,670,150
Series A, Pre-Refunded, 8.00%, 8/15/20 ........................................................... 5,000 5,645
Series B, 8.25%, 6/01/02 ......................................................................... 205,000 230,174
Series B, 7.50%, 2/01/04 ......................................................................... 10,000,000 11,182,000
Series B, 8.25%, 6/01/05 ......................................................................... 1,000,000 1,226,660
Series B, 6.30%, 8/15/08 ......................................................................... 22,360,000 25,103,796
Series B, 6.125%, 8/01/09 ........................................................................ 11,510,000 12,629,002
Series B, 6.375%, 8/15/10 ........................................................................ 17,170,000 19,244,479
Series B, 7.50%, 10/01/11 ........................................................................ 75,000 78,593
Series B, 7.50%, 10/01/12 ........................................................................ 125,000 130,931
Series B, 6.75%, 10/01/15 ........................................................................ 25,000 27,574
Series B, 6.75%, 10/01/17 ........................................................................ 10,000 11,122
Series B, 7.00%, 2/01/19 ......................................................................... 14,440,000 15,823,063
Series B, 6.00%, 8/15/26 ......................................................................... 1,670,000 1,808,092
Series B, Pre-Refunded, 8.25%, 6/01/02 ........................................................... 4,295,000 4,846,220
Series B, Pre-Refunded, 6.30%, 8/15/08 ........................................................... 4,515,000 5,160,600
Series B, Pre-Refunded, 6.375%, 8/15/10 .......................................................... 4,570,000 5,243,618
Series B, Pre-Refunded, 7.50%, 10/01/11 .......................................................... 6,925,000 7,306,221
Series B, Pre-Refunded, 7.50%, 10/01/12 .......................................................... 10,860,000 11,457,843
Series B, Pre-Refunded, 6.75%, 10/01/15 .......................................................... 25,000 28,026
Series B, Pre-Refunded, 6.75%, 10/01/17 .......................................................... 1,290,000 1,448,657
Series B, Pre-Refunded, 7.00%, 2/01/19 ........................................................... 560,000 623,381
Series B, Pre-Refunded, 6.00%, 8/15/26 ........................................................... 330,000 376,180
Series B, Sub-Series B-1, Pre-Refunded, 7.00%, 8/15/16 ........................................... 3,000,000 3,500,910
Series B-1, Pre-Refunded, 7.30%, 8/15/11 ......................................................... 8,000,000 9,436,160
Series C, Pre-Refunded, 7.25%, 8/15/24 ........................................................... 3,540,000 3,878,707
Series C, Sub-Series C-1, 7.00%, 8/01/17 ......................................................... 25,000 27,729
Series C, Sub-Series C-1, 7.00%, 8/01/18 ......................................................... 680,000 753,467
Series C, Sub-Series C-1, Pre-Refunded, 7.00%, 8/01/17 ........................................... 1,905,000 2,147,545
Series C, Sub-Series C-1, Pre-Refunded, 7.00%, 8/01/18 ........................................... 1,025,000 1,155,503
Series D, 8.00%, 8/01/99 ......................................................................... 195,000 201,997
New York (cont.)
New York City GO, (cont.)
Series D, 7.30%, 2/01/01 ......................................................................... $ 380,000 $ 408,629
Series D, 7.50%, 2/01/16 ......................................................................... 40,000 44,469
Series D, 8.00%, 8/01/16 ......................................................................... 5,000 5,566
Series D, 6.00%, 2/15/25 ......................................................................... 28,255,000 30,250,368
Series D, 6.00%, 2/15/25 ......................................................................... 3,045,000 3,403,792
Series D, Pre-Refunded, 8.25%, 8/01/11 ........................................................... 145,000 164,413
Series D, Pre-Refunded, 8.25%, 8/01/12 ........................................................... 11,095,000 12,580,399
Series D, Pre-Refunded, 8.25%, 8/01/13 ........................................................... 7,750,000 8,787,570
Series D, Pre-Refunded, 8.25%, 8/01/14 ........................................................... 4,340,000 4,914,920
Series D, Pre-Refunded, 7.625%, 2/01/15 .......................................................... 9,000,000 10,203,750
Series D, Pre-Refunded, 7.50%, 2/01/16 ........................................................... 4,960,000 5,604,602
Series D, Pre-Refunded, 8.00%, 8/01/16 ........................................................... 45,000 50,733
Series D, Pre-Refunded, 7.50%, 2/01/17 ........................................................... 12,000,000 13,559,520
Series D, Pre-Refunded, 8.00%, 8/01/17 ........................................................... 100,000 112,741
Series D, Pre-Refunded, 8.00%, 8/01/18 ........................................................... 50,000 56,371
Series D, Pre-Refunded, 8.00%, 8/01/19 ........................................................... 30,000 33,822
Series D, Pre-Refunded, 8.00%, 8/15/21 ........................................................... 15,000 16,934
Series E, 5.75%, 2/15/09 ......................................................................... 5,295,000 5,702,291
Series E, 6.50%, 12/01/12 ........................................................................ 135,000 136,280
Series E, Pre-Refunded, 5.75%, 2/15/09 ........................................................... 3,205,000 3,513,577
Series E, Pre-Refunded, 6.00%, 8/01/26 ........................................................... 235,000 267,761
Series F, 8.20%, 11/15/04 ........................................................................ 195,000 220,988
Series F, 6.50%, 2/15/07 ......................................................................... 1,545,000 1,749,342
Series F, 6.60%, 2/15/10 ......................................................................... 3,740,000 4,232,969
Series F, Pre-Refunded, 8.20%, 11/15/04 .......................................................... 5,140,000 5,882,216
Series F, Pre-Refunded, 6.50%, 2/15/07 ........................................................... 6,505,000 7,450,567
Series F, Pre-Refunded, 6.50%, 2/15/08 ........................................................... 7,540,000 8,636,014
Series F, Pre-Refunded, 6.60%, 2/15/10 ........................................................... 12,260,000 14,109,544
Series F, Pre-Refunded, 8.25%, 11/15/15 .......................................................... 2,000,000 2,291,640
Series F, Pre-Refunded, 8.25%, 11/15/17 .......................................................... 2,500,000 2,864,550
Series G, 6.00%, 10/15/26 ........................................................................ 175,000 200,907
Series G, Pre-Refunded, 6.00%, 10/15/26 .......................................................... 15,160,000 16,488,622
Series H, 7.10%, 2/01/12 ......................................................................... 330,000 363,337
Series H, 7.20%, 2/01/14 ......................................................................... 1,040,000 1,146,850
Series H, 7.00%, 2/01/16 ......................................................................... 340,000 372,892
Series H, Pre-Refunded, 7.10%, 2/01/12 ........................................................... 2,670,000 2,980,281
Series H, Pre-Refunded, 7.20%, 2/01/14 ........................................................... 8,960,000 10,028,301
Series H, Pre-Refunded, 7.00%, 2/01/16 ........................................................... 3,660,000 4,074,239
Series H-1, 6.125%, 8/01/11 ...................................................................... 4,900,000 5,376,378
Series H-1, Pre-Refunded, 6.125%, 8/01/09 ........................................................ 240,000 269,441
Series H-1, Pre-Refunded, 6.125%, 8/01/11 ........................................................ 100,000 112,267
Series I, 6.25%, 4/15/13 ......................................................................... 28,520,000 31,828,035
Series I, 6.25%, 4/15/27 ......................................................................... 4,250,000 4,680,398
Series I, Pre-Refunded, 6.25%, 4/15/13 ........................................................... 8,090,000 9,378,494
Series I, Pre-Refunded, 6.25%, 4/15/27 ........................................................... 2,750,000 3,187,993
New York (cont.)
New York City Health and Hospital Authority Local Government Revenue, Series A,
6.00%, 2/15/07 ................................................................................... $ 5,010,000 $ 5,335,550
6.30%, 2/15/20 ................................................................................... 18,235,000 19,294,089
New York City IDA, IDR, Brooklyn Navy Yard Cogeneration Partners,
5.65%, 10/01/28 .................................................................................. 5,000,000 5,077,700
5.75%, 10/01/36 .................................................................................. 5,750,000 5,884,148
New York City Municipal Water Finance Authority, Water and Sewer System Revenue,
Series A, 7.10%, 6/15/12 ......................................................................... 2,455,000 2,668,560
Series A, 7.00%, 6/15/15 ......................................................................... 4,980,000 5,391,896
Series B, 5.875%, 6/15/26 ........................................................................ 6,500,000 7,012,070
Series B, 5.75%, 6/15/29 ......................................................................... 15,000,000 16,098,150
Series B, MBIA Insured, 5.75%, 6/15/26 ........................................................... 3,000,000 3,228,540
New York State Dormitory Authority Lease Revenue, State University Dormitory Facilities, 5.50%, 7/01/27 8,915,000 9,328,656
New York State Dormitory Authority Revenue,
City University General Resources, Series 2, MBIA Insured, 6.25%, 7/01/19 ........................ 4,000,000 4,537,200
City University System Consolidation, Series 1, 5.375%, 7/01/24 .................................. 23,000,000 23,709,320
City University System Consolidation, Third Issue-1, 5.25%, 7/01/25 .............................. 10,000,000 10,209,300
City University System, Third Generation Resources, Refunding, Series 2, 6.00%, 7/01/26 .......... 5,500,000 5,994,890
City University System, Third Generation Resources, Refunding, Series 2, Pre-Refunded, 6.00%, 7/01/26 14,150,000 16,158,593
City University System, Third Generation Resources, Series 2, 6.00%, 7/01/20 ..................... 16,860,000 18,331,709
Mental Health Services Facilities, Series A, 6.00%, 8/15/17 ...................................... 18,000,000 19,768,140
Mental Health Services Facilities, Series A, 5.75%, 2/15/27 ...................................... 5,000,000 5,394,100
Our Lady Nursing Home, FHA Insured, 5.90%, 8/01/20 ............................................... 6,750,000 7,185,173
Saint Barnabas Hospital, 5.35%, 8/01/17 .......................................................... 5,500,000 5,642,285
Second Hospital, Interfaith Medical Center, Series D, 5.30%, 2/15/19 ............................. 5,000,000 5,050,350
Second Hospital, Interfaith Medical Center, Series D, 5.40%, 2/15/28 ............................. 8,000,000 8,086,880
State University Educational Facilities, 5.125%, 5/15/21 5,000,000 5,018,100
State University Educational Facilities, Pre-Refunded, 6.00%, 5/15/18 ............................ 5,000,000 5,701,250
State University Educational Facilities, Refunding, Series B, 7.375%, 5/15/14 .................... 4,240,000 4,541,337
State University Educational Facilities, Refunding, Series B, 7.00%, 5/15/16 ..................... 2,000,000 2,128,920
New York State Energy Research and Development Authority, Electric Facilities Revenue,
Consolidated Edison Co., Refunding, Series A, 6.10%, 8/15/20 ..................................... 8,500,000 9,208,730
Long Island Light, Series A, 7.15%, 6/01/20 ...................................................... 17,500,000 19,178,600
Long Island Light, Series A, 7.15%, 2/01/22 ...................................................... 1,500,000 1,643,880
New York State HFA,
Health Facilities, New York City, Refunding, Series A, 5.90%, 5/01/05 ............................ 14,070,000 15,250,473
Housing Project Mortgage, Refunding, Series A, FSA Insured, 6.10%, 11/01/15 ...................... 5,475,000 5,882,888
Housing Project Mortgage, Refunding, Series A, FSA Insured, 6.125%, 11/01/20 ..................... 4,230,000 4,536,548
Service Contract Revenue, Refunding, Series C, 5.875%, 9/15/14 ................................... 4,675,000 4,989,861
Service Contract Revenue, Refunding, Series C, 6.125%, 3/15/20 ................................... 25,500,000 27,364,815
Service Contract Revenue, Refunding, Series C, 5.50%, 9/15/22 .................................... 17,505,000 18,255,614
Service Contract Revenue, Series A, 6.375%, 9/15/14 .............................................. 25,000 27,803
Service Contract Revenue, Series A, 6.375%, 9/15/16 .............................................. 3,785,000 4,194,916
Service Contract Revenue, Series A, Pre-Refunded, 6.375%, 9/15/14 ................................ 3,130,000 3,582,316
Service Contract Revenue, Series A, Pre-Refunded, 6.50%, 3/15/25 ................................. 10,000,000 11,672,300
New York State Medical Care Facilities, Financial Agency Revenue,
Hospital and Nursing Home, FSA Mortgage Insured, 6.50%, 2/15/34 .................................. 6,945,000 7,617,971
New York (cont.)
New York State Medical Care Facilities, Financial Agency Revenue, (cont.)
Hospital and Nursing Home, Refunding, FSA Mortgage Insured, 6.40%, 8/15/14 ....................... $ 10,665,000 $ 11,764,135
Hospital Mortgage, Series A, AMBAC Insured, Pre-Refunded, 6.50%, 8/15/29 ......................... 7,600,000 8,786,968
The Hospital for Special Surgery, Series A, 6.375%, 8/15/24 ...................................... 12,500,000 14,251,375
New York State Tollway Authority,
General Revenue, Series D, 5.375%, 1/01/27 ....................................................... 5,000,000 5,119,550
Service Contract Revenue, Local Highway and Bridge, 6.25%, 4/01/14 ............................... 11,600,000 13,242,096
Service Contract Revenue, Local Highway and Bridge, 5.75%, 4/01/16 ............................... 13,200,000 13,924,944
New York State Urban Development Corp., Correctional Capital Facilities, Series 5, 6.10%, 1/01/12 7,685,000 8,544,183
New York State Urban Development Corp. Revenue, Youth Facilities, 6.00%, 4/01/17 ................. 11,720,000 12,840,315
Warren and Washington Counties IDA Revenue, Adirondack Resource Recovery Project, Refunding, Series A,
7.90%, 12/15/07 .................................................................................. 4,490,000 4,651,550
-----------
1,247,115,415
-------------
North Carolina 2.7%
Charlotte-Mecklenberg Hospital Authority, Health Care System Revenue,
5.90%, 1/15/16 ................................................................................... 7,010,000 7,544,933
Pre-Refunded, 5.90%, 1/15/16 ..................................................................... 2,890,000 3,264,024
Series A, 5.875%, 1/15/26 ........................................................................ 5,000,000 5,311,400
North Carolina Eastern Municipal Power Agency, Power System Revenue,
Refunding, Series A, 6.50%, 1/01/17 .............................................................. 25,700,000 27,406,737
Refunding, Series A, 6.50%, 1/01/24 .............................................................. 3,250,000 3,259,718
Refunding, Series B, 6.25%, 1/01/12 .............................................................. 6,875,000 7,224,800
Refunding, Series B, 6.00%, 1/01/22 .............................................................. 1,250,000 1,371,138
Refunding, Series B, 6.25%, 1/01/23 .............................................................. 39,030,000 44,219,039
Refunding, Series B, FGIC Insured, 6.25%, 1/01/23 ................................................ 4,000,000 4,378,520
Refunding, Series B, MBIA Insured, 5.80%, 1/01/16 ................................................ 11,175,000 12,296,411
Refunding, Series B, MBIA Insured, 5.75%, 12/01/16 ............................................... 14,420,000 14,944,311
Series B, 6.00%, 1/01/05 ......................................................................... 1,355,000 1,460,162
Series B, 6.00%, 1/01/14 ......................................................................... 16,000,000 16,691,520
Series D, 5.875%, 1/01/13 ........................................................................ 7,440,000 7,732,913
Series G, 5.875%, 1/01/21 ........................................................................ 13,325,000 14,595,406
North Carolina Municipal Power Agency No. 1, Catawba Electric Revenue,
6.25%, 1/01/17 ................................................................................... 9,720,000 10,336,151
Refunding, 5.75%, 1/01/15 ........................................................................ 12,435,000 12,594,168
Wake County IPC, Financing Authority Revenue, Carolina Power and Light, 6.90%, 4/01/09 ........... 5,000,000 5,287,450
-----------
199,918,801
-----------
North Dakota .4%
Dickinson Health Care Facilities Revenue, BHS Long-Term Care, Inc., 7.625%, 2/15/20 .............. 7,750,000 8,128,123
Ellendale MFHR, Ellendale Manor Apartments Project, 9.75%, 7/01/16 ............................... 249,000 249,697
Mercer County PCR, Basin Electric Power Corp.,
Second Series, AMBAC Insured, 6.05%, 1/01/19 ..................................................... 9,130,000 10,073,951
Series E, 7.00%, 1/01/19 ......................................................................... 11,540,000 11,930,167
Wahpeton MFHR, Evergreen Apartments Project, 9.75%, 7/01/16 ...................................... 710,000 712,059
-----------
31,093,997
-----------
Ohio 1.7%
Dayton Special Facilities Revenue, Emery Air Freight Corp., Refunding,
Emery Worldwide Air, Inc., Series E, 6.05%, 10/01/09 ............................................. $ 4,000,000 $ 4,311,240
Emery Worldwide Air, Inc., Series F, 6.05%, 10/01/09 ............................................. 2,750,000 2,963,978
Series A, 5.625%, 2/01/18 ........................................................................ 6,000,000 6,147,720
Franklin County Convention Facilities Authority, Tax and Lease Revenue Anticipation Bonds, MBIA Insured, 5.00%,
12/01/27 ......................................................................................... 7,500,000 7,488,300
Hamilton County Hospital Facilities Revenue, Childrens Hospital Medical Center, Series G, MBIA Insured, 5.00%,
5/15/23 .......................................................................................... 10,000,000 9,916,000
Montgomery County Health Systems Revenue,
Franciscan at Saint Leonard, Refunding, 5.50%, 7/01/18 ........................................... 3,625,000 3,676,040
Franciscan Facility, Series B-2, 8.10%, 7/01/01 .................................................. 1,400,000 1,489,796
Franciscan Medical Center-Dayton, 5.50%, 7/01/18 ................................................. 1,995,000 2,021,414
Series B-2, 8.10%, 7/01/18 ....................................................................... 3,705,000 4,449,779
Series B-2, Pre-Refunded, 8.10%, 7/01/18 ......................................................... 8,295,000 10,609,471
Montgomery County Hospital Revenue, Refunding, Grandview Hospital and Medical Center,
5.50%, 12/01/10 .................................................................................. 1,300,000 1,345,760
5.60%, 12/01/11 .................................................................................. 1,000,000 1,035,020
5.65%, 12/01/12 .................................................................................. 925,000 953,379
Ohio HFA, Residential Mortgage Revenue,
Series A-1, GNMA Secured, 5.40%, 9/01/29 ......................................................... 5,870,000 5,938,973
Series C, 5.75%, 9/01/28 ......................................................................... 7,745,000 8,048,062
Ohio State Air Quality Development Authority Revenue,
Dayton Power and Light Co. Project, Refunding, 6.10%, 9/01/30 .................................... 12,000,000 12,998,280
Toledo Edison, Series B, 8.00%, 5/15/19 .......................................................... 6,325,000 6,717,403
Ohio State EDR, Good Samaritan Medical Center, Series 1990-3, 7.875%, 12/01/10 ................... 1,515,000 1,606,415
Ohio State Solid Waste Disposal Revenue, USG Corp. Project, 5.65%, 3/01/33 ....................... 5,330,000 5,356,117
Ohio State Water Development Authority Revenue, Dayton Power, Refunding, Series A, 6.40%, 8/15/27 3,250,000 3,519,490
Ohio State Water Development Facilities Authority, PCR, Toledo Edison, Series A, 8.00%, 5/15/19 .. 10,000,000 10,620,400
University of Cincinnati COP, University Center Project, MBIA Insured, 5.125%, 6/01/24 ........... 10,500,000 10,612,140
-----------
121,825,177
-----------
Oklahoma 1.2%
Canadian County HFA, SFMR, Series A,
7.70%, 9/01/05 ................................................................................... 1,285,000 1,335,513
7.80%, 9/01/12 ................................................................................... 2,685,000 2,792,937
Oklahoma State Turnpike System Authority, First Senior Revenue,
7.875%, 1/01/21 .................................................................................. 610,000 625,817
Pre-Refunded, 7.875%, 1/01/21 .................................................................... 19,090,000 19,615,739
Stillwater Medical Center Authority Revenue,
Series A, 6.10%, 5/15/09 ......................................................................... 3,440,000 3,691,430
Series B, 6.35%, 5/15/12 ......................................................................... 1,235,000 1,333,417
Series B, 6.50%, 5/15/19 ......................................................................... 3,390,000 3,694,931
Tulsa County Home Financial Authority, Mortgage Revenue, Series D, GNMA Insured, 6.95%, 12/01/22 . 445,000 471,055
Tulsa County Municipal Airport Revenue, American Airlines, Inc.,
7.35%, 12/01/11 .................................................................................. 4,000,000 4,459,680
6.25%, 6/01/20 ................................................................................... 18,530,000 19,742,789
7.375%, 12/01/20 ................................................................................. 11,000,000 11,747,340
Oklahoma (cont.)
Tulsa County Parking Authority, Series B,
6.90%, 12/01/07 .................................................................................. $ 3,000,000 $ 3,327,120
7.00%, 12/01/14 .................................................................................. 5,500,000 5,980,040
Tulsa Housing Assistance Corp. Revenue, First Lien, Refunding, 6.80%, 7/01/11 .................... 2,740,000 2,919,114
Tulsa Industrial Authority, Hospital Revenue, St. John Medical Center Project, Series A, 6.25%, 2/15/14 2,000,000 2,163,840
Valley View Hospital Authority Revenue, Valley View Regional Medical Center, Refunding, 6.00%, 8/15/14 4,000,000 4,189,400
-----------
88,090,162
-----------
Oregon .3%
Medford Hospital Facilities Authority Revenue, Asante Health System, Series A, MBIA Insured, 5.00%, 3,655,000 3,644,218
8/15/24
Oregon State Department of Administrative Services COP, Series A, AMBAC Insured, 5.80%, 5/01/24 .. 5,000,000 5,451,800
Oregon State EDR, Georgia Pacific Corp. Project,
Refunding, Series 183, 5.70%, 12/01/25 ........................................................... 3,500,000 3,554,425
Series CLVII, 6.35%, 8/01/25 ..................................................................... 5,500,000 5,859,975
-----------
18,510,418
-----------
Pennsylvania 3.2%
Allegheny County Hospital Development Authority Revenue, University of Pittsburgh Health Center, Refunding,
Series A, MBIA Insured, 5.625%, 4/01/27 .......................................................... 6,550,000 6,873,308
Allegheny County IDA Revenue, Environmental Improvement, 6.70%, 12/01/20 ......................... 5,250,000 5,775,263
Beaver County IDA, PCR, Ohio Edison Co., Beaver Valley Project, Series A, 7.75%, 9/01/24 ......... 14,250,000 14,896,665
Cambria County HDA, Hospital Revenue, Conemaugh Valley Memorial Hospital, Refunding, Series B,
6.30%, 7/01/08 ................................................................................... 9,600,000 10,451,616
6.375%, 7/01/18 .................................................................................. 10,740,000 11,635,716
Delaware County IDA Revenue, Philadelphia Electric, Refunding, Series 1991, 7.375%, 4/01/21 ...... 6,500,000 7,027,540
Delaware River Port Authority Revenue, Pennsylvania and New Jersey, Series 1995, FGIC Insured, 5.50%, 5,000,000 5,294,550
1/01/26
Delaware Valley Regional Finance Authority, Local Government Revenue, Series B, AMBAC Insured, 5.60%, 5,000,000 5,450,150
7/01/17
Lehigh County IDA, PCR, Pennsylvania Power and Light Co. Project, Refunding, Series A, MBIA Insured, 6.15%,
8/01/29 .......................................................................................... 4,000,000 4,385,080
Montgomery County Higher Education and Health Authority, Hospital Revenue, Jeanes Health System Project,
Pre-Refunded, 8.75%, 7/01/20 ..................................................................... 5,500,000 6,059,955
Pennsylvania EDA,
Financing Authority Revenue, Macmillan, L.P. Project, 7.60%, 12/01/20 ............................ 5,000,000 6,105,500
Financing Resources Recovery Revenue, Colver Project, Series D, 7.125%, 12/01/15 ................. 13,500,000 14,998,500
Pennsylvania State Financial Authority Revenue, Municipal Capital Improvements Program, Refunding, 6.60%,
11/01/09 ......................................................................................... 33,280,000 36,654,592
Pennsylvania State HFA,
Rental Housing, Refunding, FGIC Insured, 6.40%, 7/01/12 .......................................... 10,590,000 11,322,193
SFM, Series 1991, 7.15%, 4/01/15 ................................................................. 3,635,000 3,839,723
Pennsylvania State Higher Educational Facilities Authorities Revenue, Temple University, First Series, MBIA Insured,
5.00%, 4/01/29 ................................................................................... 9,000,000 8,874,990
Pennsylvania State Pooled Finance Authority, Lease Revenue, Capital Improvement, Series B, MBIA Insured, 8.00%,
11/01/09 ......................................................................................... 4,445,000 4,650,003
Philadelphia Gas Works Revenue,
First Series A, FSA Insured, 5.00%, 7/01/26 ...................................................... 5,000,000 4,933,250
Series 13, Pre-Refunded, 7.70%, 6/15/21 .......................................................... 2,850,000 3,190,775
Series A, 6.375%, 7/01/26 ........................................................................ 3,950,000 4,366,014
Pennsylvania (cont.)
Philadelphia GO,
MBIA Insured, 5.00%, 5/15/25 ..................................................................... $ 5,000,000 $ 4,942,000
Refunding, Series A, 11.50%, 8/01/99 ............................................................. 2,400,000 2,545,872
Refunding, Series A, 11.50%, 8/01/00 ............................................................. 1,000,000 1,121,050
Philadelphia Hospital and Higher Education Facilities Authority Revenue,
Albert Einstein Medical Center, 7.50%, 4/01/99 ................................................... 3,955,000 4,009,856
Mortgage, North Philadelphia Health Systems, Series A, FHA Secured, 5.30%, 1/01/18 ............... 3,330,000 3,381,981
Mortgage, North Philadelphia Health Systems, Series A, FHA Secured, 5.35%, 1/01/23 ............... 5,780,000 5,882,075
Mortgage, North Philadelphia Health Systems, Series A, FHA Secured, 5.375%, 1/01/28 .............. 3,765,000 3,840,262
Philadelphia Hospitals and Higher Education Facilities Authority Revenue, Temple University Hospital, 5.875%,
11/15/23 ......................................................................................... 5,000,000 5,201,600
Philadelphia Municipal Authority, Gas Works Lease Revenue, 7.50%, 5/01/01 ........................ 1,000,000 1,036,530
Philadelphia School District, Series B, AMBAC Insured, 5.375%, 4/01/19 ........................... 7,000,000 7,192,570
Philadelphia Water and Sewer Revenue, ETM, Series 10, 7.35%, 9/01/04 ............................. 10,760,000 12,237,778
South Fork Municipal Authority, Hospital Revenue, Conemaugh Valley Memorial Hospital Project, Series A,
MBIA Insured, 5.75%, 7/01/26 ..................................................................... 5,000,000 5,327,500
Westmoreland County IDA Revenue, Citizens General Hospital Project, Refunding, Series A, 8.25%, 7/01/13 3,000,000 3,039,000
-----------
236,543,457
-----------
Rhode Island 1.3%
Providence Special Obligation Tax Increment, Series A, 7.65%, 6/01/16 ............................ 9,900,000 11,240,262
Rhode Island Clean Water Financial Agency Revenue, Drinking Water Providence, Series A, AMBAC Insured, 6.70%,
1/01/15 .......................................................................................... 2,200,000 2,505,140
Rhode Island Housing and Mortgage Finance Corp., Homeownership Opportunity,
Series 2, 7.75%, 4/01/22 ......................................................................... 1,645,000 1,712,100
Series 10-A, 6.50%, 10/01/22 ..................................................................... 20,200,000 21,432,604
Series 10-A, 6.50%, 4/01/27 ...................................................................... 13,085,000 13,864,343
Series 13, 6.70%, 10/01/15 ....................................................................... 7,400,000 7,984,748
Series 13, 6.85%, 4/01/27 ........................................................................ 2,600,000 2,807,116
Series 15-A, 6.85%, 10/01/24 ..................................................................... 15,000,000 16,064,250
Series 16-A, 6.375%, 10/01/26 .................................................................... 2,720,000 2,889,619
Series 17-A, 6.25%, 4/01/17 ...................................................................... 2,320,000 2,454,931
Rhode Island Port Authority and Economic Development Corp., Shepard Building Project, Refunding, Series B,
AMBAC Insured, Pre-Refunded, 6.75%, 6/01/25 ...................................................... 3,000,000 3,464,760
Rhode Island State Health and Educational Building Corp. Revenue,
Health Facilities, Tockwotton Home, Pre-Refunded, 7.25%, 4/15/17 ................................. 3,000,000 3,389,280
Roger William Realty, Elmhurst Nursing Home, FHA Insured, 7.50%, 8/01/29 ......................... 940,000 972,468
St. Antoine Residence, 6.70%, 11/15/12 ........................................................... 2,320,000 2,530,749
St. Antoine Residence, 6.75%, 11/15/18 ........................................................... 2,750,000 2,991,725
-----------
96,304,095
-----------
South Carolina 1.1%
Berkeley County School District COP, Berkeley School Facilities Group, Inc., AMBAC Insured, 6.30%, 1,800,000 2,027,700
2/01/16
Piedmont Municipal Power Agency, South Carolina Electric Revenue, Refunding,
6.60%, 1/01/21 ................................................................................... 25,505,000 25,574,119
Series A, 5.75%, 1/01/24 ......................................................................... 3,150,000 3,151,008
Series A, AMBAC Insured, 6.55%, 1/01/16 .......................................................... 18,115,000 18,162,642
South Carolina (cont.)
Piedmont Municipal Power Agency, South Carolina Electric Revenue, Refunding, (cont.)
Series A, AMBAC Insured, 5.75%, 1/01/24 .......................................................... $ 5,050,000 $ 5,056,212
Richland County PCR, Union Camp Corp. Project, Refunding, Series C, 6.55%, 11/01/20 .............. 3,000,000 3,273,810
South Carolina State Housing, Finance and Development Authority, Mortgage Revenue, Series A-2, AMBAC Insured,
5.80%, 7/01/27 ................................................................................... 6,405,000 6,765,794
South Carolina State Public Service Authority Revenue, Refunding, Series A, AMBAC Insured, 6.375%, 12,765,000 13,789,008
7/01/21
Spartanburg County Health Services District, Inc., Hospital Revenue, Series A, MBIA Insured, 5.50%, 3,000,000
4/15/27 3,158,250
-----------
80,958,543
-----------
South Dakota .4%
Lawrence County PCR, Black Hills Power and Light Co. Project, Refunding, 6.70%, 6/01/10 .......... 5,000,000 5,439,400
South Dakota State HDA, Homeownership Mortgage,
Series A, 6.30%, 5/01/17 ......................................................................... 3,680,000 3,903,192
Series A, 7.15%, 5/01/27 ......................................................................... 10,580,000 11,140,846
Series B, 7.10%, 5/01/17 ......................................................................... 2,885,000 3,042,204
Series D, 6.65%, 5/01/14 ......................................................................... 3,445,000 3,727,766
Series G, 7.125%, 5/01/14 ........................................................................ 3,405,000 3,726,636
-----------
30,980,044
-----------
Tennessee .9%
Chattanooga Health Educational and Housing Facility Board Revenue, Catholic Health Initiatives, Series A, 5.00%,
12/01/18 ......................................................................................... 2,150,000 2,112,504
Franklin IDB, MFHR, Landings Apartment Project, Refunding, Series A, FSA Insured, 6.00%, 10/01/26 2,000,000 2,119,380
Hamilton County IDB, MFHR, Patten Towers Apartments, Series A,
6.125%, 8/01/05 .................................................................................. 2,515,000 2,644,170
6.30%, 8/01/07 ................................................................................... 1,000,000 1,061,240
Jackson Hospital Revenue, Jackson Madison County General Hospital, 5.00%, 4/01/28 ................ 2,000,000 1,963,620
Knox County Health, Educational and Housing Facilities Board, MFHR, East Towne Village Project, GNMA Secured,
8.20%, 7/01/28 ................................................................................... 4,720,000 4,876,562
Memphis-Shelby County Airport Authority, Special Facilities and Project Revenue, Federal Express Corp.,
7.875%, 9/01/09 .................................................................................. 14,690,000 16,362,016
6.75%, 9/01/12 ................................................................................... 6,520,000 7,125,186
Metropolitan Government Nashville and Davidson County, Health and Educational Facilities Board Revenue,
Multi Modal Health Facility, Asset Guaranty Insurance Co. Insured, 5.50%, 5/01/23 ................ 995,000 1,037,307
Metropolitan Nashville Airport Authority Revenue, Series C, FGIC Insured, 6.60%, 7/01/15 ......... 1,940,000 2,104,396
Mount Pleasant IDR, PCR, Stauffer Chemical Co. Project, 8.00%, 12/01/12 .......................... 1,990,000 2,134,693
Nashville and Davidson County Revenue, IDB, Osco Treatment, Inc., Refunding and Improvement, 6.00%, 5,000,000 5,250,100
5/01/03
Shelby County Health Educational and Housing Facility Board Hospital Revenue, MBIA Insured, 5.00%, 5,000,000 4,950,750
4/01/18
Tennessee HDA, Homeownership Program,
Series 1992, 6.80%, 7/01/17 ...................................................................... 2,360,000 2,506,981
Series P, 7.70%, 7/01/16 ......................................................................... 4,580,000 4,740,117
Tennessee State Local Development Authority Revenue, Community Provider Pooled Loan Program, 6.45%,
10/01/14 ......................................................................................... 2,275,000 2,504,093
-----------
63,493,115
-----------
Texas 6.8%
Austin Combined Utility System Revenue, Series A, Pre-Refunded, 8.00%, 11/15/16 .................. 18,100,000 20,009,550
Austin Utility System Revenue, Refunding, FGIC Insured, 6.25%, 5/15/16 ........................... 11,310,000 12,645,485
Texas (cont.)
Bexar County Health Facilities Development Corp. Revenue,
Incarnate Word Facility, FSA Insured, 6.00%, 11/15/15 ............................................ $ 4,500,000 $ 4,980,240
Incarnate Word Health Services, Refunding, FSA Insured, 6.10%, 11/15/23 .......................... 8,300,000 9,235,327
Bexar County HFC, MFHR, Sunpark Apartments Project, 6.875%, 12/01/12 ............................. 1,725,000 1,797,226
Bexar Metropolitan Water District, Water Works Systems Revenue, Refunding, MBIA Insured, 5.875%, 5/01/22 5,000,000 5,411,100
Brazos River Authority, PCR,
Collateralized Utilities Electric Co. Project, Series A, 8.25%, 1/01/19 .......................... 15,000,000 15,390,600
Collateralized Utilities Electric Co., Refunding, Series C, 5.55%, 6/01/30 ....................... 20,000,000 19,677,000
Utilities Electric Co. Project, Series A, AMBAC Insured, 5.55%, 5/01/33 .......................... 23,965,000 24,830,616
Dallas-Fort Worth International Airport Facilities, Improvement Corp. Revenue, American Airlines, Inc.,
8.00%, 11/01/24 .................................................................................. 99,000,000 107,144,730
Refunding, 6.00%, 11/01/14 ....................................................................... 29,400,000 31,311,000
El Paso HFC, SFMR, Series A, 8.75%, 10/01/11 ..................................................... 3,730,000 4,045,745
Fort Worth Higher Education Financial Corp., Higher Education Revenue, Texas Christian University Project, 5.00%,
3/15/27 .......................................................................................... 4,000,000 3,999,760
Grand Prairie Health Facilities Development Corp., Hospital Revenue, Dallas/Ft. Worth Medical Center Project,
Refunding, AMBAC Insured, 6.875%, 11/01/10 ....................................................... 2,700,000 2,844,558
Gulf Coast Waste Disposal Authority, Environmental Improvement Revenue, UXS Corp. Projects, Refunding, 5.50%,
9/01/17 .......................................................................................... 3,250,000 3,315,650
Harris County IDR, Marine Terminal Revenue, Refunding, 6.95%, 2/01/22 ............................ 20,250,000 22,009,118
Houston Water and Sewer System Revenue,
Junior Lien, Refunding, Series A, MBIA Insured, Pre-Refunded, 6.20%, 12/01/20 .................... 22,500,000 25,523,325
Refunding, Series B, 6.375%, 12/01/14 ............................................................ 21,000,000 22,588,650
Joshua ISD, Refunding, Series B, 6.125%, 2/15/26 ................................................. 20,000 20,105
Lower Neches Valley Authority IDC Revenue, Mobil Oil Refunding Corp., Refunding, 5.55%, 3/01/33 .. 2,500,000 2,552,500
Lubbock HFC, SFMR, MBS Program, Refunding, Series A, GNMA Secured, 6.125%, 12/01/17 .............. 1,000,000 1,061,510
Matagorda County Navigation District No. 1, PCR,
Central Power and Light Co. Project, Refunding, Series E, MBIA Insured, 6.10%, 7/01/28 ........... 25,300,000 26,549,567
Collateralized, Houston Lighting and Power Co., Refunding, 6.00%, 7/01/28 ........................ 19,200,000 20,366,976
Series A, AMBAC Insured, 6.70%, 3/01/27 .......................................................... 5,500,000 5,989,225
Mesquite HFC, SFMR, Series 1983, 10.75%, 9/01/14 ................................................. 810,000 828,638
North Central Health Facilities Development Corp. Revenue, Texas Health Resources System, Series B, 5.125%,
2/15/22 .......................................................................................... 5,985,000 6,033,000
Nueces River Authority Environmental Improvement Revenue, Asarco Inc. Project, Refunding, 5.60%, 1/01/27 4,000,000 3,982,800
Nueces River Authority Texas, Asarco Inc., Project, Refunding, Series A, 5.60%, 4/01/18 .......... 4,500,000 4,467,150
Port Corpus Christi Authority, Nueces County General Revenue, Union Pacific, Refunding, 5.65%, 12/01/22 18,000,000 18,487,260
Port Corpus Christi IDC Revenue, Valero, Refunding,
Series B, 5.40%, 4/01/18 ......................................................................... 4,000,000 4,023,480
Series C, 5.40%, 4/01/18 ......................................................................... 6,000,000 6,035,220
Red River Authority, PCR, West Texas Utilities Co., Public Service Co., Oklahoma Central Power and Light Co.,
Refunding, MBIA Insured, 6.00%, 6/01/20 .......................................................... 5,000,000 5,497,200
Sabine River Authority, PCR,
Southwestern Electric Power Co., Refunding, MBIA Insured, 6.10%, 4/01/18 ......................... 4,000,000 4,416,680
Texas Utilities Electric Co. Project, Collateralized, Refunding, FGIC Insured, 6.55%, 10/01/22 ... 7,700,000 8,429,729
San Antonio Electric and Gas Revenue, Refunding, 5.50%, 2/01/20 .................................. 10,000,000 10,455,300
Texas (cont.)
San Antonio Water Revenue, Senior Lien, MBIA Insured,
6.50%, 5/15/10 ................................................................................... $ 2,795,000 $ 3,058,904
Pre-Refunded, 6.50%, 5/15/10 ..................................................................... 1,440,000 1,597,579
Tarrant County Health Facilities Development Corp.,
Health Services Revenue, Texas Health Resources System, Series A, MBIA Insured, 5.00%, 2/15/26 ... 10,000,000 9,795,100
Hospital Revenue, Ft. Worth Osteopathic Hospital, MBIA Insured, 5.25%, 5/15/28 ................... 5,010,000 5,090,962
Texas Housing Agency, Residential Development Mortgage Revenue, Series D, 8.35%,
1/01/08 .......................................................................................... 1,215,000 1,259,821
7/01/08 .......................................................................................... 2,720,000 2,820,341
Texas Water Development Board Revenue, State Revolving Fund, 6.00%, 7/15/13 ...................... 2,500,000 2,699,800
Texas Water Resources Finance Authority Revenue, 7.625%, 8/15/08 ................................. 2,210,000 2,271,968
Travis County HFC, SFMR, Refunding, Series A, 6.95%, 10/01/27 .................................... 3,735,000 4,054,006
Tyler Health Facilities Development Corp., Hospital Revenue, East Texas Medical Center Project, Refunding, Series A,
MBIA Insured, 5.50%, 11/01/17 .................................................................... 1,735,000 1,833,236
-----------
500,437,73
-----------
US Territories 1.6%
District of Columbia GO, Series E, MBIA-IBC Insured, 6.00%, 6/01/13 .............................. 155,000 170,767
District of Columbia GO, Series E, MBIA-IBC Insured, 6.00%, 6/01/13 .............................. 3,845,000 4,137,028
District of Columbia HFA,
MFHR, Refunding, Series A, FHA Insured, 7.10%, 9/01/12 ........................................... 1,830,000 1,952,006
MFHR, Refunding, Series A, FHA Insured, 7.15%, 3/01/24 ........................................... 6,575,000 6,984,228
SFMR, Refunding, Series B, 5.85%, 12/01/18 ....................................................... 2,830,000 2,931,456
District of Columbia Hospital Revenue, Washington Hospital Center Corp., Series A, Pre-Refunded, 9.00%, 3,955,000 4,454,319
1/01/08
District of Columbia Redevelopment Land Agency, Sports Arena, Special Tax Revenue, 5.625%, 11/01/10 990,000 1,024,502
District of Columbia Revenue,
Association of American Medical Colleges, Pre-Refunded, 7.50%, 2/15/20 ........................... 5,685,000 6,071,921
Catholic University of America, 6.45%, 10/01/23 .................................................. 5,265,000 5,826,512
Puerto Rico Commonwealth Highway and Transportation Authority Revenue, Series Y,
5.00%, 7/01/36 ................................................................................... 59,000,000 59,202,370
5.50%, 7/01/36 ................................................................................... 7,000,000 7,543,830
Puerto Rico Commonwealth Urban Renewal and Housing Corp., Commonwealth Appropriation, Refunding, 7.875%,
10/01/04 ......................................................................................... 3,200,000 3,369,312
Virgin Islands HFA Mortgage Revenue, Series B, GNMA Secured, Pre-Refunded, 8.10%, 12/01/18 ....... 690,000 706,374
Virgin Islands Public Finance Authority Revenue, Senior Lien, Fund Loan Notes, Refunding, Series A, 5.50%,
10/01/22 ......................................................................................... 6,485,000 6,552,444
Virgin Islands Public Financing Authority Revenue, Subordinated Lien, Fund Loan Notes, Refunding, Series D, 5.50%,
10/01/01 ......................................................................................... 1,755,000 1,806,123
10/01/02 ......................................................................................... 1,700,000 1,757,766
10/01/03 ......................................................................................... 1,850,000 1,923,14
-----------
116,414,107
-----------
Utah .7%
Carbon County, Solid Waste Disposal Revenue, Laidlaw, Inc. Project, Refunding, Series A, 7.50%, 2/01/10 5,050,000 5,743,769
Intermountain Power Agency, Power Supply Revenue, Refunding, Series A, 6.15%, 7/01/14 ............ 25,000,000 27,470,500
Salt Lake City College Revenue, Westminster College Project,
5.70%, 10/01/17 .................................................................................. 1,000,000 1,026,590
5.75%, 10/01/27 .................................................................................. 1,000,000 1,026,530
Utah (cont.)
Utah State HFA,
Refunding, Series A, 6.50%, 5/01/19 .............................................................. $ 2,945,000 $ 3,097,168
SFM, Refunding, 6.80%, 1/01/12 ................................................................... 1,300,000 1,384,084
SFM, Series A, 8.50%, 7/01/19 .................................................................... 210,000 214,979
SFM, Series B, 6.55%, 7/01/19 .................................................................... 3,105,000 3,330,640
SFM, Series B, 6.55%, 7/01/26 .................................................................... 3,345,000 3,571,122
SFM, Series C-1, 6.80%, 7/01/12 .................................................................. 205,000 218,258
SFM, Series C-1, 8.375%, 7/01/19 ................................................................. 1,185,000 1,201,008
SFM, Series D, 8.60%, 7/01/19 .................................................................... 100,000 101,121
SFM, Series E-1, 6.65%, 7/01/20 .................................................................. 2,150,000 2,295,921
SFM, Series G-1, 8.10%, 7/01/16 .................................................................. 585,000 600,952
-----------
51,282,642
-----------
Vermont .1%
Vermont HFA, SF, Series 5, 7.00%, 11/01/27 ....................................................... 9,400,000 10,077,740
-----------
Virginia .6%
Danville IDA, Hospital Revenue, Danville Regional Medical Center, Refunding, FGIC Insured, Pre-Refunded, 6.50%,
10/01/24 ......................................................................................... 5,840,000 6,680,610
Danville IDA Revenue, Regional Medical Center, FGIC Insured, 6.50%, 10/01/19 ..................... 5,885,000 6,732,086
Henrico County IDA, Public Facilities Lease Revenue, Regional Jail Project, 6.00%, 8/01/15 ....... 7,250,000 7,875,747
Lynchburg IDA, Healthcare Facilities Revenue, Central Health, Refunding, 5.20%, 1/01/28 .......... 2,000,000 1,996,880
Medical College Hospital Authority Revenue, MBIA Insured, 5.125%, 7/01/23 ........................ 2,000,000 2,014,720
Medical College Virginia Hospital Authority Revenue, General Revenue Bonds, MBIA Insured, 5.125%, 3,000,000 3,032,610
7/01/18
Richmond Public Utility Revenue, Refunding, Series A, 5.125%, 1/15/28 ............................ 5,510,000 5,544,602
Virginia State HDA, Commonwealth Mortgage,
Series C, Sub-Series C-6, 6.25%, 1/01/15 ......................................................... 5,120,000 5,378,202
Series H, Sub-Series H-2, 6.55%, 1/01/17 ......................................................... 4,755,000 5,121,895
-----------
44,377,352
-----------
Washington 2.6%
Chelan County PUD No. 1, Cheland Hydro Consolidated System Revenue, Series A, 5.65%, 7/01/32 ..... 5,000,000 5,173,650
Pierce County EDC, Solid Waste-Steilacoom Revenue, Refunding, 6.60%, 8/01/22 ..................... 32,480,000 34,632,450
Pierce County EDR, Occidental Petrol, 5.80%, 9/01/29 ............................................. 4,000,000 4,055,800
Port Moses Lake Public Corp., Washington PCR, Union Carbide Corp.,
7.50%, 8/01/04 ................................................................................... 2,100,000 2,103,422
7.875%, 8/01/06 .................................................................................. 1,000,000 1,026,790
SeaTac GO, Series 1994, 6.50%, 12/01/13 .......................................................... 2,760,000 3,090,675
Seattle Municipality, Metropolitan Seattle Sewer Revenue,
Refunding, Series V, 6.20%, 1/01/32 .............................................................. 9,680,000 10,145,511
Series W, MBIA Insured, 6.25%, 1/01/21 ........................................................... 2,500,000 2,771,024
Seattle Special Obligation, Chinatown International District, 5.90%, 8/01/26 ..................... 4,810,000 5,174,116
Snohomish County USD No. 6, 6.50%, 12/01/11 ...................................................... 7,000,000 8,341,410
University of Washington Alumni Association, Lease Revenue, Medical Center Roosevelt II, 6.30%, 8/15/14 4,000,000 4,469,200
Washington State Health Care Facilities Authority Revenue, Swedish Health Services, AMBAC Insured, 5.50%,
11/15/28 ......................................................................................... 5,000,000 5,178,100
Washington State Public Power Supply System Revenue,
Nuclear Project No. 1, Refunding, Series A, 6.05%, 7/01/12 ....................................... 35,355,000 37,928,843
Washington (cont.)
Washington State Public Power Supply System Revenue, (cont.)
Nuclear Project No. 1, Refunding, Series A, MBIA Insured, 6.25%, 7/01/17 ......................... $ 19,965,000 $ 21,539,640
Nuclear Project No. 2, Refunding, Series A, 6.00%, 7/01/09 ....................................... 18,330,000 19,997,296
Nuclear Project No. 2, Refunding, Series A, 6.30%, 7/01/12 ....................................... 7,700,000 8,973,348
Nuclear Project No. 2, Series A, 6.25%, 7/01/12 .................................................. 3,200,000 3,454,655
Nuclear Project No. 3, Refunding, Series B, 5.50%, 7/01/18 ....................................... 10,050,000 10,089,395
-----------
188,145,325
-----------
West Virginia .7%
Braxton County Solid Waste Disposal Revenue, Weyerhaeuser Co. Project,
6.50%, 4/01/25 ................................................................................... 3,500,000 3,829,594
Refunding, 5.40%, 5/01/25 ........................................................................ 10,000,000 10,091,200
Putnam County PCR, FMC Corp. Project, Refunding, 5.625%, 10/01/13 ................................ 1,700,000 1,769,546
Taylor County PCR, Union Carbide Corp., 7.625%, 8/01/05 .......................................... 2,400,000 2,824,103
West Virginia State Hospital Financing Authority Revenue, Logan General Hospital Project, Refunding and
Improvement, 7.25%, 7/01/20 ...................................................................... 7,000,000 6,824,720
West Virginia State Housing Development Fund, Housing Finance, Series D,
7.00%, 5/01/17 ................................................................................... 6,000,000 6,399,420
7.05%, 11/01/24 .................................................................................. 9,000,000 9,604,350
West Virginia State, Series A, FGIC Insured, 5.20%, 11/01/26 ..................................... 10,000,000 10,292,000
-----------
51,634,933
-----------
Wisconsin 1.3%
Janesville IDR, Simmons Manufacturing Co., 7.00%, 10/15/17 ....................................... 2,200,000 2,319,063
Madison Industrial Gas and Electric Co. Project, Series A, 6.75%, 4/01/27 ........................ 4,220,000 4,575,240
Wisconsin Housing and EDA, Homeownership Revenue,
Refunding, Series A, 6.10%, 11/01/10 ............................................................. 9,190,000 9,904,431
Series 1, 6.75%, 9/01/15 ......................................................................... 10,230,000 10,917,148
Series 1, 6.75%, 9/01/17 ......................................................................... 3,000,000 3,198,420
Series A, 6.90%, 3/01/16 ......................................................................... 1,985,000 2,170,914
Series A, 6.45%, 3/01/17 ......................................................................... 5,500,000 5,870,204
Series A, 7.10%, 3/01/23 ......................................................................... 8,635,000 9,192,906
Series B, 7.05%, 11/01/22 ........................................................................ 3,000,000 3,220,500
Wisconsin State Health and Educational Facilities Authority Revenue,
Childrens Hospital of Wisconsin Inc., AMBAC Insured, 5.375%, 2/15/28 ............................. 21,050,000 21,506,995
Franciscan Sisters Christian, Series A, 5.50%, 2/15/18 ........................................... 1,500,000 1,517,474
Franciscan Sisters Christian, Series A, 5.50%, 2/15/28 ........................................... 3,000,000 3,022,320
Mercy Health Systems Corp., AMBAC Insured, 6.125%, 8/15/13 ....................................... 6,500,000 7,231,250
Mercy Health Systems Corp., AMBAC Insured, 6.125%, 8/15/17 ....................................... 7,500,000 8,278,574
-----------
92,925,439
-----------
Wyoming .3%
Wyoming CDA,
Housing Revenue, Refunding, Series 6, 6.10%, 12/01/28 ............................................ 11,540,000 12,252,941
MF Mortgage, Series A, 6.90%, 6/01/12 ............................................................ 1,395,000 1,467,944
MF Mortgage, Series A, 6.95%, 6/01/24 ............................................................ 3,530,000 3,722,561
SFM, Series A, 7.25%, 6/01/21 .................................................................... 2,500,000 2,683,650
Wyoming (cont.)
Wyoming CDA, (cont.)
SFM, Series G, 7.375%, 6/01/17 ................................................................... $ 645,000 $ 680,068
-----------
20,807,164
-----------
Total Bonds (Cost $6,458,220,889) ................................................................ 6,975,367,419
-----------
Zero Coupon Bonds 2.2%
Calcasieu Parish, Louisiana, Memorial Hospital Service District Revenue, Lake Charles Parish Memorial Hospital
Project, Series A,12/01/22 ....................................................................... 11,040,000 7,614,508
Chicago RMR, Refunding, Series B, MBIA Insured,10/01/09 .......................................... 8,785,000 4,134,483
Coldwater, Michigan, Community Schools, MBIA Insured, Pre-Refunded, 5/01/18 ...................... 5,935,000 2,143,068
Colorado Springs Airport Revenue, Series C,
1/01/03 .......................................................................................... 1,660,000 1,367,840
1/01/05 .......................................................................................... 1,610,000 1,207,241
1/01/07 .......................................................................................... 1,675,000 1,115,081
1/01/08 .......................................................................................... 800,000 501,720
1/01/11 .......................................................................................... 1,450,000 753,231
Cook County, Illinois, Community Consolidated School District No. 54, Schaumburg Township, Series B, FGIC Insured,
Pre-Refunded,
1/01/07 .......................................................................................... 3,505,000 2,329,422
1/01/08 .......................................................................................... 4,800,000 2,985,167
1/01/09 .......................................................................................... 4,380,000 2,546,575
1/01/10 .......................................................................................... 5,760,000 3,138,335
Florida State Mid-Bay Bridge Authority Revenue, Senior Lien, Series A, AMBAC Insured,
10/01/23 ......................................................................................... 5,000,000 1,364,550
10/01/24 ......................................................................................... 3,000,000 769,260
Harrison, Michigan, Community Schools, AMBAC Insured, 5/01/20 .................................... 6,000,000 1,725,840
Jefferson County, Kentucky, Capital Projects Corp., Lease Revenue, Refunding, Series A,
8/15/07........................................................................................... 1,640,000 1,124,908
8/15/08........................................................................................... 4,505,000 2,898,516
8/15/09........................................................................................... 4,580,000 2,781,480
8/15/10........................................................................................... 4,620,000 2,648,275
8/15/13........................................................................................... 6,825,000 3,346,638
8/15/14........................................................................................... 6,860,000 3,171,103
8/15/16........................................................................................... 7,005,000 2,885,920
8/15/17........................................................................................... 7,115,000 2,763,252
Metropolitan Pier and Exposition Authority, Illinois, Dedicated State Tax Revenue,
Capital Appreciation, Series A, 6/15/09........................................................... 9,510,000 5,929,961
Capital Appreciation, Series A, Pre-Refunded, 6/15/09............................................. 1,490,000 943,676
McCormick Place Expansion Project, Series A, FGIC Insured, 6/15/08 ............................... 8,500,000 5,657,260
McCormick Place Expansion Project, Series A, FGIC Insured, 6/15/10 ............................... 8,000,000 4,717,360
McCormick Place Expansion Project, Series A, FGIC Insured, 6/15/11 ............................... 9,690,000 5,392,970
McCormick Place Expansion Project, Series A, FGIC Insured, 6/15/12 ............................... 250,000 220,832
McCormick Place Expansion Project, Series A, FGIC Insured, Pre-Refunded, 6/15/12 ................. 11,550,000 10,477,813
Miami, Dade County Special Obligation, Subordinated Lien, Series B, MBIA Insured,10/01/34 ........ 5,500,000 779,844
Owensboro, Kentucky, Electric Light and Power Revenue, Series B, AMBAC Insured,1/01/08 ........... 5,250,000 3,575,040
San Joaquin Hills, California, Transportation Corridor Agency, Toll Road Revenue,
Refunding, Series A, 1/15/21 ..................................................................... $ 50,000,000 $ 34,110,500
Senior Lien, Pre-Refunded, 1/01/23 ............................................................... 7,000,000 2,108,050
Shreveport, Louisiana, Water and Sewer Revenue, Series B, FGIC Insured,
12/01/07 ......................................................................................... 490,000 303,123
12/01/08 ......................................................................................... 2,530,000 1,446,425
12/01/09 ......................................................................................... 4,080,000 2,173,782
12/01/10 ......................................................................................... 5,630,000 2,793,267
Spring, Texas, ISD, Refunding, FGIC Insured, Pre-Refunded, 8/15/08 ............................... 7,000,000 3,602,550
University of Illinois Revenues, AMBAC Insured, 4/01/10 .......................................... 14,250,000 8,481,742
Washington State Public Power Supply System, Nuclear Project No. 3 Revenue, Refunding, Series B,
7/01/12 .......................................................................................... 6,400,000 3,317,120
7/01/13 .......................................................................................... 11,000,000 5,356,340
7/01/14 .......................................................................................... 15,000,000 6,848,700
-----------
Total Zero Coupon Bonds (Cost $103,721,369) ...................................................... 163,552,768
-----------
Total Long Term Investments (Cost $6,561,942,258) ................................................ 7,138,920,187
-----------
aShort-term Investments 1.3%
Allegheny County Hospital Development Authority Revenue, Aces Presbyterian University Hospital, Series B-1,
Weekly VRDN and Put, 3.15%, 3/01/18 .............................................................. 700,000 700,000
Arkansas State Development Finance Authority, Higher Education Capital Asset, Series A 1995, FGIC Insured,
Weekly VRDN and Put, 3.00%, 12/01/15 ............................................................. 300,000 300,000
Calcasieu Parish Inc., Louisiana Industrial Development Board,
Industrial Revenue, Refunding, Olin Corp. Project,
Series B, Daily VRDN and Put, 3.40%, 2/01/16 ..................................................... 1,000,000 1,000,000
Colorado Health Facilities Authority Revenue, Catholic Health Series B,
Weekly VRDN and Put, 3.00%, 12/01/25 ............................................................. 1,300,000 1,300,000
Denver City and County MFHR, Ogden Residence Project, Daily VRDN and Put, 3.45%, 12/01/09 ........ 2,080,000 2,080,000
Duluth Minnesota Tax Increment Revenue, Lake Superior Paper, Registered, Weekly VRDN and Put, 3.00%, 100,000 100,000
9/01/10
Georgia Development Authority, PCR, Georgia Power Company Plant,
Appling County, Hatch Project, Daily VRDN and Put, 3.25%, 9/01/29 ................................ 8,300,000 8,300,000
Heard County, Wansley Project, Daily VRDN and Put, 3.30%, 9/01/29 ................................ 9,000,000 9,000,000
Putnam County, Branch Project, Daily VRDN and Put, 3.25%, 3/01/24 ................................ 3,200,000 3,200,000
Kansas City IDA, Hospital Revenue, Resh Health Services System,
MBIA Insured, Daily VRDN and Put, 2.80%,
10/15/14 ......................................................................................... 2,500,000 2,500,000
Long Island New York Power Authority Electric System Revenue,
Subordinated, Series B, Daily VRDN and Put,
2.75%, 5/01/33 ................................................................................... 5,300,000 5,300,000
Louisiana, East Baton Rouge Parish Pollution Control Revenue,
Refunding, Exxon Project, Daily VRDN and Put,
3.30%, 11/01/19 .................................................................................. 4,500,000 4,500,000
Maryland Community Development Administration MF, Development Revenue,
Avalon Lea Apartments Project,
Refunding, FNMA Secured, Weekly VRDN and Put, 3.20%, 6/15/26 ..................................... 400,000 400,000
Maryland State Industrial Development Financing Authority,
Economic Development Revenue, Chesapeake
Biological Inc., Weekly VRDN and Put, 3.25%, 8/01/18 ............................................. 1,945,000 1,945,000
Massachusetts State Health and Educational Facilities Authority Revenue,
Capital Assets Program, Series D, MBIA
Insured, Weekly VRDN and Put, 3.10%, 1/01/35 ..................................................... 3,300,000 3,300,000
New York City Health and Hospital Corporation Revenue Health Systems,
Series A, Weekly VRDN and Put, 3.00%,
2/15/26 .......................................................................................... 9,400,000 9,400,000
New York City Municipal Water Financing Authority,
Water and Sewer System Revenue, Bond Purchase Agreement,
Series G, FGIC Insured, Daily VRDN and Put, 2.40%, 6/15/24 ....................................... 5,900,000 5,900,000
New York and New Jersey Port Authority, Special Obligation Revenue,
Versatile Structure, Series 2, Daily VRDN and
Put, 3.25%, 5/01/19 .............................................................................. $ 2,800,000 $ 2,800,000
North Carolina Medical Care Commission Revenue, Carol Woods Project, Daily VRDN and Put, 2.95%, 4/01/21 2,000,000 2,000,000
Perry County Mississippi PCR, Leaf River Forest Project, Refunding, Daily VRDN and Put, 3.20%, 3/01/02 3,300,000 3,300,000
Roanoke IDA, Hospital Revenue, Carilion Health System, Series B, Daily VRDN and Put, 2.80%, 7/01/27 500,000 500,000
Uinta County PCR, Refunding, Chevron USA Inc. Project,
Letter of Credit from Chevron Corp., Daily VRDN and Put,
2.40%, 8/15/20 ................................................................................... 21,350,000 21,350,000
Washington State Health Care Facilities Authority Revenue,
Sisters Providence, Series E, Daily VRDN and Put, 2.75%,
10/01/05 ......................................................................................... 6,000,000 6,000,000
Waynesboro Virginia IDA Revenue, Residential Care Facilities,
Sunnyside Presbyterian Home, Refunding, Daily
VRDN and Put, 3.25%, 12/15/28 .................................................................... 2,500,000 2,500,000
-----------
Total Short-term Investments (Cost $97,675,000)................................................... 97,675,000
-----------
Total Investments (Cost $6,659,617,258) 99.0% .................................................... 7,236,595,187
Other Assets, less Liabilities 1.0% .............................................................. 73,545,755
-----------
Net Assets 100.0% ................................................................................ $7,310,140,942
===========
</TABLE>
See glossary of terms on page 47.
aVariable rate demand notes (VRDNs) are tax-exempt obligations which contain a
floating or variable interest rate adjustment formula and an unconditional right
of demand to receive payment of the principle balance plus accrued interest at
specified dates.
bSufficient collateral has been segregated for securities traded on a
when-issued or delayed delivery basis.
FRANKLIN FEDERAL TAX-FREE INCOME FUND
Statement of Investments, October 31, 1998 (unaudited) (cont.)
Glossary of Terms
AMBAC - American Municipal Bond Assurance Corp.
CDA - Community Development Authority/Agency
COP - Certificate of Participation
CRDA - Community Redevelopment Authority/Agency
EDA - Economic Development Authority
EDC - Economic Development Corp.
EDR - Economic Development Revenue
ETM - Escrow to Maturity
FGIC - Financial Guaranty Insurance Co.
FHA - Federal Housing Authority/Agency
FI/GML- Federally Insured or Guaranteed Mortgage Loans
FNMA - Federal National Mortgage Association
FSA - Financial Security Assistance (Some of the securities shown as FSA
Insured were originally insured by Capital Guaranty Insurance Co.
(CGIC) which was acquired by FSA in 1995 and no longer does business
under this name.)
GNMA - Government National Mortgage Association
GO - General Obligation
HDA - Housing Development Authority
HFA - Housing Finance Agency
HFC - Housing Finance Corp.
IDA - Industrial Development Authority/Agency
IDB - Industrial Development Board
IDC - Industrial Development Corp.
IDBR - Industrial Development Board Revenue
IDR - Industrial Development Revenue
IPC - Industrial Pollution Control
ISD - Independent School District
L.P. - Limited Partnership
MBIA - Municipal Bond Investors Assurance Corp.
MBIA-IBC - Municipal Bond Investors Assurance Corp.-Insured Bond Certificates
MBS - Mortgage-Backed Securities
MF - Multi-Family
MFHR - Multi-Family Housing Revenue
MFMR - Multi-Family Mortgage Revenue
MFR - Multi-Family Revenue
MTA - Metropolitan Transit Authority
PCR - Pollution Control Revenue
PUD - Public Utility District
RDA - Redevelopment Authority/Agency
RMR - Residential Mortgage Revenue
SF - Single Family
SFM - Single Family Mortgage
SFMR - Single Family Mortgage Revenue
SFR - Single Family Revenue
USD - Unified School District
FRANKLIN FEDERAL TAX-FREE INCOME FUND
Financial Statements
<TABLE>
<CAPTION>
Statement of Assets and Liabilities
October 31, 1998 (unaudited)
<S> <C>
Assets:
Investments in securities, at value (cost $6,659,617,258) ...................................... $7,236,595,187
Cash ........................................................................................... 999,580
Receivables:
Investment securities sold .................................................................... 45,797,924
Capital shares sold ........................................................................... 11,440,003
Interest ...................................................................................... 131,259,562
----------------
Total assets .............................................................................. 7,426,092,256
----------------
Liabilities:
Payables:
Investment securities purchased ............................................................... 51,839,305
Capital shares redeemed ....................................................................... 53,547,779
Affiliates .................................................................................... 4,517,604
Shareholders .................................................................................. 5,910,123
Other liabilities .............................................................................. 136,503
----------------
Total liabilities ......................................................................... 115,951,314
----------------
Net assets, at value ..................................................................... $7,310,140,942
================
Net assets consist of:
Undistributed net investment income ............................................................ $ 6,567,734
Net unrealized appreciation .................................................................... 576,977,929
Accumulated net realized loss .................................................................. (7,136,726)
Capital shares ................................................................................. 6,733,732,005
----------------
Net assets, at value ..................................................................... $7,310,140,942
================
Class I:
Net asset value per share ($7,133,824,075 / 574,189,590 shares outstanding)* ................... $12.42
================
Maximum offering price per share ($12.42 / 95.75%) ............................................. $12.97
================
Class II:
Net asset value per share ($176,316,867 / 14,196,540 shares outstanding)* ...................... $12.42
================
Maximum offering price per share ($12.42 / 99%) ................................................ $12.55
================
</TABLE>
*Redemption price is equal to net asset value less any applicable contingent
deferred sales charge.
See notes to financial statements.
FRANKLIN FEDERAL TAX-FREE INCOME FUND
Financial Statements (continued)
<TABLE>
<CAPTION>
Statement of Operations
for the six months ended October 31, 1998 (unaudited)
<S> <C> <C>
Investment income:
Interest ............................................................. $219,845,745
--------------
Expenses:
Management fees (Note 3) ............................................. $16,537,312
Distribution fees (Note 3)
Class I ............................................................. 2,693,558
Class II ............................................................ 506,604
Transfer agent fees (Note 3) ......................................... 1,288,527
Custodian fees ....................................................... 35,891
Reports to shareholders .............................................. 394,672
Registration and filing fees ......................................... 100,397
Professional fees .................................................... 89,851
Directors' fees and expenses ......................................... 72,488
Other ................................................................ 136,097
--------------
Total expenses .................................................. 21,855,397
--------------
Net investment income .......................................... 197,990,348
--------------
Realized and unrealized gains:
Net realized gain from investments ................................... 18,742,105
Net unrealized appreciation on investments ........................... 84,347,573
--------------
Net realized and unrealized gain ...................................... 103,089,678
--------------
Net increase in net assets resulting from operations .................. $301,080,026
==============
</TABLE>
See notes to financial statements.
FRANKLIN FEDERAL TAX-FREE INCOME FUND
Financial Statements (continued)
<TABLE>
<CAPTION>
Statements of Changes in Net Assets for the six months ended October 31, 1998
(unaudited) and the year ended April 30, 1998
Six Months Ended Year Ended
October 31, 1998 April 30, 1998
---------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income ...................................... $ 197,990,348 $ 404,855,331
Net realized gain from investments ......................... 18,742,105 42,732,886
Net unrealized appreciation on investments ................. 84,347,573 156,385,279
---------------------------------------
Net increase in net assets resulting from operations ...... 301,080,026 603,973,496
Distributions to shareholders from:
Net investment income:
Class I ................................................... (193,297,707) (396,082,048)
Class II .................................................. (3,695,119) (5,046,130)
---------------------------------------
Total distributions to shareholders ......................... (196,992,826) (401,128,178)
Capital share transactions: (Note 2)
Class I .................................................... 8,936,649 (83,120,865)
Class II ................................................... 38,961,503 60,999,749
---------------------------------------
Total capital share transactions ............................ 47,898,152 (22,121,116)
Net increase in net assets ................................ 151,985,352 180,724,202
Net assets:
Beginning of period ......................................... 7,158,155,590 6,977,431,388
---------------------------------------
End of period ............................................... $7,310,140,942 $7,158,155,590
=======================================
Undistributed net investment income included in net assets:
End of period ............................................... $ 6,567,734 $ 5,570,212
=======================================
</TABLE>
See notes to financial statements.
FRANKLIN FEDERAL TAX-FREE INCOME FUND
Notes to Financial Statements (unaudited)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Federal Tax-Free Income Fund (the Fund) is registered under the
Investment Company Act of 1940 as a diversified, open-end investment company.
The Fund seeks to provide tax-free income. The following summarizes the Fund's
significant accounting policies.
a. Security Valuation
Tax-free bonds generally trade in the over-the-counter market and are valued
within the range of the latest quoted bid and asked prices. In the absence of a
sale or reported bid and asked prices, information with respect to bond and note
transactions, quotations from bond dealers, market transactions in comparable
securities, and various relationships between securities are used to determine
the value of the security. 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 Directors. Securities for
which market quotations are not readily available are valued at fair value as
determined by management in accordance with procedures established by the Board
of Directors.
b. Income Taxes
No provision has been made for income taxes because the Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute all of its taxable income.
c. Security Transactions, Investment Income, Expenses and Distributions
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Interest income and estimated expenses are accrued daily. Bond discount and
premium are amortized on an income tax basis. Distributions to shareholders are
recorded on the ex-dividend date.
Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class.
d. 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.
2. CAPITAL STOCK
The Fund offers two classes of shares: Class I and Class II. The shares differ
by their initial sales load, distribution fees, voting rights on matters
affecting a single class and the exchange privilege of each class.
At October 31, 1998, there were 10 billion shares of no par value stock
authorized, of which 3 billion each were designated as Class I and Class II.
Transactions in the Fund's shares were as follows:
<TABLE>
<CAPTION>
Six months ended Year ended
October 31, 1998 April 30, 1998
------------------------------------------------------------------
Shares Amount Shares Amount
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class I Shares:
Shares sold ................................ 61,185,738 $ 756,127,723 114,214,913 $ 1,390,939,797
Shares issued in reinvestment of distributions 6,438,796 79,316,705 13,093,027 159,083,079
Shares redeemed ............................ (66,857,382) (826,507,779) (134,063,708) (1,633,143,741)
------------------------------------------------------------------
Net increase (decrease) .................... 767,152 $ 8,936,649 (6,755,768) $ (83,120,865)
==================================================================
Class II Shares:
Shares sold ................................ 3,595,843 $ 44,424,342 5,941,310 $ 72,517,830
Shares issued in reinvestment of distributions 188,524 2,323,994 259,109 3,154,246
Shares redeemed ............................ (630,733) (7,786,833) (1,202,566) (14,672,327)
------------------------------------------------------------------
Net increase ............................... 3,153,634 $ 38,961,503 4,997,853 $ 60,999,749
==================================================================
</TABLE>
3. TRANSACTIONS WITH AFFILIATES
Certain officers and directors of the Fund are also officers or directors of
Franklin/Templeton Distributors, Inc. (Distributors), Franklin Advisers, Inc.
(Advisers), Franklin/Templeton Investor Services, Inc. (Investor Services), and
Franklin Templeton Services, Inc. (FT Services), the Fund's principal
underwriter, investment manager, transfer agent, and administrative manager,
respectively.
The Fund pays an investment management fee to Advisers based on the average net
assets of the Fund as follows:
Annualized
Fee Rate Month-End Net Assets
-----------------------------------------------------------------
.625% First $100 million
.50% Over $100 million, up to and including $250 million
.45% Over $250 million, up to and including $10 billion
Fees are further reduced on net assets over $10 billion.
Under an agreement with Advisers, FT Services provides administrative services
to the Fund. The fee is paid by Advisers based on average daily net assets, and
is not an additional expense of the Fund.
3. TRANSACTIONS WITH AFFILIATES (cont.)
The Fund reimburses Distributors up to .10% and .65% per year of the average
daily net assets of Class I and Class II, respectively, for costs incurred in
marketing the Fund's shares.
Distributors paid net commissions on sales of the Fund shares, and received
contingent deferred sales charges for the period of $1,492,843 and $33,627,
respectively.
The Fund paid transfer agent fees of $1,288,527 of which $1,208,001 was paid to
Investor Services.
4. INCOME TAXES
At April 30, 1998, the Fund had tax basis capital losses of $25,878,831 which
may be carried over to offset future capital gains. Such losses expire as
follows:
Capital loss carryovers expiring in:
2003 ............................. $22,451,357
2005 ............................. 3,427,474
------------
$25,878,831
============
At October 31, 1998, the net unrealized appreciation based on the cost of
investments for income tax purposes of $6,659,617,258 was as follows:
Unrealized appreciation ........... $579,370,985
Unrealized depreciation ........... (2,393,056)
------------
Net unrealized appreciation ....... $576,977,929
============
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the
period ended October 31, 1998 aggregated $520,820,687 and $463,656,753,
respectively.
6. CREDIT RISK
The Fund has investments in excess of 10% of its total net assets in the state
of New York. Such concentration may subject the Fund more significantly to
economic changes occurring within that state.
Franklin Federal Tax-Free Income Fund
Semi-Annual Report
October 31, 1998.
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 credit quality breakdown of the Franklin
Federal Tax-Free Income Fund based on total long-term investments as of
10/31/98.
AAA 38.1%
AA 12.7%
A 19.5%
BBB 27.2%
Below Investment Grade 2.5%
* Quality breakdown may include internal ratings for bonds not rated by a
national rating agency.
GRAPHIC MATERIAL (2)
This chart shows the portfolio breakdown by sector based on the percentage of
total long-term investments on 10/31/98 for the Franklin Federal Tax-Free
Income Fund.
% of Total Long-
Sector Term Investments
Utilities 25.2%
Prerefunded 13.9%
Housing 13.0%
Transportation 12.0%
Hospitals 10.6%
General Obligations 8.1%
Industrial 6.3%
Other Revenue 4.0%
Education 3.1%
Certificates of Participation 1.9%
Health Care 1.3%
Tax Allocation 0.4%
Sales Tax Revenue 0.2%
GRAPHIC MATERIAL (3)
The following line graph compares the performance of the Bond Buyer Municipal
40 Index to the 30-year U.S. Treasury yield from 5/1/98 to 10/31/98.
30-Year U.S. Bond Buyer 40
Treasury Index
- ---------------------------------------------------------
5/1/98 5.94% 5.37%
5/4/98 5.94% 5.35%
5/5/98 5.98% 5.36%
5/6/98 5.94% 5.34%
5/7/98 5.95% 5.34%
5/8/98 5.98% 5.34%
5/11/98 6.04% 5.36%
5/12/98 5.96% 5.33%
5/13/98 5.95% 5.30%
5/14/98 5.98% 5.28%
5/15/98 5.97% 5.28%
5/18/98 5.92% 5.26%
5/19/98 5.94% 5.26%
5/20/98 5.89% 5.24%
5/21/98 5.93% 5.25%
5/22/98 5.90% 5.26%
5/26/98 5.85% 5.23%
5/27/98 5.83% 5.22%
5/28/98 5.83% 5.23%
5/29/98 5.81% 5.22%
6/1/98 5.78% 5.22%
6/2/98 5.80% 5.23%
6/3/98 5.80% 5.24%
6/4/98 5.82% 5.25%
6/5/98 5.79% 5.22%
6/8/98 5.79% 5.23%
6/9/98 5.79% 5.23%
6/10/98 5.70% 5.20%
6/11/98 5.65% 5.19%
6/12/98 5.66% 5.18%
6/15/98 5.61% 5.16%
6/16/98 5.65% 5.18%
6/17/98 5.74% 5.23%
6/18/98 5.70% 5.21%
6/19/98 5.67% 5.22%
6/22/98 5.66% 5.21%
6/23/98 5.64% 5.21%
6/24/98 5.66% 5.22%
6/25/98 5.66% 5.23%
6/26/98 5.64% 5.23%
6/29/98 5.65% 5.23%
6/30/98 5.62% 5.22%
7/1/98 5.63% 5.23%
7/2/98 5.60% 5.21%
7/6/98 5.57% 5.21%
7/7/98 5.60% 5.21%
7/8/98 5.63% 5.22%
7/9/98 5.60% 5.21%
7/10/98 5.63% 5.21%
7/13/98 5.68% 5.23%
7/14/98 5.72% 5.25%
7/15/98 5.70% 5.25%
7/16/98 5.72% 5.26%
7/17/98 5.75% 5.27%
7/20/98 5.71% 5.26%
7/21/98 5.67% 5.25%
7/22/98 5.68% 5.25%
7/23/98 5.66% 5.25%
7/24/98 5.68% 5.25%
7/27/98 5.70% 5.25%
7/28/98 5.74% 5.26%
7/29/98 5.77% 5.26%
7/30/98 5.73% 5.25%
7/31/98 5.72% 5.26%
8/3/98 5.67% 5.24%
8/4/98 5.65% 5.24%
8/5/98 5.66% 5.24%
8/6/98 5.67% 5.24%
8/7/98 5.63% 5.22%
8/10/98 5.63% 5.22%
8/11/98 5.60% 5.20%
8/12/98 5.62% 5.21%
8/13/98 5.60% 5.21%
8/14/98 5.55% 5.20%
8/17/98 5.56% 5.19%
8/18/98 5.56% 5.19%
8/19/98 5.56% 5.19%
8/20/98 5.52% 5.18%
8/21/98 5.46% 5.16%
8/24/98 5.48% 5.16%
8/25/98 5.44% 5.15%
8/26/98 5.44% 5.13%
8/27/98 5.38% 5.12%
8/28/98 5.37% 5.12%
8/31/98 5.30% 5.11%
9/1/98 5.34% 5.14%
9/2/98 5.34% 5.15%
9/3/98 5.31% 5.14%
9/4/98 5.29% 5.15%
9/8/98 5.34% 5.16%
9/9/98 5.28% 5.15%
9/10/98 5.18% 5.13%
9/11/98 5.23% 5.13%
9/14/98 5.23% 5.14%
9/15/98 5.25% 5.15%
9/16/98 5.23% 5.13%
9/17/98 5.18% 5.12%
9/18/98 5.15% 5.10%
9/21/98 5.12% 5.07%
9/22/98 5.16% 5.09%
9/23/98 5.16% 5.09%
9/24/98 5.15% 5.09%
9/25/98 5.13% 5.09%
9/28/98 5.15% 5.09%
9/29/98 5.10% 5.08%
9/30/98 4.98% 5.04%
10/1/98 4.90% 4.99%
10/2/98 4.85% 4.97%
10/5/98 4.70% 4.95%
10/6/98 4.75% 4.95%
10/7/98 4.83% 4.98%
10/8/98 4.99% 5.04%
10/9/98 5.13% 5.12%
10/13/98 5.10% 5.11%
10/14/98 5.00% 5.09%
10/15/98 5.02% 5.09%
10/16/98 4.96% 5.05%
10/19/98 4.98% 5.04%
10/20/98 5.06% 5.08%
10/21/98 5.08% 5.08%
10/22/98 5.13% 5.11%
10/23/98 5.16% 5.14%
10/26/98 5.13% 5.14%
10/27/98 5.08% 5.12%
10/28/98 5.13% 5.12%
10/29/98 5.09% 5.11%
10/30/98 5.15% 5.13%
GRAPHIC MATERIAL (4)
This chart shows the dividend distributions for Franklin Federal Tax-Free
Income Fund - Class I from 5/1/98 to 10/31/98.
May 5.6 cents
June 5.6 cents
July 5.6 cents
August 5.6 cents
September 5.6 cents
October 5.6 cents
Total 33.6 cents
GRAPHIC MATERIAL (5)
This chart shows in bar format the comparison between Franklin Federal
Tax-Free Income Fund - Class I distribution rate of 5.18% and the taxable
equivalent rate of 8.58% on 10/31/98.
GRAPHIC MATERIAL (6)
This chart shows the dividend distributions for Franklin Federal Tax-Free
Income Fund - Class II from 5/1/98 to 10/31/98.
May 5.00 cents
June 5.00 cents
July 5.01 cents
August 5.01 cents
September 5.01 cents
October 5.01 cents
Total 30.04 cents
GRAPHIC MATERIAL (7)
This chart shows in bar format the comparison between Franklin Federal
Tax-Free Income Fund - Class II distribution rate of 4.79% and the taxable
equivalent rate of 7.93% on 10/31/98.
ANNUAL
REPORT
May 31, 1998
FRANKLIN MUNICIPAL SECURITIES TRUST
Contents
Shareholder Letter .................................................... 1
Fund Reports
Franklin Arkansas
Municipal Bond Fund ................................................ 4
Franklin California High
Yield Municipal Fund ............................................... 10
Franklin Hawaii
Municipal Bond Fund ................................................ 22
Franklin Tennessee
Municipal Bond Fund ................................................ 28
Franklin Washington
Municipal Bond Fund ................................................ 36
Bond Ratings .......................................................... 44
Financial Highlights &
Statement of Investments .............................................. 47
Financial Statements .................................................. 68
Notes to
Financial Statements .................................................. 73
Independent
Auditor's Report ...................................................... 78
SHAREHOLDER LETTER
Dear Shareholder:
It is a pleasure to bring you Franklin Municipal Securities Trust's annual
report for the period ended May 31, 1998.
During the year under review, the U.S. economy continued on its path of moderate
growth, modest inflation and relatively stable-to-lower interest rates. Economic
growth was solid, as measured by the 1998 first quarter, annualized Gross
Domestic Product (GDP) gain of 5.4%. The Consumer Price Index (CPI), a widely
used measure of inflation, continued to trend downward. The CPI's annualized
increase for May 1998 was a surprisingly low 2.2%, considering the U.S. economy
is in its seventh consecutive year of expansion.
After peaking in the second quarter of 1997, interest rates declined due to
benign inflation and the presumption that the Asian monetary crises would slow
the U.S. economy. The Asian crises also contributed to a flight to quality into
U.S. Treasury bonds and U.S. dollar-denominated assets. The 30-year Treasury
yield ended the reporting period at 5.81%, down from 6.92% on May 31, 1997.1 The
yield on the Bond Buyer 40 Index, a representative municipal bond index,
declined from 5.74% to 5.22%, for the same period.2 The overall interest rate
decline resulted in a healthy year for fixed-income securities in 1997, and the
downward trend continued to translate into bond market strength in 1998. Credit
rating upgrades substantially outpaced downgrades from national credit rating
agencies during the reporting period.
1. Source: Standard & Poor's(R) Micropal (Federal Reserve H15 Report).
2. Source: Standard & Poor's Micropal (Bond Buyer 40). Index is composed of 40
actively traded municipal bonds and does not represent the performance of any
Franklin Templeton fund. Investors cannot invest directly in this unmanaged
index.
Recent estimates for bond supply in 1998 are over $250 billion, with the
majority coming to market insured. Yield spreads between an insured and an
investment grade BBB bond ranged between approximately 25 to 35 basis points.
Increased competition among the various municipal insurers resulted in
aggressive pricing that narrowed the quality spreads. The issuance of AAA bonds
has escalated by 40% during the past ten years. Insurance generally increases a
municipal bond's quality and marketability. Low-cost insurance and falling
interest rates made it difficult to maintain the yields in the portfolios. We
anticipate that it will continue to be economical for issuers to purchase
insurance to enhance their credit quality. As insurance premiums remain
competitive, we expect that spreads will remain narrow.
The low interest-rate environment continued to increase the amount of
prerefunding activity in the market. The issuers who came to market in the
mid-1990s when rates were higher, recently found opportunities to refinance
their existing debt and save on interest costs.
Our investment philosophy remains disciplined and focused, as we strive to offer
our shareholders high, tax-free income and preservation of principal. Looking
forward, the recent economic environment should be beneficial for municipalities
and municipal bonds.
We encourage you to discuss your financial goals with an investment
representative. He or she can address concerns about volatility and help you
diversify your investments and stay focused on the long term. Mutual funds offer
a level of diversification that is almost impossible for individual investors to
achieve on their own. Municipal bonds continue to be an attractive investment
for diversifying a heavily weighted stock portfolio. As always, we appreciate
your support, welcome your questions and comments, and look forward to serving
your investment needs in the years ahead.
Sincerely,
Charles B. Johnson
Chairman
Franklin Municipal Securities Trust
Thomas J. Kenny
Director
Franklin Municipal Bond Department
FRANKLIN ARKANSAS
MUNICIPAL BOND FUND
GRAPHIC MATERIAL 1 OMITTED - SEE APPENDIX AT END OF DOCUMENT
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 48 of
this report.
Your Fund's Objective: Franklin Arkansas Municipal Bond Fund seeks to provide
high, current income exempt from regular federal and Arkansas state personal
income taxes while seeking preservation of capital by investing primarily in a
portfolio of Arkansas municipal securities.1
1. The fund may invest as much as 100% of its assets in bonds that pay interest
subject to federal alternative minimum tax. All or a significant portion of the
income on these obligations may be subject to such tax. Distributions of capital
gains and of ordinary income from accrued market discount, if any, are taxable.
State Update
Arkansas' strong financial performance is based on conservative fiscal
management, an increasingly diversified economy, and manageable future debt
plans. Manufacturing jobs from other states migrated to Arkansas over the last
decade, and construction and service industries increased to support these
manufacturing efforts. Regional employment and wealth in Arkansas' northwest
improved significantly with the expansion of companies such as Wal-Mart and
Tyson Foods. The employment growth experienced by the state since 1991 slowed,
but overall expansion continued. Arkansas' unemployment remained below the
national rate.
Arkansas manages its financial operations responsibly. The state's Revenue
Stabilization Act mandates financial balance, effectively limiting expenditures
to cash receipts and balances on hand. The state projects limited increases in
government spending over the next two years, and Arkansas' debt load remains
among the country's lowest. Despite economic progress, however, Arkansas has
underdeveloped infrastructure and low per capita personal income.
Portfolio Notes
GRAPHIC MATERIAL 2 OMITTED - SEE APPENDIX AT END OF DOCUMENT
During the reporting period, we focused on well-structured Arkansas municipal
bonds across most sectors. Arkansas bonds tend to trade at much higher prices
(lower yields) than most other states' bonds. This is due mainly to the demand
outweighing the supply of Arkansas bonds. Throughout 1997 and the first half of
1998, this relationship continued as the supply of Arkansas bonds stayed
relatively low. Municipal bond supply in Arkansas increased 5.8% from 1996 to
1997, and we expect 1998's supply to remain stable.
The fund's net assets increased 132% from May 31, 1997, to May 31, 1998, from
$13.0 million to $30.3 million.
Maintaining our disciplined approach to purchasing bonds, we looked for Arkansas
bonds offering attractive yields. We participated in issues offered by Little
River County's Georgia Pacific, Jefferson County's Entergy Arkansas Inc,
Conway's Sales & Use Tax Capital Improvement Bonds, and Arkansas State
Development Finance Authority for Home Mortgage revenue bonds. Going forward,
the fund will seek to invest in bonds that provide good call protection while
paying high, current income.
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of May 31, 1998, the end of the reporting period. However, market
and economic conditions are changing constantly, which can be expected to affect
our strategies and the fund's portfolio composition. Although historic
performance is no guarantee of future results, these insights may help you
understand our investment and management philosophy.
GRAPHIC MATERIAL 3 OMITTED - SEE APPENDIX AT END OF DOCUMENT
PERFORMANCE SUMMARY
Franklin Arkansas Municipal Bond Fund's share price, as measured by net asset
value, increased 48 cents, from $10.51 on May 31, 1997, to $10.99 on May 31,
1998. During the 12-month reporting period, the fund paid income distributions
totaling 58.5 cents ($0.585) per share. Distributions will vary based on the
earnings of the fund's portfolio, and past distributions are not predictive of
future trends.
Based on an annualization of the current monthly per-share dividend of 4.8 cents
($0.048) and the maximum offering price of $11.48 on May 31, 1998, your fund's
distribution rate was 5.02%. This double tax-free rate is generally higher than
the after-tax return on a comparable taxable investment. For example, an
investor in the maximum combined federal and Arkansas state personal income tax
bracket would need to earn 8.94% from a taxable investment to match the fund's
tax-free distribution rate.
The chart on page 8 compares your fund's shares' performance with that of the
unmanaged Lehman Brothers Municipal Bond Index. The index includes over 40,000
municipal securities from across the country, while your fund consists primarily
of Arkansas municipal bonds. Of course, such a market index has inherent
performance differentials over any fund. It does not pay management fees to
cover salaries of securities analysts or portfolio managers, or pay commissions
or market spreads to buy and sell securities. Unlike an index, mutual funds are
never 100% invested because they need cash on hand to redeem shares. In
addition, the performance shown for the fund includes the maximum initial sales
charge, all fund expenses and account fees. If operating expenses such as
Franklin Arkansas Municipal Bond Fund's had been applied to this index, the
index's performance would have been lower. Please remember that an index is
simply a measure of performance and one cannot invest in it directly.
The performance of your fund's shares exceeded the rate of inflation, as
measured by the Consumer Price Index (CPI), keeping your purchasing power well
ahead of inflation -- a primary goal of any investment.
GRAPHIC MATERIAL 4 OMITTED - SEE APPENDIX AT END OF DOCUMENT
GRAPHIC MATERIAL 5 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin Arkansas Municipal Bond Fund
Periods ended 5/31/98
Since
Inception
1-Year 3-Year (5/10/94)
Cumulative Total Return1 10.31% 25.74% 35.49%
Average Annual Total Return2 5.59% 6.38% 6.64%
Distribution Rate3 5.02%
Taxable Equivalent Distribution Rate4 8.94%
30-Day Standardized Yield5 4.89%
Taxable Equivalent Yield4 8.71%
1. Cumulative total return measures the change in value of an investment over
the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the maximum 4.25% initial
sales charge.
3. Distribution rate is based on an annualization of the current 4.8 cent per
share monthly dividend and the maximum offering price of $11.48 on May 31, 1998.
4. Taxable equivalent distribution rate and yield assume the 1998 maximum
combined federal and Arkansas state personal income tax bracket of 43.8%, based
on the federal income tax rate of 39.6%.
5. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended May 31, 1998.
The fund's manager agreed in advance to waive a portion of its management fees,
which reduces operating expenses and increases distribution rate, yield and
total return to shareholders. Without this waiver, the fund's distribution rate
and total return would have been lower, and yield for the period would have been
4.23%. The fee waiver may be discontinued at any time upon notice to the fund's
Board of Trustees.
All total return calculations assume reinvestment of dividends and capital gains
at net asset value. Since markets can go down as well as up, your investment
return and principal value will fluctuate with market conditions, and you may
have a gain or loss when you sell your shares.
FRANKLIN CALIFORNIA
HIGH YIELD MUNICIPAL FUND
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 52 of
this report.
Your Fund's Objective: Franklin California High Yield Municipal Fund seeks to
provide high, current income exempt from regular federal and California state
personal income taxes while seeking preservation of capital by investing
primarily in a portfolio of high-yielding, medium-, lower-, and non-rated
California municipal securities.1
1. The fund may invest as much as 100% of its assets in bonds that pay interest
subject to federal alternative minimum tax. All or a significant portion of the
income on these obligations may be subject to such tax. Distributions of capital
gains and of ordinary income from accrued market discount, if any, are taxable.
In general, an investor is paid a higher yield to assume a greater degree of
risk.
GRAPHIC MATERIAL 6 OMITTED - SEE APPENDIX AT END OF DOCUMENT
State Update
California's economy enjoyed the best year of this decade in 1997, with the
addition of approximately 400,000 new jobs and an increase in income levels.
Despite an unemployment rate of 5.8% that remained above the 4.6% national
average for February 1998,2 the state's job growth rate was 11U2 times the
national average rate of increase.3 Personal income rose 7.3% in the second
quarter 1997, placing it above the national rate of 5.7%.4
2. Source: The Wall Street Journal, March 25, 1998.
3. Source: Bureau of Labor Statistics.
4. Source: Fitch IBCA. February 17, 1998.
Downsizing in defense- and aerospace-related industries has all but ended, and
the construction, exports, tourism, computer services and entertainment sectors
have become the new engines of California's steady economic growth. Taking into
account California's robust economy, Standard & Poor's Corporation, a national
credit rating agency, gave the state's general obligation debt an A+ rating.5
5. Source: Standard & Poor's CreditWeek Municipal 2/23/98. These credit ratings
are not ratings for the fund.
The Asian crises have not affected the California municipal bond market to date.
The state made no specific cut-back in its growth estimates due to Asian
economic problems. During the year under review, growth in exports to Hong Kong,
Taiwan, and Mexico offset declines in exports to trading partners such as Japan,
Korea, Singapore and Malaysia.6 It is too early to estimate El Ni-o's effects on
California municipalities; however, rating agencies do not normally reduce
ratings because of natural disasters, and it does not appear that this affected
any of the portfolio's bonds.
6. Source: California Department of Finance. California Economic Indicators,
January/February 1998.
Despite an improving economic environment, structural restrictions including
strict property tax limits, two-thirds legislative requirement for budget
passage, and mandated spending on education continue to hamper state finance
flexibility. Renewed economic growth has overcome these impediments, however,
and the operating budget has been balanced for the past two years. Looking
forward, projected increases in employment and personal income and a recovery in
homebuilding bode well for California's continued economic growth.
Portfolio Notes
Nationwide, issuers took advantage of the lower interest-rate environment during
the first part of 1998. We saw a 51% increase in issuance versus the same period
last year. As a result, municipals cheapened considerably, and traded at or
above 90% of U.S. Treasuries. Market fluctuations over the 12-month reporting
period created purchase opportunities on downswings. The fund sought to take
advantage of the volatility and performed favorably over the reporting period.
Insurance dominated the market, with more than 70% of new California issues
coming to market insured. The higher penetration of insurance, along with a
limited supply of new, lower-rated issues led to a narrowing in yield spreads
between insured and lower grade issues. Consequently, the insured sector
generally represented the municipal bond market's greatest value, and the fund
concentrated its purchases in high grade issues. At the end of the reporting
period, 18.1% of the fund's total long-term assets are rated AA or better,
compared with 14.1% a year ago.
The fund's assets increased 102% during the fund's fiscal year, from $223.5
million to $452.4 million, leading to a more diversified and stable asset base.
The fund's performance is largely a result of Franklin's income-oriented
approach. The market seemed to be moving sideways over the course of the year,
but there were many periods of volatility that provided opportunities for the
fund. Using our disciplined approach to investing, the fund attempted to take
advantage of the market on the downswings, helping maximize its income-earning
potential.
Q. What is a "sideways market"?
A. A period in which prices trade within a narrow range, showing only small
changes up or down. It is also called "horizontal price movement."
Much of Franklin's strength in the high yield market lies in our research
capabilities. Our research analysts often work with issuers and underwriters in
structuring deals with attractive credit qualities. During the reporting period
we added over 60 new positions to the fund.
The market's fundamentals continue to look promising for municipal bonds. Such
securities remain one of the few investment options available for tax-conscious
investors. Going forward, we anticipate continued economic growth in California,
rather mild inflation and relatively stable interest rates. Under such
circumstances, we believe the fund is positioned for healthy performance during
the next year.
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of May 31, 1998, the end of the reporting period. However, market
and economic conditions are changing constantly, which can be expected to affect
our strategies and the fund's portfolio composition. Although historic
performance is no guarantee of future results, these insights may help you
understand our investment and management philosophy.
GRAPHIC MATERIAL 7 OMITTED - SEE APPENDIX AT END OF DOCUMENT
GRAPHIC MATERIAL 8 OMITTED - SEE APPENDIX AT END OF DOCUMENT
PERFORMANCE SUMMARY
Class I
Franklin California High Yield Municipal Fund - Class I share price, as measured
by net asset value, increased 55 cents, from $10.10 on May 31, 1997, to $10.65
on May 31, 1998. During the 12-month reporting period, the fund paid income
distributions totaling 61.8 cents ($0.618) per share. Distributions will vary
based on the earnings of the fund's portfolio, and past distributions are not
predictive of future trends.
Based on an annualization of the current monthly per-share dividend of 5.0 cents
($0.05) and the maximum offering price of $11.12 on May 31, 1998, your fund's
distribution rate was 5.40%. This double tax-free rate is generally higher than
the after-tax return on a comparable taxable investment. For example, an
investor in the maximum combined federal and California state personal income
tax bracket would need to earn 9.86% from a taxable investment to match the
fund's tax-free distribution rate.
The chart on page 16 compares your fund's Class I shares' performance with that
of the unmanaged Lehman Brothers Municipal Bond Index. The index includes over
40,000 municipal securities from across the country, while your fund consists
primarily of California municipal bonds. Of course, such a market index has
inherent performance differentials over any fund. It does not pay management
fees to cover salaries of securities analysts or portfolio managers, or pay
commissions or market spreads to buy and sell securities. Unlike an index,
mutual funds are never 100% invested because they need cash on hand to redeem
shares. In addition, the performance shown for the fund includes the maximum
initial sales charge, all fund expenses and account fees. If operating expenses
such as Franklin California High Yield Municipal Fund's had been applied to this
index, the index's performance would have been lower. Please remember that an
index is simply a measure of performance and one cannot invest in it directly.
The performance of your fund's shares exceeded the rate of inflation, as
measured by the Consumer Price Index (CPI), keeping your purchasing power well
ahead of inflation -- a primary goal of any investment.
GRAPHIC MATERIAL 9 OMITTED - SEE APPENDIX AT END OF DOCUMENT
GRAPHIC MATERIAL 10 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin California High Yield Municipal Fund - Class I
Periods ended 5/31/98
Since
Inception
1-Year 5-Year (5/3/93)
Cumulative Total Return1 11.78% 45.47% 45.04%
Average Annual Total Return2 7.01% 6.86% 6.69%
Distribution Rate3 5.40%
Taxable Equivalent
Distribution Rate4 9.86%
30-Day Standardized Yield5 5.24%
Taxable Equivalent Yield4 9.57%
1. Cumulative total return measures the change in value of an investment over
the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the current, maximum 4.25%
initial sales charge. See Note below.
3. Distribution rate is based on an annualization of the current 5.0 cent per
share monthly dividend and the maximum offering price of $11.12 on May 31, 1998.
4. Taxable equivalent distribution rate and yield assume the 1998 maximum
combined federal and California state personal income tax bracket of 45.2%,
based on the federal income tax rate of 39.6%.
5. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended May 31, 1998.
Note: Prior to July 1, 1994, Class I shares were offered at a higher initial
sales charge. Thus, actual total returns would have been lower. The fund's
manager agreed in advance to waive a portion of its management fees, which
reduces operating expenses and increases distribution rate, yield and total
return to shareholders. Without this waiver, the fund's distribution rate and
total return would have been lower, and yield for the period would have been
4.94%. The fee waiver may be discontinued at any time upon notice to the fund's
Board of Trustees.
All total return calculations assume reinvestment of dividends and capital gains
at net asset value. Since markets can go down as well as up, investment return
and principal value will fluctuate with market conditions, and you may have a
gain or loss when you sell your shares.
Class II
Franklin California High Yield Municipal Fund - Class II share price, as
measured by net asset value, increased 56 cents, from $10.12 on May 31, 1997, to
$10.68 on May 31, 1998. During the 12-month reporting period, the fund paid
income distributions totaling 56.56 cents ($0.5656) per share. Distributions
will vary based on the earnings of the fund's portfolio, and past distributions
are not predictive of future trends.
Based on an annualization of the current monthly per-share dividend of 4.43
cents ($0.0443) and the maximum offering price of $10.79 on May 31, 1998, your
fund's distribution rate was 4.93%. This double tax-free rate is generally
higher than the after-tax return on a comparable taxable investment. For
example, an investor in the maximum combined federal and California state
personal income tax bracket would need to earn 9.00% from a taxable investment
to match the fund's tax-free distribution rate.
The chart on page 20 compares your fund's Class II shares' performance with that
of the unmanaged Lehman Brothers Municipal Bond Index. The index includes over
40,000 municipal securities from across the country, while your fund consists
primarily of California municipal bonds. Of course, such a market index has
inherent performance differentials over any fund. It does not pay management
fees to cover salaries of securities analysts or portfolio managers, or pay
commissions or market spreads to buy and sell securities. Unlike an index,
mutual funds are never 100% invested because they need cash on hand to redeem
shares. In addition, the performance shown for the fund includes the sales
charges, all fund expenses and account fees. If operating expenses such as
Franklin California Municipal Fund's had been applied to this index, the index's
performance would have been lower. Please remember that an index is simply a
measure of performance and one cannot invest in it directly.
The performance of your fund's shares exceeded the rate of inflation, as
measured by the Consumer Price Index (CPI), keeping your purchasing power well
ahead of inflation -- a primary goal of any investment.
GRAPHIC MATERIAL 11 OMITTED - SEE APPENDIX AT END OF DOCUMENT
GRAPHIC MATERIAL 12 OMITTED - SEE APPENDIX AT END OF DOCUMENT
GRAPHIC MATERIAL 13 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin California High Yield Municipal Fund
Class II
Periods ended 5/31/98
Since
Inception
1-Year (5/1/96)
Cumulative Total Return1 11.30% 21.95%
Average Annual Total Return2 9.22% 9.47%
Distribution Rate3 4.93%
Taxable Equivalent Distribution Rate4 9.00%
30-Day Standardized Yield5 4.87%
Taxable Equivalent Yield4 8.89%
1. Cumulative total return measures the change in value of an investment over
the periods indicated and does not include sales charges.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the 1.0% initial sales
charge and 1.0% contingent deferred sales charge applicable to shares redeemed
within 18 months of investment.
3. Distribution rate is based on an annualization of the current 4.43 cent per
share monthly dividend and the maximum offering price of $10.79 on May 31, 1998.
4. Taxable equivalent distribution rate and yield assume the 1998 maximum
combined federal and California state personal income tax bracket of 45.2%,
based on the federal income tax rate of 39.6%
5. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended May 31, 1998.
The fund's manager agreed in advance to waive a portion of its management fees,
which reduces operating expenses and increases distribution rate, yield and
total return to shareholders. Without this waiver, the fund's distribution rate
and total return would have been lower, and yield for the period would have been
4.56%. The fee waiver may be discontinued at any time upon notice to the fund's
Board of Trustees.
All total return calculations assume reinvestment of dividends and capital gains
at net asset value. Since markets can go down as well as up, investment return
and principal value will fluctuate with market conditions, and you may have a
gain or loss when you sell your shares.
GRAPHIC MATERIAL 14 OMITTED - SEE APPENDIX AT END OF DOCUMENT
FRANKLIN HAWAII
MUNICIPAL BOND FUND
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 58 of
this report.
Your Fund's Objective: Franklin Hawaii Municipal Bond Fund seeks to provide
high, current income exempt from regular federal and Hawaii state personal
income taxes while seeking preservation of capital by investing primarily in a
portfolio of Hawaii municipal securities.1
1. The fund may invest as much as 100% of its assets in bonds that pay interest
subject to federal alternative minimum tax. All or a significant portion of the
income on these obligations may be subject to such tax. Distributions of capital
gains and of ordinary income from accrued market discount, if any, are taxable.
State Update
Hawaii's economy, highly dependent on the tourism industry, suffered the Asian
currency crises' ill effects. Historically, tourists from Japan fueled Hawaii's
economy with their high consumption of goods and services. However, the yen's
devaluation, combined with Asia's recent weak job and income growth, made many
consumers less likely to spend on luxuries such as vacations, and to spend less
when they do travel. During the fund's fiscal year, the inflow of travelers from
mainland U.S. did not fill the gap in the island's economy.
Tourism represents approximately 25% of Hawaii's gross state product, and
employs six out of ten workers in the state's economy. In conjunction with the
decline in the tourism sector, reduced Japanese investment led to a contraction
in the construction sector. The stagnant economy caused Hawaii to increase its
debt load, thereby limiting the state's budgetary flexibility. Hawaii has debt
levels six times the national average, and faced operating deficits in five of
the last six fiscal years. The credit rating of the state's general obligation
bonds has been downgraded from Aa3 to A1 by Moody's, and from AA to A+ by
Standard & Poor's, two national credit rating agencies.2 (For definitions of
bond ratings, please see p. 44.) Aware of its over-dependence on tourism, Hawaii
is attempting to diversify its economy by attracting other industries. Uniden, a
manufacturer of cordless telephones, and Square USA, a video game developer,
have opened research and development plants in the state.
2. Source: Moody's 4/9/98, Standard & Poor's 9/1/97. These credit ratings are
not ratings for the fund.
Portfolio Notes
Despite Hawaii's ailing economy, we believe a well-chosen portfolio of the
state's municipal bonds remains a strong source for tax-free income. The fund's
net assets rose 13% over the period, from $40.0 million on May 31, 1997, to
$45.2 million on May 31, 1998. Recent purchases for the fund include Honolulu
City and County General Obligation, Hawaii State General Obligation (FGIC
insured), and Hawaii State Department Budget and Finance Special Purpose Revenue
Wilcox Memorial Hospital Project. As always, we strive to keep the fund fully
invested to provide shareholders with a relatively high level of tax-free
income.
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of May 31, 1998, the end of the reporting period. However, market
and economic conditions are changing constantly, which can be expected to affect
our strategies and the fund's portfolio composition. Although historic
performance is no guarantee of future results, these insights may help you
understand our investment and management philosophy.
GRAPHIC MATERIAL 15 OMITTED - SEE APPENDIX AT END OF DOCUMENT
GRAPHIC MATERIAL 16 OMITTED - SEE APPENDIX AT END OF DOCUMENT
PERFORMANCE SUMMARY
Franklin Hawaii Municipal Bond Fund's share price, as measured by net asset
value, increased 37 cents, from $10.79 on May 31, 1997, to $11.16 on May 31,
1998. During the 12-month reporting period, the fund paid income distributions
totaling 59.7 cents ($0.597) per share. Distributions will vary based on the
earnings of the fund's portfolio, and past distributions are not predictive of
future trends.
Based on an annualization of the current monthly per share dividend of 4.9 cents
($0.049) and the maximum offering price of $11.66 on May 31, 1998, your fund's
distribution rate was 5.04%. This double tax-free rate is generally higher than
the after-tax return on a comparable taxable investment. For example, an
investor in the maximum combined federal and Hawaii state personal income tax
bracket would need to earn 9.27% from a taxable investment to match the fund's
tax-free distribution rate.
The chart on page 26 compares your fund's shares' performance with that of the
unmanaged Lehman Brothers Municipal Bond Index. The index includes over 40,000
municipal securities from across the country, while your fund consists primarily
of Hawaii municipal bonds. Of course, such a market index has inherent
performance differentials over any fund. It does not pay management fees to
cover salaries of securities analysts or portfolio managers, or pay commissions
or market spreads to buy and sell securities. Unlike an index, mutual funds are
never 100% invested because they need cash on hand to redeem shares. In
addition, the performance shown for the fund includes the maximum initial sales
charge, all fund expenses and account fees. If operating expenses such as
Franklin Hawaii Municipal Bond Fund's had been applied to this index, the
index's performance would have been lower. Please remember that an index is
simply a measure of performance and one cannot invest in it directly.
The performance of your fund's shares exceeded the rate of inflation, as
measured by the Consumer Price Index (CPI), keeping your purchasing power well
ahead of inflation -- a primary goal of any investment.
GRAPHIC MATERIAL 17 OMITTED - SEE APPENDIX AT END OF DOCUMENT
GRAPHIC MATERIAL 18 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin Hawaii Municipal Bond Fund
Periods ended 5/31/98
Since
Inception
1-Year 5-Year (2/26/92)
Cumulative Total Return1 9.10% 36.62% 57.72%
Average Annual Total Return2 4.46% 5.52% 6.81%
Distribution Rate3 5.04%
Taxable Equivalent Distribution Rate4 9.27%
30-Day Standardized Yield5 4.58%
Taxable Equivalent Yield4 8.43%
1. Cumulative total return measures the change in value of an investment over
the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the current, maximum 4.25%
initial sales charge. See Note below.
3. Distribution rate is based on an annualization of the current 4.9 cent per
share monthly dividend and the maximum offering price of $11.66 on May 31, 1998.
4. Taxable equivalent distribution rate and yield assume the 1998 maximum
combined federal and Hawaii state personal income tax bracket of 45.6%, based on
the federal income tax rate of 39.6%.
5. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended May 31, 1998.
Note: Prior to July 1, 1994, shares were offered at a higher initial sales
charge; thus actual total returns would be somewhat lower. The fund's manager
agreed in advance to waive a portion of its management fees, which reduces
operating expenses and increases distribution rate, yield and total return to
shareholders. Without this waiver, the fund's distribution rate and total return
would have been lower, and yield for the period would have been 4.18%. The fee
waiver may be discontinued at any time upon notice to the fund's Board of
Trustees.
All total return calculations assume reinvestment of dividends and capital gains
at net asset value. Since markets can go down as well as up, investment return
and principal value will fluctuate with market conditions, and you may have a
gain or loss when you sell your shares.
FRANKLIN TENNESSEE
MUNICIPAL BOND FUND
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 61 of
this report.
Your Fund's Objective: Franklin Tennessee Municipal Bond Fund seeks to provide
high, current income exempt from regular federal and Tennessee state personal
income taxes while seeking preservation of capital by investing primarily in a
portfolio of Tennessee municipal securities.1
1. The fund may invest as much as 100% of its assets in bonds that pay interest
subject to federal alternative minimum tax. All or a significant portion of the
income on these obligations may be subject to such tax. Distributions of capital
gains and of ordinary income from accrued market discount, if any, are taxable.
GRAPHIC MATERIAL 19 OMITTED - SEE APPENDIX AT END OF DOCUMENT
State Update
Tennessee's economy experienced increased diversification and moderate growth,
as it benefited from gains in health care and distribution services. Nissan
Corp., Peterbilt Motors Company, and General Motors Corp.'s Saturn Division
expanded their auto manufacturing facilities, significantly augmenting the state
economy. The state's emphasis on educational system reform and transportation
infrastructure have supported economic development. Although Tennessee's
economic growth lags behind the nation, it can be characterized as still
developing and diversifying.
Tennessee's financial position remains sound. Moody's and Fitch, two national
credit rating agencies, gave their highest rating to Tennessee's current general
obligation debt, reflecting the state's strong fiscal position.2 The state has
responsible financial management policies. Its reserve fund stands at $101
million, and the proposed 1998-1999 budget increases the level to $127 million.
Tennessee's practice of drawing upon the fund during lean years and rebuilding
it as conditions improve lends credibility to such a rainy-day fund. Limited
borrowing and the practice of pay-as-you-go financing have served to reduce
Tennessee's debt ratios to levels well below the medians for the 50 states. The
state constitution requires a balanced budget, and Tennessee is a leader in the
development of financial standards. The constitution further mandates that the
state provide 1.5 times coverage of its debt service through taxes. As of May
1998, a substantial margin in excess of 1.5 times is available.3
2. Source: Moody's 5/12/98, Fitch Research 5/8/98. These credit ratings are not
ratings for the fund.
3. Source: Moody's 5/12/98.
Portfolio Notes
Nationwide, issuers took advantage of the lower interest-rate environment during
the first part of 1998. We saw a 51% increase in issuance versus the same period
last year. As a result, municipals cheapened considerably, and traded at or
above 90% of U.S. Treasuries. Market fluctuations over the 12-month reporting
period created purchase opportunities on downswings. The fund sought to take
advantage of the volatility and performed favorably over the reporting period.
Insurance dominated the market, with more than 60% of new Tennessee issues
coming to market insured. The higher penetration of insurance, along with a
limited supply of new, lower-rated issues led to a narrowing in yield spreads
between insured and lower grade issues. Consequently, the insured sector
generally represented the municipal bond market's greatest value, and the fund
concentrated its purchases in high grade issues. At the end of the reporting
period, 56.5% of the fund's total long-term assets are rated AAA, compared with
51.7% a year ago.
The fund's assets increased 67% during the fund's fiscal year, from $26.7
million to $44.5 million, leading to a more diversified and stable asset base.
The fund's performance is largely a result of Franklin's income-oriented
approach. The market seemed to be moving sideways over the course of the year,
but there were many periods of volatility that provided opportunities for the
fund. Using our disciplined approach to investing, the fund attempted to take
advantage of the market on the downswings, helping maximize its income-earning
potential.
Q. What is a "sideways market"?
A. A period in which prices trade within a narrow range, showing only small
changes up or down. It is also called "horizontal price movement."
Purchases for the fund were concentrated in high-essential use, general
obligation and direct revenue utility issues. General obligation bonds make up
13.2% of the fund's total net assets, and utility issues 23.2% on May 31, 1998,
compared with 22.7% and 14.2% respectively, a year ago. We participated in
issues offered by Metropolitan Nashville Davidson Electric Utility and
Vanderbilt University.
The market fundamentals look promising for municipal bonds. Such securities
remain one of the few investment options available for tax-conscious investors.
Going forward, we anticipate continued economic growth in Tennessee, rather mild
inflation and relatively stable interest rates. Under such circumstances, we
believe the fund is positioned for healthy performance during the next year.
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of May 31, 1998, the end of the reporting period. However, market
and economic conditions are changing constantly, which can be expected to affect
our strategies and the fund's portfolio composition. Although historic
performance is no guarantee of future results, these insights may help you
understand our investment and management philosophy.
GRAPHIC MATERIAL 20 OMITTED - SEE APPENDIX AT END OF DOCUMENT
GRAPHIC MATERIAL 21 OMITTED - SEE APPENDIX AT END OF DOCUMENT
PERFORMANCE SUMMARY
Franklin Tennessee Municipal Bond Fund's share price, as measured by net asset
value, increased 56 cents, from $10.71 on May 31, 1997, to $11.27 on May 31,
1998. During the 12-month reporting period, the fund paid income distributions
totaling 57.3 cents ($0.573) per share. Distributions will vary based on the
earnings of the fund's portfolio, and past distributions are not predictive of
future trends.
Based on an annualization of the current monthly per-share dividend of 4.7 cents
($0.047) and the maximum offering price of $11.77 on May 31, 1998, your fund's
distribution rate was 4.79%. This double tax-free rate is generally higher than
the after-tax return on a comparable taxable investment. For example, an
investor in the maximum combined federal and Tennessee state personal income tax
bracket would need to earn 8.44% from a taxable investment to match the fund's
tax-free distribution rate.
The chart on page 34 compares your fund's shares' performance with that of the
unmanaged Lehman Brothers Municipal Bond Index. The index includes over 40,000
municipal securities from across the country, while your fund consists primarily
of Tennessee municipal bonds. Of course, such a market index has inherent
performance differentials over any fund. It does not pay management fees to
cover salaries of securities analysts or portfolio managers, or pay commissions
or market spreads to buy and sell securities. Unlike an index, mutual funds are
never 100% invested because they need cash on hand to redeem shares. In
addition, the performance shown for the fund includes the maximum initial sales
charge, all fund expenses and account fees. If operating expenses such as
Franklin Tennessee Municipal Bond Fund's had been applied to this index, the
index's performance would have been lower. Please remember that an index is
simply a measure of performance and one cannot invest in it directly.
The performance of your fund's shares exceeded the rate of inflation, as
measured by the Consumer Price Index (CPI), keeping your purchasing power well
ahead of inflation -- a primary goal of any investment.
GRAPHIC MATERIAL 22 OMITTED - SEE APPENDIX AT END OF DOCUMENT
GRAPHIC MATERIAL 23 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin Tennessee Municipal Bond Fund
Periods ended 5/31/98
Since
Inception
1-Year 3-Year (5/10/94)
Cumulative Total Return1 10.75% 26.12% 38.74%
Average Annual Total Return2 6.00% 6.48% 7.26%
Distribution Rate3 4.79%
Taxable Equivalent
Distribution Rate4 8.44%
30-Day Standardized Yield5 4.63%
Taxable Equivalent Yield4 8.15%
1. Cumulative total return measures the change in value of an investment over
the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the maximum 4.25% initial
sales charge.
3. Distribution rate is based on an annualization of the current 4.7 cent per
share monthly dividend and the maximum offering price of $11.77 on May 31, 1998.
4. Taxable equivalent distribution rate and yield assume the 1998 maximum
combined federal and Tennessee state personal income tax bracket of 43.2%, based
on the federal income tax rate of 39.6%.
5. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended May 31, 1998.
The fund's manager agreed in advance to waive a portion of its management fees,
which reduces operating expenses and increases distribution rate, yield and
total return to shareholders. Without this waiver, the fund's distribution rate
and total return would have been lower, and yield for the period would have been
4.26%. The fee waiver may be discontinued at any time upon notice to the fund's
Board of Trustees.
All total return calculations assume reinvestment of dividends and capital gains
at net asset value. Since markets can go down as well as up, investment return
and principal value will fluctuate with market conditions, and you may have a
gain or loss when you sell your shares.
FRANKLIN WASHINGTON
MUNICIPAL BOND FUND
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 65 of
this report.
Your Fund's Objective: Franklin Washington Municipal Bond Fund seeks to provide
high, current income exempt from regular federal income taxes while seeking
preservation of capital by investing primarily in a portfolio of Washington
municipal securities.1
1. The fund may invest as much as 100% of its assets in bonds that pay interest
subject to federal alternative minimum tax. All or a significant portion of the
income on these obligations may be subject to such tax. Distributions of capital
gains and of ordinary income from accrued market discount, if any, are taxable.
GRAPHIC MATERIAL 24 OMITTED - SEE APPENDIX AT END OF DOCUMENT
State Update
The economic expansion that began for Washington in the early 1980s continued
unabated during the reporting period. The state enjoys an AA+ and Aa1 rating
from Standard & Poor's and Moody's respectively, two national credit rating
agencies.2 (For definitions of bond ratings, please see p. 44.) These ratings
reflect the state's strong growth, increasing economic diversification, and
sound financial policies. Washington is the only state in the Pacific Northwest
to maintain continuous economic growth over the past decade, with most occurring
in the Puget Sound area. Boeing Co. and Microsoft Corp. continued their
successes, providing above-average wages and stimulating spin-off companies. The
state's population growth was more than double the national rate between 1990
and 1996. A rise in the state's service sector employment offset an overall
manufacturing employment decline.
2.Source: Moody's 3/25/98, Standard & Poor's 8/25/97. These credit ratings are
not ratings for the fund.
Washington state experienced stronger than expected revenue income. Washington's
1995-97 fiscal biennium was $210 million higher than the original estimate. The
state's conservative fiscal practices more than counterbalanced above-average
debt levels. To date, the state has accommodated the parameters of Proposition
601, and the amount of debt is within constitutional and statutory limits.
The Asian financial crises are expected to have an adverse effect on the state's
economy in the near term, because a large percentage of the state's commodity
exports are to Asia. However, we expect that the long-term effect will be to
lower growth rates to more sustainable levels. The state attempted to quantify
this effect by providing projections for a future slowdown in employment growth.
The anticipated slowdown is not severe, and because it is anticipated, should
not generate an undue financial shock. We believe the state will continue to
outperform the nation.
Portfolio Notes
Washington state's robust economy and the nation's overall economic health
created excellent buying opportunities in the Washington municipal bond market.
The positive economic environment prompted us to add several new issues to the
fund, which helped increase our yield to shareholders. Recent purchases included
Washington Public Power System Supply, Bellingham Washington Housing Authority
Revenue Cascade Meadows Project (MBIA insured), and Washington State Health Care
Facility Authority Revenue-Swedish Health System (AMBAC insured). More than 52%
of the fund's total net assets are rated AAA, compared with 44.8% a year ago.
The fund's net assets grew 24% from $8.4 million on May 31, 1997, to $10.4
million on May 31, 1998.
The market's fundamentals look promising for municipal bonds. Such securities
remain one of the few investment options available for tax-conscious investors.
Going forward, we anticipate continued economic growth and diversification in
Washington, rather mild inflation and relatively stable interest rates. Under
such circumstances, we believe the fund is positioned to perform favorably
during the next year.
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of May 31, 1998, the end of the reporting period. However, market
and economic conditions are changing constantly, which can be expected to affect
our strategies and the fund's portfolio composition. Although historic
performance is no guarantee of future results, these insights may help you
understand our investment and management philosophy.
GRAPHIC MATERIAL 25 OMITTED - SEE APPENDIX AT END OF DOCUMENT
GRAPHIC MATERIAL 26 OMITTED - SEE APPENDIX AT END OF DOCUMENT
What is Proposition 601?
Proposition 601 is an initiative that seeks to contain Washington state
government spending. Approved by voters, it came into effect in 1995. Under
Proposition 601, the state's operating budget can increase at a rate no greater
than the sum of population growth and inflation. If state revenues exceed this
expenditure limit, the surplus will be deposited in an emergency reserve fund.
The proposition also mandates a two-thirds majority vote in both the state
Senate and House for the passage of any tax increase.
How might it affect the municipal bond market?
It is possible, under the constraints of Proposition 601, that Washington state
might not generate enough revenue to service all of its municipal debt. However,
the state remains well within its spending limits. Washington's current credit
rating indicates Standard & Poor's favorable opinion of the state's fiscal
situation under Proposition 601. Indeed the proposition's constraints on
spending should limit Washington's debt issuances and keep its debt level low,
strengthening its fiscal position.
PERFORMANCE SUMMARY
Franklin Washington Municipal Bond Fund's share price, as measured by net asset
value, increased 39 cents, from $10.09 on May 31, 1997, to $10.48 on May 31,
1998. During the 12-month reporting period, the fund paid income distributions
totaling 58.7 cents ($0.587) per share. Distributions will vary based on the
earnings of the fund's portfolio, and past distributions are not predictive of
future trends.
Based on an annualization of the current monthly per-share dividend of 4.9 cents
($0.049) and the maximum offering price of $10.95 on May 31, 1998, your fund's
distribution rate was 5.37%. This tax-free rate is generally higher than the
after-tax return on a comparable taxable investment. For example, an investor in
the maximum federal income tax bracket would need to earn 8.89% from a taxable
investment to match the fund's tax-free distribution rate.
The chart on page 42 compares your fund's shares' performance with that of the
unmanaged Lehman Brothers Municipal Bond Index. The index includes over 40,000
municipal securities from across the country, while your fund consists primarily
of Washington municipal bonds. Of course, such a market index has inherent
performance differentials over any fund. It does not pay management fees to
cover salaries of securities analysts or portfolio managers, or pay commissions
or market spreads to buy and sell securities. Unlike an index, mutual funds are
never 100% invested because they need cash on hand to redeem shares. In
addition, the performance shown for the fund includes the maximum initial sales
charge, all fund expenses and account fees. If operating expenses such as
Franklin Washington Municipal Bond Fund's had been applied to this index, the
index's performance would have been lower. Please remember that an index is
simply a measure of performance and one cannot invest in it directly.
The performance of your fund's shares exceeded the rate of inflation, as
measured by the Consumer Price Index (CPI), keeping your purchasing power well
ahead of inflation -- a primary goal of any investment.
GRAPHIC MATERIAL 27 OMITTED - SEE APPENDIX AT END OF DOCUMENT
GRAPHIC MATERIAL 28 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Franklin Washington Municipal Bond Fund
Periods ended 5/31/98
Since
Inception
1-Year 5-Year (5/3/93)
Cumulative Total Return1 9.87% 38.60% 38.46%
Average Annual Total Return2 5.18% 5.83% 5.72%
Distribution Rate3 5.37%
Taxable Equivalent
Distribution Rate4 8.89%
30-Day Standardized Yield5 4.88%
Taxable Equivalent Yield4 8.08%
1. Cumulative total return measures the change in value of an investment over
the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the current, maximum 4.25%
initial sales charge. See Note below.
3. Distribution rate is based on an annualization of the current 4.9 cent per
share monthly dividend and the maximum offering price of $10.95 on May 31, 1998.
4. Taxable equivalent distribution rate and yield assume the 1998 maximum
federal income tax rate of 39.6%.
5. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended May 31, 1998.
Note: Prior to July 1, 1994, shares were offered at a higher initial sales
charge. Thus, actual total returns would be somewhat lower. The fund's manager
agreed in advance to waive a portion of its management fees, which reduces
operating expenses and increases distribution rate, yield and total return to
shareholders. Without this waiver, the fund's distribution rate and total return
would have been lower, and yield for the period would have been 4.21%. The fee
waiver may be discontinued at any time upon notice to the fund's Board of
Trustees.
All total return calculations assume reinvestment of dividends and capital gains
at net asset value. Since markets can go down as well as up, investment return
and principal value will fluctuate with market conditions, and you may have a
gain or loss when you sell your shares.
MUNICIPAL BOND RATINGS
Moody's
Aaa: Best quality. They carry the smallest degree of investment risk and
generally are referred to as "gilt-edged." Interest payments are protected by a
large or exceptionally stable margin, and principal is secure. Although the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
Aa: High quality by all standards. Together with the Aaa group, they comprise
what generally are known as high-grade bonds. Aa bonds are rated lower than Aaa
because margins of protection may not be as large, fluctuation of protective
elements may be of greater amplitude, or there may be other elements which make
the long-term risks appear larger.
A: Possess many favorable investment attributes and are considered upper
medium-grade obligations. Factors giving security to principal and interest are
considered adequate, but elements may be present which suggest a susceptibility
to impairment sometime in the future.
Baa: Medium-grade obligations, i.e., they are neither highly protected nor
poorly secured. Interest payments and principal security appear adequate for the
present, but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time.
Ba: Contain speculative elements. Often the protection of interest and principal
payments may be very moderate and, thereby, not well safeguarded during both
good and bad times over the future. Uncertainty of position characterizes bonds
in this class.
B: Generally lack characteristics of the desirable investment. Assurance of
interest and principal payments or of maintenance of other terms of the contract
over any long period of time may be small.
Caa: Poor standing. Such issues may be in default, or elements of danger with
respect to principal or interest may be present.
Ca: Obligations that are highly speculative. Such issues are often in default or
have other marked shortcomings.
C: Lowest-rated class of bonds. Issues rated C can be regarded as having
extremely poor prospects of ever attaining any real investment standing.
S&P(R)
AAA: The highest rating assigned by S&P to a debt obligation and indicates the
ultimate degree of protection as to principal and interest.
AA: Also qualify as high-grade obligations, and, in the majority of instances,
differ from AAA issues only in a small degree.
A: Generally regarded as upper medium-grade. They have considerable investment
strength but are not entirely free from adverse effects of changes in economic
and trade conditions. Interest and principal are regarded as safe.
BBB: Regarded as having an adequate capacity to pay principal and interest.
Whereas they normally exhibit adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a weakened
capacity to pay principal and interest for bonds in this category than for bonds
in the A category.
BB, B, CCC, CC: Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds likely will have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C: Reserved for income bonds on which no interest is being paid.
D: Debt rated "D" is in default and payment of interest and/or repayment of
principal is in arrears.
FRANKLIN MUNICIPAL SECURITIES TRUST
Financial Highlights
Franklin Arkansas Municipal Bond Fund
<TABLE>
<CAPTION>
Class I
------------------------------------------------
Year Ended May 31,
------------------------------------------------
1998 1997 1996 1995 1994+
------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year .................... $10.51 $10.21 $10.32 $10.06 $10.00
------------------------------------------------
Income from investment operations:
Net investment income ................................ .56 .58 .55 .51 .01
Net realized and unrealized gains (losses) ........... .50 .31 (.08) .19 .05
------------------------------------------------
Total from investment operations ...................... 1.06 .89 .47 .70 .06
Less distributions from net investment income ......... (.58) (.59) (.58) (.44) --
------------------------------------------------
Net asset value, end of year .......................... $10.99 $10.51 $10.21 $10.32 $10.06
================================================
Total return* ......................................... 10.31% 8.90% 4.65% 7.27% .60%
Ratios/supplemental data
Net assets, end of year (000's) ....................... $30,377 $13,140 $8,166 $4,134 $2,213
Ratios to average net assets:
Expenses ............................................. .10% .10% .10% .10% .03%**
Expenses excluding waiver and payments by affiliate .. .83% .87% 1.04% 1.11% 1.20%**
Net investment income ................................ 5.30% 5.71% 5.69% 5.64% 2.00%**
Portfolio turnover rate ............................... 18.75% 6.61% 19.22% 77.63% --
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
**Annualized.
+For the period May 10, 1994 (effective date) to May 31, 1994.
See notes to financial statements.
FRANKLIN MUNICIPAL SECURITIES TRUST
Statement of Investments, May 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
Franklin Arkansas Municipal Bond Fund AMOUNT VALUE
Long Term Investments 98.4%
<S> <C> <C>
Arkansas GO, Refunding, Waste Disposal and Pollution, Series B, 6.25%, 7/01/20 ...... $ 130,000 $ 137,836
Arkansas State College Savings, Series B, 5.20%, 6/01/15 ............................ 300,000 304,083
Arkansas State Development Finance Authority,
Drivers License Revenue, Police Headquarters, Wireless Data,
FGIC Insured, 5.40%, 6/01/18 .......................................................... 950,000 976,553
Arkansas State Development Finance Authority, HMR, Series B-1, 5.80%, 1/01/23 ....... 500,000 516,485
Arkansas State Development Finance Authority, SFMR, MBS Program,
Series B, 6.10%, 1/01/29 ............................................................ 1,000,000 1,051,680
Series D, 6.85%, 1/01/27 ............................................................ 110,000 120,305
Arkansas State Development Finance Authority,
Waste Water Systems Revenue, Revolving Loan Fund, Series A,
5.85%, 12/01/19 ....................................................................... 1,000,000 1,060,820
Arkansas State Student Loan Authority Revenue, Refunding,
Series B, 5.60%, 6/01/14 ............................................................ 325,000 333,216
Sub-Series B, 6.25%, 6/01/10 ........................................................ 500,000 540,840
Arkansas State Water Resources Development,
Series A, 5.70%, 7/01/26 ............................................................ 560,000 576,139
Series B, 5.75%, 7/01/25 ............................................................ 300,000 312,171
Blytheville Solid Waste Recycling and Sewage
Treatment Revenue, Nucor Corp. Project, 6.375%, 1/01/23 ............................... 100,000 107,623
Camden Environmental Improvement Revenue,
International Paper Co. Project, Series A, 7.625%, 11/01/18 ........................... 250,000 293,313
Conway Public Facilities Board, Capital Improvement Revenue,
Hendrix College Project, 6.00%, 10/01/26 ............................................... 500,000 523,275
Conway Sales & Use Tax Revenue, Capital Improvement,
Series A, FSA Insured, 5.35%, 12/01/17 ................................................ 2,055,000 2,119,794
Fort Smith Water and Sewer Revenue, Refunding and
Construction, MBIA Insured, 6.00%, 10/01/12 ........................................... 130,000 141,379
Fouke School District No. 15, Refunding and
Construction, MBIA Insured, Pre-Refunded, 6.60%, 4/01/19 .............................. 130,000 146,328
Greenland School District No. 95, Washington County,
Refunding and Construction, MBIA Insured, 6.50%, 5/01/13 .............................. 115,000 120,083
Guam Airport Authority Revenue, Series B, 6.60%, 10/01/10 ........................... 125,000 137,398
Guam Power Authority Revenue, Series A, 5.25%, 10/01/23 ............................. 200,000 198,322
Gurdon PCR, Refunding, International Paper Co. Project,
Series A, 5.375%, 3/01/20 ............................................................. 2,160,000 2,177,582
Jefferson County PCR, Refunding,
Arkansas Power & Light Co., 6.30%, 6/01/18 .......................................... 400,000 431,516
Entergy Arkansas, Inc. Project, 5.60%, 10/01/17 ..................................... 2,150,000 2,181,498
Jonesboro City Water and Light Plant, Public Utilities System Revenue,
MBIA Insured, 5.40%, 11/15/13 ....................................................... 100,000 105,218
Refunding, AMBAC Insured, 5.25%, 12/01/13 ........................................... 200,000 205,076
Jonesboro Residential Housing and Health Care Facilities Board,
Hospital Revenue, Refunding, St. Bernard's Regional
Medical Center, Series B, AMBAC Insured, 5.90%, 7/01/16 ............................... 450,000 480,263
Little River County Revenue, Refunding, Georgia-Pacific Corp. Project,
5.60%,10/01/26 ........................................................................ 2,000,000 2,003,140
Little Rock Capital Improvement, Refunding, 6.30%, 2/01/09 .......................... 140,000 144,773
Little Rock Municipal Airport Revenue, Refunding, MBIA Insured,
6.00%, 11/01/14 ....................................................................... 130,000 136,973
Little Rock School District GO, Refunding, 6.25%, 12/01/07 .......................... 120,000 121,190
Little Rock School District, Refunding, FSA Insured, 5.60%, 1/01/20 ................. 100,000 101,889
Little Rock Waste Disposal Revenue, 5.80%, 5/01/16 .................................. 440,000 464,011
North Little Rock Health Facilities Board, Health Care Revenue,
Baptist Health Facility, Series A, MBIA Insured,
5.50%, 12/01/21 ....................................................................... 800,000 826,880
Paragould Hospital Revenue, 6.375%, 10/01/17 ........................................ 400,000 433,492
Pope County PCR, Refunding, Arkansas Power and
Light Co. Project, 6.30%, 11/01/20 .................................................... 500,000 522,975
Puerto Rico Commonwealth GO,
Custodial Receipts, AMBAC Insured, 5.40%, 7/01/25 ................................... 250,000 256,435
Pre-Refunded, 6.50%, 7/01/23 ........................................................ 250,000 284,908
Puerto Rico Commonwealth GO, Public Improvement, 5.75%, 7/01/17 ..................... 250,000 266,008
Puerto Rico Commonwealth Highway Authority Revenue,
Series Q, Pre-Refunded, 6.00%, 7/01/20 ................................................ $ 165,000 $ 171,912
Puerto Rico Commonwealth Highway and Transportation
Authority Revenue, Series Y, 5.50%, 7/01/26 ........................................... 350,000 358,967
Puerto Rico Electric Power Authority Revenue,
Series R, Pre-Refunded, 6.25%, 7/01/17 .............................................. 175,000 191,560
Series T, 5.50%, 7/01/20 ............................................................ 400,000 406,788
Series X, 5.50%, 7/01/25 ............................................................ 200,000 203,860
Puerto Rico Industrial, Tourist, Educational, Medical and
Environmental Control Facilities Financing Authority,
Industrial Revenue, Teacher's Retirement System, Series B, 5.50%, 7/01/21 ............. 250,000 258,190
Puerto Rico SFMR, Bank and Financial Agency, Affordable
Housing Mortgage, Portfolio I, 6.25%, 4/01/29 ......................................... 175,000 186,330
Pulaski County Health Facilities Board Revenue,
b Catholic Health Initiatives, Series A, 5.00%, 12/01/28 .............................. 500,000 483,300
Refunding, Nazareth Sisters of Charity, St. Vincent's
Infirmary, MBIA Insured, 6.05%, 11/01/09 .............................................. 125,000 142,138
Pulaski County Public Facilities Board,
MFR, Refunding, South Oaks Apartments, Series A, 6.50%, 10/20/29 .................... 600,000 642,300
Refunding, Mortgage, College Projects, GNMA Secured, Series A, 5.55%, 6/20/27 ....... 1,300,000 1,306,019
Saline County Hospital Revenue, Refunding, Connie Lee Insured, 6.00%, 9/01/19 ....... 700,000 746,970
Saline County Retirement Housing and Healthcare
Facilities Board Revenue, Refunding, AMBAC Insured,
5.80%, 6/01/11 ........................................................................ 195,000 211,208
Sebastian County Community Junior College District,
Refunding and Improvement, AMBAC Insured, 5.60%, 4/01/17 .............................. 600,000 634,998
Texarkana Public Facilities Board, Waterworks
Facilities Revenue, Refunding, FGIC Insured, 5.40%, 9/01/15 ............................ 200,000 207,496
University of Arkansas Revenues,
Athletic Facilities, Pine Bluff Campus, 5.30%, 12/01/17 ............................. 340,000 344,094
Various Facilities, Fayetteville Campus, 5.25%, 11/01/17 ............................ 300,000 303,314
University of Central Arkansas Revenue, Athletic Facilities,
Series C, AMBAC Insured, 6.125%, 4/01/26 ............................................... 375,000 406,350
University of Puerto Rico Revenues, Series M, MBIA Insured, 5.25%, 6/01/25 .......... 285,000 290,106
University of Southern Arkansas, Student Fees, MBIA Insured, 6.00%, 10/01/13 ........ 125,000 129,313
Virgin Islands Public Finance Authority Revenue, Refunding,
Senior Lien, Fund Loan Notes, Series A, 5.50%, 10/01/18 ............................... 1,400,000 1,426,263
-------------
Total Long Term Investments (Cost $ 28,764,222) ..................................... 29,912,946
-------------
a Short Term Investments 0.7%
Arkansas State Development Finance Authority, Higher Education,
Capital Asset, Series A, FGIC Insured, Weekly VRDN
and Put, 3.90%, 12/01/15 (Cost $ 200,000).............................................. 200,000 200,000
-------------
Total Investments (Cost $ 28,964,222) 99.1% ......................................... 30,112,946
Other Assets, less Liabilities 0.9% ................................................. 264,236
-------------
Net Assets 100.0% ................................................................... $30,377,182
=============
</TABLE>
See Glossary of Terms on page 67.
aVariable rate demand notes (VRDNs) are tax-exempt obligations which contain a
floating or variable interest rate adjustment formula and an unconditional right
of demand to receive payment of the principal balance plus accrued interest at
specified dates.
bSufficient collateral has been segregated for securities traded on a
when-issued or delayed delivery basis.
FRANKLIN MUNICIPAL SECURITIES TRUST
Financial Highlights
Franklin California High Yield Municipal Fund
<TABLE>
<CAPTION>
Class I
------------------------------------------------
Year Ended May 31,
------------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year .................... $10.10 $9.81 $9.93 $9.73 $9.97
------------------------------------------------
Income from investment operations:
Net investment income ................................ .62 .63 .64 .66 .53
Net realized and unrealized gains (losses) ........... .55 .29 (.10) .18 (.20)
------------------------------------------------
Total from investment operations ...................... 1.17 .92 .54 .84 .33
------------------------------------------------
Less distributions from:
Net investment income ................................ (.62) (.63)++ (.66) (.64) (.56)
Net realized gains ................................... -- -- -- -- (.01)
------------------------------------------------
Total distributions ................................... (.62) (.63) (.66) (.64) (.57)
------------------------------------------------
Net asset value, end of year .......................... $10.65 $10.10 $9.81 $9.93 $9.73
================================================
Total return* ......................................... 11.78% 9.64% 5.55% 9.08% 3.22%
Ratios/supplemental data
Net assets, end of year (000's) ....................... $412,211 $213,396 $118,313 $51,102 $31,938
Ratios to average net assets:
Expenses ............................................. .35% .34% .35% .20% .07%
Expenses excluding waiver and payments by affiliate .. .69% .75% .81% .88% .87%
Net investment income ................................ 5.81% 6.24% 6.49% 6.89% 6.14%
Portfolio turnover rate ............................... 37.75% 33.79% 28.02% 57.06% 40.74%
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized. Prior to May 1, 1994, dividends from net
investment income were reinvested at the offering price.
++Includes distributions in excess of net investment income in the amount of
$.001.
Franklin California High Yield Municipal Fund (cont.)
<TABLE>
<CAPTION>
Class II
------------------------
Year Ended May 31,
------------------------
1998 1997 1996
<S> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year ........................................ $10.12 $ 9.82 $9.82
------------------------
Income from investment operations:
Net investment income .................................................... .56 .57 .05
Net realized and unrealized gains ........................................ .56 .30 --
------------------------
Total from investment operations .......................................... 1.12 .87 .05
Less distributions from net investment income ............................. (.56) (.57)++ (.05)
------------------------
Net asset value, end of year .............................................. $10.68 $10.12 $9.82
========================
Total return* ............................................................. 11.30% 9.08% .54%
Ratios/supplemental data
Net assets, end of year (000's) ........................................... $40,363 $10,624 $212
Ratios to average net assets:
Expenses ................................................................. .90% .90% .91%**
Expenses excluding waiver and payments by affiliate ...................... 1.24% 1.31% 1.81%**
Net investment income .................................................... 5.23% 5.68% 5.73%**
Portfolio turnover rate ................................................... 37.75% 33.79% 28.02%
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
**Annualized.
+For the period May 1, 1996 (effective date) to May 31, 1996.
++Includes distribution in excess of net investment income in the amount of
$.001.
FRANKLIN MUNICIPAL SECURITIES TRUST
Statement of Investments, May 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
Franklin California High Yield Municipal Fund AMOUNT VALUE
a Long Term Investments 98.3%
<S> <C> <C>
ABAG Finance Authority For Nonprofit Corporations, COP, 6.15%, 1/01/22 .............. $ 1,490,000 $ 1,600,200
Adelanto Water Authority Revenue, Series A, 7.50%, 9/01/28
Parity Water Systems Acquisition Project ............................................ 3,445,000 3,521,961
Subordinated Lien, Water Systems Acquisition Project................................. 2,000,000 2,129,740
Alameda CFD No.2, Special Tax, 6.125%, 9/01/16 ...................................... 1,240,000 1,267,776
Alameda Public Financing Authority, Local Agency Revenue,
Refunding, Special Tax, Community Facility No. 1-A,
6.70%, 8/01/12 ...................................................................... 3,400,000 3,621,340
7.00%, 8/01/19 ...................................................................... 4,015,000 4,360,973
American Canyon Joint Powers Financing Authority, Lease Revenue,
Civic/Recreation Facilities, 6.40%, 6/01/22 ............................................ 1,000,000 1,058,880
Antioch 1915 Act, AD No. 27, Series D, 7.30%, 9/02/13 ............................... 460,000 474,435
Avenal Public Financing Authority Revenue, Refunding,
7.00%, 9/02/10 ...................................................................... 1,745,000 1,762,450
7.25%, 9/02/27 ...................................................................... 3,665,000 3,732,363
Beaumont Financing Authority, Local Agency Revenue,
Refunding, Sewer Enterprise Project, Series A,
6.75%, 9/01/25 ........................................................................ 5,000,000 5,165,800
Belmont RDA, Tax Allocation, Los Costanos Community
Development, Series A, 6.80%, 8/01/24 .................................................. 1,510,000 1,680,706
Benicia 1915 Act, Refunding, Fleetside Industrial Park
Assessment, 7.00%, 9/02/14 ............................................................ 455,000 469,346
Blythe RDA, Project No.1, Tax Allocation, Refunding, 5.80%, 5/01/28 ................. 1,000,000 1,030,300
Brea Olinda USD, CFD No. 95-1, Special Tax,
5.625%, 9/01/18 ..................................................................... 1,100,000 1,083,566
5.75%, 9/01/28 ...................................................................... 1,300,000 1,272,505
Brentwood 1915 Act, Capital Improvement Finance Program,
No. 94-1, Infrastructure Financing,
5.875%, 9/02/17 ..................................................................... 775,000 773,590
6.00%, 9/02/27 ...................................................................... 1,000,000 1,001,260
Calexico Special Financing Authority, Sales Tax Revenue, 7.40%,
1/01/99 ............................................................................. 10,000 10,090
1/01/00 ............................................................................. 125,000 127,664
1/01/01 ............................................................................. 165,000 169,795
1/01/02 ............................................................................. 175,000 181,293
1/01/03 ............................................................................. 220,000 228,947
1/01/04 ............................................................................. 235,000 245,190
1/01/05 ............................................................................. 285,000 297,603
1/01/06 ............................................................................. 340,000 354,753
1/01/18 ............................................................................. 7,680,000 7,967,078
California Educational Facilities Authority Revenue,
Pooled College and University Projects, Series B, 6.30%, 4/01/21 ................... 1,000,000 1,072,120
Student Loan Program, Series A, MBIA Insured, 6.00%, 3/01/16 ....................... 4,000,000 4,226,720
California Educational Facilities Authority Revenue,
Refunding, Los Angeles College of Chiropractic,
5.60%, 11/01/17 ....................................................................... 1,500,000 1,517,565
California Health Facilities Financing Authority Revenue,
Cedarknoll, Series B, CHFCLP Insured, Pre-Refunded, 7.50%, 8/01/20 .................. 1,800,000 1,941,390
Kaiser Permanente Medical Project, Series A, 5.55%, 8/15/25 ......................... 3,750,000 3,760,538
Refunding, Marshall Hospital, Series A, 5.25%, 11/01/18 ............................. 3,215,000 3,206,834
Refunding, Sacramento Medical, Series A, 5.25%, 5/01/21 ............................. 2,320,000 2,298,517
Thessalonika Family, Series A, MBIA Insured, 6.20%, 12/01/15 ........................ 990,000 1,073,279
California HFA Revenue, Home Mortgage,
MFHR, Series B, AMBAC Insured, 6.15%, 8/01/22 ....................................... 5,000,000 5,314,000
Series B, 7.125%, 2/01/26 ........................................................... 875,000 939,103
California HFA Revenue, Home Mortgage, (cont.)
Series F-1, 7.00%, 8/01/26 .......................................................... $ 1,795,000 $ 1,932,820
Series H, 6.25%, 8/01/27 ............................................................ 2,485,000 2,670,431
Series R, MBIA Insured, 6.15%, 8/01/27 .............................................. 3,285,000 3,500,562
California PCFA Revenue, Series B,
Pacific Gas & Electric Co., 5.85%, 12/01/23 ........................................ 5,000,000 5,171,350
Southern California Edison Co., 6.40%, 12/01/24 .................................... 2,000,000 2,146,000
California PCFA, Solid Waste Disposal Revenue,
Browning-Ferris Industries, Inc., 6.75%, 9/01/19 ...................................... 1,000,000 1,127,850
California Special District Association Finance Corp.,
COP, Series V, 7.50%, 5/01/13 ......................................................... 55,000 58,967
California State GO,
FGIC Insured, 6.00%, 8/01/19 ........................................................ 30,000 32,279
FGIC Insured, Pre-Refunded, 6.00%, 8/01/19 .......................................... 1,470,000 1,639,241
Veterans Bonds, Series BD, BE, and BF, 6.40%, 2/01/22 ............................... 1,250,000 1,277,875
Veterans Bonds, Series BH, 5.50%, 12/01/18 .......................................... 5,000,000 5,087,750
California State HFA, Mortgage Revenue, Series L,
MBIA Insured, 6.40%, 8/01/27 .......................................................... 3,000,000 3,241,710
California Statewide CDA Revenue, COP,
Auxiliary Organization, California State University Foundation,
MBIA Insured, 5.20%, 6/01/24 .......................................................... 5,925,000 5,956,462
CHFCLP Insured, 7.25%, 12/01/22 ..................................................... 1,800,000 2,077,668
California Statewide CDA, Special Facilities Revenue,
United Air Lines, Inc., Los Angeles, 5.625%, 10/01/34 ................................. 26,955,000 27,233,715
Capistrano USD, CFD, Special Tax No. 92-1, 7.00%, 9/01/18 ........................... 1,000,000 1,060,340
Duarte RDA, Tax Allocation,
Rancho Duarte Phase I Project Area, 6.80%, 9/01/16 .................................. 825,000 876,224
Refunding, Davis Addition Project Area, 6.70%, 9/01/14 .............................. 2,615,000 2,778,202
Refunding, Davis Addition Project Area, 6.90%, 9/01/18 .............................. 4,120,000 4,364,522
El Cajon RDA, Tax Allocation, El Cajon Redevelopment
Project, Refunding, AMBAC Insured, 5.35%, 10/01/22 .................................... 1,000,000 1,006,680
Escondido GO, 1915 Act, Refunding, AD No. 86-1, Series R, 5.625%, 9/02/18 ........... 1,150,000 1,135,522
Fontana RDA, Tax Allocation, Refunding, Jurupa Hills
Redevelopment Project, Series A, 5.50%, 10/01/19 ...................................... 5,000,000 5,113,850
Fontana Special Tax, CFD No. 7, 6.125%, 9/01/28 ..................................... 1,280,000 1,258,227
Foothill/Eastern Transportation Corridor Agency,
Toll Road Revenue, Senior Lien, Series A,
6.50%, 1/01/32 ...................................................................... 5,500,000 6,014,085
6.00%, 1/01/34 ...................................................................... 8,235,000 8,732,559
Garden Grove Housing Authority, MFHR,
Set-Aside Tax Increment, Series C, 6.70%, 7/01/24 ...................................... 6,375,000 6,742,965
Gateway Improvement Authority Revenue,
Marin City CFD, Series A, 7.75%, 9/01/25 .............................................. 2,500,000 2,792,500
Granada Sanitation District, 1915 Act, Sewage Treatment Facilities,
Financing District, Series A,
7.125%, 9/02/16 ..................................................................... 965,000 995,176
7.25%, 9/02/22 ...................................................................... 975,000 1,005,479
Hawaiian Gardens RDA Project No. 1, Tax Allocation,
Refunding, 6.35%, 12/01/33 ............................................................ 4,000,000 4,220,640
Hesperia Public Financing Authority, Improvement Revenue,
Series B, 7.375%, 10/01/23 ............................................................ 1,930,000 2,028,449
Huntington Beach Public Financing Authority Revenue,
Huntington Beach Redevelopment Projects, Refunding,
7.00%, 8/01/24 ........................................................................ 1,000,000 1,044,490
Irvine 1915 Act, AD No. 94-15, 6.70%, 9/02/20 ....................................... 2,500,000 2,564,700
Irvine Meadows Mobile Home Park Revenue, Series A, 5.70%,
3/01/18 ............................................................................. 2,300,000 2,294,089
3/01/28 ............................................................................. 5,000,000 4,950,000
Irvine Ranch Water District, Joint Powers Agency,
Local Pool Revenue, Issue II, 8.25%, 8/15/23 .......................................... 2,000,000 2,016,340
Irwindale Public Finance Authority, Special Tax,
Refunding, CFD No. 1, 6.00%, 11/01/20 ................................................. 4,450,000 4,465,130
John C. Fremont Hospital District Revenue,
California Health Facilities, Insured, 6.75%, 6/01/13 ................................. 1,500,000 1,661,775
Lake Elsinore 1915 Act, AD No. 93-1, Series A, 7.90%, 9/02/24 ....................... 1,265,000 1,340,571
Lake Elsinore School Financing Authority Revenue,
Refunding, 6.125%, 9/01/19 ............................................................ $ 1,000,000 $ 1,048,350
Lancaster RDA, Tax Allocation, Refunding, Sub-Residential
Redevelopment Project, Subordinated Lien,
6.65%, 9/01/27 ........................................................................ 2,500,000 2,583,275
Lemon Grove School District COP, Vista La Mesa Elementary
School Construction, 6.40%, 9/01/26 ................................................... 2,000,000 2,088,460
Long Beach IDR, Refunding, California State University
Foundation, Series A, 5.25%
2/01/13 ............................................................................. 1,000,000 988,850
2/01/23 ............................................................................. 1,000,000 965,080
Long Beach Special Tax, CFD No. 2, 7.50%, 9/01/11 ................................... 140,000 141,711
Los Angeles Harbor Development Revenue, Series B,
6.00%, 8/01/14 ...................................................................... 3,500,000 3,772,370
5.375%, 11/01/23 .................................................................... 2,465,000 2,487,358
Los Angeles MFR, Refunding, Series J-2, 8.50%, 1/01/24 .............................. 1,150,000 1,189,560
Los Angeles USD, COP, Multiple Properties Project,
Refunding, FSA Insured, 5.625% 11/01/13 ............................................... 2,500,000 2,505,175
Lynwood Public Financing Authority Revenue,
Water System Improvement Project, 6.50%, 6/01/21 ....................................... 1,175,000 1,261,797
Millbrae Elementary School District, COP,
Financing Project, Pre-Refunded, 6.90%, 3/01/22 ........................................ 1,480,000 1,647,788
Modesto Public Financing Authority, Lease Revenue,
John Thurman Field Renovation Project, 6.125%, 11/01/16 ............................... 1,750,000 1,852,778
Monrovia USD, COP, Financing Project, MBIA Insured, 5.30%, 4/01/26 .................. 1,100,000 1,109,834
National City Community Development Commission,
MFHR, Park Villas Apartments, Series A, GNMA Secured,
5.85%, 7/20/19 ........................................................................ 1,545,000 1,612,995
Newman RDA, Tax Allocation, Redevelopment
and Housing Project No.1, 5.375%, 8/01/27 ............................................. 1,285,000 1,247,170
Newport Mesa USD, Special Tax, CFD No. 90-1, 6.75%, 9/01/21 ......................... 2,000,000 2,065,200
Northern Mariana Islands Commonwealth Ports Authority, Series A, 3/15/28,
Airport Revenue, Senior Lien, 6.25%.................................................. 5,050,000 5,019,650
Seaport Revenue, 6.40%............................................................... 2,000,000 1,955,020
Oakland Revenue, Refunding, YMCA of the East Bay Project, 7.10%, 6/01/10 ............ 2,815,000 3,093,488
Orange County CFD, No. 86-2, Special Tax, Refunding,
Rancho Santa Margarita, Series A, 5.55%, 8/15/17 ....................................... 1,000,000 1,004,880
Orinda 1915 Act, AD No. 94-1, Oak Springs, 8.25%, 9/02/19 ........................... 1,545,000 1,594,734
Oroville Hospital Revenue, Oroville Hospital,
Series A, CHFCLP Insured, 5.40%, 12/10/17 ............................................. 1,140,000 1,155,196
Palmdale Special Tax, CFD No. 93-1, Ritter Ranch Project, Series A, 8.50%, 9/01/17 .. 10,000,000 9,000,000
Paramount RDA, Tax Allocation, Refunding,
Redevelopment Project Area 1, MBIA Insured, 0.00%, 8/01/26 ............................. 14,050,000 3,229,252
Perris Public Financing Authority, Local Agency Revenue, Series B, 7.25%, 8/15/23 ... 500,000 527,730
Richmond Revenue, Refunding, YMCA of the East Bay Project, 7.25%, 6/01/17 ........... 3,100,000 3,363,283
Riverside County CFD, Refunding, Special Tax,
Senior Lien, No. 87-5, Series A, 7.00%, 9/01/13 ....................................... 7,335,000 7,793,438
Riverside County Public Financing Authority,
Tax Allocation Revenue, Redevelopment Projects, Series A,
5.50%, 10/01/22 ....................................................................... 2,710,000 2,756,775
Sacramento County 1915 Act, Refunding, Sunrise/U.S.
Corridor Assessment, 7.00%, 9/02/09 ................................................... 85,000 87,695
Sacramento County Special Tax, Refunding, CFD No.1,
5.60%, 12/01/12 ..................................................................... 1,515,000 1,509,046
5.70%, 12/01/20 ..................................................................... 2,410,000 2,376,935
6.30%, 9/01/21 ...................................................................... 1,575,000 1,641,843
Salinas COP, Capital Improvement Projects, Series A, 5.70%, 10/01/28 ................ 2,665,000 2,743,244
Salinas Valley Solid Waste Authority Revenue,
5.75%, 8/01/18 ...................................................................... 500,000 507,715
5.80%, 8/01/27 ...................................................................... 1,100,000 1,116,379
San Bernardino Associated Communities Financing Authority,
Health Care, COP, Refunding and Improvement,
Granada Hills, Series A, 6.90%, 5/01/27 ............................................... 10,000,000 11,023,900
San Bernardino County MFHR, Series A, 6.50%,
Meadowland Apartments Project, 3/01/10 ............................................. $ 7,250,000 $ 7,232,600
Park Heights Apartments, 8/01/05 ................................................... 2,520,000 2,513,952
San Bernardino Joint Powers Financing Authority, Lease Revenue,
Department of Transportation Lease, Series A,
5.50%, 12/01/20 ....................................................................... 4,000,000 4,095,000
San Diego County Educational Facilities Authority No. 1,
Lease Revenue, 6.50%, 8/15/15 .......................................................... 850,000 916,445
San Diego Special Tax, CFD No. 1, Series B, 7.10%, 9/01/20 .......................... 3,500,000 3,779,405
San Francisco City and County Airports Commission,
International Airport Revenue, Second Series,
Issue 8A, FGIC Insured, 6.25%, 5/01/20 .............................................. 1,570,000 1,694,375
Issue 16A, FSA Insured, 5.125%, 5/01/23 ............................................. 4,000,000 3,936,200
San Francisco City and County Redevelopment Financing Authority,
Tax Allocation Revenue, Redevelopment Projects,
Refunding, Series C, 5.30%, 8/01/25 ................................................. 1,635,000 1,636,324
Series A, 5.50%, 8/01/22 ............................................................ 1,180,000 1,187,717
San Francisco City and County Revenue,
Irwin Memorial Blood Centers, Series A, 6.80%, 12/01/21 ................................ 800,000 865,000
San Joaquin Area Flood Control Agency, 1915 Act,
Flood Protection & Restoration Assessment, FSA Insured,
6.00%, 9/02/14 ........................................................................ 970,000 1,002,117
San Joaquin Hills Transportation Corridor Agency, Toll Road Revenue,
Junior Lien, ETM, 0.00%, 1/01/28 .................................................... 19,150,000 4,134,868
Refunding, Series A, 5.50%, 1/15/28 ................................................. 20,710,000 20,857,662
Senior Lien, Pre-Refunded, 7.00%, 1/01/30 ........................................... 675,000 767,124
Senior Lien, Pre-Refunded, 6.75%, 1/01/32 ........................................... 3,450,000 3,885,218
San Jose Financing Authority Revenue, Convention Center Project,
Series C, 6.40%, 9/01/17 ............................................................... 5,000,000 5,333,850
San Jose RDA, Tax Allocation, Merged Area Redevelopment Project,
5.25%, 8/01/29 ........................................................................ 4,750,000 4,727,960
San Luis Obispo COP, Vista Hospital System, Inc., 8.375%, 7/01/29 ................... 6,660,000 7,196,863
San Marcos RDA, Tax Allocation, Affordable Housing Project,
Series A, 5.65%, 10/01/28 .............................................................. 3,000,000 3,019,680
San Mateo RDA, Tax Allocation, Merged Area, Series A,
5.50%, 8/01/17 ...................................................................... 1,330,000 1,365,631
5.50%, 8/01/22 ...................................................................... 4,820,000 4,904,109
San Ramon Public Financing Authority, Refunding,
Tax Allocation, 6.90%, 2/01/24 ........................................................ 1,500,000 1,632,270
Sand City RDA, Tax Allocation Revenue
Sand City Redevelopment Project, 6.00% 11/01/26 ....................................... 3,900,000 4,094,103
Santa Rosa 1915 Act, Fountain/Grove Parkway Extension Assessment,
7.625%, 9/02/19 ........................................................................ 1,500,000 1,547,580
Southern California Public Power Authority,
Southern Transmission Project Revenue, Sub-Crossover Refunding,
6.125%, 7/01/18 ....................................................................... 1,140,000 1,214,510
b Stockton CFD No. 1, Special Tax, Mello Roos, Weston Ranch, Series A,
5.45%, 9/01/08 ...................................................................... 1,775,000 1,762,469
5.80%, 9/01/14 ...................................................................... 4,000,000 3,982,920
6.00%, 9/01/18 ...................................................................... 1,000,000 1,000,640
6.00%, 9/01/24 ...................................................................... 1,100,000 1,098,427
Stockton Health Facilities Revenue, Refunding,
Dameron Hospital Association, Series A, 5.70%, 12/01/14 ............................... 2,300,000 2,376,429
Suisun City Public Financing Authority,
Tax Allocation Revenue, Redevelopment Project, 5.20%,
Escrow Term, Series A, 10/01/28 ..................................................... 3,500,000 3,447,710
Series A, 10/01/23 .................................................................. 275,000 272,302
Taft Public Financing Authority, Lease Revenue,
Community Correctional Facility Project, Series A, 6.05%, 1/01/17 ..................... 3,235,000 3,469,538
Tracy COP, I-205 Corridor Improvement Project,
Pre-Refunded, 7.00%, 10/01/27 ......................................................... 1,200,000 1,332,071
Union City CFD No. 1997-1, Special Tax,
5.70%, 9/01/18 ...................................................................... 1,000,000 1,005,440
5.80%, 9/01/28 ...................................................................... 2,180,000 2,187,761
University Revenues, Refunding, Multiple Purpose Projects,
Series E, MBIA Insured, 5.125%, 9/01/20 ................................................ $ 1,000,000 $ 997,940
Upland COP, Refunding, Mortgage Insured, 5.50%, 6/01/21 ............................. 2,000,000 2,041,600
Vallejo COP, Refunding, Marine World Foundation Project,
7.40%, 2/01/28 ......................................................................... 9,345,000 10,289,498
Victor Valley Union High School District COP,
Instructional Academy Project, MBIA Insured, 5.80%, 11/15/21 ........................... 1,000,000 1,065,470
Virgin Islands Public Financing Authority Revenue,
Refunding, Subordinated Lien Fund Loan Notes, Series E,
5.75%, 10/01/13 ..................................................................... 1,595,000 1,621,636
5.875%, 10/01/18 .................................................................... 1,665,000 1,700,747
b 6.00%, 10/01/22 ..................................................................... 2,650,000 2,721,814
Vista Mobile Home Park Revenue, Estrella De Oro Mobile Home,
Series A, 5.875%, 2/01/28 ............................................................. 1,685,000 1,661,090
West Sacramento Financing Authority, Lease Revenue,
City Administration Facilities Project, MBIA Insured,
5.30%, 9/01/30 ........................................................................ 1,020,000 1,031,974
Western Placer Waste Management Authority Revenue, 6.75%, 7/01/14 ................... 7,400,000 8,018,343
Westminster COP, Public Improvements Project, 6.00%, 6/01/22 ........................ 2,060,000 2,163,905
Winton Water and Sanitation District, COP, Refunding,
Wastewater System Improvement Project, MBIA Insured,
5.25%, 3/01/28 ........................................................................ 1,500,000 1,513,364
---------------
Total Long Term Investments (Cost $425,187,966) ..................................... 444,928,470
---------------
a Short Term Investments 1.3%
California Health Facilities Financing Authority Revenue,
Sutter Health, Series A, Daily VRDN and Put,
3.70%, 3/01/20 ........................................................................ 900,000 900,000
Irvine 1915 Act, AD, 3.70%,
No. 95-12, Series A, Daily VRDN and Put, 9/02/21 .................................... 2,800,000 2,800,000
No. 97-16, Northwest Irvine Project, Daily VRDN and Put, 9/02/22 .................... 200,000 200,000
Irvine Ranch Water District, DATES, Consolidated Bonds,
Series C, Daily VRDN and Put, 3.70%, 10/01/10 ......................................... 200,000 200,000
Newport Beach Hospital Revenue, Hoag Memorial Presbyterian Hospital,
Daily VRDN and Put, 3.90%, 10/01/22 .................................................... 1,700,000 1,700,000
---------------
Total Short Term Investments (Cost $5,800,000) ...................................... 5,800,000
---------------
Total Investments (Cost $430,987,966) 99.6% ......................................... 450,728,470
Other Assets, less Liabilities .4% .................................................. 1,845,219
---------------
Net Assets 100.0% ................................................................... $452,573,689
===============
</TABLE>
See Glossary of Terms on page 67.
aVariable rate demand notes (VRDNs) are tax-exempt obligations which contain a
floating or variable interest rate adjustment formula and an unconditional right
of demand to receive payment of the principal balance plus accrued interest at
specified dates.
bSufficient collateral has been segregated for securities traded on a
when-issued or delayed delivery basis.
FRANKLIN MUNICIPAL SECURITIES TRUST
Financial Highlights
<TABLE>
<CAPTION>
Franklin Hawaii Municipal Bond Fund
Class I
-----------------------------------------------
Year Ended May 31,
-----------------------------------------------
1998 1997 1996 1995 1994
-----------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year .................... $10.79 $10.54 $10.67 $10.36 $10.80
-----------------------------------------------
Income from investment operations:
Net investment income ................................ .58 .60 .60 .60 .62
Net realized and unrealized gains (losses) ........... .38 .25 (.13) .31 (.46)
-----------------------------------------------
Total from investment operations ...................... .96 .85 .47 .91 .16
Less distributions from net investment income ......... (.59) (.60) (.60) (.60) (.60)
-----------------------------------------------
Net asset value, end of year .......................... $11.16 $10.79 $10.54 $10.67 $10.36
===============================================
Total return* ......................................... 9.10% 8.23% 4.49% 9.26% 1.35%
Ratios/supplemental data
Net assets, end of year (000's) ....................... $45,138 $40,003 $38,805 $36,827 $26,904
Ratios to average net assets:
Expenses ............................................. .40% .39% .35% .20% .05%
Expenses excluding waiver and payments by affiliate .. .81% .83% .84% .87% .92%
Net investment income ................................ 5.32% 5.59% 5.63% 6.02% 5.76%
Portfolio turnover rate ............................... 23.18% 13.40% 16.01% 22.88% 31.35%
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized. Prior to May 1, 1994, dividends from net
investment income were reinvested at the offering price.
See notes to financial statements.
FRANKLIN MUNICIPAL SECURITIES TRUST
Statement of Investments, May 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
Franklin Hawaii Municipal Bond Fund AMOUNT VALUE
<S> <C> <C>
Long Term Investments 98.3%
Guam Airport Authority Revenue, Series B,
6.60%, 10/01/10 ..................................................................... $ 200,000 $ 219,836
6.70%, 10/01/23 ..................................................................... 1,000,000 1,091,970
Guam Government, Limited Obligation Highway, Refunding,
Series A, FSA Insured, 6.30%, 5/01/12 .................................................. 280,000 303,106
Guam Power Authority Revenue, Series A, 6.30%, 10/01/22 ................................ 300,000 318,501
Hawaii State Airport System Revenue,
Refunding, Third Series 1994, AMBAC Insured, 5.75%, 7/01/09 ......................... 300,000 317,649
Second Series 1990, FGIC Insured, 7.50%, 7/01/20 .................................... 60,000 64,660
Second Series 1991, 7.00%, 7/01/18 .................................................. 1,520,000 1,641,722
Second Series 1991, MBIA Insured, 6.75%, 7/01/21 .................................... 200,000 215,976
Second Series 1992, MBIA Insured, 6.90%, 7/01/12 .................................... 400,000 471,672
Hawaii State Department of Budget and Finance, Special Purpose Revenue,
Hawaii Electric Light Co. Project, Mortgage, 7.20%, 12/01/14 ........................ 100,000 106,086
Hawaiian Electric Co., Mortgage, Series A, MBIA Insured, 6.60%, 1/01/25 ............. 1,950,000 2,156,661
Hawaiian Electric Co. Project, Series B, MBIA Insured, 5.875%, 12/01/26 ............. 500,000 524,965
Hawaiian Electric Co. and Subsidiaries, Mortgage, MBIA Insured, 6.55%, 12/01/22 ..... 3,425,000 3,730,236
Kapiolani Health Obligation, 6.25%, 7/01/21 ......................................... 1,100,000 1,193,665
Pali Momi Medical Center Project, Pre-Refunded, 7.65%, 7/01/19 ...................... 105,000 118,012
Queens Medical Center Project, FGIC Insured, Pre-Refunded, 6.20%, 7/01/22 ........... 500,000 548,505
Refunding, Kaiser Permanente, Series A, 6.25%, 3/01/21 .............................. 100,000 105,301
Refunding, Kapiolani Health Care System, 6.40%, 7/01/13 ............................. 600,000 648,534
Refunding, Kapiolani Health Care System, 6.00%, 7/01/19 ............................. 125,000 132,368
Refunding, Queens Health System, Series A, 6.05%, 7/01/16 ........................... 1,000,000 1,078,990
Refunding, Queens Health System, Series A, 6.00%, 7/01/20 ........................... 120,000 128,422
Refunding, Queens Health System, Series A, 5.75%, 7/01/26 ........................... 1,500,000 1,555,665
Refunding, Queens Medical Center Project, FGIC Insured, Pre-Refunded, 6.50%, 7/01/12 725,000 726,617
St. Francis Medical Centers, FSA Insured, 6.50%, 7/01/22 ............................ 1,100,000 1,191,278
Wilcox Memorial Hospital Projects, 5.25%, 7/01/13 ................................... 600,000 595,650
Wilcox Memorial Hospital Projects, 5.35%, 7/01/18 ................................... 2,040,000 2,020,090
Wilcox Memorial Hospital Projects, 5.50%, 7/01/28 ................................... 2,410,000 2,414,290
Hawaii State Department of Transportation, Special Facilities Revenue,
Refunding, Matson Terminals, Inc.,
5.75%, 3/01/13 ........................................................................ 75,000 78,224
Hawaii State GO,
Series BW, 6.375%, 3/01/11 .......................................................... 100,000 114,876
Series CA, 6.00%, 1/01/09 ........................................................... 100,000 111,440
Series CP, FGIC Insured, 5.00%, 10/01/16 ............................................ 900,000 889,299
Hawaii State Harbor, Capital Improvement Revenue,
Refunding, Series 1994, FGIC Insured, 6.25%, 7/01/15 ................................ 1,000,000 1,080,130
Refunding, Series 1994, FGIC Insured, 6.375%, 7/01/24 ............................... 500,000 540,565
Series 1990, MBIA Insured, 7.25%, 7/01/10 ........................................... 70,000 75,472
Series 1990, MBIA Insured, 7.00%, 7/01/17 ........................................... 80,000 85,346
Series 1992, FGIC Insured, 6.50%, 7/01/19 ........................................... 200,000 215,280
Hawaii State Housing Finance and Development Corp. Revenue,
Affordable Rental Housing Program, Series A,
6.00%, 7/01/15 ...................................................................... 1,000,000 1,051,340
6.05%, 7/01/22 ...................................................................... 750,000 788,423
6.10%, 7/01/30 ...................................................................... 250,000 262,780
Hawaii State Housing Finance and Development Corp., SFM Purchase Revenue, Series A,
7.10%, 7/01/24 ...................................................................... $ 465,000 $ 499,861
6.00%, 7/01/26 ...................................................................... 290,000 299,147
Honolulu City and County Go,
Refunding, Series 1992, 6.00%, 12/01/14 ............................................. 150,000 167,975
Series A, Pre-Refunded, 6.70%, 8/01/07 .............................................. 75,000 81,730
Series A, Pre-Refunded, 6.70%, 8/01/11 .............................................. 100,000 108,973
Series B, Pre-Refunded, 6.125%, 6/01/15 ............................................. 1,000,000 1,108,870
Series B, 5.00%, 11/01/17 ........................................................... 600,000 591,180
Honolulu City and County Water Supply Board, Water System Revenue, 5.80%, 7/01/21 ...... 1,785,000 1,879,891
Honolulu City and County MFHR, Waipahu Towers Project, Series A, 6.90%, 6/20/35 ........ 1,205,000 1,301,496
Kauai County GO, Refunding, Series C, AMBAC Insured, 5.95%, 8/01/10 .................... 220,000 246,321
Maui County Board, Water Supply Revenue, Series A,
FGIC Insured, Pre-Refunded, 6.70%, 12/01/11 ........................................... 100,000 109,766
Maui County GO,
Refunding, Series 1992, 6.05%, 9/01/07 .............................................. 50,000 52,151
Refunding, Series 1992, 6.10%, 9/01/08 .............................................. 300,000 314,007
Refunding, Series A, FGIC Insured, Pre-Refunded, 5.75%, 1/01/11 ..................... 385,000 405,293
Series A, FGIC Insured, Pre-Refunded, 5.75%, 1/01/13 ................................ 150,000 157,907
Northern Mariana Islands Commonwealth Ports Authority,
Seaport Revenue, Series A, 6.40%, 3/15/28 .............................................. 1,000,000 977,510
Puerto Rico Commonwealth Aqueduct and Sewer Authority Revenue,
Series A Pre-Refunded, 7.00%, 7/01/19 ................................................. 145,000 148,271
Puerto Rico Commonwealth Highway and Transportation Authority Revenue,
Series T, Pre-Refunded, 6.625%, 7/01/18 ............................................. 315,000 349,832
Series Y, 5.50%, 7/01/26 ............................................................ 800,000 820,495
Puerto Rico Electric Power Authority Revenue,
Series O, 7.125%, 7/01/14 ........................................................... 60,000 62,890
Series O, Pre-Refunded, 7.125%, 7/01/14 ............................................. 55,000 57,781
Series T, Pre-Refunded, 6.375%, 7/01/24 ............................................. 1,000,000 1,136,880
Puerto Rico Industrial, Medical and Environmental
Facilities Revenue PCFA, PepsiCo, Inc. Project, 6.25%, 11/15/13 ....................... 350,000 384,698
Puerto Rico PBA, Guaranteed, Public Education and
Health Facilities, Refunding, Series M, 5.75%, 7/01/15 ................................ 900,000 938,141
Puerto Rico Telephone Authority Revenue,
Refunding, Series L, 6.125%, 1/01/22 ................................................... 1,230,000 1,307,477
Virgin Islands Public Finance Authority Revenue,
Refunding, Senior Lien, Fund Loan Notes, Series A, 5.625%, 10/01/25 .................... 1,900,000 1,941,381
--------------
Total Long Term Investments (Cost $41,918,493) 98.3% ................................... 44,363,526
Other Assets, less Liabilities 1.7% .................................................... 774,615
--------------
Net Assets 100.0% ...................................................................... $45,138,141
==============
</TABLE>
See Glossary of Terms on page 67.
FRANKLIN MUNICIPAL SECURITIES TRUST
Financial Highlights
<TABLE>
<CAPTION>
Franklin Tennessee Municipal Bond Fund
Class I
-----------------------------------------------
Year Ended May 31,
-----------------------------------------------
1998 1997 1996 1995 1994+
-----------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year .................... $10.71 $10.40 $10.53 $10.11 $10.00
-----------------------------------------------
Income from investment operations:
Net investment income ................................ .57 .58 .56 .52 .01
Net realized and unrealized gains (losses) ........... .56 .33 (.09) .35 .10
-----------------------------------------------
Total from investment operations ...................... 1.13 .91 .47 .87 .11
Less distributions from net investment income ......... (.57) (.60) (.60) (.45) --
-----------------------------------------------
Net asset value, end of year .......................... $11.27 $10.71 $10.40 $10.53 $10.11
===============================================
Total return* ......................................... 10.75% 8.95% 4.50% 8.97% 1.10%
Ratios/supplemental data
Net assets, end of year (000's) ....................... $44,526 $26,708 $13,956 $5,986 $2,224
Ratios to average net assets:
Expenses ............................................. .40% .40% .33% .10% .03%**
Expenses excluding waiver and payments by affiliate .. .81% .84% .91% .92% 1.05%**
Net investment income ................................. 5.12% 5.51% 5.67% 6.02% 1.89%**
Portfolio turnover rate ............................... 37.67% 27.60% 27.23% 24.71% 22.64%
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
**Annualized.
+For the period May 10, 1994 (effective date) to May 31, 1994.
See notes to financial statements.
FRANKLIN MUNICIPAL SECURITIES TRUST
Statement of Investments, May 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
Franklin Tennessee Municipal Bond Fund AMOUNT VALUE
<S> <C> <C>
a Long Term Investments 98.6%
Carroll County IDBR, Refunding, Henry I. Siegel Co., Inc. Project, 7.20%, 4/01/05 ... $ 500,000 $ 522,930
b Chattanooga Health, Educational and Housing Facilities
Board Revenue, Catholic Health Initiatives, Series A,
5.00%, 12/01/18 ....................................................................... 1,000,000 977,430
Cleveland Water and Sewer, FGIC Insured, 5.375%, 9/01/28 ............................ 1,000,000 1,011,890
Collierville Water and Sewer Systems, MBIA Insured, 5.625%, 11/01/21 ................ 500,000 517,745
Dickson Electric System Revenue, MBIA Insured, 5.50%, 9/01/16 ....................... 1,220,000 1,269,569
Eastside Utility District, Hamilton County Waterworks Revenue,
Refunding, MBIA Insured, 5.25%, 11/01/17 .............................................. 800,000 808,176
Franklin IDB, MFHR, Refunding, Landings Apartment Project,
Series A, FSA Insured, 6.00%, 10/01/26 ................................................ 1,000,000 1,053,410
Hamilton County IDB, MFHR, Patten Towers Apartments, Series B, 7.125%, 2/01/09 ...... 500,000 521,255
Hardeman County, FGIC Insured, 5.625%, 4/01/24 ...................................... 880,000 917,259
Hollow Rock-Bruceton Special School District, FSA Insured, 5.75%, 4/01/24 ........... 500,000 526,810
Humphreys County IDB, Solid Waste Disposal Revenue,
Du Pont (E.I.) De Nemours & Co. Project, 6.70%, 5/01/24 ................................ 800,000 885,536
Jackson GO, Refunding & Improvement, MBIA Insured, 5.125%, 3/01/16 .................. 1,000,000 1,007,270
Johnson City Health and Educational Facilities Board,
Mortgage Revenue, Pine Oaks Assisted Project, Series A,
GNMA Secured, 5.90%, 6/20/37 .......................................................... 1,400,000 1,450,428
Johnson City Public Improvement, FSA Insured, 5.90%, 6/01/12 ........................ 500,000 532,920
Johnson City Public Improvement, GO, Series B,
AMBAC Insured, Pre-Refunded, 6.70%, 5/01/20 ........................................... 100,000 115,945
Johnson City Solid Waste, AMBAC Insured, 5.80%, 5/01/09 ............................. 100,000 108,377
Knox-Chapman Utility District, Knox County Water and Sewer Revenue,
FSA Insured, 5.40%, 1/01/23 ......................................................... 660,000 672,210
Refunding, MBIA Insured, 6.10%, 1/01/19 ............................................. 100,000 108,338
Knox County First Utility District, Water and Sewer Revenue,
Refunding & Improvement, Series A, MBIA Insured,
5.625%, 12/01/19 ...................................................................... 1,000,000 1,049,170
Knox County Health, Educational and Housing Facilities Board,
Hospital Revenue, Refunding,
Ft. Sanders Alliance, MBIA Insured, 5.75%, 1/01/14 .................................. 1,250,000 1,357,638
Mercy Health Systems, Series B, AMBAC Insured, 5.875%, 9/01/15 ...................... 345,000 365,276
Knox County IDB, MFMR, Refunding, Waterford Apartments,
Series A, 5.95%, 3/01/28 .............................................................. 250,000 263,225
Loudon County IDB, Solid Waste Disposal Revenue,
Kimberly-Clark Corp. Project, 6.20%, 2/01/23 ........................................... 1,305,000 1,381,329
Macon County GO, FGIC Insured, 5.90%, 9/01/13 ....................................... 150,000 159,017
Maury County IDB, PCR, Multi-Modal, Refunding,
Saturn Corp. Project, 6.50%, 9/01/24 ................................................... 620,000 683,680
McKenzie High School District, FSA Insured, 5.75%, 4/01/22 .......................... 500,000 525,625
Memphis GO, 5.75%, 8/01/15 .......................................................... 500,000 522,175
Memphis Health, Educational and Housing Facilities Board,
Mortgage Revenue, Refunding,
Edgewater Territory, FHA/GNMA Secured, 7.375%, 1/20/27 .............................. 150,000 161,327
MF, River Trace II, Series A, 6.45%, 4/01/26 ........................................ 100,000 106,406
Memphis-Shelby County Airport Authority Revenue,
Refunding, MBIA Insured, 5.65%, 9/01/15 ................................................ 500,000 520,120
Memphis-Shelby County Airport Authority, Special Facilities
and Project Revenues, Refunding, Federal Express Corp.,
6.75%, 9/01/12 ........................................................................ 100,000 109,437
Metropolitan Government of Nashville and Davidson County, Electric Revenue, Series A,
Refunding, 6.00%, 5/15/17 ........................................................... 200,000 211,110
5.20%, 5/15/23 ...................................................................... 1,000,000 1,001,730
Metropolitan Government of Nashville and Davidson County,
Health and Educational Facilities Board, Refunding,
Dandridge Towers, Series 8-A, 6.375%, 1/01/11 ......................................... 500,000 529,155
Metropolitan Government of Nashville and Davidson County,
Health and Educational Facilities Board Revenue,
Meharry Medical College Project, AMBAC Insured, Pre-Refunded, 6.875%, 12/01/24 ...... 150,000 174,891
b Multi-Modal Health, 5.50%, 5/01/23 .................................................. 995,000 1,018,154
Metropolitan Government of Nashville and Davidson County,
Health and Educational Facilities Board Revenue, (con.t)
Refunding, The Vanderbilt University, Series A, 5.375%, 7/01/18 ..................... $ 700,000 $ 716,107
Refunding, The Vanderbilt University, Series B, 5.00%, 10/01/28 ..................... 1,500,000 1,465,545
Metropolitan Government of Nashville and Davidson County,
Public Improvement, 5.875%, 5/15/26 ................................................... 1,000,000 1,059,490
Metropolitan Government of Nashville and Davidson County,
Sports Authority Revenue, Stadium Public Improvement
Project, AMBAC Insured, 5.875%, 7/01/21 ............................................... 1,775,000 1,887,784
Metropolitan Government of Nashville and Davidson County,
Water and Sewer Revenue, Refunding,
5.50%, 1/01/16 ...................................................................... 620,000 620,174
Series A, FGIC Insured, 5.00%, 1/01/19 .............................................. 400,000 395,924
Metropolitan Nashville Airport Authority Revenue,
Series C, FGIC Insured, 6.60%, 7/01/15 ................................................ 205,000 221,859
Milan Special School District, AMBAC Insured,
Pre-Refunded, 6.625%, 4/01/11 .......................................................... 180,000 205,168
Northern Mariana Islands Commonwealth Ports Authority,
Seaport Revenue, Port Saipan Harbor Improvement,
Series A, 6.85%, 10/01/25 ............................................................. 300,000 293,253
Pigeon Forge Public Improvement, MBIA Insured, 5.90%, 6/01/09 ....................... 100,000 105,718
Puerto Rico Commonwealth GO, Pre-Refunded, 6.50%, 7/01/23 ........................... 100,000 113,963
Puerto Rico Commonwealth Highway and Transportation
Authority Revenue, Series Y, Pre-Refunded, 6.00%, 7/01/22 ............................. 500,000 564,615
Puerto Rico Commonwealth Public Improvement, 5.75%, 7/01/17 ......................... 750,000 798,023
Puerto Rico Electric Power Authority Revenue,
Series R, Pre-Refunded, 6.25%, 7/01/17 .............................................. 100,000 109,463
Series X, 5.50%, 7/01/25 ............................................................ 500,000 509,650
Puerto Rico Industrial, Tourist, Educational, Medical and
Environmental Control Facilities, Financing
Authority, Hospital Revenue, Auxilio Mutuo Obligation Group,
Series A, MBIA Insured, 6.25%, 7/01/24 ................................................ 200,000 220,184
Puerto Rico Ports Authority Revenue, Special Facilities,
American Airlines, Series A, 6.25%, 6/01/26 ............................................ 600,000 652,860
Shelby County GO, Series B, Pre-Refunded, 6.00%, 3/01/16 ............................ 530,000 568,181
Shelby County Health, Educational and Housing Facilities Board,
Hospital Revenue,
5.00%, 4/01/18 ...................................................................... 1,000,000 983,860
MBIA Insured, 5.30%, 8/01/15 ........................................................ 500,000 509,245
South Fulton IDBR, Tyson Foods, Inc. Project, 6.40%, 10/01/20 ....................... 300,000 330,240
Sullivan County IDBR, Refunding, Brandymill, Series I-A,
GNMA Secured, 6.35%, 7/20/27 ........................................................... 350,000 379,628
Tennessee HDA, Home Ownership Program,
Issue 4A, 6.375%, 7/01/22 ........................................................... 800,000 856,752
Series 3, 5.85%, 7/01/23 ............................................................ 500,000 516,440
Tennessee HDA, Mortgage Finance,
Series A, 6.90%, 7/01/25 ............................................................ 200,000 217,922
Series B, 6.60%, 7/01/25 ............................................................ 215,000 230,966
Series B, MBIA Insured, 6.20%, 7/01/18 .............................................. 630,000 670,874
Tennessee Housing Development Agency
Homeownership, 5.375%, 7/01/23 ......................................................... 1,000,000 1,001,530
Tennessee State Local Development Authority Revenue,
Community Provider Pooled Loan Program, 6.55%, 10/01/23 ............................. 100,000 107,792
Refunding, State Loan Program, Series A,
MBIA Insured, 5.125%, 3/01/22 ......................................................... 150,000 150,273
Tennessee State School Board Authority, Higher
Educational Facilities, Series A, 6.25%, 5/01/22 ...................................... 100,000 106,354
White House Utility District, Robertson and Sumner
Counties Waterworks System Revenue, Refunding, Series B,
FGIC Insured, 5.375%, 1/01/19 ......................................................... 1,890,000 1,925,663
Wilson County COP,
Educational Facilities, 6.125%, 6/30/10 ............................................. $ 220,000 $ 237,764
FSA Insured, 5.25%, 3/30/18 ......................................................... 1,000,000 1,010,460
b Virgin Islands Public Finance Authority Revenue,
Refunding, Senior Lien, Fund Loan Notes, Series A, 5.50%, 10/01/18 ..................... 1,000,000 1,018,760
---------------
Total Long Term Investments (Cost $41,736,665) ...................................... 43,909,447
---------------
a Short Term Investments 2.3%
Metropolitan Nashville Airport Authority Revenue,
Refunding & Improvement, FGIC Insured, Weekly VRDN and Put,
3.90%, 7/01/19 ........................................................................ 100,000 100,000
Puerto Rico Commonwealth Government Development Bank,
Refunding, MBIA Insured, Weekly VRDN and Put,
3.80%, 12/01/15 ....................................................................... 700,000 700,000
Sullivan County IDB, PCB, DATES, Refunding,
Mead Corp. Project, Daily VRDN and Put, 4.00%, 10/01/16 ............................... 100,000 100,000
Tennessee State GO, Series A, Weekly VRDN and Put, 3.90%, 7/02/01 ................... 100,000 100,000
---------------
Total Short Term Investments (Cost $1,000,000) ...................................... 1,000,000
---------------
Total Investments (Cost $42,736,665) 100.9% ......................................... 44,909,447
Other Assets, less Liabilities (.9)% ................................................ (383,610)
---------------
Net Assets 100.0% .................................................................. $44,525,837
===============
</TABLE>
See Glossary of Terms on page 67.
aVariable rate demand notes (VRDNs) are tax-exempt obligations which contain a
floating or variable interest rate adjustment formula and an unconditional right
of demand to receive payment of the principal balance plus accrued interest at
specified dates. bSufficient collateral has been segregated for securities
traded on a when-issued or delayed delivery basis.
FRANKLIN MUNICIPAL SECURITIES TRUST
Financial Highlights
<TABLE>
<CAPTION>
Franklin Washington Municipal Bond Fund
Class I
-----------------------------------------------
Year Ended May 31,
-----------------------------------------------
1998 1997 1996 1995 1994
-----------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year .................... $10.09 $ 9.80 $9.90 $9.55 $9.99
-----------------------------------------------
Income from investment operations:
Net investment income ................................ .57 .58 .56 .56 .51
Net realized and unrealized gains (losses) ........... .41 .29 (.08) .36 (.46)
-----------------------------------------------
Total from investment operations ...................... .98 .87 .48 .92 .05
-----------------------------------------------
Less distributions from:
Net investment income ................................ (.59) (.58) (.58) (.57) (.47)
Net realized gains ................................... -- -- -- -- (.02)
-----------------------------------------------
Total distributions ................................... (.59) (.58) (.58) (.57) (.49)
-----------------------------------------------
Net asset value, end of year .......................... $10.48 $10.09 $9.80 $9.90 $9.55
===============================================
Total return* ......................................... 9.87% 9.04% 4.91% 10.10% 2.88%
Ratios/supplemental data
Net assets, end of year (000's) ....................... $10,376 $8,361 $7,718 $5,741 $4,272
Ratios to average net assets:
Expenses ............................................. .10% .10% .10% .10% .05%
Expenses excluding waiver and payments by affiliate .. .84% .90% .92% 1.05% .71%
Net investment income ................................ 5.54% 5.81% 5.81% 6.13% 5.59%
Portfolio turnover rate ............................... 6.94% 7.73% 19.13% 18.46% 39.52%
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized. Prior to May 1, 1994, dividends from net
investment income were reinvested at the offering price.
See notes to financial statements.
FRANKLIN MUNICIPAL SECURITIES TRUST
Statement of Investments, May 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
Franklin Washington Municipal Bond Fund AMOUNT VALUE
<S> <C> <C>
Long Term Investments 96.7%
Aberdeen GO, Series A, MBIA Insured, 5.80%, 12/01/12 ................................ $100,000 $104,582
Bellevue Water and Sewer Revenue, Refunding, 5.875%, 7/01/10 ........................ 100,000 106,471
Bellingham Housing Authority Revenue,................................................ 200,000 231,078
Cascade Meadows Project, 7.10%, 11/01/23
Refunding, Pacific Rim & Cascade Meadows Projects,
MBIA Insured, Pre-Refunded, 5.20%, 11/01/27 ............................................ 200,000 199,392
Clark County School District No. 114, Evergreen School,
Refunding, AMBAC Insured, 5.95%, 12/01/12 .............................................. 100,000 107,819
Clark County Sewer Revenue, MBIA Insured, 5.70%, 12/01/16 ........................... 200,000 209,310
Conservation and Renewable Energy System Revenue,
Washington Conservation Project, 6.50%, 10/01/14 ....................................... 400,000 433,704
Douglas County PUD No. 1, Electric Systems Revenue,
MBIA Insured, 6.00%, 1/01/15 .......................................................... 100,000 108,455
Federal Way GO, Refunding, 5.85%, 12/01/21 .......................................... 100,000 102,735
Grant County PUD No. 002, Wanapum Hydroelectric Revenue,
Second Series A, 6.375%, 1/01/23 ...................................................... 250,000 264,888
Grant County PUD No. 2, Priest Rapids Hydroelectric Revenue,
Second Series B, MBIA Insured, 5.875%, 1/01/26 ......................................... 100,000 104,729
King County GO, Sewer District, 5.875%, 1/01/15 ..................................... 100,000 106,430
King County Housing Authority Revenue, Woodridge Park Project,
6.25%, 5/01/15 ........................................................................ 175,000 184,609
King County School District No. 400, Mercer Island, 5.90%, 12/01/15 ................. 100,000 106,548
King County School District No. 412, Shoreline, 6.10%, 6/01/13 ...................... 100,000 108,139
King County School District No. 415, Kent, FSA Insured, 5.875%, 6/01/16 ............. 200,000 213,724
Lewis County PUD No. 001, Cowlitz Falls Hydroelectric Project Revenue,
6.00%, 10/01/24 ....................................................................... 200,000 205,674
Pierce County EDC Revenue, Solid Waste, Occidental Petroleum Corp.,
5.80%, 9/01/29 ........................................................................ 375,000 377,381
Pierce County Sewer Revenue, 5.70%, 2/01/17 ......................................... 100,000 104,525
Pilchuck Development Public Corp., Special Facilities
Airport Revenue, Tramco, Inc. Project, B.F. Goodrich, 6.00%, 8/01/23 .................. 800,000 827,640
Port of Seattle Revenue, Series B, 6.00%, 11/01/17 .................................. 200,000 206,144
SeaTac GO, MBIA Insured, 6.50%, 12/01/13 ............................................ 450,000 496,949
Seattle Housing Authority, Low Income Housing Assistance Revenue,
Kin On Project, GNMA Secured, 7.40%, 11/20/36 ......................................... 99,000 112,469
Seattle Municipality Metropolitan Sewer Revenue,
Refunding, Series V, 6.20%, 1/01/32 ................................................... 200,000 210,158
Snohomish County GO, MBIA Insured, 5.90%, 12/01/15 .................................. 100,000 105,903
Snohomish County Housing Authority Revenue, Pooled, 6.30%, 4/01/16 .................. 200,000 211,740
Snohomish County PUD No. 1,
Electric and Generation Systems Revenue, Refunding,
FGIC Insured, 6.00%, 1/01/18 .......................................................... 200,000 211,864
Water Revenue, 5.85%, 11/01/17 ...................................................... 100,000 100,842
Spokane County GO, Refunding, 6.00%, 12/01/14 ....................................... 130,000 141,154
Spokane County Water District No. 3 Revenue,
Refunding, 5.90%, 1/01/14 .............................................................. 100,000 102,049
Stevens County Public Corp., PCR, Refunding,
Water Power Co. Project, 6.00%, 12/01/23 ............................................... 300,000 313,224
Sunnyside GO, MBIA Insured, 6.10%, 12/01/14 ......................................... 100,000 107,815
Tacoma Electric Systems Revenue, Refunding,
FGIC Insured, 6.25%, 1/01/15 ........................................................... 200,000 216,694
Tacoma GO, Series A, MBIA Insured, 5.625%, 12/01/22 ................................. 300,000 311,505
Tacoma Refuse Utility Revenue, AMBAC Insured,
Pre-Refunded, 7.00%, 12/01/19 ......................................................... 100,000 116,986
Tacoma Water Revenue, FGIC Insured, 5.25%, 12/01/16 ................................. 100,000 101,902
University of Washington, Alumni Association,
Lease Revenue, Medical Center Roosevelt II, FSA Insured,
6.30%, 8/15/14 ........................................................................ 500,000 550,835
Washington State COP, Office Building Project,
Series A, MBIA Insured, 6.00%, 4/01/12 ................................................ 100,000 105,014
Washington State Health Care Facilities Authority Revenue,
Multicare Medical Center, FGIC Insured, 5.75%, 8/15/22 .............................. 100,000 103,248
Swedish Health Services, AMBAC Insured, 5.50%, 11/15/28 ............................. 500,000 508,100
Washington State Higher Education Facilities Authority Revenue,
Refunding, Pacific Lutheran University Project,
Connie Lee Insured, 5.70%, 11/01/26 ................................................... 200,000 210,580
Washington State Housing Finance Commission, GNMA/FNMA Secured,
Series 1A-1, 6.25%, 6/01/16 ......................................................... $100,000 $ 107,538
SF Program, Series 1A-3, 6.15%, 12/01/15 ............................................ 200,000 213,538
SF Program, Series 2N, 6.05%, 12/01/16 .............................................. 100,000 105,846
SF Program, Series 3A, 5.75%, 12/01/28 .............................................. 200,000 205,412
Washington State Housing Finance, SFMR, MBS Program, Series A, 7.05%, 7/01/22 ....... 75,000 81,698
Washington State Motor Vehicle Fuel Tax, Series D, 6.00%, 9/01/20 ................... 240,000 257,882
Washington State Public Power Supply System Revenue,
Nuclear Project No. 1, Refunding, Series B, 5.125%, 7/01/17 ........................... 200,000 197,000
Whatcom County School District No. 501, Bellingham, 6.05%, 12/01/13 ................. 100,000 107,076
--------------
Total Long Term Investments (Cost $9,455,289) ....................................... 10,028,998
--------------
a Short Term Investments .9%
Puerto Rico Commonwealth Government Development Bank,
Refunding, MBIA Insured, Weekly VRDN and Put, 3.80%,
12/01/15 (Cost $100,000) .............................................................. 100,000
--------------
Total Investments (Cost $9,555,289) 97.6% ........................................... 10,128,998
Other Assets, less Liabilities 2.4% ................................................. 247,161
--------------
Net Assets 100.0% ................................................................... $10,376,159
==============
</TABLE>
See Glossary of Terms on page 67.
aVariable rate demand notes (VRDNs) are tax-exempt obligations which contain a
floating or variable interest rate adjustment formula and an unconditional right
of demand to receive payment of the principal balance plus accrued interest at
specified dates.
FRANKLIN MUNICIPAL SECURITIES TRUST
Statement of Investments, May 31, 1998 (cont.)
Glossary of Terms:
1915 Act-Improvement Bond Act of 1915
ABAG -The Association of Bay Area Governments
AD -Assessment District
AMBAC -American Municipal Bond Assurance Corp.
CDA -Community Development Authority/Agency
CFD -Community Facilities District
CHFCLP -California Health Facilities Construction Loan Program
COP -Certificate of Participation
DATES -Demand Adjustable Tax-Exempt Securities
EDC -Economic Development Co.
ETM -Escrow to Maturity
FGIC -Financial Guaranty Insurance Corp.
FHA -Federal Housing Authority/Agency
FNMA -Federal National Mortgage Association
FSA -Financial Security Assistance (Some of the securities shown as FSA
Insured were originally insured by Capital Guaranty Insurance Co.
(CGIC) which was acquired by FSA in 1995 and no longer does business
under this name.)
GNMA -Government National Mortgage Association
GO -General Obligation
HDA -Housing Development Authority/Agency
HFA -Housing Finance Authority/Agency
HMR -Home Mortgage Revenue
IDB -Industrial Development Board
IDBR -Industrial Development Board Revenue
IDR -Industrial Development Revenue
MBIA -Municipal Bond Investors Assurance Corp.
MBS -Mortgage Backed Securities
MFHR -Multi-Family Housing Revenue
MFMR -Multi-Family Mortgage Revenue
MFR -Multi-Family Revenue
PBA -Public Building Authority
PCFA -Pollution Control Financing Authority
PCR -Pollution Control Revenue
PUD -Public Utility District
RDA -Redevelopment Agency
SF -Single Family
SFM -Single Family Mortgage
SFMR -Single Family Mortgage Revenue
USD -Unified School District
FRANKLIN MUNICIPAL SECURITIES TRUST
Financial Statements
Statements of Assets and Liabilities
May 31, 1998
<TABLE>
<CAPTION>
Franklin Franklin Franklin Franklin Franklin
Arkansas California Hawaii Tennessee Washington
Municipal High Yield Municipal Municipal Municipal
Bond Fund Municipal Fund Bond Fund Bond Fund Bond Fund
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets:
Investments in securities:
Cost .............................. $28,964,222 $430,987,966 $41,918,493 $42,736,665 $ 9,555,289
===================================================================
Value ............................. 30,112,946 450,728,470 44,363,526 44,909,447 10,128,998
Cash ............................... 127,743 1,324,358 41,328 1,263,580 52,413
Receivables:
Investment securities sold ........ 30,000 -- -- 600,903 --
Capital shares sold ............... 152,352 2,834,381 19,158 158,724 --
Interest .......................... 476,703 8,049,323 911,355 694,439 199,503
Affiliates ........................ 15,732 -- -- -- 9,242
-------------------------------------------------------------------
Total assets .................. 30,915,476 462,936,532 45,335,367 47,627,093 10,390,156
-------------------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased ... 482,015 8,844,968 -- 2,958,932 --
Capital shares redeemed ........... -- 207,752 48,113 3,000 --
Affiliates ........................ -- 386,920 23,373 1,954 --
Shareholders ...................... 18,758 368,681 69,508 81,272 1,626
Distributions to shareholders ...... 37,521 528,687 51,001 51,413 12,371
Other liabilities .................. -- 25,835 5,231 4,685 --
-------------------------------------------------------------------
Total liabilities ............. 538,294 10,362,843 197,226 3,101,256 13,997
-------------------------------------------------------------------
Net assets, at value ......... $30,377,182 $452,573,689 $45,138,141 $44,525,837 $10,376,159
===================================================================
Net assets consist of:
Undistributed net investment
income ............................. $ 43,656 $-- $ 114,350 $ 34,304 $ 33,989
Accumulated distributions in excess
of net investment income ........... -- (6,110) -- -- --
Net unrealized appreciation ........ 1,148,724 19,740,504 2,445,033 2,172,782 573,709
Accumulated net realized gain (loss) (29,535) (2,280,993) (545,809) 135,848 (126,686)
Capital shares ..................... 29,214,337 435,120,288 43,124,567 42,182,903 9,895,147
-------------------------------------------------------------------
Net assets, at value .......... $30,377,182 $452,573,689 $45,138,141 $44,525,837 $10,376,159
===================================================================
Franklin Franklin Franklin Franklin Franklin
Arkansas California Hawaii Tennessee Washington
Municipal High Yield Municipal Municipal Municipal
Bond Fund Municipal Fund Bond Fund Bond Fund Bond Fund
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class I:
Net assets, at value ............... $30,377,182 $412,210,656 $45,138,141 $44,525,837 $10,376,159
===================================================================
Shares outstanding ................. 2,763,059 38,697,871 4,043,306 3,949,484 989,775
===================================================================
Net asset value per share* ......... $10.99 $10.65 $11.16 $11.27 $10.48
===================================================================
Maximum offering price per share
(net asset value per share / 95.75%) $11.48 $11.12 $11.66 $11.77 $10.95
===================================================================
Class II:
Net assets, at value ............... -- $ 40,363,033 -- -- --
===================================================================
Shares outstanding ................. -- 3,780,428 -- -- --
===================================================================
Net asset value per share* ......... -- $10.68 -- -- --
===================================================================
Maximum offering price per share
(net asset value per share / 99%) .. -- $10.79 -- -- --
===================================================================
*Redemption price is equal to net asset value less any applicable contingent
deferred sales charge.
See notes to financial statements.
FRANKLIN MUNICIPAL SECURITIES TRUST
Financial Statements (continued)
Statements of Operations
for the year ended May 31, 1998
Franklin Franklin Franklin Franklin Franklin
Arkansas California Hawaii Tennessee Washington
Municipal High Yield Municipal Municipal Municipal
Bond Fund Municipal Fund Bond Fund Bond Fund Bond Fund
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment income:
Interest ........................... $1,164,643 $20,243,392 $2,466,298 $2,007,687 $529,641
-------------------------------------------------------------------
Expenses:
Management fees (Note 3) ........... 134,808 1,729,049 269,392 227,268 58,648
Distribution fees (Note 3)
Class I ........................... 22,637 310,913 44,292 37,949 10,263
Class II .......................... -- 150,863 -- -- --
Transfer agent fees (Note 3) ....... 7,015 93,561 17,684 10,574 3,387
Custodian fees ..................... 228 3,726 472 414 97
Reports to shareholders ............ 3,363 43,068 8,058 5,541 1,719
Registration and filing fees ....... 5,693 38,148 1,746 7,128 2,186
Professional fees .................. 1,575 24,602 2,634 2,863 559
Other .............................. 2,685 11,157 3,503 4,234 2,334
-------------------------------------------------------------------
Total expenses ................ 178,004 2,405,087 347,781 295,971 79,193
Expenses waived/paid by affiliate
(Note 3) ........................... (156,504) (1,121,780) (175,429) (150,761) (69,815)
-------------------------------------------------------------------
Net expenses ................ 21,500 1,283,307 172,352 145,210 9,378
-------------------------------------------------------------------
Net investment income ...... 1,143,143 18,960,085 2,293,946 1,862,477 520,263
-------------------------------------------------------------------
Realized and unrealized gains:
Net realized gain (loss) from investments 5,532 (116,948) 246,873 201,405 2,260
Net unrealized appreciation on investments 834,896 15,006,888 1,170,843 1,488,290 345,821
-------------------------------------------------------------------
Net realized and unrealized gain .... 840,428 14,889,940 1,417,716 1,689,695 348,081
-------------------------------------------------------------------
Net increase in net assets resulting
from operations .................... $1,983,571 $33,850,025 $3,711,662 $3,552,172 $868,344
===================================================================
</TABLE>
See notes to financial statements.
FRANKLIN MUNICIPAL SECURITIES TRUST
Financial Statements (continued)
Statements of Changes in Net Assets
for the years ended May 31, 1998 and 1997
<TABLE>
<CAPTION>
Franklin Arkansas Franklin California High Franklin Hawaii
Municipal Bond Fund Yield Municipal Fund Municipal Bond Fund
----------------------------------------------------------------------------------------
1998 1997 1998 1997 1998 1997
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income .... $ 1,143,143 $ 588,356 $ 18,960,085 $ 10,701,441 $ 2,293,946 $ 2,197,925
Net realized gain (loss)
from investments .......... 5,532 4,094 (116,948) (119,287) 246,873 51,434
Net unrealized appreciation
on investments ............ 834,896 272,692 15,006,888 4,691,793 1,170,843 857,481
----------------------------------------------------------------------------------------
Net increase in net
assets resulting from
operations ................ 1,983,571 865,142 33,850,025 15,273,947 3,711,662 3,106,840
Distributions to shareholders
from:
Net investment income:
Class I ............... (1,144,675) (580,057) (17,741,641) (10,372,492) (2,307,589) (2,194,657)
Class II .............. -- -- (1,199,464) (347,490) -- --
In excess of net
investment income:
Class I .............. -- -- -- (24,277) -- --
Class II ............. -- -- -- (813) -- --
----------------------------------------------------------------------------------------
Total distributions to
shareholders .............. (1,144,675) (580,057) (18,941,105) (10,745,072) (2,307,589) (2,194,657)
Capital share transactions:
(Note 2)
Class I ................ 16,397,936 4,689,718 184,852,793 90,671,188 3,731,394 285,742
Class II ............... -- -- 28,791,162 10,295,368 -- --
----------------------------------------------------------------------------------------
Total capital share
transactions .............. 16,397,936 4,689,718 213,643,955 100,966,556 3,731,394 285,742
Net increase in
net assets ................ 17,236,832 4,974,803 228,552,875 105,495,431 5,135,467 1,197,925
Net assets:
Beginning of year ......... 13,140,350 8,165,547 224,020,814 118,525,383 40,002,674 38,804,749
----------------------------------------------------------------------------------------
End of year ............... $30,377,182 $13,140,350 $452,573,689 $224,020,814 $45,138,141 $40,002,674
========================================================================================
Undistributed net investment income
(accumulated distributions in excess of net
investment income) included in net assets
End of year .............. $ 43,656 $ 45,188 $ (6,110) $ (25,090) $ 114,350 $ 127,993
========================================================================================
Franklin Tennessee Franklin Washington
Municipal Bond Fund Municipal Bond Fund
-------------------------------------------------------------------
1998 1997 1998 1997
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 1,862,477 $ 1,061,715 $ 520,263 $ 464,255
Net realized gain (loss) from investments 201,405 (277) 2,260 (4,404)
Net unrealized appreciation on investments 1,488,290 561,758 345,821 228,610
-------------------------------------------------------------------
Net increase in net assets resulting
from operations 3,552,172 1,623,196 868,344 688,461
Distributions to shareholders from net
investment income (1,851,295) (1,084,118) (526,988) (460,520)
Capital share transactions (Note 2) 16,116,499 12,213,104 1,674,114 414,786
-------------------------------------------------------------------
Net increase in net assets 17,817,376 12,752,182 2,015,470 642,727
Net assets:
Beginning of year 26,708,461 13,956,279 8,360,689 7,717,962
-------------------------------------------------------------------
End of year $44,525,837 $26,708,461 $10,376,159 $8,360,689
===================================================================
Undistributed net investment income included
in net assets
End of year $ 34,304 $ 23,122 $ 33,989 $ 40,714
===================================================================
</TABLE>
See notes to financial statements.
FRANKLIN MUNICIPAL SECURITIES TRUST
Notes to Financial Statements
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Municipal Securities Trust (the Trust) is registered under the
Investment Company Act of 1940 as an open-end, non-diversified investment
company, consisting of five separate series (the Funds). The Funds and their
investment objective are to provide tax-free income.
The following summarizes the Funds' significant accounting policies.
a. Security Valuation
Tax-free bonds generally trade in the over-the-counter market and are valued
within the range of the latest quoted bid and asked prices. In the absence of a
sale or reported bid and asked prices, information with respect to bond and note
transactions, quotations from bond dealers, market transactions in comparable
securities, and various relationships between securities are used to determine
the value of the security. The Trust 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. Securities for
which market quotations are not readily available are valued at fair value as
determined by management in accordance with procedures established by the Board
of Trustees.
b. Income Taxes
No provision has been made for income taxes because each Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and
distribute all of its taxable income.
c. Security Transactions, Investment Income, Expenses and Distributions
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Interest income and estimated expenses are accrued daily. Bond discount and
premium are amortized on an income tax basis. Dividends from net investment
income are normally declared daily and distributed monthly to shareholders.
Other distributions are recorded on the ex-dividend date.
Common expenses incurred by the Trust are allocated among the Funds based on the
ratio of net assets of each Fund to the combined net assets. Other expenses are
charged to each Fund on a specific identification basis.
Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class.
d. 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.
2. SHARES OF BENEFICIAL INTEREST
The Franklin California High Yield Municipal Fund offers two classes of shares:
Class I and Class II. The shares have the same rights except for their initial
sales load, distribution fees, voting rights on matters affecting a single class
and the exchange privilege of each class.
2. SHARES OF BENEFICIAL INTEREST (cont.)
At May 31, 1998, there were an unlimited number of shares authorized (no par
value). Transactions in the Fund's shares were as follows:
<TABLE>
<CAPTION>
Franklin Arkansas Franklin California
Municipal Bond Fund High Yield Municipal Fund
----------------------------------------------------
Shares Amount Shares Amount
----------------------------------------------------
<S> <C> <C> <C> <C>
Class I Shares:
1998
Shares sold .......................................... 1,545,732 $16,752,477 22,284,623 $234,404,399
Shares issued in reinvestment of distributions ....... 57,600 625,362 663,035 6,974,790
Shares redeemed ...................................... (90,387) (979,903) (5,372,964) (56,526,396)
--------------------------------------------------
Net increase .......................................... 1,512,945 $16,397,936 17,574,694 $184,852,793
==================================================
1997
Shares sold .......................................... 470,751 $ 4,901,027 11,958,887 $119,678,964
Shares issues in reinvestment of distributions ....... 36,550 380,970 372,489 3,734,093
Shares redeemed ...................................... (57,166) (592,279) (3,267,236) (32,741,869)
--------------------------------------------------
Net increase .......................................... 450,135 $ 4,689,718 9,064,140 $ 90,671,188
==================================================
Class II Shares:
1998
Shares sold .......................................... 2,979,250 $ 31,420,783
Shares issued in reinvestment of distributions ....... 51,598 545,089
Shares redeemed ...................................... (300,304) (3,174,710)
------------------------
Net increase .......................................... 2,730,544 $ 28,791,162
========================
1997
Shares sold .......................................... 1,204,172 $ 12,057,953
Shares issues in reinvestment of distributions ....... 19,594 197,069
Shares redeemed ...................................... (195,499) (1,959,654)
------------------------
Net increase .......................................... 1,028,267 $ 10,295,368
========================
Franklin Hawaii Franklin Tennessee
Municipal Bond Fund Municipal Bond Fund
----------------------------------------------------
Shares Amount Shares Amount
----------------------------------------------------
<S> <C> <C> <C> <C>
Class I Shares:
1998
Shares sold .......................................... 779,362 $8,639,651 1,961,959 $21,692,685
Shares issued in reinvestment of distributions ....... 74,894 830,944 103,474 1,149,741
Shares redeemed ...................................... (517,067) (5,739,201) (609,509) (6,725,927)
--------------------------------------------------
Net increase .......................................... 337,189 $3,731,394 1,455,924 $16,116,499
==================================================
1997
Shares sold .......................................... 790,934 $8,525,981 1,355,345 $14,372,546
Shares issues in reinvestment of distributions ....... 80,695 866,517 64,058 680,991
Shares redeemed ...................................... (847,717) (9,106,756) (267,495) (2,840,433)
--------------------------------------------------
Net increase .......................................... 23,912 $ 285,742 1,151,908 $12,213,104
==================================================
2. SHARES OF BENEFICIAL INTEREST (cont.)
Franklin Washington
Municipal Bond Fund
----------------------
Shares Amount
----------------------
<S> <C> <C>
Class I Shares:
1998
Shares sold .......................................... 187,538 $1,946,679
Shares issued in reinvestment of distributions ....... 35,472 368,307
Shares redeemed ...................................... (61,822) (640,872)
----------------------
Net increase .......................................... 161,188 $1,674,114
======================
1997
Shares sold .......................................... 103,811 $1,037,350
Shares issues in reinvestment of distributions ....... 32,188 322,025
Shares redeemed ...................................... (94,809) (944,589)
----------------------
Net increase .......................................... 41,190 $ 414,786
======================
</TABLE>
3. TRANSACTIONS WITH AFFILIATES
Certain officers and trustees of the Trust are also officers or directors of
Franklin/Templeton Distributors, Inc. (Distributors), Franklin Advisers, Inc.
(Advisers), Franklin/Templeton Investor Services, Inc. (Investor Services), and
Franklin Templeton Services, Inc. (FT Services), the Fund's principal
underwriter, investment manager, transfer agent, and administrative manager,
respectively.
The Funds pay an investment management fee to Advisers based on the average net
assets of the Funds as follows:
Annualized
Fee Rate Month-End Net Assets
- -------------------------------------------------------------------------------
0.625% First $100 million
0.50% Over $100 million, up to and including $250 million 0.45% In
excess of $250 million
Under an agreement with Advisers, FT Services provides administrative services
to the Funds. The fee is paid by Advisers based on average daily net assets, and
is not an additional expense of the Funds.
Advisers agreed in advance to waive management fees and assume payment of other
expenses for the Funds, through 5/31/98, as noted in the the Statements of
Operations.
The Franklin Hawaii Municipal Bond Fund reimburses Distributors up to 0.10% per
year of its average daily net assets, the Franklin Arkansas Municipal Bond,
Franklin Tennessee Municipal Bond and Franklin Washington Municipal Bond Funds
reimburse Distributors up to 0.15% per year of the Funds' average daily net
assets, and the Franklin California High Yield Municipal Fund reimburses
Distributors up to 0.15% and 0.65% per year of the average daily net assets of
Class I and Class II, respectively, for costs in marketing the Funds' shares.
3. TRANSACTIONS WITH AFFILIATES (cont.)
<TABLE>
<CAPTION>
Distributors received (paid) net commissions on sales of the Funds' shares, and
received contingent deferred sales charges for the year as follows:
Franklin Franklin Franklin Franklin Franklin
Arkansas California Hawaii Tennessee Washington
Municipal High Yield Municipal Municipal Municipal
Bond Fund Municipal Fund Bond Fund Bond Fund Bond Fund
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net commissions received (paid) .................. $1,553 $(595,523) $17,991 $27,859 $2,028
Contingent deferred sales charges ................ $-- $ 4,213 $-- $-- $--
4. INCOME TAXES
At May 31, 1998, the Funds had tax basis capital losses which may be carried
over to offset future capital gains. Such losses expire as follows:
Franklin Franklin Franklin Franklin
Arkansas California Hawaii Washington
Municipal High Yield Municipal Municipal
Bond Fund Municipal Fund Bond Fund Bond Fund
--------------------------------------------
<S> <C> <C> <C> <C>
Capital loss carryovers expiring in: 2003 $29,535 $1,431,250 $474,475 $ 82,647
2004 .......................... -- 4,508 64,421 39,744
2005 .......................... -- 390,400 -- --
2006 .......................... -- -- -- --
--------------------------------------------
$29,535 $1,826,158 $538,896 $122,391
============================================
</TABLE>
At May 31, 1998 the Franklin California High Yield Municipal Fund and the
Franklin Washington Municipal Bond Fund have deferred capital losses occurring
subsequent to October 31, 1997 of $454,835 and $4,295, respectively. For tax
purposes, such losses will be reflected in the year ending May 31, 1999.
Net realized capital gains (losses) differ for financial statement and tax
purposes primarily due to differing treatment of wash sales.
At May 31, 1998, the net unrealized appreciation based on the cost of
investments for income tax purposes was as follows:
<TABLE>
<CAPTION>
Franklin Franklin Franklin Franklin Franklin
Arkansas California Hawaii Tennessee Washington
Municipal High Yield Municipal Municipal Municipal
Bond Fund Municipal Fund Bond Fund Bond Fund Bond Fund
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investments at cost ........................ $28,964,222 $430,987,966 $41,925,406 $42,736,665 $9,555,289
=============================================================
Unrealized appreciation ..................... $ 1,149,708 $ 20,818,236 $ 2,444,351 $ 2,172,782 $ 577,997
Unrealized depreciation ..................... (984) (1,077,732) (6,231) -- (4,288)
-------------------------------------------------------------
Net unrealized appreciation ................. $ 1,148,724 $ 19,740,504 $ 2,438,120 $ 2,172,782 $ 573,709
=============================================================
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the year
ended May 31, 1998 were as follows:
Franklin Franklin Franklin Franklin Franklin
Arkansas California Hawaii Tennessee Washington
Municipal High Yield Municipal Municipal Municipal
Bond Fund Municipal Fund Bond Fund Bond Fund Bond Fund
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Purchases ................................... $20,239,957 $334,005,108 $13,578,332 $30,524,425 $2,342,713
Sales ....................................... $ 3,912,189 $123,644,872 $ 9,769,645 $13,831,476 $ 625,619
</TABLE>
6. CREDIT RISK
The Funds have investments in excess of 10% of their total net assets in their
respective states. Such concentration may subject the Funds more significantly
to economic changes occurring within those states.
FRANKLIN MUNICIPAL SECURITIES TRUST
Independent Auditor's Report
To the Shareholders and Board of Directors
Of the Franklin Municipal Securities Trust
We have audited the accompanying statements of assets and liabilities of the
Funds comprising the Franklin Municipal Securities Trust, including each Fund's
statement of investments as of May 31, 1998, and the related statements of
operations 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 Trust'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 May
31, 1998, 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 each
of the Funds comprising Franklin Municipal Securities Trust as of May 31, 1998,
the results of their operations for the year then ended, the changes in their
net assets for each of the two years in the period then ended, and their
financial highlights for each of the periods presented, in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
San Francisco, California
June 26, 1998
FRANKLIN MUNICIPAL SECURITIES TRUST
Tax Information
Under Section 852(b)(5)(A) of the Internal Revenue Code, the Trust hereby
designates 100% of the distributions paid from net investment income as
exempt-interest dividends for the fiscal year ended May 31, 1998.
Franklin Municipal Securities Trust
Annual Report
May 31, 1998.
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 credit quality breakdown of the Franklin
Arkansas Municipal Bond Fund based on total long-term investments as of
5/31/98.
AAA 43.8%
AA 10.5%
A 18.7%
BBB 27.0%
GRAPHIC MATERIAL (2)
This chart shows the portfolio breakdown by sector based on the percentage of
total long-term investments on 5/31/98 for the Franklin Arkansas Municipal
Bond Fund.
Utilities 20.5%
Industrial 15.3%
Hospitals 11.1%
Education 8.8%
Housing 8.4%
General Obligation 7.8%
Sales Tax 7.1%
Prerefunded 2.7%
Transportation 2.1%
Other Revenue 16.2%
GRAPHIC MATERIAL (3)
This chart shows in bar format the comparison between Franklin Arkansas
Municipal Bond Fund's Class I distribution rate of 5.02% and the taxable
equivalent rate of 8.94% on 5/31/98.
GRAPHIC MATERIAL (4)
This chart shows the dividend distributions for Franklin Arkansas Municipal
Bond Fund's Class I from 6/1/97 to 5/31/98.
June 4.9 cents
July 4.9 cents
August 4.9 cents
September 4.9 cents
October 4.9 cents
November 4.9 cents
December 4.9 cents
January 4.9 cents
February 4.9 cents
March 4.8 cents
April 4.8 cents
May 4.8 cents
Total 58.5 cents
GRAPHIC MATERIAL (5)
The following line graph compares the performance of the Franklin Arkansas
Municipal Bond Fund's shares to that of the Lehman Brothers Municipal Bond
Index, and to the Consumer Price Index based on a $10,000 investment from
5/10/94 to 5/31/98.
- -------------------------------------------------------
Date Franklin Arkansas Lehman CPI
Municipal Brothers
Bond Fund-Class I Municipal Bond
Index
- -------------------------------------------------------
5/10/94 $9,579 $10,000 $10,000
5/31/94 $9,636 0.59% $10,059 0.05% $10,005
6/30/94 $9,550 -0.61% $9,998 0.34% $10,039
7/31/94 $9,722 1.83% $10,181 0.27% $10,066
8/31/94 $9,741 0.35% $10,216 0.40% $10,106
9/30/94 $9,565 -1.47% $10,066 0.27% $10,133
10/31/94 $9,271 -1.78% $9,887 0.07% $10,141
11/30/94 $8,978 -1.81% $9,708 0.13% $10,154
12/31/94 $9,268 2.20% $9,921 0.00% $10,154
1/31/95 $9,608 2.86% $10,205 0.40% $10,194
2/28/95 $9,930 2.91% $10,502 0.40% $10,235
3/31/95 $10,017 1.15% $10,623 0.33% $10,269
4/30/95 $10,045 0.12% $10,636 0.33% $10,303
5/31/95 $10,322 3.19% $10,975 0.20% $10,323
6/30/95 $10,219 -0.87% $10,879 0.20% $10,344
7/31/95 $10,268 0.95% $10,983 0.00% $10,344
8/31/95 $10,388 1.27% $11,122 0.26% $10,371
9/30/95 $10,487 0.63% $11,192 0.20% $10,392
10/31/95 $10,648 1.45% $11,355 0.33% $10,426
11/30/95 $10,830 1.66% $11,543 -0.07% $10,419
12/31/95 $10,952 0.96% $11,654 -0.07% $10,411
1/31/96 $11,002 0.76% $11,743 0.59% $10,473
2/29/96 $10,907 -0.68% $11,663 0.32% $10,506
3/31/96 $10,781 -1.28% $11,513 0.52% $10,561
4/30/96 $10,759 -0.28% $11,481 0.39% $10,602
5/31/96 $10,800 -0.04% $11,477 0.19% $10,622
6/30/96 $10,947 1.09% $11,602 0.06% $10,629
7/31/96 $11,042 0.91% $11,707 0.19% $10,649
8/31/96 $11,030 -0.02% $11,705 0.19% $10,669
9/30/96 $11,211 1.40% $11,869 0.32% $10,703
10/31/96 $11,351 1.13% $12,003 0.32% $10,737
11/30/96 $11,534 1.83% $12,223 0.19% $10,758
12/31/96 $11,489 -0.42% $12,171 0.00% $10,758
1/31/97 $11,499 0.19% $12,194 0.32% $10,792
2/28/97 $11,619 0.92% $12,307 0.31% $10,826
3/31/97 $11,474 -1.33% $12,143 0.25% $10,853
4/30/97 $11,584 0.84% $12,245 0.12% $10,866
5/31/97 $11,761 1.51% $12,430 -0.06% $10,859
6/30/97 $11,883 1.07% $12,563 0.12% $10,872
7/31/97 $12,219 2.77% $12,911 0.12% $10,885
8/31/97 $12,105 -0.94% $12,789 0.19% $10,906
9/30/97 $12,274 1.19% $12,942 0.25% $10,933
10/31/97 $12,353 0.64% $13,024 0.25% $10,961
11/30/97 $12,455 0.59% $13,101 -0.06% $10,954
12/31/97 $12,649 1.46% $13,293 -0.12% $10,941
1/31/98 $12,763 1.03% $13,429 0.19% $10,962
2/28/98 $12,762 0.03% $13,433 0.19% $10,983
3/31/98 $12,795 0.09% $13,446 0.19% $11,003
4/30/98 $12,780 -0.45% $13,385 0.18% $11,023
5/31/98 $12,9781.55% 1.58% $13,597 0.18% $11,043
Total 29.78% 35.97% 10.43%
Return
- -------------------------------------------------------
GRAPHIC MATERIAL (6)
This chart shows in pie format the credit quality breakdown of the Franklin
California Municipal Fund based on total long-term investments as of 5/31/98.
AAA 12.8%
AA 5.3%
A 16.8%
BBB 45.6%
Below Investment Grade 19.5%
GRAPHIC MATERIAL (7)
This chart shows the portfolio breakdown by sector based on the percentage of
total long-term investments on 5/31/98 for the Franklin California Municipal
Fund.
Transportation 20.8%
Tax Allocation Bonds 14.7%
Mello-Roos Bonds 11.6%
Certificates of Participation 7.5%
Hospitals 7.3%
Utilities 7.2%
Housing 6.8%
Special Assessment Bonds 5.0%
Education 4.3%
Prerefunded 3.6%
Marks-Roos Bonds 2.6%
Industrial Revenue Bonds 1.5%
General Obligation 1.4%
Health Care 1.3%
Other Revenue 4.4%
GRAPHIC MATERIAL (8)
This chart shows in bar format the comparison between Franklin California
Municipal Fund's Class I distribution rate of 5.40% and the taxable
equivalent rate of 9.86% on 5/31/98.
GRAPHIC MATERIAL (9)
This chart shows the dividend distributions for Franklin California Municipal
Fund's Class I from 6/1/97 to 5/31/98.
June 5.2 cents
July 5.2 cents
August 5.2 cents
September 5.2 cents
October 5.2 cents
November 5.2 cents
December 5.2 cents
January 5.2 cents
February 5.2 cents
March 5.0 cents
April 5.0 cents
May 5.0 cents
Total 61.8 cents
GRAPHIC MATERIAL (10)
The following line graph compares the performance of the Franklin California
Municipal Fund's Class I shares to that of the Lehman Brothers Municipal Bond
Index, and to the Consumer Price Index based on a $10,000 investment from
5/3/93 to 5/31/98.
- ------------------------------------------------------
Date Franklin California Lehman CPI
High Yield Brothers
Municipal Fund-Class I Municipal
Bond
Index
- ------------------------------------------------------
5/3/93 $9,579 $10,000 $10,000
5/31/93 $9,550 0.56% $10,056 0.14% $10,014
6/30/93 $9,713 1.67% $10,224 0.14% $10,028
7/31/93 $9,703 0.13% $10,237 0.00% $10,028
8/31/93 $9,909 2.08% $10,450 0.28% $10,056
9/30/93 $10,059 1.14% $10,569 0.21% $10,077
10/31/93 $10,092 0.19% $10,589 0.41% $10,119
11/30/93 $10,039 -0.88% $10,496 0.07% $10,126
12/31/93 $10,223 2.11% $10,718 0.00% $10,126
1/31/94 $10,346 1.14% $10,840 0.27% $10,153
2/28/94 $10,183 -2.59% $10,559 0.34% $10,187
3/31/94 $9,726 -4.07% $10,129 0.34% $10,222
4/30/94 $9,759 0.85% $10,215 0.14% $10,236
5/31/94 $9,843 0.87% $10,304 0.07% $10,244
6/30/94 $9,744 -0.61% $10,241 0.34% $10,278
7/31/94 $9,931 1.83% $10,429 0.27% $10,306
8/31/94 $10,006 0.35% $10,465 0.40% $10,347
9/30/94 $9,906 -1.47% $10,312 0.27% $10,375
10/31/94 $9,763 -1.78% $10,128 0.07% $10,383
11/30/94 $9,538 -1.81% $9,945 0.13% $10,396
12/31/94 $9,604 2.20% $10,163 0.00% $10,396
1/31/95 $9,892 2.86% $10,454 0.40% $10,438
2/28/95 $10,181 2.91% $10,758 0.40% $10,479
3/31/95 $10,397 1.15% $10,882 0.33% $10,514
4/30/95 $10,453 0.12% $10,895 0.33% $10,549
5/31/95 $10,736 3.19% $11,243 0.20% $10,570
6/30/95 $10,631 -0.87% $11,145 0.20% $10,591
7/31/95 $10,678 0.95% $11,251 0.00% $10,591
8/31/95 $10,793 1.27% $11,394 0.26% $10,618
9/30/95 $10,898 0.63% $11,465 0.20% $10,640
10/31/95 $11,069 1.45% $11,632 0.33% $10,675
11/30/95 $11,264 1.66% $11,825-0.07% $10,667
12/31/95 $11,427 0.96% $11,938-0.07% $10,660
1/31/96 $11,489 0.76% $12,029 0.59% $10,723
2/29/96 $11,403 -0.68% $11,947 0.32% $10,757
3/31/96 $11,296 -1.28% $11,794 0.52% $10,813
4/30/96 $11,279 -0.28% $11,761 0.39% $10,855
5/31/96 $11,330 -0.04% $11,757 0.19% $10,876
6/30/96 $11,509 1.09% $11,885 0.06% $10,882
7/31/96 $11,585 0.91% $11,993 0.19% $10,903
8/31/96 $11,602 -0.02% $11,990 0.19% $10,924
9/30/96 $11,792 1.40% $12,158 0.32% $10,959
10/31/96 $11,936 1.13% $12,296 0.32% $10,994
11/30/96 $12,153 1.83% $12,521 0.19% $11,015
12/31/96 $12,131 -0.42% $12,468 0.00% $11,015
1/31/97 $12,134 0.19% $12,492 0.32% $11,050
2/28/97 $12,257 0.92% $12,607 0.31% $11,084
3/31/97 $12,137 -1.33% $12,439 0.25% $11,112
4/30/97 $12,262 0.84% $12,544 0.12% $11,125
5/31/97 $12,424 1.51% $12,733-0.06% $11,119
6/30/97 $12,598 1.07% $12,869 0.12% $11,132
7/31/97 $12,947 2.77% $13,226 0.12% $11,145
8/31/97 $12,887 -0.94% $13,101 0.19% $11,166
9/30/97 $13,127 1.19% $13,257 0.25% $11,194
10/31/97 $13,231 0.64% $13,342 0.25% $11,222
11/30/97 $13,347 0.59% $13,421-0.06% $11,216
12/31/97 $13,553 1.46% $13,617-0.12% $11,202
1/31/98 $13,670 1.03% $13,757 0.19% $11,223
2/28/98 $13,685 0.03% $13,761 0.19% $11,245
3/31/98 $13,685 0.09% $13,774 0.19% $11,266
4/30/98 $13,672 -0.45% $13,712 0.18% $11,286
5/31/98 $13,893 1.62% 1.58% $13,928 0.18% $11,307
Total 38.93% 39.28% 13.07%
Return
- ------------------------------------------------------
GRAPHIC MATERIAL (11)
This chart shows in bar format the comparison between Franklin California
Municipal Fund's Class II distribution rate of 4.93% and the taxable
equivalent rate of 9.00% on 5/31/98.
GRAPHIC MATERIAL (12)
This chart shows the dividend distributions for Franklin California Municipal
Fund's Class II from 6/1/97 to 5/31/98.
June 4.73 cents
July 4.73 cents
August 4.73 cents
September 4.70 cents
October 4.70 cents
November 4.70 cents
December 4.70 cents
January 4.97 cents
February 4.97 cents
March 4.77 cents
April 4.43 cents
May 4.43 cents
Total 56.56 cents
GRAPHIC MATERIAL (13)
The following line graph compares the performance of the Franklin California
Municipal Fund's Class II shares to that of the Lehman Brothers Municipal
Bond Index, and to the Consumer Price Index based on a $10,000 investment
from 5/1/96 to 5/31/98.
- -----------------------------------------------------------------
Date Franklin California Lehman Brothers CPI
High Yield Municipal Bond
Municipal Fund-Class II Index
- -----------------------------------------------------------------
5/1/96 $9,899 $10,000 $10,000
5/31/96 $9,937 -0.04% $9,996 0.19% $10,019
6/28/96 $10,080 1.09% $10,105 0.06% $10,025
7/31/96 $10,152 0.91% $10,197 0.19% $10,044
8/30/96 $10,153 -0.02% $10,195 0.19% $10,063
9/30/96 $10,316 1.40% $10,338 0.32% $10,095
10/31/96 $10,436 1.13% $10,454 0.32% $10,128
11/29/96 $10,620 1.83% $10,646 0.19% $10,147
12/31/96 $10,606 -0.42% $10,601 0.00% $10,147
1/31/97 $10,601 0.19% $10,621 0.32% $10,179
2/28/97 $10,701 0.92% $10,719 0.31% $10,211
3/31/97 $10,601 -1.33% $10,576 0.25% $10,236
4/30/97 $10,694 0.84% $10,665 0.12% $10,249
5/31/97 $10,841 1.51% $10,826 -0.06% $10,243
6/30/97 $10,977 1.07% $10,942 0.12% $10,255
7/31/97 $11,287 2.77% $11,245 0.12% $10,267
8/31/97 $11,230 -0.94% $11,139 0.19% $10,287
9/30/97 $11,433 1.19% $11,272 0.25% $10,312
10/31/97 $11,518 0.64% $11,344 0.25% $10,338
11/30/97 $11,624 0.59% $11,411 -0.06% $10,332
12/31/97 $11,786 1.46% $11,578 -0.12% $10,320
1/31/98 $11,896 1.03% $11,697 0.19% $10,339
2/28/98 $11,896 0.03% $11,700 0.19% $10,359
3/31/98 $11,893 0.09% $11,711 0.19% $10,379
4/30/98 $11,875 -0.45% $11,658 0.18% $10,397
5/31/98 $12,072 1.65% 1.58% $11,842 0.18% $10,416
Total 20.72% 18.42% 4.16%
Return
- -----------------------------------------------------------------
GRAPHIC MATERIAL (14)
This chart shows in pie format the credit quality breakdown of the Franklin
Hawaii Municipal Bond Fund based on total long-term investments as of 5/31/98.
AAA 44.7%
AA 16.5%
A 22.1%
BBB 16.7%
GRAPHIC MATERIAL (15)
This chart shows the portfolio breakdown by sector based on the percentage of
total long-term investments on 5/31/98 for the Franklin Hawaii Municipal Bond
Fund.
Hospitals 24.9%
Utilities 22.6%
Transportation 18.5%
Prerefunded 11.4%
Housing 9.5%
General Obligation 7.7%
Industrial 1.0%
Other Revenue 4.4%
GRAPHIC MATERIAL (16)
This chart shows in bar format the comparison between Franklin Hawaii
Municipal Bond Fund's Class I distribution rate of 5.04% and the taxable
equivalent rate of 9.27% on 5/31/98.
GRAPHIC MATERIAL (17)
This chart shows the dividend distributions for Franklin Hawaii Municipal
Bond Fund from 6/1/97 to 5/31/98.
June 5.0 cents
July 5.0 cents
August 5.0 cents
September 5.0 cents
October 5.0 cents
November 5.0 cents
December 5.0 cents
January 5.0 cents
February 5.0 cents
March 4.9 cents
April 4.9 cents
May 4.9 cents
Total 59.7 cents
GRAPHIC MATERIAL (18)
The following line graph compares the performance of the Franklin Hawaii
Municipal Bond Fund's shares to that of the Lehman Brothers Municipal Bond
Index, and to the Consumer Price Index based on a $10,000 investment from
2/26/92 to 5/31/98.
- --------------------------------------------------------------------------------
Date Franklin Hawaii Municipal Bond Lehman Brothers CPI
Fund-Class I Municipal
Bond Index
- --------------------------------------------------------------------------------
2/26/92 $9,579 $10,000 $10,000
2/29/92 $9,579 0.00% $10,000 0.04% $10,004
3/31/92 $9,579 0.04% $10,004 0.51% $10,055
4/30/92 $9,684 0.89% $10,093 0.14% $10,069
5/31/92 $9,804 1.18% $10,212 0.14% $10,083
6/30/92 $9,924 1.68% $10,384 0.36% $10,119
7/31/92 $10,326 3.00% $10,696 0.21% $10,140
8/31/92 $10,166 -0.98% $10,591 0.28% $10,169
9/30/92 $10,171 0.65% $10,660 0.28% $10,197
10/31/92 $10,008 -0.98% $10,555 0.35% $10,233
11/30/92 $10,280 1.79% $10,744 0.14% $10,247
12/31/92 $10,453 1.02% $10,854 -0.07% $10,240
1/31/93 $10,596 1.16% $10,980 0.49% $10,290
2/28/93 $10,940 3.62% $11,377 0.35% $10,326
3/31/93 $10,923 -1.06% $11,256 0.35% $10,363
4/30/93 $10,996 1.01% $11,370 0.28% $10,392
5/31/93 $11,058 0.56% $11,434 0.14% $10,406
6/30/93 $11,273 1.67% $11,625 0.14% $10,421
7/31/93 $11,293 0.13% $11,640 0.00% $10,421
8/31/93 $11,531 2.08% $11,882 0.28% $10,450
9/30/93 $11,718 1.14% $12,017 0.21% $10,472
10/31/93 $11,760 0.19% $12,040 0.41% $10,515
11/30/93 $11,603 -0.88% $11,934 0.07% $10,522
12/31/93 $11,897 2.11% $12,186 0.00% $10,522
1/31/94 $12,035 1.14% $12,325 0.27% $10,550
2/28/94 $11,674 -2.59% $12,006 0.34% $10,586
3/31/94 $11,011 -4.07% $11,517 0.34% $10,622
4/30/94 $11,086 0.85% $11,615 0.14% $10,637
5/31/94 $11,205 0.87% $11,716 0.07% $10,645
6/30/94 $11,128 -0.61% $11,645 0.34% $10,681
7/31/94 $11,346 1.83% $11,858 0.27% $10,710
8/31/94 $11,390 0.35% $11,899 0.40% $10,753
9/30/94 $11,192 -1.47% $11,724 0.27% $10,782
10/31/94 $10,882 -1.78% $11,516 0.07% $10,789
11/30/94 $10,629 -1.81% $11,307 0.13% $10,803
12/31/94 $10,930 2.20% $11,556 0.00% $10,803
1/31/95 $11,278 2.86% $11,886 0.40% $10,846
2/28/95 $11,672 2.91% $12,232 0.40% $10,890
3/31/95 $11,785 1.15% $12,373 0.33% $10,926
4/30/95 $11,830 0.12% $12,388 0.33% $10,962
5/31/95 $12,241 3.19% $12,783 0.20% $10,984
6/30/95 $12,069 -0.87% $12,672 0.20% $11,006
7/31/95 $12,196 0.95% $12,792 0.00% $11,006
8/31/95 $12,336 1.27% $12,955 0.26% $11,034
9/30/95 $12,405 0.63% $13,036 0.20% $11,056
10/31/95 $12,593 1.45% $13,225 0.33% $11,093
11/30/95 $12,840 1.66% $13,445 -0.07% $11,085
12/31/95 $13,030 0.96% $13,574 -0.07% $11,077
1/31/96 $13,089 0.76% $13,677 0.59% $11,143
2/29/96 $12,982 -0.68% $13,584 0.32% $11,178
3/31/96 $12,838 -1.28% $13,410 0.52% $11,236
4/30/96 $12,802 -0.28% $13,373 0.39% $11,280
5/31/96 $12,789 -0.04% $13,367 0.19% $11,302
6/30/96 $12,948 1.09% $13,513 0.06% $11,308
7/31/96 $13,070 0.91% $13,636 0.19% $11,330
8/31/96 $13,106 -0.02% $13,633 0.19% $11,351
9/30/96 $13,291 1.40% $13,824 0.32% $11,388
10/31/96 $13,440 1.13% $13,980 0.32% $11,424
11/30/96 $13,651 1.83% $14,236 0.19% $11,446
12/31/96 $13,614 -0.42% $14,176 0.00% $11,446
1/31/97 $13,614 0.19% $14,203 0.32% $11,483
2/28/97 $13,727 0.92% $14,334 0.31% $11,518
3/31/97 $13,536 -1.33% $14,143 0.25% $11,547
4/30/97 $13,664 0.84% $14,262 0.12% $11,561
5/31/97 $13,843 1.51% $14,477 -0.06% $11,554
6/30/97 $14,009 1.07% $14,632 0.12% $11,568
7/31/97 $14,345 2.77% $15,038 0.12% $11,582
8/31/97 $14,267 -0.94% $14,896 0.19% $11,604
9/30/97 $14,436 1.19% $15,074 0.25% $11,633
10/31/97 $14,502 0.64% $15,170 0.25% $11,662
11/30/97 $14,633 0.59% $15,260 -0.06% $11,655
12/31/97 $14,818 1.46% $15,482 -0.12% $11,641
1/31/98 $14,950 1.03% $15,642 0.19% $11,663
2/28/98 $14,963 0.03% $15,647 0.19% $11,685
3/31/98 $14,975 0.09% $15,661 0.19% $11,707
4/30/98 $14,893 -0.45% $15,590 0.18% $11,728
5/31/98 $15,107 1.44% 1.58% $15,836 0.18% $11,749
Total Return 51.07% 58.36% 17.49%
- --------------------------------------------------------------------------------
GRAPHIC MATERIAL (19)
This chart shows in pie format the credit quality breakdown of the Franklin
Tennessee Municipal Bond Fund based on total long-term investments as of
5/31/98.
AAA 56.5%
AA 28.1%
A 7.1%
BBB 8.3%
GRAPHIC MATERIAL (20)
This chart shows the portfolio breakdown by sector based on the percentage of
total long-term investments on 5/31/98 for the Franklin Tennessee Municipal
Bond Fund.
Utilities 23.2%
Hospitals 15.6%
Housing 14.0%
General Obligation 13.2%
Industrial 9.8%
Education 6.4%
Prerefunded 4.2%
Transportation 3.9%
Certificates of Participation 2.8%
Other Revenue 6.9%
GRAPHIC MATERIAL (21)
This chart shows in bar format the comparison between Franklin Tennessee
Municipal Bond Fund's distribution rate of 4.79% and the taxable equivalent
rate of 8.44% on 5/31/98.
GRAPHIC MATERIAL (22)
This chart shows the dividend distributions for Franklin Tennessee Municipal
Bond Fund from 6/1/97 to 5/31/98.
June 5.0 cents
July 5.0 cents
August 5.0 cents
September 4.7 cents
October 4.7 cents
November 4.7 cents
December 4.7 cents
January 4.7 cents
February 4.7 cents
March 4.7 cents
April 4.7 cents
May 4.7 cents
Total 57.3 cents
GRAPHIC MATERIAL (23)
The following line graph compares the performance of the Franklin Tennessee
Municipal Bond Fund's shares to that of the Lehman Brothers Municipal Bond
Index, and to the Consumer Price Index based on a $10,000 investment from
6/1/97 to 5/31/98.
- --------------------------------------------------------------------
Date Franklin Tennessee Lehman Brothers CPI
Municipal Bond Municipal Bond
Fund-Class I Index
- --------------------------------------------------------------------
5/10/94 $9,579 $10,000 $10,000
5/31/94 $9,693 0.59% $10,059 0.05% $10,005
6/30/94 $9,579 -0.61% $9,998 0.34% $10,039
7/31/94 $9,799 1.83% $10,181 0.27% $10,066
8/31/94 $9,818 0.35% $10,216 0.40% $10,106
9/30/94 $9,644 -1.47% $10,066 0.27% $10,133
10/31/94 $9,381 -1.78% $9,887 0.07% $10,141
11/30/94 $9,148 -1.81% $9,708 0.13% $10,154
12/31/94 $9,448 2.20% $9,921 0.00% $10,154
1/31/95 $9,799 2.86% $10,205 0.40% $10,194
2/28/95 $10,103 2.91% $10,502 0.40% $10,235
3/31/95 $10,201 1.15% $10,623 0.33% $10,269
4/30/95 $10,219 0.12% $10,636 0.33% $10,303
5/31/95 $10,537 3.19% $10,975 0.20% $10,323
6/30/95 $10,436 -0.87% $10,879 0.20% $10,344
7/31/95 $10,485 0.95% $10,983 0.00% $10,344
8/31/95 $10,637 1.27% $11,122 0.26% $10,371
9/30/95 $10,706 0.63% $11,192 0.20% $10,392
10/31/95 $10,858 1.45% $11,355 0.33% $10,426
11/30/95 $11,063 1.66% $11,543 -0.07% $10,419
12/31/95 $11,187 0.96% $11,654 -0.07% $10,411
1/31/96 $11,250 0.76% $11,743 0.59% $10,473
2/29/96 $11,135 -0.68% $11,663 0.32% $10,506
3/31/96 $11,010 -1.28% $11,513 0.52% $10,561
4/30/96 $10,989 -0.28% $11,481 0.39% $10,602
5/31/96 $11,010 -0.04% $11,477 0.19% $10,622
6/30/96 $11,148 1.09% $11,602 0.06% $10,629
7/31/96 $11,254 0.91% $11,707 0.19% $10,649
8/31/96 $11,264 -0.02% $11,705 0.19% $10,669
9/30/96 $11,458 1.40% $11,869 0.32% $10,703
10/31/96 $11,577 1.13% $12,003 0.32% $10,737
11/30/96 $11,783 1.83% $12,223 0.19% $10,758
12/31/96 $11,729 -0.42% $12,171 0.00% $10,758
1/31/97 $11,740 0.19% $12,194 0.32% $10,792
2/28/97 $11,860 0.92% $12,307 0.31% $10,826
3/31/97 $11,705 -1.33% $12,143 0.25% $10,853
4/30/97 $11,817 0.84% $12,245 0.12% $10,866
5/31/97 $11,995 1.51% $12,430 -0.06% $10,859
6/30/97 $12,129 1.07% $12,563 0.12% $10,872
7/31/97 $12,512 2.77% $12,911 0.12% $10,885
8/31/97 $12,365 -0.94% $12,789 0.19% $10,906
9/30/97 $12,543 1.19% $12,942 0.25% $10,933
10/31/97 $12,620 0.64% $13,024 0.25% $10,961
11/30/97 $12,754 0.59% $13,101 -0.06% $10,954
12/31/97 $12,981 1.46% $13,293 -0.12% $10,941
1/31/98 $13,116 1.03% $13,429 0.19% $10,962
2/28/98 $13,112 0.03% $13,433 0.19% $10,983
3/31/98 $13,120 0.09% $13,446 0.19% $11,003
4/30/98 $13,058 -0.45% $13,385 0.18% $11,023
5/31/98 $13,289 1.77% 1.58% $13,597 0.18% $11,043
Total 32.89% 35.97% 10.43%
Return
- --------------------------------------------------------------------
GRAPHIC MATERIAL (24)
This chart shows in pie format the credit quality breakdown of the Franklin
Washington Municipal Bond Fund based on total long-term investments as of
5/31/98.
AAA 52.4%
AA 27.3%
A 5.2%
BBB 15.1%
GRAPHIC MATERIAL (25)
This chart shows the portfolio breakdown by sector based on the percentage of
total long-term investments on 5/31/98 for the Franklin Washington Municipal
Bond Fund.
Utilities 29.7%
General Obligation 19.5%
Housing 14.2%
Industrial 12.0%
Education 11.9%
Hospitals 6.1%
Prerefunded 3.5%
Transportation 2.1%
Certificates of Participation 1.0%
GRAPHIC MATERIAL (26)
This chart shows in bar format the comparison between Franklin Washington
Municipal Bond Fund's distribution rate of 5.37% and the taxable equivalent
rate of 8.89% on 5/31/98.
GRAPHIC MATERIAL (27)
This chart shows the dividend distributions for Franklin Washington Municipal
Bond Fund from 6/1/97 to 5/31/98.
June 4.8 cents
July 4.9 cents
August 4.9 cents
September 4.9 cents
October 4.9 cents
November 4.9 cents
December 4.9 cents
January 4.9 cents
February 4.9 cents
March 4.9 cents
April 4.9 cents
May 4.9 cents
Total 58.7 cents
GRAPHIC MATERIAL (28)
The following line graph compares the performance of the Franklin Washington
Municipal Bond Fund's shares to that of the Lehman Brothers Municipal Bond
Index, and to the Consumer Price Index based on a $10,000 investment from
3/1/88 to 5/31/98.
- -----------------------------------------------------------------------------
Date Franklin Washington Lehman Brothers CPI
Municipal Bond Fund- Municipal Bond
Class I Index
- -----------------------------------------------------------------------------
5/3/93 $9,579 $10,000 $10,000
5/31/93 $9,569 0.56% $10,056 0.14% $10,014
6/30/93 $9,770 1.67% $10,224 0.14% $10,028
7/31/93 $9,761 0.13% $10,237 0.00% $10,028
8/31/93 $9,968 2.08% $10,450 0.28% $10,056
9/30/93 $10,098 1.14% $10,569 0.21% $10,077
10/31/93 $10,172 0.19% $10,589 0.41% $10,119
11/30/93 $9,974 -0.88% $10,496 0.07% $10,126
12/31/93 $10,237 2.11% $10,718 0.00% $10,126
1/31/94 $10,361 1.14% $10,840 0.27% $10,153
2/28/94 $10,061 -2.59% $10,559 0.34% $10,187
3/31/94 $9,373 -4.07% $10,129 0.34% $10,222
4/30/94 $9,448 0.85% $10,215 0.14% $10,236
5/31/94 $9,584 0.87% $10,304 0.07% $10,244
6/30/94 $9,489 -0.61% $10,241 0.34% $10,278
7/31/94 $9,748 1.83% $10,429 0.27% $10,306
8/31/94 $9,764 0.35% $10,465 0.40% $10,347
9/30/94 $9,527 -1.47% $10,312 0.27% $10,375
10/31/94 $9,287 -1.78% $10,128 0.07% $10,383
11/30/94 $9,049 -1.81% $9,945 0.13% $10,396
12/31/94 $9,304 2.20% $10,163 0.00% $10,396
1/31/95 $9,666 2.86% $10,454 0.40% $10,438
2/28/95 $10,008 2.91% $10,758 0.40% $10,479
3/31/95 $10,132 1.15% $10,882 0.33% $10,514
4/30/95 $10,129 0.12% $10,895 0.33% $10,549
5/31/95 $10,552 3.19% $11,243 0.20% $10,570
6/30/95 $10,400 -0.87% $11,145 0.20% $10,591
7/31/95 $10,462 0.95% $11,251 0.00% $10,591
8/31/95 $10,633 1.27% $11,394 0.26% $10,618
9/30/95 $10,718 0.63% $11,465 0.20% $10,640
10/31/95 $10,922 1.45% $11,632 0.33% $10,675
11/30/95 $11,150 1.66% $11,825 -0.07% $10,667
12/31/95 $11,302 0.96% $11,938 -0.07% $10,660
1/31/96 $11,344 0.76% $12,029 0.59% $10,723
2/29/96 $11,253 -0.68% $11,947 0.32% $10,757
3/31/96 $11,106 -1.28% $11,794 0.52% $10,813
4/30/96 $11,070 -0.28% $11,761 0.39% $10,855
5/31/96 $11,067 -0.04% $11,757 0.19% $10,876
6/30/96 $11,224 1.09% $11,885 0.06% $10,882
7/31/96 $11,313 0.91% $11,993 0.19% $10,903
8/31/96 $11,332 -0.02% $11,990 0.19% $10,924
9/30/96 $11,525 1.40% $12,158 0.32% $10,959
10/31/96 $11,650 1.13% $12,296 0.32% $10,994
11/30/96 $11,845 1.83% $12,521 0.19% $11,015
12/31/96 $11,808 -0.42% $12,468 0.00% $11,015
1/31/97 $11,805 0.19% $12,492 0.32% $11,050
2/28/97 $11,920 0.92% $12,607 0.31% $11,084
3/31/97 $11,776 -1.33% $12,439 0.25% $11,112
4/30/97 $11,904 0.84% $12,544 0.12% $11,125
5/31/97 $12,069 1.51% $12,733 -0.06% $11,119
6/30/97 $12,209 1.07% $12,869 0.12% $11,132
7/31/97 $12,533 2.77% $13,226 0.12% $11,145
8/31/97 $12,435 -0.94% $13,101 0.19% $11,166
9/30/97 $12,579 1.19% $13,257 0.25% $11,194
10/31/97 $12,652 0.64% $13,342 0.25% $11,222
11/30/97 $12,749 0.59% $13,421 -0.06% $11,216
12/31/97 $12,944 1.46% $13,617 -0.12% $11,202
1/31/98 $13,042 1.03% $13,757 0.19% $11,223
2/28/98 $13,053 0.03% $13,761 0.19% $11,245
3/31/98 $13,101 0.09% $13,774 0.19% $11,266
4/30/98 $13,075 -0.45% $13,712 0.18% $11,286
5/31/98 $13,263 1.44% 1.58% $13,928 0.18% $11,307
Total 32.63% 39.28% 13.07%
Return
- -----------------------------------------------------------------------------
SEMI ANNUAL REPORT
November 30, 1998
FRANKLIN MUNICIPAL SECURITIES TRUST
FRANKLIN ARKANSAS MUNICIPAL BOND FUND
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND
FRANKLIN HAWAII MUNICIPAL BOND FUND
FRANKLIN TENNESSEE MUNICIPAL BOND FUND
FRANKLIN WASHINGTON MUNICIPAL BOND FUND
[LOGO]FRANKLIN TEMPLETON
[LOGO] FRANKLIN TEMPLETON CELEBRATING OVER 50 YEARS
Thank you for investing with Franklin Templeton. We encourage our investors to
maintain a long-term perspective and remember that all securities markets move
both up and down, as do mutual fund share prices.
We appreciate your past support and look forward to serving your investment
needs in the years ahead.
[PICTURE]
CHARLES B. JOHNSON (right)
Chairman
Franklin Municipal Securities Trust
THOMAS J. KENNY (left)
Director
Franklin Municipal
Bond Department
CONTENTS
Shareholder Letter ............................................ 1
Special Update: A Word About Municipal Bond Insurance ........ 5
Fund Reports
Franklin Arkansas Municipal Bond Fund ........................ 7
Franklin California High Yield Municipal Fund ................ 12
Franklin Hawaii Municipal Bond Fund .......................... 18
Franklin Tennessee Municipal Bond Fund ....................... 24
Franklin Washington Municipal Bond Fund ...................... 30
Municipal Bond Ratings ........................................ 36
Financial Highlights & Statement of Investments ............... 39
Financial Statements .......................................... 63
Notes to Financial Statements ................................. 69
FUND CATEGORY
[PYRAMID]
SHAREHOLDER LETTER
Dear Shareholder:
It's a pleasure to bring you Franklin Municipal Securities Trust's semiannual
report for the period ended November 30, 1998.
A TALE OF TWO ECONOMIES
During the six months under review, the U.S. economy began to appear like a tale
of two economies -- a healthy and expanding domestic sector contrasted with a
fragile and ailing export-oriented sector. Despite momentary dips in many
economic indicators, the gross domestic product grew at a 3.9% annualized rate
in the third quarter of 1998, masking much of the underlying divergence.
Consumer spending remained robust and the housing market regained its momentum,
after ebbing slightly in August and September. Consumer confidence rose in
November, after tumbling in October, signaling that consumers remained guardedly
optimistic about the economy, the stock market and their jobs. Housing starts,
which fell 2.6% in September, rose an unexpectedly strong 7.3% in October, the
biggest gain in 13 months. At the same time, existing home sales also showed
surprising strength, registering 2.1% growth for the month. Retail sales bounced
back in October as well, increasing a respectable 1.0%, compared with
September's 0.3% feeble increase.
Meanwhile, exports were hit hard by the emerging market turmoil that prevailed
for much of the reporting period, hampering the U.S. manufacturing sector and
producing record trade deficits. The National Association of Purchasing Managers
Index in
November indicated that manufacturing activity declined for the fourth time in
the past six months. Durable goods orders, which include orders for cars,
appliances and other heavy machinery, fell 2.2% in October, the first decrease
in five months. The third quarter trade deficit, $44.5 billion, was the largest
on record, and the trade deficit for the first nine months of 1998, $123
billion, was 50.5% above 1997's imbalance.
Because of the problems in the world markets, many financial institutions
curtailed their lending, creating a "credit crunch." Beginning with the Russian
debt crisis and culminating with the emergency bailout of a major hedge fund,
capital worldwide became less available, adversely affecting many companies.
Taking note of these factors, the Federal Reserve Board's (the Fed's) monetary
policy panel, the Federal Open Market Committee, starting in late September, cut
the federal funds target rate three times by 0.25%, to 4.75%, in an effort to
stimulate growth. The Fed's moves were aimed at providing liquidity to the
financial system and making it easier for major corporations to obtain favorable
lending from banks.
The bond and stock markets reacted to the Fed's loosening of monetary policy in
two opposite ways. After the 30-year U.S. Treasury bond reached a record-low
yield of 4.70% on October 5, 1998, the U.S. bond market quickly lost ground as
investors became less enthusiastic about committing capital to fixed-income
markets. On November 30, 1998, the yield on the 30-year Treasury bond stood at
5.08%, 0.38% higher than the yield on October 5, 1998. The stock market was a
different story. After losing more than 20% of their value in the third quarter
correction, many stocks rebounded strongly. On November 23, 1998, the Dow
Jones(R) Industrial Average reached an all-time high of 9374.27, with many other
indices registering record highs as well.
2
As of the end of the reporting period, the yields on 30-year, AAA-rated, insured
municipal bonds stood at more than 96% of the yield on a 30-year Treasury bond.
For those investors in the 39.6% tax bracket, the taxable equivalent yield on an
average municipal bond was 8.36% versus 5.08% for the Treasury bond.(1)
"While investment success is the primary objective of investment planning, one
important by-product of a good plan can be peace of mind."
STAYING ON COURSE
In times like these, it's easy to understand why people can become emotional
about their investments. That's why we believe investors should call their
investment representatives, and plan to cover three points in their
conversations. One, review their current financial plans, recalling their goals
and why they made their investment choices in the first place. Two, discuss the
value of diversification, which can help reduce the risk that any one type of
security will have a negative impact on an overall portfolio, and check if their
investments are still properly diversified. As shown during the reporting
period, the bond and stock markets often behave differently. In each of the five
years since 1973 that stocks posted negative annual returns, bonds posted
positive returns.(2) Three, review their investment timeframe to help put recent
market declines into perspective and avoid turning what could be only a
temporary paper loss into a permanent one. Maintaining a long-term outlook is
one of the keys to weathering market volatility.
An important component of a long-term approach is setting up a regular
investment plan. Investing on a scheduled basis, regardless of market
directions, can help investors take advantage of market downturns when prices
are low, and benefit from any market rallies. We encourage you to contact your
investment representative to discuss setting up a regular investment plan. While
investment
1. Source: Bloomberg.
2. Source: For bond market statistics based on the Lehman Brothers Government/
Corporate Bond Index - Lehman Brothers; for stock measured by the S&P 500 Index
- - Standard & Poor's(R).
3
success is the primary objective of investment planning, one important
by-product of a good plan can be peace of mind.
Our investment philosophy remains disciplined and focused, as we strive to offer
our shareholders high, current tax-free income and relatively low price
volatility. The outlook for the municipal bond market should remain positive,
given the relatively stable U.S. economy, low inflation environment, budget
surplus, strong dollar, and the economic and market uncertainty facing many of
the world's regions. Municipal bond funds continue to be an attractive
investment for those investors seeking tax-free income as well as providing an
opportunity to diversify risk in their portfolio.
As always, we appreciate your support, welcome your questions and comments and
look forward to serving your investment needs in the years ahead.
Sincerely,
/s/ Charles B. Johnson
- ----------------------
Charles B. Johnson
Chairman
Franklin Municipal Securities Trust
/s/ Thomas J. Kenny
- ----------------------
Thomas J. Kenny
Director
Franklin Municipal Bond Department
4
A WORD ABOUT MUNICIPAL BOND INSURANCE
[SPECIAL UPDATE]
Municipal bond insurers guarantee the timely payment of interest and principal
on insured bond issues, providing bond investors with additional protection
against the potential of the issuer's payment default. Moody's and Standard &
Poor's assign the four principal municipal bond insurers - MBIA, AMBAC, FGIC and
FSA - their highest rating, AAA, based on their ability to pay claims. This is
important, as once a bond is insured it no longer carries the underlying
security's rating, but the insurer's rating. At the end of 1997, the four
primary municipal bond insurers comprised more than 99% of the market, with MBIA
controlling the largest share, 42.1%.
Municipal bond insurers often work with bond reinsurers to enhance their ability
to generate new business. By purchasing portions of insured bond portfolios from
the insurers, bond reinsurers assume a portion of the risk, freeing up the
insurers' capital and enabling them to insure additional municipal bond issues.
The added capital provided by the reinsurers, in turn, increases the overall
size of the insured municipal bond market.
Currently, many municipal bond issuers favor the use of bond insurance. For the
first nine months of 1998, municipal bond insurers covered 51.6% of the
new-issue municipal bond market, involving 4,268 new issues valued at $110
billion. For issuers, obtaining bond insurance can often lower their borrowing
costs as it usually improves their credit rating, which more than makes up for
the cost of the insurance. In addition, the four primary, triple-A rated bond
insurers
5
presently charge issuers comparatively inexpensive insurance premiums, due to
the extremely competitive environment for municipal bond insurance. Bond
insurance also enables issuers to market their bonds to a larger pool of
potential buyers. For example, insured municipal bond funds purchase primarily,
if not exclusively, insured bonds.
INSURERS AS A % OF MARKET SHARE*
12/31/97
<TABLE>
<S> <C>
MBIA .................. 42.1%
AMBAC ................. 23.9%
FGIC .................. 18.9%
FSA ................... 14.5%
Other ................. 0.6%
</TABLE>
*Source: The Bond Buyer, 1998
Low-cost municipal bond insurance benefits investors beyond the credit
protection it provides against payment default. As insured bonds appeal to a
wider variety of investors, insurance can lead to improved liquidity, allowing
investors to more easily buy and sell bonds.
INSURED MUNICIPAL BOND ISSUES*
As a % of muni bond market
<TABLE>
<S> <C>
1993 ...................... 37.0%
1994 ...................... 37.0%
1995 ...................... 43.0%
1996 ...................... 46.0%
1997 ...................... 49.0%
1998** .................... 51.6%
</TABLE>
*Source: Fitch IBCA.
**Through 9/30/98.
6
FRANKLIN ARKANSAS MUNICIPAL BOND FUND
CREDIT QUALITY BREAKDOWN
Franklin Arkansas Municipal Bond Fund
Based on Total Long-Term Investments*
11/30/98
[PIE CHART]
<TABLE>
<S> <C>
AAA ............... 44.6%
AA ................ 7.1%
A ................. 18.5%
BBB ............... 29.8%
</TABLE>
*Quality breakdown may include internal
ratings for bonds not rated by a
national rating agency.
Your Fund's Goal: Franklin Arkansas Municipal Bond Fund seeks to provide high,
current income exempt from regular federal and Arkansas state personal income
taxes while seeking preservation of capital by investing primarily in a
portfolio of Arkansas municipal securities.(1)
STATE UPDATE
Arkansas began the six-month period under review on a positive note, buoyed by
steady employment growth and continuing diversification of its economic base.
The modest expansion maintained its momentum throughout the reporting period,
even as job growth began to slow, partly due to a lack of available labor. The
large number of jobs created in the services and construction industries more
than made up for the losses in manufacturing, resulting in an unemployment rate
below the national average. Resource-related industries, the largest being
poultry processing, contributed significantly to the state's economy while
construction remained the state's fastest-growing industry.(2)
Sound fiscal discipline and strong fundamentals underscored Arkansas' slow but
steady economy during the reporting period.
(1). The fund may invest as much as 100% of its assets in bonds that pay
interest subject to federal alternative minimum tax. All or a significant
portion of the income on these obligations may be subject to such tax.
Distributions of capital gains and of ordinary income from accrued market
discount, if any, are generally taxable.
(2). Source: Moody's Investors Service, 5/19/98. This does not indicate ratings
of the fund.
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 40 of
this report.
7
DIVIDEND DISTRIBUTIONS*
Franklin Arkansas
Municipal Bond Fund - Class I
6/1/98 - 11/30/98
<TABLE>
<CAPTION>
DIVIDEND
MONTH PER SHARE
----- ---------
<S> <C>
June 4.8 cents
July 4.8 cents
August 4.8 cents
September 4.8 cents
October 4.8 cents
November 4.8 cents
TOTAL 28.8 CENTS
</TABLE>
*Assumes shares were purchased and held for the entire accrual period. Since
dividends accrue daily, your actual distributions will vary depending on the
date you purchased your shares and any account activity during the month. Income
distributions include all accrued income earned by the fund during the reporting
period.
The Revenue Stabilization Act (the Act) explicitly prohibits deficit spending,
and made the state's low per-capita debt ratios the envy of much of the nation,
at $156 versus the national median of $422. Furthermore, voters must approve all
general obligation debt. As a result, the state needed only a small percentage
of its revenues to service general obligation debt. Net general revenues,
meanwhile, continued to climb. Through March 1998, net general revenue grew at a
6.7% annual rate, eclipsing the 4.2% rate set one year earlier. Responsible
borrowing practices, as mandated by the Act, also had a beneficial impact on the
outlook of Arkansas debt, characterized as "stable," and rated Aa3 by Moody's
and AA by Standard & Poor's, two national credit rating agencies.(2)
WHAT IS THE ARKANSAS REVENUE STABILIZATION ACT?
The Arkansas Revenue Stabilization Act prohibits state spending from exceeding
revenues in any fiscal year. State expenditures are not allowed until sufficient
revenues to fund them have been collected. This Act also requires that the state
Assembly create three levels of spending priority. Under this system, medium-,
and then low-priority, spending items are funded, only after all high-priority
items have been fully supported by existing state income. By prohibiting deficit
spending, this Act ensures Arkansas will have a balanced budget.
8
PORTFOLIO NOTES
During the reporting period, assets in Franklin Arkansas Municipal Bond Fund
grew from approximately $30 million in May 1998 to more than $39 million on
November 30, 1998, partially owing to the fund's positive performance. Municipal
bond supply in Arkansas was relatively robust in 1998, in stark contrast to the
sparse supply of new-issue debt during 1997. Our investment strategy remained
constant, as we sought well-structured bonds across all sectors. As a result of
this strategy, our holdings of AAA-rated bonds increased, from 43.8% of the
portfolio on May 31, 1998, to 44.6% at the end of the reporting period. Some
recently purchased bonds in the portfolio included Pulaski County Health
Facilities Board (Catholic Health Initiatives); Pine Bluff Environmental
Improvement (International Paper Co.); Little Rock Capital Improvement bonds and
Pulaski County Public Facilities Board.
Going forward, we believe that Arkansas municipal bonds will continue to be
attractive investments. We expect a relatively healthy level of new-issue supply
in 1999. Investor demand should remain strong, maintaining yields below the
national average. The fund will continue to look for bonds at a slight discount
that provide good call protection while paying high current income.
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of November 30, 1998, the end of the reporting period. However,
market and economic conditions are changing constantly, which can be expected to
affect our strategies and the fund's portfolio composition. Although historical
performance is no guarantee of future results, these insights may help you
understand our investment and management philosophy.
PORTFOLIO BREAKDOWN
Franklin Arkansas
Municipal Bond Fund
11/30/98
<TABLE>
<CAPTION>
% OF TOTAL
LONG-TERM
SECTOR INVESTMENTS
------ -----------
<S> <C>
Utilities 21.1%
Industrial 18.4%
Other Revenue 13.7%
Housing 13.2%
Hospitals 7.7%
Education 7.1%
General Obligation 7.1%
Sales Tax 6.3%
Prerefunded 2.4%
Transportation 1.9%
Health Care 1.1%
</TABLE>
9
FRANKLIN ARKANSAS MUNICIPAL BOND FUND
CLASS I:
Subject to the maximum 4.25% initial sales charge. The fund's manager agreed in
advance to waive a portion of its management fees, which reduces operating
expenses and increases distribution rate, yield and total return to
shareholders. Without this waiver, the fund's distribution rate and total return
would have been lower, and yield for the period would have been 3.84%. The fee
waiver may be discontinued at any time upon notice to the fund's Board of
Trustees.
PERFORMANCE SUMMARY AS OF 11/30/98
Distributions will vary based on earnings of the fund's portfolio and any
profits realized from the sale of the portfolio's securities. Past distributions
are not indicative of future trends. All total returns include reinvested
distributions at net asset value.
PRICE AND DISTRIBUTION INFORMATION (6/1/98-11/30/98)
<TABLE>
<CAPTION>
CLASS I CHANGE 11/30/98 5/31/98
- ------- ------ -------- -------
<S> <C> <C> <C>
Net Asset Value +$0.06 $11.05 $10.99
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTIONS
-------------
<S> <C>
Dividend Income $0.288
</TABLE>
Past performance is not predictive of future results.
10
PERFORMANCE
<TABLE>
<CAPTION>
SINCE
INCEPTION
CLASS I 1-YEAR 3-YEAR (5/10/94)
- ------- ------ ------ ---------
<S> <C> <C> <C>
Cumulative Total Return(1) +7.57% +23.67% +40.04%
Average Annual Total Return(2) +3.00% + 5.79% + 6.65%
Distribution Rate(3) 4.99%
Taxable Equivalent Distribution Rate(4) 8.88%
30-Day Standardized Yield(5) 4.53%
Taxable Equivalent Yield(4) 8.06%
</TABLE>
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the applicable, maximum
sales charge(s) for that class.
3. Distribution rate is based on an annualization of the current 4.8 cent per
share monthly dividend and the maximum offering price of $11.54 on November 30,
1998.
4. Taxable equivalent distribution rate and yield assume the 1998 maximum
combined federal and Arkansas state personal income tax bracket of 43.8%, based
on the federal income tax rate of 39.6%.
5. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended November 30, 1998.
Bond prices, and thus the fund's share price, generally move in the opposite
direction from interest rates. Since markets can go down as well as up,
investment return and principal value will fluctuate with market conditions, and
you may have a gain or loss when you sell your shares.
Past performance is not predictive of future results.
11
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND
Your Fund's Goal: Franklin California High Yield Municipal Fund seeks to provide
high, current income exempt from regular federal and California state personal
income taxes while seeking preservation of capital by investing primarily in a
portfolio of high-yielding, medium-, lower-, and non-rated California municipal
securities.(1)
STATE UPDATE
During the six months under review, California's economy, while moderating
slightly from the previous year's period, remained strong. The state's
employment and personal income growth outpaced the national average. The
economic recovery also enabled the state to return to a more favorable financial
position and erase its accumulated deficit. However, California's reliance on
trade with troubled Asian countries negatively affected its export sector,
accounting for the lion's share of the economic moderation. For the first half
of 1998, exports to the region were down approximately 15% from the first six
months of 1997.(2)
CREDIT QUALITY BREAKDOWN
Franklin California High Yield
Municipal Fund
Based on Total Long-Term Investments*
11/30/98
<TABLE>
<S> <C>
BBB .................. 41.5%
BB ................... 21.3%
A .................... 17.3%
AAA .................. 15.6%
AA ................... 4.3%
</TABLE>
*Quality breakdown may include
internal ratings for bonds not rated by a
national rating agency.
(1). The fund may invest as much as 100% of its assets in bonds that pay
interest subject to federal alternative minimum tax. All or a significant
portion of the income on these obligations may be subject to such tax.
Distributions of capital gains and of ordinary income from accrued market
discount, if any, are generally taxable. In general, an investor is paid a
higher yield to assume a greater degree of risk.
(2). Source: Fitch IBCA, State of California, October 1998.
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 44 of
this report.
12
PORTFOLIO BREAKDOWN
Franklin California High Yield
Municipal Fund
11/30/98
<TABLE>
<CAPTION>
% OF TOTAL
LONG-TERM
SECTOR INVESTMENTS
------ -----------
<S> <C>
Tax Allocation 17.4%
Transportation 16.9%
Mello-Roos 13.2%
Hospitals 8.8%
Utilities 7.8%
Special Assessment 6.5%
Certificates of
Participation 6.1%
Prerefunded 5.0%
Housing 4.2%
Education 4.1%
Other Revenue 4.0%
Marks-Roos 2.1%
Health Care 1.7%
General Obligation 1.1%
Industrial Revenue 1.1%
</TABLE>
After the recession of the early '90s, the California economy became broader and
more diversified, no longer heavily dependent on national defense spending. The
service sector remains the state's largest employer, accounting for 30.3% of all
jobs as of October 1998, followed by trade with 22.2%. Manufacturing maintained
its steady downward slide, comprising only 13.7% of jobs.(3)
On October 2, 1998, Moody's, a national credit rating agency, upgraded its
credit rating on the state's general obligation bonds to Aa3 from A1. This is
the first upgrade Moody's has given California in nine years and reflects the
state's continuing economic recovery and recent legislation meant to improve the
state's credit condition.(4)
PORTFOLIO NOTES
The improving national and state environments favorably affected Franklin
California High Yield Municipal Fund's performance during the reporting period.
The value of many of the portfolio's bonds increased, as interest rates
declined. For example, the yield on the 30-year Treasury bond fell from 5.86% at
the start of the year, to a low of 4.70%, before moving back up to 5.08% on
November 30, 1998. Lower interest rates led to higher municipal supply as
issuers took advantage of the rate environment to issue new or refunded debt.
Issuance should approach $300 billion by year-end, far outpacing the $220
billion issued in 1997.
Franklin California High Yield Municipal Fund performed very well over the
six-month reporting period, and Class I shares had a 30-day SEC yield of 4.76%
and a 4.99% distribution rate for the period ended November 30, 1998. Partially
because of the fund's robust performance during the period, total net assets
grew from $452 million
(3). Source: California Employment & Development Dept., California Labor Force &
Industry Employment, October 1998.
(4). Source: Moody's Investors Service, State of California, October 1998. This
does not indicate Moody's rating of the fund.
13
on May 31, 1998, to approximately $573 million at the end of the reporting
period, giving the fund an increasingly stable and diversified asset base.
However, the fund's substantial new investments within the historically low,
current interest-rate environment increased pressure on the dividend payment.
Additionally, the growth of insurance in the municipal bond market led to
smaller interest-rate differences between higher- and lower-rated bonds. As the
supply of non-rated issues diminished, more competition and lower yields
resulted. We still found sufficient opportunities remained in the high-yield
marketplace for Franklin California High Yield Municipal Fund, as Franklin's
research capabilities and size often give us the first look at new issues coming
to market.
The fund was able to take advantage of Franklin's presence in California to
structure and control issues to fit the portfolio's needs. In managing over $20
billion in California municipal assets, Franklin believes it has a distinct
advantage over its competitors in locating value. Consequently, Franklin
California High Yield Municipal Fund is able to use the buying power of the
entire fund group to find new high-yield issues. Many dealers, underwriters and
issuers know and trust Franklin and will come to us to help them structure and
price new issues, giving the fund more leverage in defining the marketplace.
Recent purchases in the fund included Vallejo Hiddenbrooke Improvement District.
Hiddenbrooke is a new, private, 586-acre, 1,400-unit golf course community in
Vallejo, CA. The single-family housing development surrounds a completed Arnold
Palmer championship golf course, which will include a soon-to-be-completed $11
million clubhouse, banquet facility and fitness center. The bonds were priced to
yield 6.5% with a 30-year maturity.
14
We continue to follow our strategy of investing for income, price stability and
tax efficiency. The fund should perform well into the next reporting period,
aided by stable interest rates and ample supply of new bonds.
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of November 30, 1998, the end of the reporting period. However,
market and economic conditions are changing constantly, which can be expected to
affect our strategies and the fund's portfolio composition. Although historical
performance is no guarantee of future results, these insights may help you
understand our investment and management philosophy.
DIVIDEND DISTRIBUTIONS*
Franklin California High Yield Municipal Fund
6/1/98 - 11/30/98
<TABLE>
<CAPTION>
DIVIDEND PER SHARE
------------------
MONTH CLASS I CLASS II
- ----- ------- --------
<S> <C> <C>
June 5.0 cents 4.10 cents
July 5.0 cents 4.46 cents
August 5.0 cents 4.46 cents
September 5.0 cents 4.46 cents
October 5.0 cents 4.65 cents
November 5.0 cents 4.65 cents
TOTAL 30.0 cents 26.78 cents
</TABLE>
*Assumes shares were purchased and held for the entire accrual period. Since
dividends accrue daily, your actual distributions will vary depending on the
date you purchased your shares and any account activity during the month. Income
distributions include all accrued income earned by the fund during the reporting
period.
15
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND
CLASS I:
Subject to the current, maximum 4.25% initial sales charge. Prior to July 1,
1994, fund shares were offered at a higher initial sales charge; thus actual
returns would have been lower. The fund's manager agreed in advance to waive a
portion of its management fees, which reduces operating expenses and increases
distribution rate, yield and total return to shareholders. Without this waiver,
the fund's distribution rate and total return would have been lower, and yield
for the period would have been 4.58%. The fee waiver may be discontinued at any
time upon notice to the fund's Board of Trustees.
CLASS II:
Subject to 1% initial sales charge and 1% contingent deferred sales charge for
shares redeemed within 18 months of investment. These shares have higher annual
fees and expenses than Class I shares. The fund's manager agreed in advance to
waive a portion of its management fees, which reduces operating expenses and
increases distribution rate, yield and total return to shareholders. Without
this waiver, the fund's distribution rate and total return would have been
lower, and yield for the period would have been 4.19%. The fee waiver may be
discontinued at any time upon notice to the fund's Board of Trustees.
PERFORMANCE SUMMARY AS OF 11/30/98
Distributions will vary based on earnings of the fund's portfolio and any
profits realized from the sale of the portfolio's securities. Past distributions
are not indicative of future trends. All total returns include reinvested
distributions at net asset value.
PRICE AND DISTRIBUTION INFORMATION (6/1/98-11/30/98)
<TABLE>
<CAPTION>
CLASS I CHANGE 11/30/98 5/31/98
- ------- ------ -------- -------
<S> <C> <C> <C>
Net Asset Value +$0.18 $10.83 $10.65
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTIONS
-------------
<S> <C>
Dividend Income $0.30
</TABLE>
<TABLE>
<CAPTION>
CLASS II CHANGE 11/30/98 5/31/98
- -------- ------ -------- -------
<S> <C> <C> <C>
Net Asset Value +$0.18 $10.86 $10.68
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTIONS
-------------
<S> <C>
Dividend Income $0.2678
</TABLE>
Past performance is not predictive of future results.
16
PERFORMANCE
<TABLE>
<CAPTION>
SINCE
INCEPTION
CLASS I 1-YEAR 5-YEAR (5/3/93)
- ------- ------ ------ --------
<S> <C> <C> <C>
Cumulative Total Return(1) +8.86% +44.67% +51.81%
Average Annual Total Return(2) +4.21% + 6.73% + 6.94%
Distribution Rate(3) 4.99%
Taxable Equivalent Distribution Rate(4) 9.11%
30-Day Standardized Yield(5) 4.76%
Taxable Equivalent Yield(4) 8.69%
</TABLE>
<TABLE>
<CAPTION>
SINCE
INCEPTION
CLASS II 1-YEAR (5/1/96)
- -------- ------ --------
<S> <C> <C>
Cumulative Total Return(1) +8.28% +27.28%
Average Annual Total Return(2) +6.17% + 9.36%
Distribution Rate(3) 4.76%
Taxable Equivalent Distribution Rate(4) 8.69%
30-Day Standardized Yield(5) 4.38%
Taxable Equivalent Yield(4) 8.00%
</TABLE>
(1). Cumulative total return represents the change in value of an investment
over the periods indicated and does not include sales charges.
(2). Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes the current,
applicable, maximum sales charge(s) for that class.
(3). Distribution rate is based on an annualization of the respective class's
current monthly dividend and the maximum offering price per share on November
30, 1998.
(4). Taxable equivalent distribution rate and yield assume the 1998 maximum
combined federal and California personal income tax bracket of 45.2%, based on
the federal income tax rate of 39.6%.
(5). Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended November 30, 1998.
Bond prices, and thus the fund's share price, generally move in the opposite
direction from interest rates. Since markets can go down as well as up,
investment return and principal value will fluctuate with market conditions, and
you may have a gain or loss when you sell your shares.
Past performance is not predictive of future results.
17
FRANKLIN HAWAII
MUNICIPAL BOND FUND
Your Fund's Goal: Franklin Hawaii Municipal Bond Fund seeks to provide high,
current income exempt from regular federal and Hawaii state personal income
taxes while seeking preservation of capital by investing primarily in a
portfolio of Hawaii municipal securities.(1)
STATE UPDATE
Tourism, the driving force behind the state economy, presently accounts for 25%
of the gross state product and six out of every 10 jobs. It remains one of the
key factors in stimulating the other sectors of the local economy such as
construction, lodging and retail sales. Hawaii currently derives a majority of
its tourism customer base from two sources, California and Japan. Although many
Californians chose to vacation in Hawaii during the reporting period, Japan's
long-term anemic economic performance, exacerbated by the Asian financial crisis
and the yen's depreciation, kept Japanese tourism to the Aloha State at its
lowest levels since 1991.
CREDIT QUALITY BREAKDOWN
Franklin Hawaii Municipal Bond Fund
Based on Total Long-Term Investments*
11/30/98
[PIE CHART]
<TABLE>
<S> <C>
AAA 45.0%
AA 12.3%
A 19.5%
BBB 23.2%
</TABLE>
* Quality breakdown may include internal ratings for bonds not rated by a
national rating agency.
(1). The fund may invest as much as 100% of its assets in bonds that pay
interest subject to federal alternative minimum tax. All or a significant
portion of the income on these obligations may be subject to such tax.
Distributions of capital gains and of ordinary income from accrued market
discount, if any, are generally taxable.
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 52 of
this report.
18
Compounding woes, rising overall debt levels and successive downward revenue
revisions led Moody's, a national credit rating agency, to downgrade the state's
general obligation debt to A1 from Aa3. At $2,848 per capita, state debt is more
than six times the national median of $422, making Hawaii second only to Alaska
in overall debt burden. That said, Hawaii's debt ratios are difficult to compare
with other states, as many of the roles traditionally left to municipalities,
such as local education, health and welfare, are centralized at the state
level.(2)
The outlook for Hawaii's economy is considered stable and improving. In part,
this is a reflection of dynamic management and political stability during lean
times. Governor Ben Cayetano, recently re-elected, took advantage of the
current, low interest-rate environment and refunded some of the state's
high-cost debt. The Economic Revitalization Task Force further identified
several aggressive options, including stimulus packages and a cut in the income
tax rate in 1999. In addition, the 50,000 military personnel stationed in Hawaii
somewhat counterbalanced the state's deteriorating economic fundamentals.
Geographically strategic to the nation's defense, Hawaii's large military
presence is, for the most part, immune to the wholesale base closures that
affected the rest of the country during the past several years and should
continue to be a steadying influence to the state's economy.(2)
DIVIDEND DISTRIBUTIONS*
Franklin Hawaii
Municipal Bond Fund - Class I
6/1/98 - 11/30/98
<TABLE>
<CAPTION>
DIVIDEND
MONTH PER SHARE
- ----- ---------
<S> <C>
June 4.9 cents
July 4.9 cents
August 4.9 cents
September 4.9 cents
October 4.9 cents
November 4.9 cents
TOTAL 29.4 CENTS
</TABLE>
*Assumes shares were purchased and held for the entire accrual period. Since
dividends accrue daily, your actual distributions will vary depending on the
date you purchased your shares and any account activity during the month. Income
distributions include all accrued income earned by the fund during the reporting
period.
(2). Source: Moody's Investors Service, State of Hawaii, 4/9/98. This does not
indicate Moody's rating of the fund.
19
PORTFOLIO BREAKDOWN
Franklin Hawaii
Municipal Bond Fund
11/30/98
<TABLE>
<CAPTION>
% OF TOTAL
LONG-TERM
SECTOR INVESTMENTS
- ------ -----------
<S> <C>
Hospitals 25.8%
Utilities 22.2%
Transportation 17.2%
Prerefunded 9.6%
Housing 8.7%
General Obligation 7.6%
Other Revenue 4.1%
Certificates of Participation 3.8%
Industrial 1.0%
</TABLE>
PORTFOLIO NOTES
In spite of the recent state downgrades, the demand for Hawaii municipal bonds
still remains relatively strong, primarily due to the limited supply of issuance
in the state. In times like these, we may purchase Puerto Rico municipal bonds,
as they also offer tax-free income in many states including Hawaii. During the
reporting period, we increased our holdings of AAA-rated bonds to 45.0% of total
long-term investments on November 30, 1998, compared with 44.7% from May 31,
1998. Purchases for the fund during the period included Maui County General
Obligation; Hawaii State Department of Budget and Finance Special Purpose
Revenue, Queens Health System; and Puerto Rico Industrial Tourist, Medical and
Environmental Facilities, Guaynabo Warehouse.
Our investment strategy remains consistent. We strive to provide shareholders
with a relatively high level of tax-free income and preservation of principal.
20
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of November 30, 1998, the end of the reporting period. However,
market and economic conditions are changing constantly, which can be expected to
affect our strategies and the fund's portfolio composition. Although historical
performance is no guarantee of future results, these insights may help you
understand our investment and management philosophy.
21
FRANKLIN HAWAII
MUNICIPAL BOND FUND
CLASS I:
Subject to the current, maximum 4.25% initial sales charge. Prior to July 1,
1994, fund shares were offered at a higher initial sales charge; thus actual
returns would have been lower. The fund's manager agreed in advance to waive a
portion of its management fees, which reduces operating expenses and increases
distribution rate, yield and total return to shareholders. Without this waiver,
the fund's distribution rate and total return would have been lower, and yield
for the period would have been 3.76%. The fee waiver may be discontinued at any
time upon notice to the fund's Board of Trustees.
PERFORMANCE SUMMARY AS OF 11/30/98
Distributions will vary based on earnings of the fund's portfolio and any
profits realized from the sale of the portfolio's securities. Past distributions
are not indicative of future trends. All total returns include reinvested
distributions at net asset value.
PRICE AND DISTRIBUTION INFORMATION (6/1/98-11/30/98)
<TABLE>
<CAPTION>
CLASS I CHANGE 11/30/98 5/31/98
- ------- ------ -------- -------
<S> <C> <C> <C>
Net Asset Value +$0.13 $ 11.29 $ 11.16
DISTRIBUTIONS
Dividend Income $0.294
</TABLE>
Past performance is not predictive of future results.
22
PERFORMANCE
<TABLE>
<CAPTION>
SINCE
INCEPTION
CLASS I 1-YEAR 5-YEAR (2/26/92)
- ------- ------ ------ ---------
<S> <C> <C> <C>
Cumulative Total Return(1) +7.24% +35.25% +64.01%
Average Annual Total Return(2) +2.70% + 5.31% + 6.91%
Distribution Rate(3) 4.99%
Taxable Equivalent Distribution Rate(4) 9.18%
30-Day Standardized Yield(5) 4.16%
Taxable Equivalent Yield(4) 7.65%
</TABLE>
(1). Cumulative total return represents the change in value of an investment
over the periods indicated and does not include sales charges.
(2). Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes the current,
applicable, maximum sales charge(s) for that class.
(3). Distribution rate is based on an annualization of the current 4.9 cent per
share monthly dividend and the maximum offering price of $11.79 on November 30,
1998.
(4). Taxable equivalent distribution rate and yield assume the 1998 maximum
combined federal and Hawaii State personal income tax bracket of 45.6%, based on
the federal income tax rate of 39.6%.
(5). Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended November 30, 1998.
Bond prices, and thus the fund's share price, generally move in the opposite
direction from interest rates. Since markets can go down as well as up,
investment return and principal value will fluctuate with market conditions, and
you may have a gain or loss when you sell your shares.
Past performance is not predictive of future results.
23
FRANKLIN TENNESSEE
MUNICIPAL BOND FUND
Your Fund's Goal: Franklin Tennessee Municipal Bond Fund seeks to provide high,
current income exempt from regular federal and Tennessee state personal income
taxes while seeking preservation of capital by investing primarily in a
portfolio of Tennessee municipal securities.(1)
STATE UPDATE
During the six-month period under review, Tennessee's sound economy continued to
expand and diversify. The state added employment in services, trade and durable
manufacturing, which more than made up for losses in the once important textile
and apparel manufacturing industries. The improving auto manufacturing sector
has been a key component of the state's economy throughout the 1990s. In recent
years, Nissan, Peterbilt and Saturn built manufacturing plants in Tennessee,
owing to a skilled workforce and low-cost power available through the Tennessee
Valley Authority.(2) While industrial expansion has in general improved many
state residents' standard of living, it has also left the state vulnerable to
national economic cycles as well as international competition.
CREDIT QUALITY BREAKDOWN
Franklin Tennessee Municipal Bond Fund
Based on Total Long-Term Investments*
11/30/98
[PIE CHART]
<TABLE>
<S> <C>
AAA ................... 52.7%
AA .................... 30.5%
BBB ................... 10.5%
A ..................... 5.4%
BB .................... 0.9%
</TABLE>
*Quality breakdown may include
internal ratings for bonds not rated by a
national rating agency.
(1). The fund may invest as much as 100% of its assets in bonds that pay
interest subject to federal alternative minimum tax. All or a significant
portion of the income on these obligations may be subject to such tax.
Distributions of capital gains and of ordinary income from accrued market
discount, if any, are generally taxable.
(2). Source: Moody's Investors Service, State of Tennessee, 8/10/98.
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 56 of
this report.
24
Tennessee's strong financial position resulted largely from the state's
conservative financial management. The state's debt burden, at $216 per capita,
is one of the lowest in the nation. Prudent use of debt has resulted in balanced
financial operations. For example, while the state debt service limit is $392
million, currently the service is running at $125 million, only 32% of the
limit.(3)
New-issue bond supply should be moderate, but sufficient. The low debt burden
per capita combined with the growing need for new infrastructure such as
highways, schools and affordable housing should sustain the demand for new
borrowing. If interest rates remain low, refunding issues resulting from lower
borrowing costs available to issuers could add to the new-issue supply.
PORTFOLIO NOTES
For the six months ending November 30, 1998, Franklin Tennessee Municipal Bond
Fund experienced strong asset growth. The fund's total net assets increased 30%,
from $44.5 million on May 31, 1998, to $58.1 million at the end of the reporting
period. The fund strives to always remain fully invested and seeks investments
in tax-exempt municipal securities with good call protection, in an effort to
keep within its stated objective of providing long-term income to shareholders.
As a result, the fund boasts excellent call protection with a weighted average
life to first call of more than eight years.
PORTFOLIO BREAKDOWN
Franklin Tennessee
Municipal Bond Fund
11/30/98
<TABLE>
<CAPTION>
% OF TOTAL
LONG-TERM
SECTOR INVESTMENTS
- ------ -----------
<S> <C>
Hospitals 24.1%
Utilities 23.3%
Housing 10.3%
General Obligation 8.8%
Prerefunded 7.9%
Education 7.7%
Industrial 7.5%
Other Revenue 5.3%
Transportation 2.9%
Certificates of Participation 2.2%
</TABLE>
(3). Source: Standard & Poor's CreditWeek Municipal, Tennessee, 5/11/98.
25
DIVIDEND DISTRIBUTIONS*
Franklin Tennessee
Municipal Bond Fund - Class I
6/1/98 - 11/30/98
<TABLE>
<CAPTION>
DIVIDEND
MONTH PER SHARE
- ----- ---------
<S> <C>
June 4.7 cents
July 4.7 cents
August 4.7 cents
September 4.6 cents
October 4.6 cents
November 4.6 cents
Total 27.9 cents
</TABLE>
We closely monitor the supply of Tennessee tax-exempt municipal bonds. For the
first nine months of 1998, the state issued a total of $3.8 billion of new
bonds, a 106.1% increase from the first nine months of 1997. Noteworthy
positions added to the portfolio during the reporting period included Harpeth
Valley Utilities District Improvement Revenue; Knoxville Electric Revenue
Refunding and Improvement Systems and Johnson City Health and Educational
Facilities Board, Johnson City Medical Center.
We continue to maintain broad sector diversification in the portfolio holdings.
Such diversification helps us reduce the fund's exposure to risk and volatility
that may affect any one sector. In addition, the fund's superior credit quality,
with 80% of the portfolio invested in bonds rated AA or higher, further
increases the fund's stability. As a result, Franklin Tennessee Municipal Bond
Fund performed strongly for the period, resulting in a 4.63% distribution rate.
Looking forward, we will continue to follow our investment strategy of investing
for income, price stability and tax efficiency. We intend to maintain our
fiscally responsible management style by avoiding interest-rate speculation and
the use of derivatives. The fund should perform well into the next reporting
period, aided by stable interest rates and ample supply of new bonds.
*Assumes shares were purchased and held for the entire accrual period. Since
dividends accrue daily, your actual distributions will vary depending on the
date you purchased your shares and any account activity during the month. Income
distributions include all accrued income earned by the fund during the reporting
period.
26
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of November 30, 1998, the end of the reporting period. However,
market and economic conditions are changing constantly, which can be expected to
affect our strategies and the fund's portfolio composition. Although historical
performance is no guarantee of future results, these insights may help you
understand our investment and management philosophy.
27
FRANKLIN TENNESSEE
MUNICIPAL BOND FUND
CLASS I:
Subject to the maximum 4.25% initial sales charge. The fund's manager agreed in
advance to waive a portion of its management fees, which reduces operating
expenses and increases distribution rate, yield and total return to
shareholders. Without this waiver, the fund's distribution rate and total return
would have been lower, and yield for the period would have been 3.97%. The fee
waiver may be discontinued at any time upon notice to the fund's Board of
Trustees.
PERFORMANCE SUMMARY AS OF 11/30/98
Distributions will vary based on earnings of the fund's portfolio and any
profits realized from the sale of the portfolio's securities. Past distributions
are not indicative of future trends. All total returns include reinvested
distributions at net asset value.
PRICE AND DISTRIBUTION INFORMATION (6/1/98-11/30/98)
<TABLE>
<CAPTION>
CLASS I CHANGE 11/30/98 5/31/98
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value +$0.15 $11.42 $11.27
DISTRIBUTIONS
-----------------------------------------------------
Dividend Income $0.279
</TABLE>
Past performance is not predictive of future results.
28
PERFORMANCE
<TABLE>
<CAPTION>
SINCE
INCEPTION
CLASS I 1-YEAR 3-YEAR (5/10/94)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) +8.23% +24.72% +44.28%
Average Annual Total Return(2) +3.65% +6.09% +7.35%
Distribution Rate(3) 4.63%
Taxable Equivalent Distribution Rate(4) 8.15%
30-Day Standardized Yield(5) 4.35%
Taxable Equivalent Yield(4) 7.66%
</TABLE>
(1). Cumulative total return represents the change in value of an investment
over the periods indicated and does not include sales charges.
(2). Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes the applicable, maximum
sales charge(s) for that class.
(3). Distribution rate is based on an annualization of the current 4.6 cent per
share monthly dividend and the maximum offering price of $11.93 on November 30,
1998.
(4). Taxable equivalent distribution rate and yield assume the 1998 maximum
combined federal and Tennessee state personal income tax bracket of 43.2%, based
on the federal income tax rate of 39.6%.
(5). Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended November 30, 1998.
Bond prices, and thus the fund's share price, generally move in the opposite
direction from interest rates. Since markets can go down as well as up,
investment return and principal value will fluctuate with market conditions, and
you may have a gain or loss when you sell your shares.
Past performance is not predictive of future results.
29
CREDIT QUALITY BREAKDOWN
Franklin Washington Municipal Bond Fund
Based on Total Long-Term Investments*
11/30/98
<TABLE>
<S> <C>
AAA ..................... 60.2%
AA ...................... 21.6%
A ....................... 12.0%
BBB ..................... 6.2%
</TABLE>
*Quality breakdown may include
internal ratings for bonds not rated by a
national rating agency.
FRANKLIN WASHINGTON
MUNICIPAL BOND FUND
Your Fund's Goal: Franklin Washington Municipal Bond Fund seeks to provide high,
current income exempt from regular federal income tax while seeking preservation
of capital by investing primarily in a portfolio of Washington municipal
securities.(1)
STATE UPDATE
Washington's escalating population growth and ongoing economic restructuring led
to the state's improved economic condition during the six months under review.
Broad diversification helped buffer this formerly one-dimensional,
aerospace-oriented economy from the Asian financial woes affecting many Pacific
Northwest states. For instance, Microsoft's market capitalization leaves the
software giant ranked as one of the largest companies in the world. Still,
Washington is not immune from international forces, as more than half of the
state's exports are destined for Asia.(2)
(1). The fund may invest as much as 100% of its assets in bonds that pay
interest subject to federal alternative minimum tax. All or a significant
portion of the income on these obligations may be subject to such tax.
Distributions of capital gains and of ordinary income from accrued market
discount, if any, are generally taxable.
(2). Source: Fitch IBCA, State of Washington, 8/28/98.
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 60 of
this report.
30
The diversified economic base and above-average economic growth trends bolstered
the state's financial status. During the reporting period, Washington enjoyed
Aa3 and AA+ ratings, from Moody's and Standard & Poor's, respectively, two
national credit rating agencies. Conservative fiscal management, enforced by
Initiative 601 which places limits on tax and spending increases, kept the
budget in check. The debt burden, at $1,375 per capita, is about three times the
national average of $422; however, this represents a disproportionately small
4.6% of personal income in this relatively wealthy state. Meanwhile, record low
unemployment and population growth support forecasts by Moody's that the state
is poised for continued growth through fiscal 2001.(3)
DIVIDEND DISTRIBUTIONS*
Franklin Washington
Municipal Bond Fund - Class I
6/1/98 - 11/30/98
<TABLE>
<CAPTION>
DIVIDEND
MONTH PER SHARE
- ------------------------------
<S> <C>
June 4.9 cents
July 4.9 cents
August 4.9 cents
September 4.9 cents
October 4.9 cents
November 4.9 cents
- ------------------------------
TOTAL 29.4 CENTS
</TABLE>
*Assumes shares were purchased and held for the entire accrual period. Since
dividends accrue daily, your actual distributions will vary depending on the
date you purchased your shares and any account activity during the month. Income
distributions include all accrued income earned by the fund during the reporting
period.
3. Source: Moody's Investor Service, State of Washington, 7/2/98. This does not
indicate Moody's or Standard & Poor's ratings of the fund.
31
PORTFOLIO BREAKDOWN
Franklin Washington
Municipal Bond Fund
11/30/98
<TABLE>
<CAPTION>
% OF TOTAL
LONG-TERM
SECTOR INVESTMENTS
- -----------------------------------------------------
<S> <C>
Utilities 31.6%
General Obligation 16.6%
Housing 12.4%
Industrial 10.7%
Hospitals 10.2%
Education 9.7%
Prerefunded 6.2%
Transportation 1.7%
Certificates of Participation 0.9%
</TABLE>
PORTFOLIO NOTES
In our opinion, Washington offered attractive buying opportunities in the
state's municipal bond market, allowing us to purchase bonds that not only
provided strong income sources, but also improved the fund's credit quality.
During the period, we increased our holdings of AAA-rated bonds to 60.2% of
total long-term investments on November 30, 1998, compared with 52.4% on May 31,
1998. Recent purchases included Seattle Water Systems Revenue, FGIC insured;
Washington State Health Care Facilities Authority Revenue-Childrens Hospital and
Regional Medical Center, FSA insured; and Washington State Health Care
Facilities Authority Revenue-Multicare Health Systems, MBIA insured.
Going forward, we will continue to manage the fund with the primary intentions
of maintaining its competitive yield and protecting its share value. We
anticipate further economic growth in Washington, rather mild inflation and
relatively stable interest rates. Under such circumstances, we believe the fund
is positioned for positive performance.
32
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of November 30, 1998, the end of the reporting period. However,
market and economic conditions are changing constantly, which can be expected to
affect our strategies and the fund's portfolio composition. Although historical
performance is no guarantee of future results, these insights may help you
understand our investment and management philosophy.
33
FRANKLIN WASHINGTON
MUNICIPAL BOND FUND
CLASS I:
Subject to the current, maximum 4.25% initial sales charge. Prior to July 1,
1994, fund shares were offered at a higher initial sales charge; thus actual
returns would have been lower. The fund's manager agreed in advance to waive a
portion of its management fees, which reduces operating expenses and increases
distribution rate, yield and total return to shareholders. Without this waiver,
the fund's distribution rate and total return would have been lower, and yield
for the period would have been 3.73%. The fee waiver may be discontinued at any
time upon notice to the fund's Board of Trustees.
PERFORMANCE SUMMARY AS OF 11/30/98
Distributions will vary based on earnings of the fund's portfolio and any
profits realized from the sale of the portfolio's securities. Past distributions
are not indicative of future trends. All total returns include reinvested
distributions at net asset value.
PRICE AND DISTRIBUTION INFORMATION (6/1/98-11/30/98)
<TABLE>
<CAPTION>
CLASS I CHANGE 11/30/98 5/31/98
- ---------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value +$0.12 $10.60 $10.48
DISTRIBUTIONS
- ---------------------------------------------------------------
Dividend Income $0.294
</TABLE>
Past performance is not predictive of future results.
34
PERFORMANCE
<TABLE>
<CAPTION>
SINCE
INCEPTION
CLASS I 1-YEAR 5-YEAR (5/3/93)
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) +8.23% +38.35% +44.21%
Average Annual Total Return(2) +3.63% +5.79% +5.96%
Distribution Rate(3) 5.31%
Taxable Equivalent Distribution Rate(4) 8.79%
30-Day Standardized Yield(5) 4.47%
Taxable Equivalent Yield(4) 7.40%
</TABLE>
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the current, applicable,
maximum sales charge(s) for that class.
3. Distribution rate is based on an annualization of the current 4.9 cent per
share monthly dividend and the maximum offering price of $11.07 on November 30,
1998.
4. Taxable equivalent distribution rate and yield assume the maximum federal
income tax rate of 39.6%.
5. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended November 30, 1998.
Bond prices, and thus the fund's share price, generally move in the opposite
direction from interest rates. Since markets can go down as well as up,
investment return and principal value will fluctuate with market conditions, and
you may have a gain or loss when you sell your shares.
Bond prices, and thus the fund's share price, generally move in the opposite
direction from interest rates. Since markets can go down as well as up,
investment return and principal value will fluctuate with market conditions, and
you may have a gain or loss when you sell your shares.
35
Past performance is not predictive of future results.
MUNICIPAL BOND RATINGS
MOODY'S
Aaa: Best quality. They carry the smallest degree of investment risk and
generally are referred to as "gilt-edged." Interest payments are protected by a
large or exceptionally stable margin, and principal is secure. Although the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
Aa: High quality by all standards. Together with the Aaa group, they comprise
what generally are known as high-grade bonds. Aa bonds are rated lower than Aaa
because margins of protection may not be as large, fluctuation of protective
elements may be of greater amplitude, or there may be other elements which make
the long-term risks appear larger.
A: Possess many favorable investment attributes and are considered upper
medium-grade obligations. Factors giving security to principal and interest are
considered adequate, but elements may be present which suggest a susceptibility
to impairment sometime in the future.
Baa: Medium-grade obligations, i.e., they are neither highly protected nor
poorly secured. Interest payments and principal security appear adequate for the
present, but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time.
36
Ba: Contain speculative elements. Often the protection of interest and principal
payments may be very moderate and, thereby, not well safeguarded during both
good and bad times over the future. Uncertainty of position characterizes bonds
in this class.
B: Generally lack characteristics of the desirable investment. Assurance of
interest and principal payments or of maintenance of other terms of the contract
over any long period of time may be small.
Caa: Poor standing. Such issues may be in default, or elements of danger with
respect to principal or interest may be present.
Ca: Obligations that are highly speculative. Such issues are often in default or
have other marked shortcomings.
C: Lowest-rated class of bonds. Issues rated C can be regarded as having
extremely poor prospects of ever attaining any real investment standing.
S&P(R)
AAA: The highest rating assigned by S&P to a debt obligation and indicates the
ultimate degree of protection as to principal and interest.
AA: Also qualify as high-grade obligations, and, in the majority of instances,
differ from AAA issues only in a small degree.
A: Generally regarded as upper medium-grade. They have considerable investment
strength but are not entirely free from adverse effects of changes in economic
and trade conditions. Interest and principal are regarded as safe.
BBB: Regarded as having an adequate capacity to pay principal and interest.
Whereas they normally exhibit adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a weakened
capacity to pay principal and interest for bonds in this category than for bonds
in the A category.
37
BB, B, CCC, CC: Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds likely will have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C: Reserved for income bonds on which no interest is being paid.
D: Debt rated "D" is in default and payment of interest and/or repayment of
principal is in arrears.
38
FRANKLIN MUNICIPAL SECURITIES TRUST
Financial Highlights
FRANKLIN ARKANSAS MUNICIPAL BOND FUND
<TABLE>
<CAPTION>
CLASS I
--------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED MAY 31,
NOVEMBER 30, 1998 ----------------------------------------------------------------
(UNAUDITED) 1998 1997 1996 1995 1994+
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ........ $ 10.99 $ 10.51 $ 10.21 $ 10.32 $ 10.06 $ 10.00
---------- ---------- ---------- ---------- ---------- ----------
Income from investment operations:
Net investment income ...................... .29 .56 .58 .55 .51 .01
Net realized and unrealized gains (losses) . .07 .50 .31 (.08) .19 .05
---------- ---------- ---------- ---------- ---------- ----------
Total from investment operations ............ .36 1.06 .89 .47 .70 .06
---------- ---------- ---------- ---------- ---------- ----------
Less distributions from net investment income (.29) (.58) (.59) (.58) (.44) --
---------- ---------- ---------- ---------- ---------- ----------
Net asset value, end of period .............. $ 11.06 $ 10.99 $ 10.51 $ 10.21 $ 10.32 $ 10.06
========== ========== ========== ========== ========== ==========
Total return* ............................... 3.23% 10.31% 8.90% 4.65% 7.27% .60%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ........... $ 39,701 $ 30,377 $ 13,140 $ 8,166 $ 4,134 $ 2,213
Ratios to average net assets:
Expenses ................................... .10%** .10% .10% .10% .10% .03%**
Expenses excluding waiver and payments
by affiliate ............................... .80%** .83% .87% 1.04% 1.11% 1.20%**
Net investment income ...................... 5.22%** 5.30% 5.71% 5.69% 5.64% 2.00%**
Portfolio turnover rate ..................... 3.58% 18.75% 6.61% 19.22% 77.63% --
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
**Annualized
+For the period May 10, 1994 (effective date) to May 31, 1994.
See notes to financial statements.
39
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, NOVEMBER 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN ARKANSAS MUNICIPAL BOND FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS 90.5%
Arkansas GO, Waste Disposal and Pollution, Refunding, Series B, 6.25%, 7/01/20 ...................... $ 130,000 $ 137,787
Arkansas State Development Finance Authority,
Drivers License Revenue, State Police Headquarters, Wireless Data, FGIC Insured, 5.40%, 6/01/18 .. 950,000 988,703
HMR, Series B-1, 5.80%, 1/01/23 .................................................................. 495,000 511,983
SFMR, MBS Program, 5.375%, 7/01/30 ............................................................... 560,000 565,023
SFMR, MBS Program, Series B, 6.10%, 1/01/29 ...................................................... 1,000,000 1,050,630
SFMR, MBS Program, Series D, 6.85%, 1/01/27 ...................................................... 110,000 119,193
Waste Water System Revenue, Revolving Loan Fund, Series A, 5.85%, 12/01/19 ....................... 1,000,000 1,058,210
Arkansas State Student Loan Authority Revenue, Refunding, Sub Series B,
6.25%, 6/01/10 ................................................................................... 500,000 536,485
5.60%, 6/01/14 ................................................................................... 325,000 331,042
Arkansas State Water Resources Development,
Series A, 5.70%, 7/01/26 ......................................................................... 560,000 580,647
Series B, 5.75%, 7/01/25 ......................................................................... 300,000 316,938
Blytheville Solid Waste Recycling and Sewage Treatment Revenue, Nucor Corp. Project, 6.375%, 1/01/23 100,000 107,491
Camden Environmental Improvement Revenue, International Paper Co. Project, Series A, 7.625%, 11/01/18 250,000 291,285
Conway Public Facilities Board, Capital Improvement Revenue, Hendrix College Project, 6.00%, 10/01/26 500,000 524,755
Conway Sales and Use Tax Revenue, Capital Improvement, Series A, FSA Insured, 5.35%, 12/01/17 ....... 1,975,000 2,069,761
Fort Smith Water and Sewer Revenue, Refunding and Construction, MBIA Insured, 6.00%, 10/01/12 ....... 130,000 143,475
Fouke School District No. 15, Refunding and Construction, MBIA Insured, Pre-Refunded, 6.60%, 4/01/19 130,000 147,064
Greenland School District No. 95, Washington County, Refunding and Construction, MBIA Insured,
6.50%, 5/01/13 ...................................................................................... 115,000 119,447
Guam Airport Authority Revenue, Series B, 6.60%, 10/01/10 ........................................... 125,000 137,481
Guam Power Authority Revenue, Series A, 5.25%, 10/01/23 ............................................. 200,000 200,440
Gurdon PCR, International Paper Co. Project, Refunding, Series A, 5.375%, 3/01/20 ................... 2,160,000 2,175,228
Jefferson County PCR,
Arkansas Power and Light Co. Project, Refunding, 6.30%, 6/01/18 .................................. 400,000 432,620
Entergy Arkansas Inc. Project, Refunding, 5.60%, 10/01/17 ........................................ 2,900,000 2,944,167
Jonesboro City Water and Light Plant, Public Utilities System Revenue,
MBIA Insured, 5.40%, 11/15/13 .................................................................... 100,000 107,402
Refunding, AMBAC Insured, 5.25%, 12/01/13 ........................................................ 200,000 207,276
Jonesboro Residential Housing and Health Care Facilities Board, Hospital Revenue, St. Bernard's
Regional Medical Center, Refunding, Series B, AMBAC Insured, 5.90%, 7/01/16 ......................... 450,000 491,913
Little River County Revenue, Georgia-Pacific Corp. Project, Refunding, 5.60%, 10/01/26 .............. 3,000,000 3,002,160
Little Rock Capital Improvement, Refunding, 6.30%, 2/01/09 .......................................... 140,000 143,947
Little Rock Capital Improvement Revenue, Infrastructure Improvements, Series A, AMBAC Insured,
5.00%, 10/01/19 ..................................................................................... 1,000,000 993,530
Little Rock Municipal Airport Revenue, Refunding, MBIA Insured, 6.00%, 11/01/14 ..................... 130,000 138,112
Little Rock School District GO, Refunding, 6.25%, 12/01/07 .......................................... 120,000 121,415
FSA Insured, 5.60%, 1/01/20 ...................................................................... 100,000 102,095
Little Rock Waste Disposal Revenue, 5.80%, 5/01/16 .................................................. 440,000 464,015
North Little Rock Health Facilities Board, Health Care Revenue,
Baptist Health Facility, Series A, MBIA Insured, 5.50%, 12/01/21 .................................... 800,000 839,920
Paragould Hospital Revenue, 6.375%, 10/01/17 ........................................................ 400,000 435,224
Pine Bluff Environmental Improvement Revenue, International Paper Co. Project, 5.55%, 11/01/22 ...... 500,000 503,225
Pope County PCR, Arkansas Power and Light Co. Project, Refunding, 6.30%, 11/01/20 ................... 500,000 521,710
Puerto Rico Commonwealth GO,
AMBAC Insured, 5.40%, 7/01/25 .................................................................... 250,000 260,230
Pre-Refunded, 6.50%, 7/01/23 ..................................................................... 250,000 285,993
Public Improvement, Refunding, 5.75%, 7/01/17 .................................................... 250,000 269,025
</TABLE>
40
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, NOVEMBER 30, 1998 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN ARKANSAS MUNICIPAL BOND FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
Puerto Rico Commonwealth Highway and Transportation Authority Revenue,
Series A, 5.00%, 7/01/38 ................................................................. $ 3,000,000 $ 2,954,100
Series Y, 5.50%, 7/01/26 ................................................................. 350,000 365,614
Puerto Rico Commonwealth Highway Authority Highway Revenue, Series Q,
Pre-Refunded, 6.00%, 7/01/20 ............................................................... 165,000 171,531
Puerto Rico Electric Power Authority Revenue,
Refunding, Series X, 5.50%, 7/01/25 ...................................................... 200,000 206,104
Series R, Pre-Refunded, 6.25%, 7/01/17 ................................................... 175,000 192,122
Series T, 5.50%, 7/01/20 ................................................................. 400,000 413,940
Puerto Rico Housing Bank and Financing Authority SFMR,
Affordable Housing Mortgage, First Portfolio, 6.25%, 4/01/29 ............................. 135,000 144,470
Puerto Rico Industrial, Tourist, Educational, Medical and Environmental Control
Facilities Financing Authority, Industrial Revenue, Teacher's Retirement
System Revenue, Series B, 5.50%, 7/01/21 ................................................. 250,000 259,990
Pulaski County Health Facilities Board Revenue, Nazareth Sisters of
Charity, St. Vincent's Infirmary, Refunding, MBIA Insured, 6.05%, 11/01/09 ................. 125,000 145,666
Pulaski County Public Facilities Board,
MFR, South Oaks Apartments, Refunding, Series A, GNMA Secured, 6.50%, 10/20/29 ........... 600,000 644,118
Mortgage, College Projects, Refunding, Series A, GNMA Secured, 5.55%, 6/20/27 ............ 1,300,000 1,326,013
Saline County Hospital Revenue, Refunding, Connie Lee Insured, 6.00%, 9/01/19 ............... 700,000 760,977
Saline County Retirement Housing and Healthcare Facilities Board Revenue,
Refunding, AMBAC Insured, 5.80%, 6/01/11 ................................................. 195,000 212,638
Sebastian County, Community Junior College District, Refunding and
Improvement, AMBAC Insured, 5.60%, 4/01/17 ................................................. 600,000 645,186
Texarkana Public Facilities Board, Waterworks Facilities Revenue,
Refunding, FGIC Insured, 5.40%, 9/01/15 .................................................... 200,000 210,662
University of Arkansas Revenues, Various Facilities, Fayetteville Campus,
5.25%, 11/01/17 .......................................................................... 300,000 304,680
5.30%, 11/01/17 .......................................................................... 340,000 347,140
University of Central Arkansas Revenue, Athletic Facilities,
Series C, AMBAC Insured, 6.125%, 4/01/26 ................................................. 375,000 414,098
University of Puerto Rico, University System Revenues, Series M, MBIA Insured, 5.25%, 6/01/25 285,000 292,262
University of Southern Arkansas, Student Fees, MBIA Insured, 6.00%, 10/01/13 ................ 125,000 129,400
Virgin Islands Public Finance Authority Revenue, Senior Lien, Fund Loan Notes, Refunding,
Series A, 5.50%, 10/01/18 ................................................................ 1,400,000 1,421,797
-----------
TOTAL LONG TERM INVESTMENTS (COST $34,608,691) ............................................... 35,939,555
-----------
(a) SHORT TERM INVESTMENTS 6.8%
Arkansas State Development Finance Authority, Higher Education,
Capital Asset, Series A, FGIC Insured, Weekly VRDN and Put, 3.15%, 12/01/15 ................ 600,000 600,000
Clark County, Solid Waste Disposal Revenue, Reynolds Metals Co. Project,
Weekly VRDN and Put, 3.25%, 8/01/22 ........................................................ 100,000 100,000
Puerto Rico Commonwealth Highway and Transportation Authority,
Transportation Revenue, Series A, AMBAC Insured, Weekly VRDN and Put, 2.75%, 7/01/28 ....... 1,800,000 1,800,000
University of Arkansas Revenues, Various Facilities, UAMS Campus,
Refunding, Weekly VRDN and Put, 3.15%, 12/01/19 ............................................ 200,000 200,000
-----------
TOTAL SHORT TERM INVESTMENTS (COST $2,700,000) .............................................. 2,700,000
-----------
TOTAL INVESTMENTS (COST $37,308,691) 97.3% .................................................. 38,639,555
OTHER ASSETS, LESS LIABILITIES 2.7% ......................................................... 1,061,058
-----------
NET ASSETS 100.0% ........................................................................... $39,700,613
===========
</TABLE>
See Glossary of Terms on page 62.
(a) Variable rate demand notes (VRDNs) are tax-exempt obligations which contain
a floating or variable interest rate adjustment formula and an unconditional
right of demand to receive payment of the principal balance plus accrued
interest at specified dates.
See notes to financial statements.
41
FRANKLIN MUNICIPAL SECURITIES TRUST
Financial Highlights
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND
<TABLE>
<CAPTION>
CLASS I
-----------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED MAY 31,
NOVEMBER 30, 1998 -------------------------------------------------------------------
(UNAUDITED) 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ...... $ 10.65 $ 10.10 $ 9.81 $ 9.93 $ 9.73 $ 9.97
----------- ----------- ----------- ----------- ----------- -----------
Income from investment operations:
Net investment income .................... .29 .62 .63 .64 .66 .53
Net realized and unrealized gains (losses) .19 .55 .29 (.10) .18 (.20)
----------- ----------- ----------- ----------- ----------- -----------
Total from investment operations .......... .48 1.17 .92 .54 .84 .33
----------- ----------- ----------- ----------- ----------- -----------
Less distributions from:
Net investment income .................... (.29) (.62) (.63)++ (.66) (.64) (.56)
In excess of net investment income ....... (.01) -- -- -- -- --
Net realized gains ....................... -- -- -- -- -- (.01)
----------- ----------- ----------- ----------- ----------- -----------
Total distributions ....................... (.30) (.62) (.63) (.66) (.64) (.57)
----------- ----------- ----------- ----------- ----------- -----------
Net asset value, end of period ............ $ 10.83 $ 10.65 $ 10.10 $ 9.81 $ 9.93 $ 9.73
=========== =========== =========== =========== =========== ===========
Total return* ............................. 4.58% 11.78% 9.64% 5.55% 9.08% 3.22%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ......... $ 511,420 $ 412,211 $ 213,396 $ 118,313 $ 51,102 $ 31,938
Ratios to average net assets:
Expenses ................................. .42%** .35% .34% .35% .20% .07%
Expenses excluding waiver and payments
by affiliate ........................... .64%** .69% .75% .81% .88% .87%
Net investment income .................... 5.38%** 5.81% 6.24% 6.49% 6.89% 6.14%
Portfolio turnover rate ................... 5.13% 37.75% 33.79% 28.02% 57.06% 40.74%
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized. Prior to May 1, 1994, dividends from net
investment income were reinvested at the offering price.
**Annualized
++Includes distributions in excess of net investment income in the amount
of $.001.
42
FRANKLIN MUNICIPAL SECURITIES TRUST
Financial Highlights (continued)
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND (CONT.)
<TABLE>
<CAPTION>
CLASS II
------------------------------------------------------------
SIX MONTHS ENDED
NOVEMBER 30, 1998 YEAR ENDED MAY 31,
(UNAUDITED) 1998 1997 1996+
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ......................... $ 10.68 $ 10.12 $ 9.82 $ 9.82
--------- --------- --------- ---------
Income from investment operations:
Net investment income ....................................... .26 .56 .57 .05
Net realized and unrealized gains ........................... .19 .56 .30 --
--------- --------- --------- ---------
Total from investment operations ............................. .45 1.12 .87 .05
--------- --------- --------- ---------
Less distributions from:
Net investment income ....................................... (.26) (.56) (.57)++ (.05)
In excess of net investment income .......................... (.01) -- -- --
--------- --------- --------- ---------
Total distributions .......................................... (.27) (.56) (.57) (.05)
--------- --------- --------- ---------
Net asset value, end of period ............................... $ 10.86 $ 10.68 $ 10.12 $ 9.82
========= ========= ========= =========
Total return* ................................................ 4.27% 11.30% 9.08% .54%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ............................ $ 61,404 $ 40,363 $ 10,624 $ 212
Ratios to average net assets:
Expenses .................................................... .97%** .90% .90% .91%**
Expenses excluding waiver and payments by affiliate ......... 1.20%** 1.24% 1.31% 1.81%**
Net investment income ....................................... 4.82%** 5.23% 5.68% 5.73%**
Portfolio turnover rate ...................................... 5.13% 37.75% 33.79% 28.02%
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
**Annualized
+For the period May 1, 1996 (effective date) to May 31, 1996.
++Includes distributions in excess of net investment income in the amount of
$.001.
See notes to financial statements.
43
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, NOVEMBER 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS 99.2%
ABAG Finance Authority for Nonprofit Corporations, COP,
California Mortgage Insured, 6.15%, 1/01/22 ................................................ $ 1,490,000$ $1,654,243
Rhoda Haas Goldman Plaza, California Mortgage Insured, 5.125%, 5/15/23 ..................... 3,000,000 2,997,840
Adelanto Water Authority Revenue,
Parity Water Systems Acquisition Project, Series A, 7.50%, 9/01/28 ......................... 3,445,000 3,782,438
Subordinated Lien, Water Systems Acquisition Project, Series A, 7.50%, 9/01/28 ............. 2,000,000 2,195,900
Alameda CFD No. 2, Special Tax, 6.125%, 9/01/16 ............................................... 1,240,000 1,295,825
Alameda PFA, Local Agency Revenue, Special Tax, Community Facility District No. 1-A,
6.70%, 8/01/12 ............................................................................. 3,400,000 3,644,358
7.00%, 8/01/19 ............................................................................. 4,015,000 4,408,189
American Canyon Joint Powers Financing Authority, Lease Revenue,
Civic/Recreation Facilities, 6.40%, 6/01/22 .................................................. 1,000,000 1,059,880
Antioch 1915 Act, AD No. 27, Series D, 7.30%, 9/02/13 ......................................... 460,000 474,531
Avenal PFA Revenue, Refunding,
7.00%, 9/02/10 ............................................................................. 1,635,000 1,671,918
7.25%, 9/02/27 ............................................................................. 3,665,000 3,800,092
Beaumont Financing Authority, Local Agency Revenue, Sewer Enterprise Project,
Refunding, Series A, 6.75%, 9/01/25 .......................................................... 5,000,000 5,202,400
Belmont RDA, Tax Allocation, Los Costanos Community Development, Series A, 6.80%, 8/01/24 ..... 1,510,000 1,713,352
Benicia 1915 Act, Fleetside Industrial Park Assessment, Refunding, 7.00%, 9/02/14 ............. 445,000 459,124
Blythe RDA, Project No.1, Tax Allocation, Refunding, 5.80%, 5/01/28 ........................... 1,000,000 1,053,640
Brea Olinda CFD No. 97-1, Special Tax, 5.875%, 9/01/28 ........................................ 1,400,000 1,415,764
Brea Olinda USD, CFD No. 95-1, Special Tax,
5.625%, 9/01/18 ............................................................................ 1,100,000 1,097,943
5.75%, 9/01/28 ............................................................................. 1,300,000 1,304,485
Brentwood 1915 Act, Capital Improvement Finance Program, No. 94-1,
Infrastructure Financing, 5.875%, 9/02/17 .................................................... 775,000 787,733
6.00%, 9/02/27 ............................................................................. 1,000,000 1,029,900
Calexico Special Financing Authority, Sales Tax Revenue, 7.40%,
1/01/99 .................................................................................... 10,000 10,013
1/01/00 .................................................................................... 125,000 127,065
1/01/01 .................................................................................... 165,000 169,470
1/01/02 .................................................................................... 175,000 181,333
1/01/03 .................................................................................... 220,000 229,449
1/01/04 .................................................................................... 235,000 246,172
1/01/05 .................................................................................... 285,000 298,560
1/01/06 .................................................................................... 340,000 356,330
1/01/18 .................................................................................... 7,680,000 8,000,410
California Educational Facilities Authority Revenue,
Los Angeles College of Chiropractic, Refunding, 5.60%, 11/01/17 ............................ 1,500,000 1,562,100
Pooled College and University Projects, Series B, 6.30%, 4/01/21 ........................... 1,000,000 1,119,040
Student Loan Program, Series A, MBIA Insured, 6.00%, 3/01/16 ............................... 4,000,000 4,270,960
California Health Facilities Financing Authority Revenue,
(b) atholic Healthcare West, Series A, 5.00%, 7/01/18 ....................................... 10,000,000 9,876,700
Health Facility Clinic, Series A, California Mortgage Insured, 5.25%, 6/01/23 .............. 2,435,000 2,453,092
Kaiser Permanente, Series A, 5.55%, 8/15/25 ................................................ 3,750,000 3,791,813
Kaiser Permanente, Series A, 5.40%, 5/01/28 ................................................ 5,000,000 5,085,950
Marshall Hospital, Refunding, Series A, 5.25%, 11/01/18 .................................... 3,215,000 3,271,616
</TABLE>
44
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, NOVEMBER 30, 1998 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
California Health Facilities Financing Authority Revenue, (cont.)
Sacramento Medical Health Facility, Series A, California Mortgage Insured, 5.25%, 5/01/21 ...... $ 2,320,000 $ 2,338,398
Thessalonika Family, Series A, MBIA Insured, 6.20%, 12/01/15 ................................... 990,000 1,097,593
California HFA Revenue, Home Mortgage,
MFHR, Series B, AMBAC Insured, 6.15%, 8/01/22 .................................................. 5,000,000 5,348,900
Series B, 7.125%, 2/01/26 ...................................................................... 765,000 792,815
Series D, Pre-Refunded, 7.50%, 8/01/20 ......................................................... 1,800,000 1,953,666
Series F-1, 7.00%, 8/01/26 ..................................................................... 1,795,000 1,920,650
Series H, 6.25%, 8/01/27 ....................................................................... 2,475,000 2,641,122
Series R, MBIA Insured, 6.15%, 8/01/27 ......................................................... 3,285,000 3,485,155
California PCFA Revenue,
PG&E Corp., Series B, 5.85%, 12/01/23 .......................................................... 5,000,000 5,242,250
Southern California Edison Co., Series B, 6.40%, 12/01/24 ...................................... 2,000,000 2,196,460
California PCFA, Solid Waste Disposal Revenue, Browning-Ferris
Industries, Inc., 6.75%, 9/01/19 ................................................................. 1,000,000 1,113,150
California Special District Association Finance Corp., COP, Series V, 7.50%, 5/01/13 .............. 55,000 59,803
California State GO,
FGIC Insured, 6.00%, 8/01/19 ................................................................... 30,000 33,136
FGIC Insured, Pre-Refunded, 6.00%, 8/01/19 ..................................................... 1,470,000 1,657,013
Veterans Bonds, Series BD, BE, and BF, 6.40%, 2/01/22 .......................................... 1,250,000 1,267,675
Veterans Bonds, Series BH, 5.50%, 12/01/18 ..................................................... 5,000,000 5,151,950
California State HFA, Mortgage Revenue, Series L, MBIA Insured, 6.40%, 8/01/27 .................... 3,000,000 3,213,930
California Statewide CDA, Lease Revenue, Special Facilities,
United Air Lines, Inc., Los Angeles, 5.625%, 10/01/34 ............................................ 26,955,000 27,667,421
California Statewide CDA Revenue, COP,
Auxiliary Organization, California State University Foundation, MBIA Insured, 5.20%, 6/01/24 ..... 7,165,000 7,301,708
CHFCLP Insured, 7.25%, 12/01/22 ................................................................ 1,800,000 2,105,874
Capistrano USD, CFD, Special Tax No. 92-1, Pre-Refunded, 7.00%, 9/01/18 ........................... 1,000,000 1,156,750
Carlsbad 1915 Act, Escrow-AD No. 96-1,
5.50%, 9/02/28 ................................................................................. 4,775,000 4,726,247
5.55%, 9/02/28 ................................................................................. 1,745,000 1,729,766
Central Valley Financing Authority, Cogeneration Project Revenue,
Carson Ice General Project, Refunding, MBIA Insured, 5.00%, 7/01/18 ............................. 1,000,000 1,006,080
Chaffey Community College District, COP, 5.20%, 9/01/23 ........................................... 3,060,000 3,105,472
(b)Clovis 1915 Act, Special Assessment, AD No. 98-1, Temperance, 6.375%, 9/02/18 ................... 1,620,000 1,624,034
Compton Sewer Revenue, Refunding,
5.125%, 9/01/13 ................................................................................ 1,565,000 1,590,447
5.375%, 9/01/23 ................................................................................ 2,000,000 2,025,040
Duarte RDA, Tax Allocation,
Davis Addition Project Area, Refunding, 6.70%, 9/01/14 ......................................... 2,615,000 2,857,044
Davis Addition Project Area, Refunding, 6.90%, 9/01/18 ......................................... 4,120,000 4,515,644
Rancho Duarte Phase I Project Area, Pre-Refunded, 6.80%, 9/01/16 ............................... 805,000 981,263
El Cajon RDA, Tax Allocation, Redevelopment Project, Refunding, AMBAC Insured, 5.35%, 10/01/22 .... 1,000,000 1,028,920
El Monte PFA,
Housing Set Aside Revenue, 5.75%, 6/01/28 ...................................................... 2,570,000 2,570,000
Tax Allocation Revenue, Multiple Redevelopment District No. 86-1,
Series R, 5.75%, 6/01/28 ......................................................................... 6,215,000 6,215,000
Escondido GO, 1915 Act, AD No. 86-1, Refunding, Series R, 5.625%, 9/02/18 .......................... 1,150,000 1,181,073
Fontana RDA, Tax Allocation, Jurupa Hills Redevelopment
Project, Refunding, Series A, 5.50%, 10/01/19 ..................................................... 5,000,000 5,160,250
</TABLE>
45
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, NOVEMBER 30, 1998 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
Fontana Special Tax,
CFD No. 7, 6.125%, 9/01/28 ..................................................................... $ 1,280,000 $1,318,426
Refunding, Subordinated CFD No. 2, Series B, 5.70%, 9/01/12 .................................... 1,960,000 1,969,996
Foothill/Eastern Transportation Corridor Agency, Toll Road Revenue,
Senior Lien, Series A,
6.50%, 1/01/32 ................................................................................. 5,500,000 6,172,320
6.00%, 1/01/34 ................................................................................. 8,235,000 9,001,596
Garden Grove Housing Authority MFHR, Set-Aside Tax Increment,
Series C, 6.70%, 7/01/24 ......................................................................... 6,375,000 6,786,889
Gateway Improvement Authority Revenue, Marin City CFD, Series A,
Pre-Refunded, 7.75%, 9/01/25 ..................................................................... 2,500,000 3,067,400
Gateway Refinancing Authority Revenue, Refunding, Series A, 5.55%, 9/01/25 ........................ 5,500,000 5,662,965
Granada Sanitation District, 1915 Act, Sewage Treatment Facilities,
Financing District, Series A,
7.125%, 9/02/16 ................................................................................ 940,000 969,591
7.25%, 9/02/22 ................................................................................. 960,000 990,336
Hawaiian Gardens RDA, Project No. 1, Tax Allocation, Refunding, 6.35%, 12/01/33 ................... 4,000,000 4,263,760
Hesperia PFA, Improvement Revenue, Series B, 7.375%, 10/01/23 ..................................... 1,930,000 2,047,383
Hi Desert Memorial Health Care District Revenue, Refunding, 5.50%,
10/01/15 ....................................................................................... 1,000,000 980,570
10/01/19 ....................................................................................... 2,000,000 1,944,300
Huntington Beach PFA Revenue, Huntington Beach Redevelopment Projects, Refunding, 7.00%, 8/01/24 .. 1,000,000 1,057,230
Irvine 1915 Act,
AD No. 94-15, 6.70%, 9/02/20 ................................................................... 2,500,000 2,565,550
AD No. 95-12, Group Three, 5.50%, 9/02/21 ...................................................... 3,000,000 3,010,500
Irvine Meadows Mobile Home Park Revenue, Series A, 5.70%,
3/01/18 ........................................................................................ 2,300,000 2,363,227
3/01/28 ........................................................................................ 5,000,000 5,074,150
Irwindale PFA, Special Tax, CFD No. 1, Refunding, 6.00%, 11/01/20 ................................. 4,450,000 4,514,036
John C. Fremont Hospital District Revenue, California Health Facilities, Insured, 6.75%, 6/01/13 .. 1,500,000 1,696,365
La Mirada RDA, Special Tax, CFD No. 89-1, Refunding, 5.70%, 10/01/20 .............................. 3,025,000 3,068,711
Lake Elsinore 1915 Act, AD No. 93-1, Series A, 7.90%, 9/02/24 ..................................... 1,265,000 1,342,279
Lake Elsinore School Financing Authority Revenue, Refunding, 6.125%, 9/01/19 ...................... 1,000,000 1,070,710
Lancaster RDA, Tax Allocation, Sub-Residential Redevelopment Project,
Subordinated Lien, Refunding, 6.65%, 9/01/27 ..................................................... 2,500,000 2,681,050
Lemon Grove School District, COP, Vista La Mesa Elementary School Construction, 6.40%, 9/01/26 .... 2,000,000 2,114,220
Long Beach IDR, California State University Foundation, Refunding, Series A, 5.25%,
2/01/13 ........................................................................................ 1,000,000 1,026,280
2/01/23 ........................................................................................ 1,000,000 1,004,960
Long Beach Special Tax, CFD No. 2, 7.50%, 9/01/11 ................................................. 140,000 141,189
Los Angeles Harbor Department Revenue, Series B,
6.00%, 8/01/14 ................................................................................. 3,500,000 3,883,285
5.375%, 11/01/23 ............................................................................... 2,465,000 2,526,748
Los Angeles MFR, Refunding, Series J-2C, 8.50%, 1/01/24 ........................................... 1,150,000 1,185,144
Lynwood PFA Revenue, Water System Improvement Project, 6.50%, 6/01/21 ............................. 1,175,000 1,316,599
Millbrae Elementary School District, COP, Financing Project, Pre-Refunded, 6.90%, 3/01/22 ......... 1,480,000 1,654,551
Modesto PFA, Lease Revenue, John Thurman Field Renovation Project, 6.125%, 11/01/16 ............... 1,700,000 1,841,967
Monrovia USD,
COP, Financing Project, MBIA Insured, 5.30%, 4/01/26 ........................................... 1,100,000 1,130,756
Special Tax, CFD No. 89-1, 5.65%, 9/01/23 ...................................................... 2,200,000 2,233,022
</TABLE>
46
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, NOVEMBER 30, 1998 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
Monterey Park PFA, Tax Allocation Revenue, Merged Redevelopment Project Area,
5.25%, 3/01/18 ...................................................................................... $ 1,900,000 $ 1,859,321
5.30%, 3/01/28 ...................................................................................... 3,000,000 2,917,200
National City Community Development Commission, MFHR, Park Villas Apartments, Series A, GNMA Secured,
5.85%, 7/20/19 ...................................................................................... 1,545,000 1,626,113
Newman RDA, Tax Allocation, Redevelopment and Housing Project No.1, 5.375%, 8/01/27 .................... 1,285,000 1,272,844
Northern Mariana Islands, Commonwealth Ports Authority,
Airport Revenue, Senior Lien, Series A, 6.25%, 3/15/28 .............................................. 5,050,000 5,119,640
Seaport Revenue, Series A, 6.40%, 3/15/28 ........................................................... 2,000,000 1,980,940
Oakland Revenue, YMCA of the East Bay Project, Refunding, 7.10%, 6/01/10 ............................... 2,815,000 3,168,677
Orange County CFD No. 86-2, Special Tax, Rancho Santa Margarita, Refunding, Series A,
5.55%, 8/15/17 ...................................................................................... 1,000,000 1,022,590
Orinda 1915 Act, AD No. 94-1, Oak Springs, 8.25%, 9/02/19 .............................................. 1,515,000 1,564,207
Oroville Hospital Revenue, Oroville Hospital, Series A, CHFCLP Insured, 5.40%, 12/01/17 ................ 1,140,000 1,168,557
Palm Desert Financing Authority, Tax Allocation, Housing Set-Aside Revenue, MBIA Insured,
5.10%, 10/01/27 ..................................................................................... 1,875,000 1,894,800
Palmdale Special Tax, CFD No. 93-1, Ritter Ranch Project, Series A, 8.50%, 9/01/17 ..................... 10,000,000 9,000,000
Paramount RDA, Tax Allocation, Redevelopment Project Area 1, Refunding, MBIA Insured, 8/01/26 .......... 14,050,000 3,451,523
Perris PFA, Local Agency Revenue, Series B, 7.25%, 8/15/23 ............................................. 500,000 528,985
Pittsburg 1915 Act, Infrastructure Financing Authority Reassessment Revenue,
Series A, 5.60%, 9/02/24 ............................................................................ 1,000,000 1,022,380
Sub Series B, 6.00%, 9/02/24 ........................................................................ 2,710,000 2,767,100
Pomona RDA, Tax Allocation, Series Y,
5.45%, 5/01/22 ...................................................................................... 2,360,000 2,397,500
5.50%, 5/01/32 ...................................................................................... 4,380,000 4,460,899
Richmond Revenue, YMCA of the East Bay Project, Refunding, 7.25%, 6/01/17 .............................. 3,010,000 3,340,588
Riverside County CFD No. 87-5, Special Tax, Senior Lien, Refunding, Series A, 7.00%, 9/01/13 ........... 7,335,000 7,946,006
Riverside County PFA, Tax Allocation Revenue, Redevelopment Projects, Series A, 5.50%, 10/01/22 ........ 2,710,000 2,784,335
Roseville Special Tax, CFD No. 1, 5.75%, 9/01/23 ....................................................... 5,000,000 5,061,450
Sacramento County Special Tax, CFD No.1, Refunding,
5.60%, 12/01/12 ..................................................................................... 1,515,000 1,542,391
5.70%, 12/01/20 ..................................................................................... 2,410,000 2,463,333
6.30%, 9/01/21 ...................................................................................... 1,575,000 1,656,443
Salinas COP, Capital Improvement Projects, Series A, 5.70%, 10/01/28 ................................... 2,665,000 2,776,290
Salinas Valley Solid Waste Authority Revenue,
5.75%, 8/01/18 ...................................................................................... 500,000 515,275
5.80%, 8/01/27 ...................................................................................... 1,100,000 1,129,755
San Bernardino Associated Communities Financing Authority, Granada Hills Health Care, COP,
Refunding and Improvement, Series A, 6.90%, 5/01/27 ................................................. 10,000,000 10,514,700
San Bernardino Joint Powers Financing Authority, Lease Revenue, Department of Transportation Lease,
Series A, 5.50%, 12/01/20 ........................................................................... 4,000,000 4,187,680
San Diego Certificates of Undivided Interest, Water Utilities Fund Net System Revenue, FGIC Insured,
5.00%, 8/01/21 ...................................................................................... 6,000,000 6,025,920
San Diego County Educational Facilities Authority No. 1, Lease Revenue, 6.50%, 8/15/15 ................. 850,000 927,971
San Diego Housing Authority MFHR, MBS, Series C, GNMA Secured, 5.25%, 1/20/40 .......................... 3,880,000 3,904,328
San Diego Special Tax, CFD No. 1, Series B, Pre-Refunded, 7.10%, 9/01/20 ............................... 3,500,000 4,212,250
San Francisco Bay Area Rapid Transit District Sales Tax Revenue, Refunding, AMBAC Insured,
5.00%, 7/01/28 ...................................................................................... 5,000,000 4,999,800
San Francisco City and County Airport Commission, International Airport Revenue,
Issue 8A, Second Series, FGIC Insured, 6.25%, 5/01/20 ............................................... 1,570,000 1,728,806
Issue 16A, Second Series, FSA Insured, 5.125%, 5/01/23 .............................................. 2,000,000 2,007,620
</TABLE>
47
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, NOVEMBER 30, 1998 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
San Francisco City and County Redevelopment Financing Authority, Tax Allocation Revenue,
Redevelopment Projects, Refunding, Series C, 5.30%, 8/01/25 ............................... $ 1,635,000 $ 1,651,677
Series A, 5.50%, 8/01/22 .................................................................. 1,180,000 1,194,266
San Francisco City and County Revenue, Irwin Memorial Blood Center, Series A,
6.80%, 12/01/21 ........................................................................... 800,000 872,080
San Joaquin Area Flood Control Agency, 1915 Act, Flood Protection and Restoration
Assessment, FSA Insured, 6.00%, 9/02/14 ................................................... 970,000 1,003,892
San Joaquin Hills Transportation Corridor Agency, Toll Road Revenue,
Junior Lien, ETM, 1/01/28 ................................................................. 19,150,000 4,491,058
Refunding, Series A, 5.50%, 1/15/28 ....................................................... 20,710,000 21,258,194
Senior Lien, Pre-Refunded, 7.00%, 1/01/30 ................................................. 675,000 770,195
Senior Lien, Pre-Refunded, 6.75%, 1/01/32 ................................................. 3,450,000 3,904,193
San Jose Financing Authority Revenue, Convention Center Project, Refunding,
Series C, 6.40%, 9/01/17 .................................................................. 5,000,000 5,384,700
San Jose RDA, Tax Allocation, Merged Area Redevelopment Project, 5.25%, 8/01/29 .............. 6,750,000 6,867,383
San Luis Obispo COP, Vista Hospital System, Inc., 8.375%, 7/01/29 ............................ 6,660,000 7,175,617
San Marcos Public Facilities Authority Revenue, Refunding, 5.80%, 9/01/27 .................... 3,000,000 3,061,200
San Marcos RDA, Tax Allocation, Affordable Housing Project, Series A, 5.65%, 10/01/28 ........ 3,000,000 3,115,500
San Mateo RDA, Tax Allocation, Merged Area, Series A, 5.50%,
8/01/17 ................................................................................... 1,330,000 1,384,344
8/01/22 ................................................................................... 4,820,000 4,980,699
San Ramon PFA, Tax Allocation Revenue,
Pre-Refunded, 6.90%, 2/01/24 .............................................................. 700,000 818,909
Refunding, 6.90%, 2/01/24 ................................................................. 800,000 899,256
Sand City RDA, Tax Allocation Revenue, Redevelopment Project, 6.00%, 11/01/26 ................ 3,900,000 4,194,138
Santa Ana Financing Authority Revenue, Mainplace Project, Refunding, Series D,
5.50%, 9/01/15 ............................................................................ 1,250,000 1,264,988
5.60%, 9/01/19 ............................................................................ 2,000,000 2,027,320
Santa Rosa 1915 Act, Fountaingrove Parkway Extension Assessment, 7.625%, 9/02/19 ............. 1,500,000 1,548,015
Southern California Public Power Authority, Southern Transmission Project,
Sub-Crossover Refunding, 6.125%, 7/01/18 .................................................. 1,140,000 1,228,635
Stockton CFD No. 1, Special Tax, Mello Roos, Weston Ranch, Series A,
5.45%, 9/01/08 ............................................................................ 1,775,000 1,812,524
5.80%, 9/01/14 ............................................................................ 4,000,000 4,098,280
6.00%, 9/01/18 ............................................................................ 1,000,000 1,031,900
6.00%, 9/01/24 ............................................................................ 1,100,000 1,126,774
Stockton Health Facilities Revenue, Dameron Hospital Association, Refunding,
Series A, 5.70%, 12/01/14 ................................................................. 2,300,000 2,395,381
Suisun City PFA, Tax Allocation Revenue, Redevelopment Project,
Escrow Term, Series A, 5.20%, 10/01/28 .................................................... 3,000,000 3,020,880
Series A, 5.20%, 10/01/23 ................................................................. 275,000 276,914
Taft PFA, Lease Revenue, Community Correctional Facility Project, Series A,
6.05%, 1/01/17 ............................................................................ 3,235,000 3,525,050
Torrance RDA, Tax Allocation,
Downtown Redevelopment, Refunding, Series A, 5.55%, 9/01/18 ............................... 1,695,000 1,736,019
Downtown Redevelopment, Refunding, Series A, 5.60%, 9/01/28 ............................... 1,500,000 1,533,570
Subordinated Lien, Refunding, Series B, 5.625%, 9/01/28 ................................... 1,500,000 1,523,715
Tracy COP, I-205 Corridor Improvement Project, Pre-Refunded, 7.00%, 10/01/27 ................. 1,200,000 1,332,096
Union City CFD No. 1997-1, Special Tax,
5.70%, 9/01/18 ............................................................................ 1,000,000 1,015,310
5.80%, 9/01/28 ............................................................................ 2,180,000 2,231,099
University Revenues, Multiple Purpose Projects, Refunding, Series E, MBIA Insured,
5.125%, 9/01/20 ........................................................................... 625,000 635,025
Upland COP, Refunding, California Mortgage Insured, 5.50%, 6/01/21 ........................... 2,000,000 2,074,860
</TABLE>
48
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, NOVEMBER 30, 1998 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
Vallejo COP, Marine World Foundation Project, Refunding, 7.40%, 2/01/28 ................... $ 9,345,000 $ 10,409,396
Vallejo Hiddenbrooke Improvement District No. 1, Series A, 6.50%, 9/01/31 ................. 12,830,000 13,287,390
Victor Valley Union High School District, COP, Instructional Academy Project,
MBIA Insured, 5.80%, 11/15/21 .......................................................... 1,000,000 1,112,230
Virgin Islands PFA Revenue, Sub-Lien, Fund Loan Notes, Refunding, Series E,
5.75%, 10/01/13 ........................................................................ 1,595,000 1,661,623
5.875%, 10/01/18 ....................................................................... 1,665,000 1,734,813
6.00%, 10/01/22 ........................................................................ 2,650,000 2,781,361
Vista Mobile Home Park Revenue, Estrella De Oro Mobile Home, Series A, 5.875%, 2/01/28 .... 1,685,000 1,727,142
West Sacramento Financing Authority, Lease Revenue, City Administration Facilities
Project, MBIA Insured,
5.30%, 9/01/30 ......................................................................... 1,020,000 1,049,386
West Sacramento Redevelopment Agency, Tax Allocation, West Sacramento Redevelopment
Project, MBIA Insured,
5.00%, 9/01/29 ......................................................................... 2,235,000 2,234,821
Western Placer Waste Management Authority Revenue, 6.75%, 7/01/14 ......................... 7,400,000 8,162,274
Westminster COP, Public Improvements Project, Pre-Refunded, 6.00%, 6/01/22 ................ 2,060,000 2,310,867
Whittier School District COP, School Facilities Project,
5.375%, 9/01/22 ........................................................................ 1,055,000 1,061,666
5.40%, 9/01/29 ......................................................................... 1,725,000 1,732,620
Winton Water and Sanitation District, COP, Wastewater System Improvement Project,
Refunding, MBIA Insured,
5.25%, 3/01/28 ......................................................................... 1,500,000 1,535,700
-----------
TOTAL LONG TERM INVESTMENTS (COST $539,242,079) ........................................... 568,054,550
===========
</TABLE>
49
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, NOVEMBER 30, 1998 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(a)SHORT TERM INVESTMENTS 1.6%
California Health Facilities Financing Authority Revenue, Saint Joseph Health
System, Refunding, Series A, Daily VRDN and Put, 3.20%, 7/01/13 ............ $ 1,900,000 $ 1,900,000
California PCFA Revenue, Shell Oil Co., Refunding, Series A, Daily VRDN and Put,
3.20%, 10/01/07 ............................................................. 600,000 600,000
Chula Vista IDR, San Diego Gas, Refunding, Series A, Daily VRDN and Put, 3.10%,
7/01/21 ..................................................................... 2,800,000 2,800,000
Irvine 1915 Act, AD No. 89-10, Daily VRDN and Put, 3.25%, 9/02/15 .............. 100,000 100,000
Irvine 1915 Act, AD No. 97-16, Northwest Irvine Project, Daily VRDN and Put,
3.25%, 9/02/22 .............................................................. 1,800,000 1,800,000
Irvine Ranch Water District,
Construction Bonds, Daily VRDN and Put, 3.25%, 10/01/05 ..................... 1,000,000 1,000,000
COP, Capital Improvement Project, Daily VRDN and Put, 3.10%, 8/01/16 ........ 1,000,000 1,000,000
-------------
TOTAL SHORT TERM INVESTMENTS (COST $9,200,000) ................................. 9,200,000
-------------
TOTAL INVESTMENTS (COST $548,442,079) 100.8% ................................... 577,254,550
OTHER ASSETS, LESS LIABILITIES (.8)% ........................................... (4,430,492)
-------------
NET ASSETS 100.0% .............................................................. $ 572,824,058
=============
</TABLE>
See Glossary of Terms on page 62.
(a)Variable rate demand notes (VRDNs) are tax-exempt obligations which contain a
floating or variable interest rate adjustment formula and an unconditional right
of demand to receive payment of the principal balance plus accrued interest at
specified dates.
(b)Sufficient collateral has been segregated for securities traded on the
when-issued or delayed delivery basis.
50 See notes to financial statements.
FRANKLIN MUNICIPAL SECURITIES TRUST
Financial Highlights
FRANKLIN HAWAII MUNICIPAL BOND FUND
<TABLE>
<CAPTION>
CLASS I
------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED MAY 31,
NOVEMBER 30, 1998 --------------------------------------------------------
(UNAUDITED) 1998 1997 1996 1995 1994
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............... $ 11.16 $ 10.79 $ 10.54 $ 10.67 $ 10.36 $ 10.80
------------------------------------------------------------------------------
Income from investment operations:
Net investment income ............................. .29 .58 .60 .60 .60 .62
Net realized and unrealized gains (losses) ........ .14 .38 .25 (.13) .31 (.46)
------------------------------------------------------------------------------
Total from investment operations ................... .43 .96 .85 .47 .91 .16
------------------------------------------------------------------------------
Less distributions from net investment income ...... (.30) (.59) (.60) (.60) (.60) (.60)
------------------------------------------------------------------------------
Net asset value, end of period ..................... $ 11.29 $ 11.16 $ 10.79 $ 10.54 $ 10.67 $ 10.36
==============================================================================
Total return* ...................................... 3.87% 9.10% 8.23% 4.49% 9.26% 1.35%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) .................. $49,082 $45,138 $40,003 $38,805 $36,827 $26,904
Ratios to average net assets:
Expenses .......................................... .40%** .40% .39% .35% .20% .05%
Expenses excluding waiver and payments by affiliate .82%** .81% .83% .84% .87% .92%
Net investment income ............................. 5.18%** 5.32% 5.59% 5.63% 6.02% 5.76%
Portfolio turnover rate ............................ 1.97% 23.18% 13.40% 16.01% 22.88% 31.35%
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized. Prior to May 1, 1994, dividends from net
investment income were reinvested at the offering price.
**Annualized
See notes to financial statements. 51
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, NOVEMBER 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN HAWAII MUNICIPAL BOND FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS 98.1%
Guam Airport Authority Revenue, Series B,
6.60%, 10/01/10 ............................................................... $ 200,000 $ 219,970
6.70%, 10/01/23 ............................................................... 1,000,000 1,094,110
Guam Government, Limited Obligation Highway, Refunding, Series A, FSA Insured,
6.30%, 5/01/12 ................................................................ 280,000 304,755
Guam Power Authority Revenue, Series A, 6.30%, 10/01/22 .......................... 300,000 319,131
Hawaii State Airport System Revenue,
Refunding, Third Series 1994, AMBAC Insured, 5.75%, 7/01/09 ................... 300,000 325,623
Second Series 1990, FGIC Insured, 7.50%, 7/01/20 .............................. 60,000 64,526
Second Series 1991, 7.00%, 7/01/18 ............................................ 1,520,000 1,634,304
Second Series 1991, MBIA Insured, 6.75%, 7/01/21 .............................. 200,000 216,690
Second Series 1992, MBIA Insured, 6.90%, 7/01/12 .............................. 400,000 479,072
(b)Hawaii State COP, Kapolei State Office Building, Series A, AMBAC Insured,
5.00%, 5/01/18 ................................................................ 1,000,000 988,940
Hawaii State Department of Budget and Finance, Special Purpose Revenue,
Hawaii Electric Light Co. Project, Mortgage, 7.20%, 12/01/14 .................. 100,000 105,061
Hawaiian Electric Co. and Subsidiaries, Mortgage, MBIA Insured, 6.55%, 12/01/22 3,425,000 3,801,613
Hawaiian Electric Co., Mortgage, Series A, MBIA Insured, 6.60%, 1/01/25 ....... 1,950,000 2,201,511
Hawaiian Electric Co. Project, Series B, MBIA Insured, 5.875%, 12/01/26 ....... 500,000 547,080
Kaiser Permanente, Refunding, Series A, 6.25%, 3/01/21 ........................ 100,000 105,234
Kapiolani Health Care System, Mortgage, Refunding, 6.40%, 7/01/13 ............. 600,000 648,150
Kapiolani Health Care System, Mortgage, Refunding, 6.00%, 7/01/19 ............. 125,000 132,628
Kapiolani Health Obligation, 6.25%, 7/01/21 ................................... 1,100,000 1,198,010
Pali Momi Medical Center Project, Mortgage, Pre-Refunded, 7.65%, 7/01/19 ...... 105,000 117,153
Queens Health System, Refunding, Series A, 6.05%, 7/01/16 ..................... 1,000,000 1,095,890
Queens Health System, Refunding, Series A, 6.00%, 7/01/20 ..................... 120,000 130,328
Queens Health System, Refunding, Series A, 5.75%, 7/01/26 ..................... 1,500,000 1,578,885
Queens Health System, Series B, MBIA Insured, 5.25%, 7/01/23 .................. 500,000 511,305
Queens Health System, Series B, MBIA Insured, 5.00%, 7/01/28 .................. 750,000 757,200
Queens Medical Center Project, FGIC Insured, Pre-Refunded, 6.20%, 7/01/22 ..... 500,000 549,395
St. Francis Medical Centers, Mortgage, Refunding, FSA Insured, 6.50%, 7/01/22 . 1,100,000 1,209,494
Wilcox Memorial Hospital Projects, 5.25%, 7/01/13 ............................. 600,000 602,040
Wilcox Memorial Hospital Projects, 5.35%, 7/01/18 ............................. 2,040,000 2,045,141
Wilcox Memorial Hospital Projects, 5.50%, 7/01/28 ............................. 2,410,000 2,436,847
Hawaii State Department of Transportation, Special Facilities Revenue, Matson
Terminals, Inc., Refunding, 5.75%, 3/01/13 .................................... 75,000 78,470
Hawaii State GO,
Series BW, 6.375%, 3/01/11 .................................................... 100,000 117,083
Series CA, 6.00%, 1/01/09 ..................................................... 100,000 113,430
Series CP, FGIC Insured, 5.00%, 10/01/16 ...................................... 900,000 905,931
Hawaii State Harbor, Capital Improvement Revenue,
Refunding, Series 1994, FGIC Insured, 6.25%, 7/01/15 .......................... 1,000,000 1,103,130
Refunding, Series 1994, FGIC Insured, 6.375%, 7/01/24 ......................... 500,000 554,360
Series 1990, MBIA Insured, 7.25%, 7/01/10 ..................................... 70,000 74,802
Series 1990, MBIA Insured, 7.00%, 7/01/17 ..................................... 80,000 85,185
Series 1992, FGIC Insured, 6.50%, 7/01/19 ..................................... 200,000 219,766
Hawaii State Housing Finance and Development Corp. Revenue, Affordable Rental
Housing Program, Series A,
6.00%, 7/01/15 ................................................................ 1,000,000 1,058,290
6.05%, 7/01/22 ................................................................ 750,000 793,095
6.10%, 7/01/30 ................................................................ 250,000 264,335
</TABLE>
52
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, NOVEMBER 30, 1998 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN HAWAII MUNICIPAL BOND FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
Hawaii State Housing Finance and Development Corp., SFM Purchase Revenue, Series A,
7.10%, 7/01/24 ................................................................. $ 465,000 $ 495,458
6.00%, 7/01/26 ................................................................. 255,000 263,438
Honolulu City and County GO,
Refunding, Series 1992, 6.00%, 12/01/14 ........................................ 150,000 170,661
Series A, Pre-Refunded, 6.70%, 8/01/07 ......................................... 75,000 81,428
Series A, Pre-Refunded, 6.70%, 8/01/11 ......................................... 100,000 108,570
Series B, 5.00%, 11/01/17 ...................................................... 600,000 602,982
Series B, Pre-Refunded, 6.125%, 6/01/14 ........................................ 1,000,000 1,111,930
Honolulu City and County, MFHR, Waipahu Towers Project, Series A, 6.90%, 6/20/35 .. 1,205,000 1,305,244
Honolulu City and County Water Supply Board, Water System Revenue, 5.80%, 7/01/21 . 1,785,000 1,945,275
Kauai County GO, Refunding, Series C, AMBAC Insured, 5.95%, 8/01/10 ............... 220,000 250,831
Maui County Board, Water Supply Revenue, Series A, FGIC Insured, Pre-Refunded,
6.70%, 12/01/11 ................................................................ 100,000 109,475
Maui County GO,
Refunding, Series 1992, Pre-Refunded, 6.05%, 9/01/07 ........................... 50,000 52,607
Refunding, Series 1992, Pre-Refunded, 6.10%, 9/01/08 ........................... 300,000 315,894
Series A, FGIC Insured, Pre-Refunded, 5.75%, 1/01/11 ........................... 385,000 404,993
Series A, FGIC Insured, Pre-Refunded, 5.75%, 1/01/13 ........................... 150,000 157,790
Series C, FGIC Insured, 5.20%, 3/01/17 ......................................... 575,000 587,736
Northern Mariana Islands, Commonwealth Ports Authority, Seaport Revenue, Series A,
6.40%, 3/15/28 ................................................................. 1,000,000 990,470
Puerto Rico Commonwealth Highway and Transportation Authority Revenue,
Series T, Pre-Refunded, 6.625%, 7/01/18 ........................................ 315,000 350,305
Series Y, 5.50%, 7/01/26 ....................................................... 800,000 835,688
Puerto Rico Electric Power Authority Revenue,
Series O, 7.125%, 7/01/14 ...................................................... 60,000 62,308
Series O, Pre-Refunded, 7.125%, 7/01/14 ........................................ 55,000 57,130
Series T, Pre-Refunded, 6.375%, 7/01/24 ........................................ 1,000,000 1,139,080
Puerto Rico Industrial, Medical and Environmental Facilities Revenue PCFA, PepsiCo,
Inc. Project, 6.25%, 11/15/13 .................................................. 350,000 385,035
Puerto Rico Industrial Tourist, Medical and Environmental Facilities Revenue,
Guaynabo Warehouse, Series A, 5.15%, 7/01/19 ................................... 850,000 843,574
Puerto Rico PBA, Guaranteed, Public Education and Health Facilities, Refunding,
Series M, 5.75%, 7/01/15 ....................................................... 900,000 949,014
Puerto Rico Telephone Authority Revenue, Refunding, Series L, 6.125%, 1/01/22 ..... 1,230,000 1,306,640
Virgin Islands Public Finance Authority Revenue, Senior Lien, Fund Loan Notes,
Refunding, Series A, 5.625%, 10/01/25 .......................................... 1,900,000 1,953,599
Virgin Islands Water and Power Authority, Electric System Revenue, Refunding,
5.30%, 7/01/18 ................................................................. 500,000 505,155
----------
TOTAL LONG TERM INVESTMENTS (COST $45,129,380) .................................... 48,130,273
----------
</TABLE>
53
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, NOVEMBER 30, 1998 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN HAWAII MUNICIPAL BOND FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(a)SHORT TERM INVESTMENTS 1.8%
Hawaii State Housing Finance and Development Corp. Revenue, Rental Housing System,
Series A, Weekly VRDN and Put, 3.20%, 7/01/24 ................................. $ 800,000 $ 800,000
Puerto Rico Commonwealth Government Development Bank, Refunding, MBIA Insured,
Weekly VRDN and Put, 2.90%, 12/01/15 .......................................... 100,000 100,000
-----------
TOTAL SHORT TERM INVESTMENTS (COST $900,000) ..................................... 900,000
-----------
TOTAL INVESTMENTS (COST $46,029,380) 99.9% ....................................... 49,030,273
OTHER ASSETS, LESS LIABILITIES .1% ............................................... 51,619
-----------
NET ASSETS 100.0% ................................................................ $49,081,892
===========
</TABLE>
See Glossary of Terms on page 62.
(a)Variable rate demand notes (VRDNs) are tax-exempt obligations which contain a
floating or variable interest rate adjustment formula and an unconditional right
of demand to receive payment of the principal balance plus accrued interest at
specified dates.
(b)Sufficient collateral has been segregated for securities traded on a
when-issued or delayed delivery basis.
54 See notes to financial statements.
FRANKLIN MUNICIPAL SECURITIES TRUST
Financial Highlights
FRANKLIN TENNESSEE MUNICIPAL BOND FUND
<TABLE>
<CAPTION>
CLASS I
---------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED MAY 31,
NOVEMBER 30, 1998 ----------------------------------------------------------
(UNAUDITED) 1998 1997 1996 1995 1994+
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ........... $ 11.27 $ 10.71 $ 10.40 $ 10.53 $10.11 $10.00
---------------------------------------------------------------------------------
Income from investment operations:
Net investment income ......................... .28 .57 .58 .56 .52 .01
Net realized and unrealized gains (losses) .... .15 .56 .33 (.09) .35 .10
---------------------------------------------------------------------------------
Total from investment operations ............... .43 1.13 .91 .47 .87 .11
---------------------------------------------------------------------------------
Less distributions from net investment income .. (.28) (.57) (.60) (.60) (.45) --
---------------------------------------------------------------------------------
Net asset value, end of period ................. $ 11.42 $ 11.27 $ 10.71 $ 10.40 $10.53 $10.11
=================================================================================
Total return* .................................. 3.87% 10.75% 8.95% 4.50% 8.97% 1.10%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) .............. $58,097 $44,526 $26,708 $13,956 $5,986 $2,224
Ratios to average net assets:
Expenses ...................................... .40%** .40% .40% .33% .10% .03%**
Expenses excluding waiver and payments
by affiliate .................................. .80%** .81% .84% .91% .92% 1.05%**
Net investment income ......................... 4.92%** 5.12% 5.51% 5.67% 6.02% 1.89%**
Portfolio turnover rate ........................ 6.42% 37.67% 27.60% 27.23% 24.71% 22.64%
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
**Annualized
+For the period May 10, 1994 (effective date) to May 31, 1994.
See notes to financial statements. 55
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, NOVEMBER 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN TENNESSEE MUNICIPAL BOND FUND AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 99.4%
<S> <C> <C>
Carroll County IDBR, Henry I. Siegel Co., Inc. Project, Refunding, 7.20%, 4/01/05 ........ $ 500,000 $ 520,770
Chattanooga Health Educational and Housing Facility Board Revenue, Catholic
Health Initiatives, Refunding, Series A, 5.00%, 12/01/18 .............................. 1,000,000 988,790
Series A, 5.00%, 12/01/28 ............................................................. 1,000,000 974,230
Cleveland Water and Sewer, FGIC Insured, 5.375%, 9/01/28 ................................. 1,000,000 1,027,650
Collierville Water and Sewer Systems, MBIA Insured, 5.625%, 11/01/21 ..................... 500,000 527,535
Dickson Electric System Revenue, MBIA Insured, 5.50%, 9/01/16 ............................ 1,220,000 1,297,019
Eastside Utility District, Hamilton County, Waterworks Revenue, Refunding,
MBIA Insured, 5.25%, 11/01/17 ......................................................... 800,000 824,096
Fayetteville and Lincoln IDBR, Hospital Facility Lease, AMBAC Insured, 5.30%, 5/01/28 .... 1,000,000 1,018,500
Franklin IDB, MFHR, Landings Apartment Project, Refunding, Series A, FSA
Insured, 6.00%, 10/01/26 .............................................................. 1,000,000 1,060,870
Hamilton County IDB, MFHR, Patten Towers Apartments, 7.125%, 2/01/09 ..................... 500,000 524,775
Hardeman County GO, FGIC Insured, 5.625%, 4/01/24 ........................................ 880,000 932,624
Harpeth Valley Utilities District, Davidson and Williamson Counties Revenue,
Utilities Improvement, MBIA Insured, 5.00%, 9/01/28 ................................... 1,430,000 1,401,686
Hollow Rock-Bruceton Special School District GO, FSA Insured, Pre-Refunded, 5.75%, 4/01/24 500,000 562,550
Humphreys County IDB, Solid Waste Disposal Revenue, Du Pont (E.I.) De Nemours
and Co. Project, 6.70%, 5/01/24 ....................................................... 800,000 892,136
Jackson GO, Refunding and Improvement, MBIA Insured, 5.125%, 3/01/16 ..................... 1,000,000 1,017,070
Jackson Water and Sewer Revenue, Series A, AMBAC Insured, 5.00%, 7/01/18 ................. 300,000 299,244
Johnson City Health and Educational Facilities Board,
(b)Medical Center Hospital, Hospital Revenue, Refunding and Improvement,
MBIA Insured, 5.25%, 7/01/28 .......................................................... 2,000,000 2,005,240
Pine Oaks Assisted Project, Mortgage Revenue, Series A, GNMA Secured, 5.90%, 6/20/37 .. 1,400,000 1,461,292
Johnson City Public Improvement, FSA Insured, Pre-Refunded, 5.90%, 6/01/12 ............... 500,000 553,070
Johnson City Solid Waste, AMBAC Insured, 5.80%, 5/01/09 .................................. 100,000 109,368
Johnson County Public Improvement GO, Series B, AMBAC Insured, Pre-Refunded,
6.70%, 5/01/20 ........................................................................ 100,000 117,165
Knox County First Utility District, Water and Sewer Revenue, Refunding and
Improvement, Series A, MBIA Insured, 5.625%, 12/01/19 ................................. 1,000,000 1,070,000
Knox County Health, Educational and Housing Board, Hospital Facilities Revenue,
Fort Sanders Alliance, Refunding, MBIA Insured, 5.75%, 1/01/14 ........................ 1,250,000 1,374,925
Mercy Health Systems, Refunding, Series B, 5.875%, 9/01/15 ............................ 345,000 370,468
Knox County IDB, MFR, Waterford Apartments, Refunding, Series A, FHA
Insured, 5.95%, 3/01/28 ............................................................... 250,000 264,818
Knox-Chapman Utility District, Knox County Water and Sewer Revenue,
FSA Insured, 5.40%, 1/01/23 ........................................................... 660,000 681,325
Refunding, MBIA Insured, 6.10%, 1/01/19 ............................................... 100,000 109,500
(b)Knoxville Electric Revenue, Refunding and Improvement Systems, Series S,
5.10%, 7/01/24 ........................................................................ 2,000,000 2,001,160
Loudon County IDB, Solid Waste Disposal Revenue, Kimberly-Clark Corp. Project,
6.20%, 2/01/23 ........................................................................ 1,305,000 1,393,479
Macon County GO, FGIC Insured, Pre-Refunded, 5.90%, 9/01/13 .............................. 150,000 167,699
Maury County IDB, PCR, Multi-Modal, Saturn Corp. Project, Refunding, 6.50%, 9/01/24 ...... 620,000 687,041
McKenzie High School District GO, FSA Insured, Pre-Refunded, 5.75%, 4/01/22 .............. 500,000 562,550
Memphis GO, Pre-Refunded, 5.75%, 8/01/15 ................................................. 500,000 538,250
Memphis Health, Educational and Housing Facility Board, Mortgage Revenue,
Edgewater Terrace, Refunding, FHA/GNMA Secured, 7.375%, 1/20/27 ....................... 150,000 160,244
MF River Trace II, Refunding, Series A, 6.45%, 4/01/26 ................................ 100,000 106,854
Memphis-Shelby County Airport Authority Revenue, Refunding, MBIA Insured, 5.65%, 9/01/15 . 500,000 528,920
Memphis-Shelby County Airport Authority, Special Facilities and Project
Revenue, Federal Express Corp., 6.75%, 9/01/12 ........................................ 100,000 109,032
Metropolitan Government of Nashville and Davidson County GO, Refunding, 5.125%, 5/15/25 .. 1,000,000 1,008,430
</TABLE>
56
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, NOVEMBER 30, 1998 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN TENNESSEE MUNICIPAL BOND FUND AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
Metropolitan Government of Nashville and Davidson County,
<S> <C> <C>
Electric Revenue, Refunding, Series A, Pre-Refunded, 6.00%, 5/15/17 .......... $ 200,000 $ 218,290
Electric Revenue, Series A, 5.20%, 5/15/23 ................................... 1,000,000 1,016,370
Health and Educational Facilities Board Revenue, Meharry Medical College
Project, AMBAC Insured, Pre-Refunded, 6.875%, 12/01/24 ..................... 150,000 176,030
Health and Educational Facilities Board Revenue, Mortgage, Dandridge
Towers, Refunding, Series A, 6.375%, 1/01/11 ............................... 500,000 532,745
Health and Educational Facilities Board Revenue, Multi-Modal Health Facility,
Asset Guaranty Insurance Co. Insured, 5.50%, 5/01/23 ....................... 995,000 1,037,954
Health and Educational Facilities Board Revenue, The Vanderbilt University,
Refunding, Series A, 5.375%, 7/01/18 ....................................... 700,000 724,241
Health and Educational Facilities Board Revenue, The Vanderbilt University,
Refunding, Series B, 5.00%, 10/01/28 ....................................... 2,750,000 2,728,743
Public Improvements, 5.875%, 5/15/26 ......................................... 1,000,000 1,082,150
Sports Authority Revenue, Stadium Public Improvement Project, AMBAC Insured,
5.875%, 7/01/21 ............................................................ 1,775,000 1,926,177
Water and Sewer Revenue, Refunding, 5.50%, 1/01/16 ........................... 620,000 620,211
Metropolitan Nashville Airport Authority Revenue, Series C, FGIC Insured,
6.60%, 7/01/15 ............................................................. 205,000 221,941
Milan Special School District GO, AMBAC Insured, Pre-Refunded, 6.625%, 4/01/11 .. 180,000 206,309
Montgomery County Health Educational and Housing Facility Board, Hospital
Revenue, Clarksville Regional Health System, Refunding and Improvement,
5.375%, 1/01/28 .............................................................. 3,000,000 2,962,920
Northern Mariana Islands, Commonwealth Ports Authority, Seaport Revenue,
Series A, 6.40%, 3/15/28 ..................................................... 300,000 297,141
Pigeon Forge Public Improvement, MBIA Insured, 5.90%, 6/01/09 ................... 100,000 106,083
Puerto Rico Commonwealth GO,
Pre-Refunded, 6.50%, 7/01/23 ................................................. 100,000 114,397
Public Improvement, Refunding, 5.75%, 7/01/17 ................................ 750,000 807,075
Puerto Rico Commonwealth Highway and Transportation Authority, Highway Revenue,
Series Y, Pre-Refunded, 6.00%, 7/01/22 ....................................... 500,000 570,355
Puerto Rico Electric Power Authority Revenue,
Refunding, Series X, 5.50%, 7/01/25 .......................................... 500,000 515,260
Series R, Pre-Refunded, 6.25%, 7/01/17 ....................................... 100,000 109,784
Puerto Rico Industrial, Tourist, Educational, Medical and Environmental Control
Facilities Financing Authority, Hospital Revenue, Hospital Auxilio Mutuo
Obligation Group, Series A, MBIA Insured, 6.25%, 7/01/24 ..................... 200,000 222,720
Puerto Rico Ports Authority Revenue, Special Facilities, American Airlines,
Series A, 6.25%, 6/01/26 ..................................................... 600,000 653,112
Shelby County Health, Educational and Housing Facilities Board, Hospital Revenue,
MBIA Insured,
5.30%, 8/01/15 ............................................................... 490,000 508,566
5.00%, 4/01/18 ............................................................... 1,000,000 988,940
Shelby County School GO, Series B, Pre-Refunded, 6.00%, 3/01/16 ................. 530,000 571,616
South Fulton IDBR, Tyson Foods, Inc. Project, 6.40%, 10/01/20 ................... 300,000 330,318
Sullivan County IDBR, Brandymill, Refunding, Series I-A, GNMA Secured,
6.35%, 7/20/27 ............................................................... 350,000 377,703
Tennessee HDA,
Homeownership Program, 5.375%, 7/01/23 ....................................... 1,000,000 1,011,560
Homeownership Program, Issue 4A, 6.375%, 7/01/22 ............................. 800,000 852,760
Homeownership Program, Series 3, 5.85%, 7/01/23 .............................. 320,000 331,734
Mortgage Finance, Series A, 6.90%, 7/01/25 ................................... 200,000 218,154
Mortgage Finance, Series B, 6.60%, 7/01/25 ................................... 190,000 204,525
Mortgage Finance, Series B, MBIA Insured, 6.20%, 7/01/18 ..................... 630,000 669,538
Tennessee State Local Development Authority Revenue,
Community Provider Pooled Loan Program, 6.55%, 10/01/23 ...................... 100,000 109,190
State Loan Program, Refunding, Series A, MBIA Insured, 5.125%, 3/01/22 ....... 150,000 152,138
</TABLE>
57
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, NOVEMBER 30, 1998 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN TENNESSEE MUNICIPAL BOND FUND AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
Tennessee State School Board Authority, Higher Educational Facilities,
<S> <C> <C>
2nd Program, Series A, 5.00%, 5/01/28 ..................................... $ 1,000,000 $ 972,930
Series A, Pre-Refunded, 6.25%, 5/01/22 .................................... 100,000 109,420
Virgin Islands Public Finance Authority Revenue, Senior Lien, Fund Loan Notes,
Refunding, Series A, 5.50%, 10/01/18 ...................................... 1,000,000 1,015,570
White House Utility District, Robertson and Sumner Counties Waterworks System
Revenue, Refunding, Series B, 5.375%, 1/01/19 ............................. 1,890,000 1,949,213
Wilson County COP,
Educational Facilities, 6.125%, 6/30/10 ................................... 220,000 238,378
FSA Insured, 5.25%, 3/30/18 ............................................... 1,000,000 1,027,450
------------
TOTAL LONG TERM INVESTMENTS (COST $54,913,302) ............................... 57,740,086
------------
(a) SHORT TERM INVESTMENTS 1.5%
Metropolitan Nashville Airport Authority Revenue, Refunding and Improvement,
FGIC Insured, Weekly VRDN and Put, 3.20%, 7/01/19 ......................... 100,000 100,000
Puerto Rico Commonwealth Government Development Bank, Refunding, MBIA Insured,
Weekly VRDN and Put, 2.90%, 12/01/15 ...................................... 100,000 100,000
Puerto Rico Commonwealth Highway and Transportation Authority, Transportation
Revenue, Series A, AMBAC Insured, Weekly VRDN and Put, 2.75%, 7/01/28 ..... 400,000 400,000
Sullivan County IDB, PCR, Mead Corp. Project, Refunding, Daily VRDN and Put,
3.20%, 10/01/16 ........................................................... 300,000 300,000
------------
TOTAL SHORT TERM INVESTMENTS (COST $900,000) ................................. 900,000
------------
TOTAL INVESTMENTS (COST $55,813,302) 100.9% .................................. 58,640,086
OTHER ASSETS, LESS LIABILITIES (.9)% ......................................... (543,454)
------------
NET ASSETS 100.0% ............................................................ $ 58,096,632
============
</TABLE>
See Glossary of Terms on page 62.
(a)Variable rate demand notes (VRDNs) are tax-exempt obligations which contain a
floating or variable interest rate adjustment formula and an unconditional right
of demand to receive payment of the principal balance plus accrued interest at
specified dates.
(b)Sufficient collateral has been segregated for securities traded on a
when-issued or delayed delivery basis.
58 See notes to financial statements.
FRANKLIN MUNICIPAL SECURITIES TRUST
Financial Highlights
FRANKLIN WASHINGTON MUNICIPAL BOND FUND
<TABLE>
<CAPTION>
CLASS I
---------------------------------------------------------
SIX MONTHS ENDED
NOVEMBER 30, 1998 YEAR ENDED MAY 31,
-----------------------------------------
(UNAUDITED) 1998 1997 1996 1995 1994
PER SHARE OPERATING PERFORMANCE ---------------------------------------------------------
(for a share outstanding throughout the period)
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period .......... $ 10.48 $ 10.09 $ 9.80 $ 9.90 $ 9.55 $ 9.99
---------------------------------------------------------
Income from investment operations:
Net investment income ........................ .28 .57 .58 .56 .56 .51
Net realized and unrealized gains (losses) ... .14 .41 .29 (.08) .36 (.46)
---------------------------------------------------------
Total from investment operations .............. .42 .98 .87 .48 .92 .05
---------------------------------------------------------
Less distributions from:
Net investment income ........................ (.30) (.59) (.58) (.58) (.57) (.47)
Net realized gains ........................... -- -- -- -- -- (.02)
---------------------------------------------------------
Total distributions ........................... (.30) (.59) (.58) (.58) (.57) (.49)
---------------------------------------------------------
Net asset value, end of period ................ $ 10.60 $ 10.48 $10.09 $ 9.80 $ 9.90 $ 9.55
---------------------------------------------------------
Total return* ................................. 4.03% 9.87% 9.04% 4.91% 10.10% 2.88%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $11,761 $10,376 $8,361 $7,718 $5,741 $4,272
Ratios to average net assets:
Expenses ..................................... .10%** .10% .10% .10% .10% .05%
Expenses excluding waiver and payments
by affiliate ................................. .85%** .84% .90% .92% 1.05% .71%
Net investment income ........................ 5.38%** 5.54% 5.81% 5.81% 6.13% 5.59%
Portfolio turnover rate ....................... 2.05% 6.94% 7.73% 19.13% 18.46% 39.52%
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized. Prior to May 1, 1994, dividends from net
investment income were reinvested at the offering price.
**Annualized
See notes to financial statements. 59
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, NOVEMBER 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN WASHINGTON MUNICIPAL BOND FUND AMOUNT VALUE
<S> <C> <C>
LONG TERM INVESTMENTS 96.2%
Aberdeen GO, Series A, MBIA Insured, 5.80%, 12/01/12 ................................................ $100,000 $107,467
Bellevue Water and Sewer Revenue, Refunding, 5.875%, 7/01/10 ........................................ 100,000 106,611
Bellingham Housing Authority Revenue,
Cascade Meadows Project, Pre-Refunded, 7.10%, 11/01/23 ........................................... 200,000 232,342
Pacific Rim and Cascade Meadows Projects, Refunding, MBIA Insured, 5.20%, 11/01/27 ............... 200,000 201,532
Chelan County PUD No. 1, Chelan Hydroelectric Revenue, Series A, FSA Insured, 5.25%, 7/01/33 ........ 200,000 201,372
Clark County School District No. 114, Evergreen School, Refunding, AMBAC Insured, Pre-Refunded,
5.95%, 12/01/12 .................................................................................. 100,000 111,795
Clark County Sewer Revenue, MBIA Insured, 5.70%, 12/01/16 ........................................... 200,000 213,338
Conservation and Renewable Energy System Revenue, Washington Conservation Project, 6.50%, 10/01/14 400,000 434,492
Douglas County PUD No. 1, Electric Systems Revenue, MBIA Insured, 6.00%, 1/01/15 .................... 100,000 110,152
Federal Way GO, Refunding, 5.85%, 12/01/21 .......................................................... 100,000 105,157
Grant County PUD No. 2,
Priest Rapids Hydroelectric Revenue, Second Series, Series B, MBIA Insured, 5.875%, 1/01/26 ...... 100,000 107,526
(b)Wanapum Hydroelectric Revenue, Refunding, Second Series, Series A, MBIA Insured, 5.20%, 1/01/23 250,000 250,198
Wanapum Hydroelectric Revenue, Second Series, Series A, Pre-Refunded, 6.375%, 1/01/23 ............ 250,000 273,360
King County GO, Sewer District, 5.875%, 1/01/15 ..................................................... 100,000 108,314
King County Housing Authority Revenue, Woodridge Park Project, 6.25%, 5/01/15 ....................... 175,000 185,290
King County School District No. 400, Mercer Island, 5.90%, 12/01/15 ................................. 100,000 108,889
King County School District No. 412, Shoreline, Pre-Refunded, 6.10%, 6/01/13 ........................ 100,000 111,604
King County School District No. 415, Kent, FSA Insured, 5.875%, 6/01/16 ............................. 200,000 215,486
Lewis County PUD No. 1, Cowlitz Falls Hydroelectric Project Revenue, 6.00%, 10/01/24 ................ 200,000 207,546
Pierce County EDC Revenue, Solid Waste, Occidental Petroleum Corp., 5.80%, 9/01/29 .................. 375,000 379,549
Pierce County Sewer Revenue, 5.70%, 2/01/17 ......................................................... 100,000 104,646
Pilchuck Development Public Corp., Special Facilities Airport Revenue, Tramco, Inc. Project, B.F
Goodrich, 6.00%, 8/01/23 ......................................................................... 800,000 831,016
Port of Seattle Revenue, Series B,
6.00%, 11/01/17 .................................................................................. 180,000 186,961
Pre-Refunded, 6.00%, 11/01/17 .................................................................... 20,000 21,509
SeaTac GO, MBIA Insured, 6.50%, 12/01/13 ............................................................ 450,000 503,073
Seattle Housing Authority, Low Income Housing Assistance Revenue, Kin On Project, GNMA Secured,
7.40%, 11/20/36 .................................................................................. 99,000 115,364
Seattle Municipality Metropolitan Sewer Revenue, Refunding, Series V, 6.20%, 1/01/32 ................ 200,000 212,080
Seattle Water Systems Revenue, FGIC Insured, 5.00%, 10/01/23 ........................................ 300,000 298,710
Snohomish County GO, MBIA Insured, 5.90%, 12/01/15 .................................................. 100,000 108,266
Snohomish County Housing Authority Revenue, Pooled, 6.30%, 4/01/16 .................................. 200,000 212,746
Snohomish County PUD No. 1,
Electric and Generation Systems Revenue, Refunding, FGIC Insured, 6.00%, 1/01/18 ................. 200,000 213,850
Water Revenue, 5.85%, 11/01/17 ................................................................... 100,000 100,892
Spokane County GO, Refunding, 6.00%, 12/01/14 ....................................................... 130,000 143,615
Spokane County Water District No. 3 Revenue, Refunding, 5.90%, 1/01/14 .............................. 100,000 101,830
Stevens County Public Corp., PCR, Refunding, Water Power Co. Project, 6.00%, 12/01/23 ............... 300,000 316,980
Sunnyside GO, MBIA Insured, 6.10%, 12/01/14 ......................................................... 100,000 109,478
Tacoma Electric Systems Revenue, Refunding, FGIC Insured, 6.25%, 1/01/15 ............................ 200,000 219,296
Tacoma GO, Series A, MBIA Insured, 5.625%, 12/01/22 ................................................. 300,000 314,112
Tacoma Refuse Utility Revenue, AMBAC Insured, Pre-Refunded, 7.00%, 12/01/19 ......................... 100,000 117,721
Tacoma Water Revenue, FGIC Insured, 5.25%, 12/01/16 ................................................. 100,000 103,809
University of Washington, Alumni Association, Lease Revenue, Medical Center Roosevelt II, FSA
Insured, 6.30%, 8/15/14 .......................................................................... 500,000 557,720
Washington State COP, Office Building Project, Series A, MBIA Insured, 6.00%, 4/01/12 ............... 100,000 105,486
</TABLE>
60
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, NOVEMBER 30, 1998 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN WASHINGTON MUNICIPAL BOND FUND AMOUNT VALUE
------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
<S> <C> <C>
Washington State Health Care Facilities Authority Revenue,
Children's Hospital and Regional Medical Center, FSA Insured, 5.00%, 10/01/28 $ 400,000 $ 392,072
Multicare Health Systems, MBIA Insured, 5.00%, 8/15/22 ..................... 250,000 245,890
Multicare Medical Center, FGIC Insured, Pre-Refunded, 5.75%, 8/15/22 ....... 100,000 108,587
Swedish Health Services, AMBAC Insured, 5.50%, 11/15/28 .................... 500,000 518,170
Washington State Higher Education Facilities Authority Revenue,
Pacific Lutheran University Project, Refunding, Connie Lee Insured,
5.70%, 11/01/26 ............................................................ 200,000 214,056
Washington State Housing Finance Commission, SF Program,
Series 1A-1, GNMA/FNMA Secured, 6.25%, 6/01/16 ............................. 100,000 106,939
Series 1A-3, GNMA/FNMA Secured, 6.15%, 12/01/15 ............................ 200,000 212,554
Series 2N, GNMA/FNMA Secured, 6.05%, 12/01/16 .............................. 100,000 105,730
Series 3A, GNMA/FNMA Secured, 5.75%, 12/01/28 .............................. 195,000 200,885
Washington State Housing Finance, SFMR, MBS Program, Series A, 7.05%, 7/01/22 . 60,000 64,757
Washington State Motor Vehicle Fuel Tax GO, Series D, 6.00%, 9/01/20 .......... 240,000 261,451
Whatcom County School District No. 501, Bellingham, 6.05%, 12/01/13 ........... 100,000 109,904
------------
TOTAL LONG TERM INVESTMENTS (COST $10,600,073) ................................ 11,312,175
------------
(a) SHORT TERM INVESTMENTS 4.2%
Puerto Rico Commonwealth Highway and Transportation Authority, Transportation
Revenue, Series A, AMBAC Insured, Weekly VRDN and Put, 3.05%, 7/01/28 ...... 200,000 200,000
Washington State Health Care Facilities Authority Revenue, Sisters Providence,
Series C, Daily VRDN and Put, 3.05%, 10/01/05 .............................. 200,000 200,000
Series D, Daily VRDN and Put, 3.10%, 10/01/05 .............................. 100,000 100,000
------------
TOTAL SHORT TERM INVESTMENTS (COST $500,000) .................................. 500,000
------------
TOTAL INVESTMENTS (COST $11,100,073) 100.4% ................................... 11,812,175
OTHER ASSETS, LESS LIABILITIES (.4)% .......................................... (50,741)
------------
NET ASSETS 100.0% ............................................................. $ 11,761,434
============
</TABLE>
See Glossary of Terms on page 62.
(a) Variable rate demand notes (VRDNs) are tax-exempt obligations which contain
a floating or variable interest rate adjustment formula and an unconditional
right of demand to receive payment of the principal balance plus accrued
interest at specified dates.
(b) Sufficient collateral has been segregated for securities traded on a
when-issued or delayed delivery basis.
See notes to financial statements. 61
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, NOVEMBER 30, 1998 (UNAUDITED) (CONT.)
GLOSSARY OF TERMS
- --------------------------------------------------------------------------------
1915 ACT - Improvement Bond Act of 1915
ABAG - The Association of Bay Area Governments
AD - Assessment District
AMBAC - American Municipal Bond Assurance Corp.
CDA - Community Development Agency
CFD - Community Facilities District
CHFCLP - California Health Facilities Construction Loan Program
COP - Certificate of Participation
EDC - Economic Development Corp.
ETM - Escrow to Maturity
FGIC - Financial Guaranty Insurance Corp.
FHA - Federal Housing Authority/Agency
FNMA - Fannie Mae
FSA - Financial Security Assistance (Some of the securities shown as FSA
Insured were originally insured by Capital Guaranty Insurance Co.
(CGIC) which was acquired by FSA in 1995 and no longer does business
under this name).
GNMA - Ginnie Mae
GO - General Obligation
HDA - Housing Development Authority/Agency
HFA - Housing Finance Authority/Agency
HMR - Home Mortgage Revenue
IDB - Industrial Development Board
IDBR - Industrial Development Board Revenue
IDR - Industrial Development Revenue
MBIA - Municipal Bond Investors Assurance Corp.
MBS - Mortgage Backed Securities
MFHR - Multi-Family Housing Revenue
MFR - Multi-Family Revenue
PBA - Public Building Authority
PCFA - Pollution Control Financing Authority
PCR - Pollution Control Revenue
PFA - Public Financing Authority
PUD - Public Utility district
RDA - Redevelopment Agency
SF - Single Family
SFM - Single Family Mortgage
SFMR - Single Family Mortgage Revenue
USD - Unified School District
62
FRANKLIN MUNICIPAL SECURITIES TRUST
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN
ARKANSAS CALIFORNIA HAWAII TENNESSEE WASHINGTON
MUNICIPAL HIGH YIELD MUNICIPAL MUNICIPAL MUNICIPAL
BOND FUND MUNICIPAL FUND BOND FUND BOND FUND BOND FUND
----------------------------------------------------------------------------------------
Assets:
Investments in securities:
<S> <C> <C> <C> <C> <C>
Cost .............................. $ 37,308,691 $ 548,442,079 $ 46,029,380 $ 55,813,302 $ 11,100,073
========================================================================================
Value ............................. 38,639,555 577,254,550 49,030,273 58,640,086 11,812,175
Cash ............................... 356,151 147,572 62,594 239,309 16,607
Receivables:
Investment securities sold ........ 3,080,226 -- -- 2,080,256 5,000
Capital shares sold ............... 63,613 1,099,694 196,724 367,688 --
Interest .......................... 631,991 9,353,675 1,032,006 876,635 199,713
----------------------------------------------------------------------------------------
Total assets .................. 42,771,536 587,855,491 50,321,597 62,203,974 12,033,495
----------------------------------------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased ... 2,987,077 11,420,144 984,637 3,983,453 249,664
Capital shares redeemed ........... -- 1,924,270 123,376 1,188 --
Affiliates ........................ 4,109 277,556 13,924 12,377 2,277
Shareholders ...................... 23,542 429,981 47,844 28,679 2,657
Distributions to shareholders ...... 56,195 795,823 68,612 81,645 17,463
Other liabilities .................. -- 183,659 1,312 -- --
----------------------------------------------------------------------------------------
Total liabilities ............. 3,070,923 15,031,433 1,239,705 4,107,342 272,061
----------------------------------------------------------------------------------------
Net assets, at value ......... $ 39,700,613 $ 572,824,058 $ 49,081,892 $ 58,096,632 $ 11,761,434
========================================================================================
Net assets consist of:
Undistributed net investment income $ 39,301 $ -- $ 92,751 $ 31,708 $ 20,751
Accumulated distributions in excess
of net investment income ........ -- (606,133) -- -- --
Net unrealized appreciation ........ 1,330,864 28,812,471 3,000,893 2,826,784 712,102
Accumulated net realized gain (loss) (18,052) (2,075,444) (543,230) 140,536 (131,560)
Capital shares ..................... 38,348,500 546,693,164 46,531,478 55,097,604 11,160,141
----------------------------------------------------------------------------------------
Net assets, at value ......... $ 39,700,613 $ 572,824,058 $ 49,081,892 $ 58,096,632 $ 11,761,434
========================================================================================
</TABLE>
See notes to financial statements. 63
FRANKLIN MUNICIPAL SECURITIES TRUST
Financial Statements (continued)
STATEMENT OF ASSETS AND LIABILITIES (CONT.)
NOVEMBER 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN
ARKANSAS CALIFORNIA HAWAII TENNESSEE WASHINGTON
MUNICIPAL HIGH YIELD MUNICIPAL MUNICIPAL MUNICIPAL
BOND FUND MUNICIPAL FUND BOND FUND BOND FUND BOND FUND
CLASS I:
<S> <C> <C> <C> <C> <C>
Net assets, at value ............... $ 39,700,613 $ 511,420,322 $49,081,892 $ 58,096,632 $ 11,761,434
============================================================================================
Shares outstanding ................. 3,591,050 47,209,852 4,346,709 5,087,465 1,109,558
============================================================================================
Net asset value per share* ......... $ 11.06 $ 10.83 $ 11.29 $ 11.42 $ 10.60
============================================================================================
Maximum offering price per share
(net asset value per share divided $ 11.55 $ 11.31 $ 11.79 $ 11.93 $ 11.07
by 95.75% ============================================================================================
CLASS II:
Net assets, at value ............... -- $ 61,403,736 -- -- --
============================================================================================
Shares outstanding ................. -- 5,653,949 -- -- --
============================================================================================
Net asset value per share* ......... -- $ 10.86 -- -- --
============================================================================================
Maximum offering price per share
(net asset value per share divided -- $ 10.97 -- -- --
by 99.00%) ============================================================================================
============================================================================================
</TABLE>
*Redemption price is equal to net asset value less any applicable contingent
deferred sales charge.
64 See notes to financial statements.
FRANKLIN MUNICIPAL SECURITIES TRUST
Financial Statements (continued)
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED NOVEMBER 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN
ARKANSAS CALIFORNIA HAWAII TENNESSEE WASHINGTON
MUNICIPAL HIGH YIELD MUNICIPAL MUNICIPAL MUNICIPAL
BOND FUND MUNICIPAL FUND BOND FUND BOND FUND BOND FUND
--------------------------------------------------------------------------------
Investment income:
<S> <C> <C> <C> <C> <C>
Interest ................................. $ 872,683 $ 14,876,713 $ 1,314,901 $ 1,371,443 $ 300,676
================================================================================
Expenses:
Management fees (Note 3) ................. 102,935 1,284,764 147,431 161,364 34,377
Distribution fees (Note 3)
Class I ................................. 16,454 231,826 23,591 25,820 5,500
Class II ................................ -- 167,435 -- -- --
Transfer agent fees (Note 3) ............. 4,158 55,507 9,618 6,003 1,860
Custodian fees ........................... 165 2,051 271 208 58
Reports to shareholders .................. 1,933 25,592 4,349 3,205 897
Registration and filing fees ............. 2,875 21,275 876 3,425 1,080
Professional fees ........................ 1,379 9,894 1,616 1,613 953
Trustees' fees and expenses .............. 1,799 9,340 2,820 2,660 700
Other .................................... 1,274 4,048 1,767 1,826 1,366
--------------------------------------------------------------------------------
Total expenses ...................... 132,972 1,811,732 192,339 206,124 46,791
Expenses waived/paid by affiliate
(Note 3) ........................... (116,518) (590,200) (98,028) (103,000) (41,291)
--------------------------------------------------------------------------------
Net expenses ....................... 16,454 1,221,532 94,311 103,124 5,500
--------------------------------------------------------------------------------
Net investment income ............. 856,229 13,655,181 1,220,590 1,268,319 295,176
--------------------------------------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from investments 11,483 205,549 2,579 4,688 (4,874)
Net unrealized appreciation on investments 182,140 9,071,967 555,860 654,002 138,393
--------------------------------------------------------------------------------
Net realized and unrealized gain .......... 193,623 9,277,516 558,439 658,690 133,519
--------------------------------------------------------------------------------
Net increase in net assets resulting
from operations .......................... $ 1,049,852 $ 22,932,697 $ 1,779,029 $ 1,927,009 $ 428,695
================================================================================
</TABLE>
See notes to financial statements. 65
FRANKLIN MUNICIPAL SECURITIES TRUST
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE SIX MONTHS ENDED NOVEMBER 30, 1998 (UNAUDITED)
AND THE YEAR ENDED MAY 31, 1998
<TABLE>
<CAPTION>
FRANKLIN ARKANSAS FRANKLIN CALIFORNIA HIGH
MUNICIPAL BOND FUND YIELD MUNICIPAL FUND
---------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
NOVEMBER 30, 1998 MAY 31, 1998 NOVEMBER 30, 1998 MAY 31, 1998
---------------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
<S> <C> <C> <C> <C>
Net investment income .................... $ 856,229 $ 1,143,143 $ 13,655,181 $ 18,960,085
Net realized gain (loss) from investments 11,483 5,532 205,549 (116,948)
Net unrealized appreciation on investments 182,140 834,896 9,071,967 15,006,888
---------------------------------------------------------------------
Net increase in net assets resulting
from operations ..................... 1,049,852 1,983,571 22,932,697 33,850,025
Distributions to shareholders from:
Net investment income:
Class I ................................. (860,584) (1,144,675) (12,412,026) (17,741,641)
Class II ................................ -- -- (1,237,045) (1,199,464)
In excess of investment income:
Class I ................................. (551,198) --
Class II ................................ -- -- (54,935) --
---------------------------------------------------------------------
Total distributions to shareholders ....... (860,584) (1,144,675) (14,255,204) (18,941,105)
Capital share transactions (Note 2)
Class I .................................. 9,134,163 16,397,936 91,401,098 184,852,793
Class II ................................. -- -- 20,171,778 28,791,162
---------------------------------------------------------------------
Total capital share transactions .......... 9,134,163 16,397,936 111,572,876 213,643,955
Net increase in net assets ........... 9,323,431 17,236,832 120,250,369 228,552,875
Net assets:
Beginning of period ....................... 30,377,182 13,140,350 452,573,689 224,020,814
---------------------------------------------------------------------
End of period ............................. $ 39,700,613 $ 30,377,182 $ 572,824,058 $ 452,573,689
=====================================================================
Undistributed net investment income
(accumulated distributions in excess of net
investment income) included in net assets:
End of period ............................ $ 39,301 $ 43,656 $ (606,133) $ (6,110)
=====================================================================
</TABLE>
66 See notes to financial statements.
FRANKLIN MUNICIPAL SECURITIES TRUST
FINANCIAL STATEMENTS (continued)
STATEMENTS OF CHANGES IN NET ASSETS (CONT.)
FOR THE SIX MONTHS ENDED NOVEMBER 30, 1998 (UNAUDITED)
AND THE YEAR ENDED MAY 31, 1998
<TABLE>
<CAPTION>
FRANKLIN HAWAII FRANKLIN TENNESSEE
MUNICIPAL BOND FUND MUNICIPAL BOND FUND
---------------------------------- -----------------------------------
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
NOVEMBER 30, 1998 MAY 31, 1998 NOVEMBER 30, 1998 MAY 31, 1998
----------------- ------------ ----------------- ------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income .................... $ 1,220,590 $ 2,293,946 $ 1,268,319 $ 1,862,477
Net realized gain from investments ....... 2,579 246,873 4,688 201,405
Net unrealized appreciation on investments 555,860 1,170,843 654,002 1,488,290
------------ ------------ ------------ ------------
Net increase in net assets resulting
from operations .................... 1,779,029 3,711,662 1,927,009 3,552,172
Distributions to shareholders from net
investment income ......................... (1,242,189) (2,307,589) (1,270,915) (1,851,295)
Capital share transactions (Note 2) ....... 3,406,911 3,731,394 12,914,701 16,116,499
------------ ------------ ------------ ------------
Net increase in net assets ........... 3,943,751 5,135,467 13,570,795 17,817,376
Net assets:
Beginning of period ....................... 45,138,141 40,002,674 44,525,837 26,708,461
------------ ------------ ------------ ------------
End of period ............................. $ 49,081,892 $ 45,138,141 $ 58,096,632 $ 44,525,837
============ ============ ============ ============
Undistributed net investment income included
in net assets:
End of period ............................ $ 92,751 $ 114,350 $ 31,708 $ 34,3047
------------ ------------ ------------ ------------
</TABLE>
See notes to financial statements.
67
FRANKLIN MUNICIPAL SECURITIES TRUST
FINANCIAL STATEMENTS (continued)
STATEMENTS OF CHANGES IN NET ASSETS (CONT.)
FOR THE SIX MONTHS ENDED NOVEMBER 30, 1998 (UNAUDITED)
AND THE YEAR ENDED MAY 31, 1998
<TABLE>
<CAPTION>
FRANKLIN WASHINGTON
MUNICIPAL BOND FUND
----------------------------------
SIX MONTHS ENDED YEAR ENDED
NOVEMBER 30, 1998 MAY 31, 1998
----------------- ------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income ................................... $ 295,176 $ 520,263
Net realized gain (loss) from investments ............... (4,874) 2,260
Net unrealized appreciation on investments .............. 138,393 345,821
------------ ------------
Net increase in net assets resulting from operations 428,695 868,344
Distributions to shareholders from net investment income . (308,414) (526,988)
Capital share transactions (Note 2) ...................... 1,264,994 1,674,114
------------ ------------
Net increase in net assets .......................... 1,385,275 2,015,470
Net assets:
Beginning of period ...................................... 10,376,159 8,360,689
------------ ------------
End of period ............................................ $ 11,761,434 $ 10,376,159
------------ ------------
Undistributed net investment income included in net assets:
End of period ............................................ $ 20,751 $ 33,989
------------ ------------
</TABLE>
See notes to financial statements.
68
FRANKLIN MUNICIPAL SECURITIES TRUST
Notes to Financial Statements (unaudited)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Municipal Securities Trust (the Trust) is registered under the
Investment Company Act of 1940 as an open-end, non-diversified investment
company, consisting of five series (the Funds). The Funds' investment objectives
are to provide tax-free income.
The following summarizes the Funds' significant accounting policies.
a. SECURITY VALUATION
Tax-free bonds generally trade in the over-the-counter market and are valued
within the range of the latest quoted bid and asked prices. In the absence of a
sale or reported bid and asked prices, information with respect to bond and note
transactions, quotations from bond dealers, market transactions in comparable
securities, and various relationships between securities are used to determine
the value of the security. The Trust 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. Securities for
which market quotations are not readily available are valued at fair value as
determined by management in accordance with procedures established by the Board
of Trustees.
b. INCOME TAXES
No provision has been made for income taxes because each Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and
distribute all of its taxable income.
c. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Interest income and estimated expenses are accrued daily. Bond discount and
premium are amortized on an income tax basis. Dividends from net investment
income are normally declared daily and distributed monthly to shareholders.
Other distributions are recorded on the ex-dividend date.
Common expenses incurred by the Trust are allocated among the Funds based on the
ratio of net assets of each Fund to the combined net assets. Other expenses are
charged to each Fund on a specific identification basis.
Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class.
d. 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.
69
FRANKLIN MUNICIPAL SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
2. SHARES OF BENEFICIAL INTEREST
The classes of shares offered within each of the funds are indicated below. The
shares differ by their initial sales load, distribution fees, voting rights on
matters affecting a single class and the exchange privilege of each class.
Class I
Franklin Arkansas Municipal Bond Fund
Franklin Hawaii Municipal Bond Fund
Franklin Tennessee Municipal Bond Fund
Franklin Washington Municipal Bond Fund
Class I & Class II
Franklin California High Yield Municipal Fund
On March 19, 1998, the Board approved name changes for Class I and Class II
shares to Class A and Class C, respectively. The effective date of the name
changes is January 1, 1999.
At November 30, 1998, there were an unlimited number of shares authorized (no
par value). Transactions in the Funds' shares were as follows:
<TABLE>
<CAPTION>
FRANKLIN ARKANSAS FRANKLIN CALIFORNIA
MUNICIPAL BOND FUND HIGH YIELD MUNICIPAL FUND
--------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
<S> <C> <C> <C> <C>
CLASS I SHARES:
Six months ended November 30, 1998
Shares sold ....................................... 1,015,188 $11,194,926 13,177,426 $141,586,768
Shares issued in reinvestment of distributions .... 36,618 404,199 466,590 5,016,338
Shares redeemed ................................... (223,815) (2,464,962) (5,132,035) (55,202,008)
--------- ----------- ---------- ------------
Net increase ...................................... 827,991 $ 9,134,163 8,511,981 $ 91,401,098
========= =========== ========== ============
Year ended May 31, 1998
Shares sold ....................................... 1,545,732 $16,752,477 22,284,623 $234,404,399
Shares issued in reinvestment of distributions .... 57,600 625,362 663,035 6,974,790
Shares redeemed ................................... (90,387) (979,903) (5,372,964) (56,526,396)
--------- ----------- ---------- ------------
Net increase ...................................... 1,512,945 $16,397,936 17,574,694 $184,852,793
========= =========== ========== ============
CLASS II SHARES:
Six months ended November 30, 1998
Shares sold ....................................... 2,157,081 $ 23,225,288
Shares issued in reinvestment of distributions .... 54,290 585,337
Shares redeemed ................................... (337,850) (3,638,847)
--------- ------------
Net increase ...................................... 1,873,521 $ 20,171,778
========= ============
Year ended May 31, 1998
Shares sold ....................................... 2,979,250 $ 31,420,783
Shares issued in reinvestment of distributions .... 51,598 545,089
Shares redeemed ................................... (300,304) (3,174,710)
--------- ------------
Net increase ...................................... 2,730,544 $ 28,791,162
========= ============
</TABLE>
70
FRANKLIN MUNICIPAL SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
2. SHARES OF BENEFICIAL INTEREST (cont.)
<TABLE>
<CAPTION>
FRANKLIN HAWAII FRANKLIN TENNESSEE
MUNICIPAL BOND FUND MUNICIPAL BOND FUND
------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
<S> <C> <C> <C> <C>
Class I Shares:
Six months ended November 30, 1998
Shares sold ....................................... 463,181 $ 5,208,759 1,334,109 $ 15,139,401
Shares issued in reinvestment of distributions .... 38,803 436,362 62,051 704,900
Shares redeemed ................................... (198,581) (2,238,210) (258,179) (2,929,600)
-------- ------------ --------- ------------
Net increase ...................................... 303,403 $ 3,406,911 1,137,981 $ 12,914,701
======== ============ ========= ============
Year ended May 31, 1998
Shares sold ....................................... 779,362 $ 8,639,651 1,961,959 $ 21,692,685
Shares issued in reinvestment of distributions .... 74,894 830,944 103,474 1,149,741
Shares redeemed ................................... (517,067) (5,739,201) (609,509) (6,725,927)
-------- ------------ --------- ------------
Net increase ...................................... 337,189 $ 3,731,394 1,455,924 $ 16,116,499
======== ============ ========= ============
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN WASHINGTON
MUNICIPAL BOND FUND
-----------------------
SHARES AMOUNT
------ ------
<S> <C> <C>
Class I Shares:
Six months ended November 30, 1998
Shares sold .................................. 162,443 $ 1,712,566
Shares issued in reinvestment of distributions 18,618 196,371
Shares redeemed .............................. (61,278) (643,943)
------- -----------
Net increase ................................. 119,783 $ 1,264,994
======= ===========
Year ended May 31, 1998
Shares sold .................................. 187,538 $ 1,946,679
Shares issued in reinvestment of distributions 35,472 368,307
Shares redeemed .............................. (61,822) (640,872)
------- -----------
Net increase ................................. 161,188 $ 1,674,114
======= ===========
</TABLE>
3. TRANSACTIONS WITH AFFILIATES
Certain officers and trustees of the Funds are also officers or directors of
Franklin/Templeton Distributors, Inc. (Distributors), Franklin Advisers, Inc.
(Advisers), Franklin/Templeton Investor Services, Inc. (Investor Services), and
Franklin Templeton Services, Inc. (FT Services), the Funds' principal
underwriter, investment manager, transfer agent, and administrative manager,
respectively.
The Funds pay an investment management fee to Advisers based on the average net
assets of the Funds as follows:
Annualized
Fee Rate Daily Net Assets
.625% First $100 million
.50% Over $100 million, up to and including $250 million
.45% In excess of $250 million
71
FRANKLIN MUNICIPAL SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
3. TRANSACTIONS WITH AFFILIATES (cont.)
Under an agreement with Advisers, FT Services provides administrative services
to the Funds. The fee is paid by Advisers based on average daily net assets, and
is not an additional expense of the Funds.
Advisers agreed in advance to waive management fees and assume payment of other
expenses, as noted in the Statements of Operations.
The Franklin Hawaii Municipal Bond Fund reimburses Distributors up to .10% per
year of its average daily net assets, the Franklin Arkansas Municipal Bond,
Franklin Tennessee Municipal Bond and Franklin Washington Municipal Bond Funds
reimburse Distributors up to .15% per year of the Funds' average daily net
assets, and the Franklin California High Yield Municipal Fund reimburses
Distributors up to .15% and .65% per year of the average daily net assets of
Class I and Class II, respectively, for costs incurred in marketing the Funds'
shares.
Distributors received (paid) net commissions from (on) sales of the Funds'
shares, and received contingent deferred sales charges for the period as
follows:
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN
ARKANSAS CALIFORNIA HAWAII TENNESSEE WASHINGTON
MUNICIPAL HIGH YIELD MUNICIPAL MUNICIPAL MUNICIPAL
BOND FUND MUNICIPAL FUND BOND FUND BOND FUND BOND FUND
--------- -------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net commissions received (paid) ..... $ (21,119) $(392,961) $ 5,118 $ (9,105) $ 3,165
Contingent deferred sales charges ... $ -- $ 25,971 $ -- $ -- $ --
</TABLE>
4. INCOME TAXES
At May 31, 1998, the Funds had tax basis capital losses which may be carried
over to offset future capital gains. Such losses expire as follows:
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN
ARKANSAS CALIFORNIA HAWAII WASHINGTON
MUNICIPAL HIGH YIELD MUNICIPAL MUNICIPAL
BOND FUND MUNICIPAL FUND BOND FUND BOND FUND
--------- -------------- --------- ---------
<S> <C> <C> <C> <C>
Capital loss carryovers expiring in: 2003 ......... $29,535 $1,431,250 $474,475 $ 82,647
2004 ......... -- 4,508 64,421 39,744
2005 ......... -- 390,400 -- --
------- ---------- -------- --------
$29,535 $1,826,158 $538,896 $122,391
======= ========== ======== ========
</TABLE>
At May 31, 1998 the Franklin California High Yield Municipal Fund and the
Franklin Washington Municipal Bond Fund had deferred capital losses occurring
subsequent to October 31, 1997 of $454,835 and $4,295, respectively. For tax
purposes, such losses will be reflected in the year ending May 31, 1999.
72
FRANKLIN MUNICIPAL SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
4. INCOME TAXES (cont.)
At November 30, 1998, the net unrealized appreciation based on the cost of
investments for income tax purposes was as follows:
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN
ARKANSAS CALIFORNIA HAWAII TENNESSEE WASHINGTON
MUNICIPAL HIGH YIELD MUNICIPAL MUNICIPAL MUNICIPAL
BOND FUND MUNICIPAL FUND BOND FUND BOND FUND BOND FUND
--------- -------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Investments at cost ......... $ 37,308,691 $ 548,442,079 $ 46,035,573 $ 55,813,302 $ 11,100,073
============== ============= ============= ============= =============
Unrealized appreciation ..... $ 1,337,334 $ 29,927,876 $ 3,001,126 $ 2,857,898 $ 712,102
Unrealized depreciation ..... (6,470) (1,115,405) (6,426) (31,114) --
-------------- -------------- -------------- -------------- -------------
Net unrealized appreciation.. $ 1,330,864 $ 28,812,471 $ 2,994,700 $ 2,826,784 $ 712,102
-------------- -------------- -------------- -------------- -------------
</TABLE>
Net realized capital gains (losses) differ for financial statement and tax
purposes primarily due to differing treatments of wash sales.
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the
period ended November 30, 1998 were as follows:
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN
ARKANSAS CALIFORNIA HAWAII TENNESSEE WASHINGTON
MUNICIPAL HIGH YIELD MUNICIPAL MUNICIPAL MUNICIPAL
BOND FUND MUNICIPAL FUND BOND FUND BOND FUND BOND FUND
--------- -------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Purchases $ 6,978,542 $139,491,820 $ 4,120,269 $ 16,416,360 $ 1,365,448
Sales ... $ 1,144,774 $ 25,812,901 $ 907,900 $ 3,250,038 $ 216,414
</TABLE>
6. CREDIT RISK
The Funds have investments in excess of 10% of their total net assets in their
respective states. Such concentration may subject the Funds more significantly
to economic changes occurring within those states.
