MESSAGE FROM THE CHAIRMAN
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
MESSAGE FROM THE CHAIRMAN ................................ 1
MANAGER'S DISCUSSION ..................................... 4
FUND REPORTS
Franklin Arkansas Municipal Bond Fund .................... 6
Franklin California High Yield Municipal Fund ............ 10
Franklin Hawaii Municipal Bond Fund ...................... 15
Franklin Tennessee Municipal Bond Fund ................... 19
Franklin Washington Municipal Bond Fund .................. 23
STATEMENT OF INVESTMENTS ................................. 27
FINANCIAL STATEMENTS ..................................... 38
NOTES TO FINANCIAL STATEMENTS............................. 42
REPORT OF INDEPENDENT AUDITORS............................ 48
</TABLE>
July 20, 1995
Fellow Shareholder:
We're pleased to bring you the annual report of the Franklin Municipal
Securities Trust for the period ended May 31, 1995.
Calendar year 1994 was one of the worst years for fixed-income securities. In
fact, the 20-year U.S. Treasury bond recorded its poorest performance since
1967.(1) Following this disappointing year, 1995 to date has been a welcome
change. Stock and bond markets both enjoyed strong performance through the first
five months of the year. In February, the Dow Jones Industrial Average broke the
4000 mark for the first time, and finished the period above 4300.
(1.) Source: Ibbotson Associates. Based on one-year total returns of long-term
government bonds from January 1926 to December 1994.
- --------------------------------------------------------------------------------
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
- - ARE NOT FDIC INSURED;
- - ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY, ANY FINANCIAL
INSTITUTION;
- - ARE SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL
AMOUNT INVESTED.
- --------------------------------------------------------------------------------
<PAGE>
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Of more importance to shareholders of the Franklin Municipal Securities Trust is
the recent strength of the municipal bond market. Although the rally was
sidetracked in early December by the municipal bankruptcy filing of Orange
County, California, the municipal market has recovered nicely. Through May 31,
1995, municipal bond prices, as measured by the Bond Buyer 40 Index, had risen
5.17% to $101.13 from $96.16 on January 31, 1995. Of course, there's no
guarantee that these markets will continue to rise as they have recently. In
fact, current debate regarding a national flat tax has caused the municipal
market to pause in recent months.
There has been a tremendous amount of press discussing various tax reform
issues, including a flat tax proposal, consumption tax, a national sales tax,
and a "Super IRA." Each of these proposals carry a variety of underlying
questions -- Will there be any allowed deductions? Will I lose the benefit of
investing in tax-free municipal bonds? As you can imagine, a number of details
need to be fully considered. Such news coverage has understandably caused some
concern among investors; however, it is probably too early to draw clear-cut
conclusions on how any of the proposed tax reform plans could impact the
municipal bond market. We will continue to monitor this situation and keep our
shareholders apprised of changes that may affect their investments.
As you know, markets experience both ups and downs, which is a normal part of
investing. That's why we've always encouraged our shareholders to focus on their
long-term investment goals. History has shown that, over the long term, stocks
and bonds have delivered impressive results.(2) By concentrating on long-term
investment goals, you need not be unduly concerned with short-term market
fluctuations.
Furthermore, many financial experts agree that a technique known as "dollar cost
averaging" may be one of the best ways to take advantage of market downturns and
rallies. With dollar cost averaging, you invest a fixed dollar amount at regular
intervals, regardless of the market's direction. Using this method, you
automatically purchase more shares when prices are low, and
(2). Past performance cannot guarantee future results.
2
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fewer shares when prices are high, which can significantly reduce your average
cost per share. Of course, no investment technique can assure a profit or
protect against loss. But dollar cost averaging can provide you with a simple
investment strategy that can minimize the effects of market volatility and help
you make the most of your investment dollars.(3) For more information on dollar
cost averaging, please see your investment advisor. Or, call Franklin Templeton
Fund Information, toll free, at 1-800/DIAL BEN.
You can also help minimize the effects of market fluctuations by diversifying
your investments. Mutual funds offer a level of diversification that would be
almost impossible for individual investors to achieve on their own. For example,
the five funds in the Franklin Municipal Securities Trust have their assets
spread over 190 issues in their various portfolios.
Mutual funds also provide full-time, professional management, and Franklin's
Municipal Bond Research Department is one of the largest in the industry.(4) Our
analysts frequently make site visits to obtain invaluable first-hand information
about issuers and specific municipal projects.
The benefits of mutual fund investing -- diversification and professional
management -- became even more apparent during the crisis in Orange County,
California.(5) This event triggered declines throughout the municipal market not
only because bonds issued by Orange County were affected, but bonds issued by
municipalities that invested in the Orange County investment pool were also
affected. The problems in Orange County created ripples that were felt
throughout the municipal bond market.
As always, we welcome your questions, appreciate your trust and support, and
look forward to serving you in the years to come.
Sincerely,
Charles B. Johnson
Chairman
Municipal Securities Trust
(3). When using this strategy, you should consider your financial ability to
continue purchases through periods of low price levels or changing economic
conditions.
(4). Source: Research and Ratings Review, Vol. II. Issue 8, November 14, 1994.
Franklin's municipal research team ranks second out of 1,000 investment advisory
firms, in terms of municipal bond analysts, in a survey by TMS Holdings, Inc.
(5). The Orange County and related bankruptcy proceedings are ongoing, and the
funds' managers continue to monitor proceedings.
3
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MANAGER'S DISCUSSION
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Fiscal year ending May 31, 1995, of the Franklin Municipal Securities Trust was
one of contrasts. During the first half of the year, bond prices fell
dramatically in the face of rapidly rising interest rates. By December of '94,
however, economic growth had slowed considerably, inflation remained subdued,
and the municipal bond market headed into a much welcomed rally. The recovery
was marred by the bankruptcy of Orange County, California in early December, but
this crisis was short-lived. Municipal bond prices continued their recovery
nicely and by May 31, 1995, had risen 7.98% since December 31, 1994.(1)
In managing our tax-free funds, we seek to provide our shareholders with a high
level of current income exempt from federal income taxes and, in most cases,
state and personal income taxes as well.(2) To achieve this goal, we generally
purchase current coupon bonds at a slight discount. We also practice a "buy and
hold" strategy, electing to retain higher coupon bonds (even when they trade at
a premium) for the higher income they provide. This helps us live up to our
funds' objectives -- to provide a high level of current, tax-free income. This
strategy also has a number of beneficial side effects, including fairly low
portfolio turnover rates, resulting in lower expenses which tend to result in
higher yields for investors. It also tends to help protect the funds from
extreme price volatility. Since bonds that trade at a premium are generally
slower to react to market fluctuations, the large percentage of such bonds in
our funds helped to dampen the effects of 1994's uncertain bond market.
In short, we believe our investment approach provides portfolios that pay a high
level of tax-free income while enjoying comparatively stable share prices.
The coming months should be strong ones for the municipal bond market as bond
issuance has fallen dramatically in the face of higher interest rates and voter
reluctance to approve new projects. As a result, we expect the new supply of
municipal
(1). Source: Lehman Brothers Municipal Bond Index
(2). For investors subject to federal or state alternative minimum tax, all or a
portion of these dividends may be subject to such tax, depending on the fund.
Distributions of capital gains and of ordinary income from accrued market
discount, if any, are generally taxable.
4
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bonds to be roughly $130 to $140 billion in 1995 -- slightly less than last
year, and significantly less than 1993, when municipal bond issuance hit an
all-time high. At the same time, there will be a record number of bonds that
will be redeemed or called in 1995 (approximately $185 billion) which will
return cash to investors that will need to be reinvested. This should help
increase demand for municipal bonds. While we expected 1994's reduced supply to
bode well for the municipal bond market, dramatic increases in interest rates
overshadowed any positive effects of a lower supply. Fortunately, long-term
interest rates have, to date, declined in 1995, and the slowing economy suggests
that the Fed's aggressive campaign to restrict the money supply is near its end.
In fact, given the significant drop in growth of the Gross Domestic Product
(GDP) in the first quarter of 1995 (GDP was 2.1% compared to 5.1% for the last
quarter of 1995), the Fed reduced short-term interest rates by .25% on July 6,
1995.
Furthermore, yields from municipal securities are currently very attractive
relative to yields available from U.S. Treasuries and other high-quality,
taxable fixed-income securities. For instance, municipal bonds, represented by
the Bond Buyer 40 (an index of 40 municipal bonds) offered 6.10% on May 31,
1995. For investors in the maximum federal income tax bracket of 39.6%, this
tax-free yield equals a taxable equivalent yield of 9.93%. Given their relative
value and the reduced supply available, we expect municipal bonds to perform
well in the coming year.
Sincerely,
Thomas J. Kenny
Senior Vice President -- Director,
Franklin Municipal Bond Department
5
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FRANKLIN ARKANSAS MUNICIPAL BOND FUND
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FUND OBJECTIVE
Managed to provide shareholders with a high level of 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.*
Higher interest rates gave us the opportunity to purchase higher-yielding
current coupon bonds for the fund's portfolio. The fund's higher earnings and
its dividend increase to 4.8 cents from 4.6 cents per share in December 1994
reflected our research and investment into higher coupon issues.
Since its inception in May 1994, the Franklin Arkansas Municipal Bond Fund has
endured an unusually volatile municipal bond market. Thus far, 1995 has been a
promising year for your fund. Recent economic data show signs of a slowing
economy, and inflation appears relatively subdued. The municipal market has
reacted strongly, gaining back most of the losses it experienced in 1994.
Although the market price of many bonds in the portfolio are currently trading
at a premium, we have elected to hold onto these securities for the high level
of tax-free income they earn for the fund.
We remain conservative in our management of the fund. The chart above
illustrates that, at the end of the fiscal year, over 50% of the fund's
securities were rated AAA -- the highest rating possible -- from Standard &
Poor's, or were judged to be of comparable credit quality by the fund's managers
at the time of purchase. We evaluate each issue on an individual basis, favoring
highly-rated "essential service" bonds. These securities tend to have a more
reliable income stream as they are backed by dependable revenue generated from
projects such as utilities, transportation and water, power and sewer works, to
name a few. As a result, these bonds tend to be less affected by budgetary and
political changes, and are believed to be very attractive in a municipal
cost-cutting
GRAPHIC MATERIAL 3 OMITTED SEE APPENDIX AT END OF DOCUMENT
*The fund may invest as much as 100% of its assets in bonds that pay interest
subject to the 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. The risks of investing in a non-diversified fund, such as
increased susceptibility to adverse economic or regulatory developments, are
described in the prospectus.
6
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environment. Like all mutual funds, however, the principal value of the fund's
holdings as well as the price of its shares will vary with market conditions.
We also seek to reduce the fund's risk by spreading its assets among a broad
range of cities and counties throughout Arkansas. Additionally, we purchase
securities from a variety of municipal sectors, as the table to the right
indicates.
Our outlook for the fund is positive. As stated previously, recent economic
reports indicate that U.S. economic growth has stabilized at a healthy and
sustainable level, while inflation has remained subdued. Signs of a slowing
economy should eventually result in a gradual decline in interest rates, which
could positively affect bond prices and, thus, the fund's price per share.
Arkansas' employment growth was one of the strongest in the nation in 1994 and
is expected to continue, though at a lower rate, in 1995. The state's growth
ranks twelfth in the nation at 3.2% versus a national rate of 2.6%. Most of this
job growth was led by manufacturing, which employs 26.4% of the state's
population.
Resource-related industries dominate the Arkansas economy, with the largest
industries being food products (Tyson Industries), lumber, and paper goods.
Northwest Arkansas is experiencing a great deal of employment growth due to
Wal-Mart's headquarters and many other businesses that have located there to
service Wal-Mart's needs. Employment diversification has lessened the cyclical
nature of Arkansas' economy, especially during recessionary periods. Going
forward, employment growth in the construction and services sectors should
continue, helping to further balance the state's economy. The growth of its
food-processing industry, its position as a low-cost manufacturing state, an
ample supply of natural resources, and its location in the South should help
Arkansas' economic base to grow and remain stable, possibly outpacing national
growth.
FRANKLIN ARKANSAS MUNICIPAL BOND FUND
Portfolio Breakdown on May 31, 1995 As a percentage of total net assets
<TABLE>
<CAPTION>
% OF TOTAL
SECTOR NET ASSETS
- --------------------------------------------------------------------------------
<S> <C>
Utilities 24.9%
- --------------------------------------------------------------------------------
Housing 22.8%
- --------------------------------------------------------------------------------
General Obligations 13.4%
- --------------------------------------------------------------------------------
Hospitals 13.0%
- --------------------------------------------------------------------------------
Education 12.6%
- --------------------------------------------------------------------------------
Industrial 6.9%
- --------------------------------------------------------------------------------
Transportation 6.4%
- --------------------------------------------------------------------------------
</TABLE>
FOR A COMPLETE LIST OF PORTFOLIO HOLDINGS, PLEASE SEE PAGE 27 OF THIS REPORT.
7
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PERFORMANCE SUMMARY
The Franklin Arkansas Municipal Bond Fund's share price, as measured by net
asset value, increased to $10.32 on May 31, 1995, from $10.06 on May 31, 1994.
Your fund began paying monthly dividends in September 1994. Through the end of
the reporting period, shareholders received 42.6 cents ($0.426) per share in
dividend income.+ Due to increased income earned by the fund, we were able to
increase the monthly dividend to 4.8 cents ($0.048) per share from 4.6 cents
($0.046) per share, effective with the December 1994 distribution. Dividends
will vary based on the earnings of the fund's portfolio, and past distributions
are not necessarily predictive of future results.
At the end of the reporting period, your fund's distribution rate was 5.34%,
based on an annualization of the current monthly dividend of 4.8 cents per share
and the maximum offering price of $10.78 on May 31, 1995. This double tax-free
rate is generally higher than the after-tax return on a comparable taxable
investment. For example, if you are in the maximum combined federal and Arkansas
state personal income tax bracket of 43.8%, you would have to earn 9.50% from a
taxable investment to match your fund's tax-free distribution rate.
The Franklin Arkansas Municipal Bond Fund provided a total return of +7.27% for
the one-year period ended May 31, 1995. Total return measures the change in
value of an investment during the period indicated, assuming reinvestment of
dividends and capital gains, if any. This calculation does not include the
initial sales charge, and past performance is not predictive of future results.
The chart on the following page compares the fund's performance with that of the
Lehman Brothers Municipal Bond Index and the Consumer Price Index (CPI). The
Lehman Brothers Index has some inherent performance differentials over any fund
as it holds no cash in its portfolio and
GRAPHIC MATERIAL 1 OMITTED SEE APPENDIX AT END OF DOCUMENT
+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 and total return calculations include all income earned by the
fund during the reporting period.
8
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involves no sales charges or management expenses. In addition, the index
includes municipal securities from across the country while your fund is
composed primarily of Arkansas municipal bonds. Please remember that an index
is simply a measure of performance and cannot be invested in directly.
Your fund's managers maintain a long-term investment perspective and we
encourage our shareholders to do the same. While the fund may experience
volatility from time to time, we believe that its performance will be rewarding
over the long term.
GRAPHIC MATERIAL 2 OMITTED SEE APPENDIX AT END OF DOCUMENT
*This performance graph assumes an initial $10,000 investment and includes the
maximum 4.25% sales charge, all fund expenses and account fees. It also assumes
that your dividends and capital gains were reinvested at net asset value. The
Lehman Brothers Municipal Bond Index includes price appreciation or depreciation
and distributions as a percentage of the original investment. Past performance
cannot guarantee future results.
FRANKLIN ARKANSAS MUNICIPAL BOND FUND
Period ended May 31, 1995
<TABLE>
<CAPTION>
SINCE
INCEPTION
1-YEAR (05/09/94)
- --------------------------------------------------------------------------------
<S> <C> <C>
Cumulative Total Return(1) 7.27% 7.76%
Average Annual Total Return(2) 2.68% 3.02%
Distribution Rate(3) 5.34%
Taxable Equivalent Distribution Rate(4) 9.50%
30-Day Standardized Yield(5) 5.52%
Taxable Equivalent Yield(4) 9.82%
- --------------------------------------------------------------------------------
</TABLE>
(1). Cumulative total return measures the change in value of an investment over
the periods indicated and does not include the maximum 4.25% initial sales
charge stated in the prospectus. See note below.
(2). Average annual total return represents the average annual change in value
of an investment over the specified periods and includes the maximum 4.25%
initial sales charge. See note below.
(3). Based on an annualization of the fund's current 4.8 cent per share monthly
dividend and the maximum offering price of $10.78 on May 31, 1995.
(4). Taxable equivalent distribution rate and yield assume the 1995 maximum
combined federal and Arkansas state income tax bracket of 43.8%, based on the
39.6% federal income tax rate.
(5). Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended 5/31/95.
Note: All total return calculations assume reinvestment of dividends and capital
gains at net asset value. 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.
The fund's manager has agreed in advance to waive a portion of the 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 3.58%. The fee waiver may be discontinued at any time upon notification to
the fund's Board of Trustees.
9
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FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND
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FUND OBJECTIVE
Managed to provide shareholders with 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.*
The investment strategy we employ in the management of your fund has proven very
effective for its shareholders over the past year. By staying invested in
current to slightly discounted bonds, the California High Yield Municipal Fund
didn't experience the volatility that other funds did. Additionally, Franklin's
investment philosophy of achieving the highest income possible and not trading
for total return has enabled your fund to move ahead of other funds that try to
guess the market. The fund continues to grow quite rapidly and is positioned to
perform well as the market stabilizes in the year ahead. The fund does not use
derivatives. The weak supply of municipal issues coming to market, which may be
less than $140 billion, should assist in strengthening the market and,
subsequently, the fund's overall performance.
GRAPHIC MATERIAL 6 OMITTED SEE APPENDIX AT END OF DOCUMENT
Issuance of high yield bonds in California was quite slow through the first six
months of the fund's fiscal year, which led to very tight yield spreads between
high yield and investment grade bonds; as a result, we increased the fund's
exposure to higher quality issues, since their yields were in close range to
lower-rated bonds.
*The fund may invest as much as 100% of its assets in bonds that pay interest
subject to the 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. The risks of investing in a non-diversified fund, such as
increased susceptibility to adverse economic or regulatory developments, are
described in the prospectus.
+ In general, an investor is paid a higher yield to assume a greater degree of
risk.
10
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Careful analysis of credit quality is particularly important in a fund that
seeks higher current income through investments in medium-, lower- and non-rated
bonds. National ratings services such as Standard & Poor's, Moody's, and our own
in-house rating system, provide the fund's analysts with an evaluation of each
bond issuer's credit quality.
While our primary focus remains on higher-yielding lower-rated securities, the
fund's exposure to higher quality bonds increased over the reporting period,
with 7.5% of the fund invested in AAA and AA rated bonds in May 1995, up from 0%
in May 1994. The portion of A-rated securities in the portfolio has also
increased to 35.0%, up from 18.3% in May 1994. These ratings, while not
signifying approval of the shares by national ratings agencies, reflect the
quality of the bonds in the fund's portfolio and are subject to change.
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND
Portfolio Breakdown on May 31, 1995
As a percentage of total net assets
<TABLE>
<CAPTION>
% OF TOTAL
SECTOR NET ASSETS
- --------------------------------------------------------------------------------
<S> <C>
Mello-Roos Bonds 23.9%
- --------------------------------------------------------------------------------
Certificates of Participation 16.1%
- --------------------------------------------------------------------------------
Special Assessment Bonds 14.0%
(1915 Act)
- --------------------------------------------------------------------------------
Housing 8.5%
- --------------------------------------------------------------------------------
Tax Allocation Bonds 8.4%
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Hospitals 7.4%
- --------------------------------------------------------------------------------
Utilities 6.3%
- --------------------------------------------------------------------------------
Marks-Roos Bonds 5.3%
- --------------------------------------------------------------------------------
Health Care 3.9%
- --------------------------------------------------------------------------------
Education 3.1%
- --------------------------------------------------------------------------------
Industrial Revenue Bonds 2.1%
- --------------------------------------------------------------------------------
Transportation 0.8%
- --------------------------------------------------------------------------------
Other Revenue 0.2%
- --------------------------------------------------------------------------------
</TABLE>
FOR A COMPLETE LIST OF PORTFOLIO HOLDINGS, PLEASE SEE PAGE 29 OF THIS REPORT.
11
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We have studied the events in Orange County closely and believe that the fund
has not been adversely affected. Of course, bankruptcy proceedings are ongoing,
and we will continue to monitor the situation. On May 31, 1995, the Franklin
California High Yield Fund held no direct, unenhanced obligations of Orange
County.
The past four years have challenged California's resiliency as cyclical and
structural problems have been addressed. The national recession severely
affected the state and its effects linger. As cold-war tensions subsided, the
state's enormous military industry lost 700,000 jobs -- though it is estimated
that 240,000 of these jobs have been restored. Likewise, military base closures
in Northern and Southern California have impacted both state and local
economies.
California's social welfare and entitlement programs have strained finances as
caseload growth has exceeded both population and resource availability. In
addition, the state has been affected by numerous natural catastrophes,
including earthquakes, fire, drought and floods, further straining state
resources.
In response to economic pressures, California increased personal and corporate
income tax rates in 1991, implemented property tax transfers away from local
governments to fund education, increased student fees for higher education, and
realigned welfare and social programs from the state to the county levels. It is
hoped that these actions will work to stabilize the state's economy.
12
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PERFORMANCE SUMMARY
The Franklin California High Yield Municipal Fund's share price, as measured by
net asset value, increased to $9.93 on May 31, 1995, from $9.73 on May 31, 1994.
The fund continued to meet its investment objective of providing high current
income to its shareholders. For the one-year period ended May 31, 1995, your
fund paid monthly income distributions totaling 63.6 cents ($0.636) per share.
(++) Dividends will vary based on the earnings of the fund's portfolio, and past
distributions are not necessarily predictive of future results.
At the end of the reporting period, your fund's distribution rate was 6.13%,
based on an annualization of the current monthly dividend of 5.3 cents per share
and the maximum offering price of $10.37 on May 31, 1995. This double tax-free
rate is generally higher than the after-tax return on a comparable taxable
investment. For example, if you are in the maximum combined federal and
California state personal income tax bracket of 46.2%, you would have to earn
11.39% from a taxable investment to match your fund's tax-free distribution
rate.
The Franklin California High Yield Municipal Fund provided a total return of
+9.08% for the one-year period ended May 31, 1995. Total return measures the
change in value of an investment during the period indicated, assuming
reinvestment of dividends and capital gains, if any. This calculation does not
include the initial sales charge, and past performance is not predictive of
future results.
GRAPHIC MATERIAL 4 OMITTED SEE APPENDIX AT END OF DOCUMENT
Since 1993, the Franklin California High Yield Municipal Fund has exceeded the
Consumer Price Index (CPI), keeping your purchasing power well ahead of
inflation -- a primary goal of any investment. The fund, however, has slightly
underperformed the unmanaged Lehman Brothers Municipal Bond Index, as
illustrated by the chart on the following page. The index has some inherent
performance differentials over any fund as it holds
++Assumes shares were purchased and held for the entire accrual period. Since
dividends accrue daily, your actual distribution will vary, depending on the
date you purchased your shares and any account activity during the month. Income
distributions and total return calculations include all accrued income earned by
the fund during the reporting period.
13
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GRAPHIC MATERIAL 5 OMITTED SEE APPENDIX AT END OF DOCUMENT
no cash in its portfolio and involves no sales charges or management expenses.
In addition, the index includes municipal securities from across the country
while your fund is composed primarily of California municipal bonds. Please
remember that an index is simply a measure of performance and cannot be invested
in directly.
Your fund's managers maintain a long-term investment perspective and we
encourage our shareholders to do the same. While the fund may experience
volatility from time to time, we believe that its performance will be rewarding
over the long term.
*This performance graph assumes an initial $10,000 investment and includes the
maximum 4.25% sales charge, all fund expenses and account fees. It also assumes
that your dividends and capital gains were reinvested at net asset value. The
Lehman Brothers Municipal Bond Index includes price appreciation or depreciation
and distributions as a percentage of the original investment. Past performance
cannot guarantee future results.
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND
Period ended May 31, 1995
<TABLE>
<CAPTION>
SINCE
INCEPTION
1-YEAR (05/03/93)
- --------------------------------------------------------------------------------
<S> <C> <C>
Cumulative Total Return(1) 9.08% 12.09%
Average Annual Total Return(2) 4.45% 3.48%
Distribution Rate(3) 6.13%
Taxable Equivalent Distribution Rate(4) 11.39%
30-Day Standardized Yield(5) 6.50%
Taxable Equivalent Yield(4) 12.08%
- --------------------------------------------------------------------------------
</TABLE>
(1). Cumulative total return measures the change in value of an investment over
the periods indicated and does not include the maximum 4.25% initial sales
charge stated in the prospectus. See note below.
(2). Average annual total return represents the average annual change in value
of an investment over the specified periods. The figures have been restated to
reflect the maximum 4.25% initial sales charge. See note below.
(3). Based on an annualization of the fund's current 5.3 cent per share monthly
dividend and the maximum offering price of $10.37 on May 31, 1995.
(4). Taxable equivalent distribution rate and yield assume the 1995 maximum
combined federal and California state income tax bracket of 46.2%, based on the
39.6% federal income tax rate.
(5). Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended 5/31/95.
Note: Prior to July 1, 1994, fund shares were offered at a higher initial sales
charge. Thus, actual total returns for purchasers of shares during that period
would have been somewhat different than noted above. All total return
calculations assume reinvestment of dividends and capital gains at net asset
value. 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.
The fund's manager has agreed in advance to waive a portion of the 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 5.77%. The fee waiver may be discontinued at any time upon advance notice
to the fund's Board of Trustees.
14
<PAGE>
FRANKLIN HAWAII MUNICIPAL BOND FUND
================================================================================
FUND OBJECTIVE
Managed to provide shareholders with a high level of 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.(*)
As bond yields increased, we took the opportunity to sell some of the fund's
lower coupon bonds, and bought current coupon bonds, a strategy that enabled us
to slightly increase the fund's income. In response, the fund's average coupon
rose to 6.28% on May 31, 1995, from 6.10% on May 31, 1994. While our investment
strategy focuses on income rather than total return, the fund reported a total
return of +9.26% for the one year period -- better than the average total return
of other Hawaii municipal bond funds. According to Lipper Analytical Services,
Inc., the average total return of Hawaii municipal bond funds was +7.29% for the
period ended May 31, 1995.(**)
We remain conservative in our management of the fund. The chart below
illustrates that, at the end of the fiscal year, over 50% of the fund's
securities were rated AAA at the time of purchase -- the highest rating possible
- -- from Standard & Poor's, or were judged to be of comparable credit quality by
the fund's managers. We evaluate each issue on an individual basis, favoring
highly rated "essential service" bonds. These securities tend to have a more
reliable income stream as they are backed by dependable revenue generated from
projects such as utilities, transportation and water, power and sewer works, to
name a few. As a result, these bonds tend to be less affected by budgetary and
political changes, and are believed
GRAPHIC MATERIAL 9 OMITTED SEE APPENDIX AT END OF DOCUMENT
*The fund may invest as much as 100% of its assets in bonds that pay interest
subject to the 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. The risks of investing in a non-diversified fund, such as
increased susceptibility to adverse economic or regulatory developments, are
described in the prospectus.
**The fund was ranked #1 out of 8 Hawaii municipal bond funds in total return
for the one-year period and #1 out of 5 funds for the three-year period ended
May 31, 1995, as measured by Lipper Analytical Services, Inc., a nationally
recognized mutual fund rating organization. Lipper rankings do not include sales
charges; past and present expense reductions by the fund's manager increased the
fund's total returns. Rankings may have been different if these factors had been
considered. Past performance cannot guarantee future results.
15
<PAGE>
================================================================================
to be very attractive in a municipal cost-cutting environment. Like all mutual
funds, however, the principal value of the fund's holdings as well as the price
of its shares will vary with market conditions.
During the past year, new issuance of municipal bonds emanating from the islands
was limited. We purchased bonds when we felt the issues represented good value.
We sold older issues with lower coupons and bought higher coupon bonds, thus
enhancing the fund's cash flow.
We also seek to reduce the fund's risk by spreading its assets among a broad
range of cities and counties throughout Hawaii. Additionally, we purchase
securities from a variety of municipal sectors, as the table to the right
illustrates.
Our outlook for the fund is positive. Recent economic reports indicate that U.S.
economic growth has stabilized at a healthy and sustainable level, while
inflation has remained subdued. Signs of a slowing economy should eventually
result in a gradual decline in interest rates, which could positively affect
bond prices and, thus, the fund's price per share.
Tourism continues to dominate the Hawaiian economy. As the mainland has enjoyed
generally strong economic performance and the job base has broadened in the
continental U.S., travel to the Islands has increased. Additionally, the state's
economy has been helped by the reassessment of military base commitments
throughout south-east Asia. From an economic standpoint, Hawaii has
increasingly benefited as the United States' western-most, and reliable,
military outpost.
Government construction throughout the state should continue to contribute to
its stable economy. Given Hawaii's strong commitment to the tourism industry,
construction in the hotel and resort areas should hold at current levels, and
increase marginally in the near term. New building projects aimed at enhancing
tourism should also result in higher municipal bond issuance in the state.
FRANKLIN HAWAII MUNICIPAL BOND FUND
Portfolio Breakdown on May 31, 1995
As a percentage of total net assets
<TABLE>
<CAPTION>
% OF TOTAL
SECTOR NET ASSETS
- --------------------------------------------------------------------------------
<S> <C>
Transportation 21.3%
- --------------------------------------------------------------------------------
Utilities 21.3%
- --------------------------------------------------------------------------------
Hospitals 17.4%
- --------------------------------------------------------------------------------
General Obligations 17.0%
- --------------------------------------------------------------------------------
Housing 15.5%
- --------------------------------------------------------------------------------
Industrial 4.0%
- --------------------------------------------------------------------------------
Pre-Refunded 2.5%
- --------------------------------------------------------------------------------
Education 1.0%
- --------------------------------------------------------------------------------
</TABLE>
FOR A COMPLETE LIST OF PORTFOLIO HOLDINGS, PLEASE SEE PAGE 31 OF THIS REPORT.
16
<PAGE>
================================================================================
PERFORMANCE SUMMARY
The Franklin Hawaii Municipal Bond Fund's share price, as measured by net asset
value, increased to $10.67 on May 31, 1995, from $10.36 on May 31, 1994. The
fund continued to meet its investment objective of providing high current income
to its shareholders. For the one-year period ended May 31, 1995, your fund paid
monthly income distributions totaling 60 cents ($0.60) per share.(+) Dividends
will vary based on the earnings of the fund's portfolio, and past distributions
are not necessarily predictive of future results.
At the end of the reporting period, your fund's distribution rate was 5.39%,
based on an annualization of the current monthly dividend of 5.0 cents per share
and the maximum offering price of $11.14 on May 31, 1995. This double tax-free
rate is generally higher than the after-tax return on a comparable taxable
investment. For example, if you are in the maximum combined federal and Hawaii
state personal income tax bracket of 45.6%, you would have to earn 9.91% from a
taxable investment to match your fund's tax-free distribution rate.
The Franklin Hawaii Municipal Bond Fund provided a total return of +9.26% for
the one-year period ended May 31, 1995. Total return measures the change in
value of an investment during the period indicated, assuming reinvestment of
dividends and capital gains, if any. This calculation does not include the
initial sales charge, and past performance is not predictive of future results.
GRAPHIC MATERIAL 7 OMITTED SEE APPENDIX AT END OF DOCUMENT
Since 1992, the Franklin Hawaii Municipal Bond Fund has exceeded the Consumer
Price Index (CPI), keeping your purchasing power well ahead of inflation -- a
primary goal of any investment. The fund, however, has slightly underperformed
the unmanaged Lehman Brothers Municipal Bond Index, as illustrated by the chart
on the following page. The index has some inherent performance differentials
over any fund as it holds no cash in its portfolio and involves no sales charges
or
(+) 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 and total return calculations include all income earned by the
fund during the reporting period.
17
<PAGE>
================================================================================
GRAPHIC MATERIAL 8 OMITTED SEE APPENDIX AT END OF DOCUMENT
management expenses. In addition, the index includes municipal securities from
across the country while your fund is composed primarily of Hawaii municipal
bonds. Please remember that an index is simply a measure of performance and
cannot be invested in directly.
Your fund's managers maintain a long-term investment perspective and we
encourage our shareholders to do the same. While the fund may experience
volatility from time to time, we believe that its performance will be rewarding
over the long term.
*This performance graph assumes an initial $10,000 investment and includes the
maximum 4.25% sales charge, all fund expenses and account fees. It also assumes
that your dividends and capital gains were reinvested at net asset value. The
Lehman Brothers Municipal Bond Index includes price appreciation or depreciation
and distributions as a percentage of the original investment. Past performance
cannot guarantee future results.
FRANKLIN HAWAII MUNICIPAL BOND FUND
Period ended May 31, 1995
<TABLE>
<CAPTION>
SINCE
INCEPTION
1-YEAR 3-YEAR (02/26/92)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) 9.26% 24.87% 27.80%
Average Annual Total Return(2) 4.61% 6.14% 6.39%
Distribution Rate(3) 5.39%
Taxable Equivalent Distribution Rate(4) 9.91%
30-Day Standardized Yield(5) 5.46%
Taxable Equivalent Yield(4) 10.04%
- ------------------------------------------------------------------------------------------
</TABLE>
(1). Cumulative total return measures the change in value of an investment over
the periods indicated and does not include the maximum 4.25% initial sales
charge stated in the prospectus. See note below.
(2). Average annual total return represents the average annual change in value
of an investment over the specified periods. The figures have been restated to
reflect the maximum 4.25% initial sales charge. See note below.
(3). Based on an annualization of the fund's current 5.0 cent per share monthly
dividend and the maximum offering price of $11.14 on May 31, 1995.
(4). Taxable equivalent distribution rate and yield assume the 1995 maximum
combined federal and Hawaii state income tax bracket of 45.6%, based on the
39.6% federal income tax rate.
(5). Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended 5/31/95.
Note: Prior to July 1, 1994, fund shares were offered at a higher initial sales
charge. Thus, actual total returns for purchasers of shares during that period
would have been somewhat different than noted above. All total return
calculations assume reinvestment of dividends and capital gains at net asset
value. 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.
The fund's manager has agreed in advance to waive a portion of the 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 4.62%. The fee waiver may be discontinued at any time upon advance notice
to the fund's Board of Trustees.
18
<PAGE>
FRANKLIN TENNESSEE MUNICIPAL BOND FUND
================================================================================
FUND OBJECTIVE
Managed to provide shareholders with a high level of 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.*
Higher interest rates gave us the opportunity to purchase higher-yielding
current coupon bonds for the fund's portfolio. The fund's higher earnings and
its dividend increase to 4.9 cents from 4.8 cents per share in December 1994
reflected our research and investment into higher coupon issues.
Since its inception in May 1994, the Franklin Tennessee Municipal Bond Fund has
endured an unusually volatile municipal bond market. Thus far, 1995 has been a
promising year for your fund. Recent economic data show signs of a slowing
economy, and inflation appears relatively subdued. The municipal market has
reacted strongly, gaining back most of the losses it experienced in 1994.
Although the market price of many bonds in the portfolio are currently trading
at a premium, we have elected to hold onto these securities for the high level
of tax-free income they earn for the fund.
We remain conservative in our management of the fund. The chart above
illustrates that, at the end of the fiscal year, over 30% of the fund's
securities were rated AAA at the time of purchase -- the highest rating possible
- -- from Standard & Poor's, or were judged to be of comparable credit quality by
the fund's managers. We evaluate each issue on an individual basis, favoring
highly rated "essential service" bonds. These securities tend to have a more
reliable income stream as they are backed by dependable revenue generated from
projects such as utilities, transportation and
GRAPHIC MATERIAL 12 OMITTED SEE APPENDIX AT END OF DOCUMENT
*The fund may invest as much as 100% of its assets in bonds that pay interest
subject to the 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. The risks of investing in a non-diversified fund, such as
increased susceptibility to adverse economic or regulatory developments, are
described in the prospectus.
19
<PAGE>
================================================================================
water, power and sewer works, to name a few. As a result, these bonds tend to be
less affected by budgetary and political changes, and are believed to be very
attractive in a municipal cost-cutting environment. Like all mutual funds,
however, the principal value of the fund's holdings as well as the price of its
shares will vary with market conditions.
We also seek to reduce the fund's risk by spreading its assets among a broad
range of cities and counties throughout Tennessee. Additionally, we purchase
securities from a variety of municipal sectors, as the table to the right
indicates.
Our outlook for the fund is positive. As stated previously, recent economic
reports indicate that U.S. economic growth has stabilized at a healthy and
sustainable level, while inflation has remained subdued. Signs of a slowing
economy should eventually result in a gradual decline in interest rates, which
could positively affect bond prices and, thus, the fund's price per share.
Tennessee's economy has become more diversified, experiencing growth in its
services sector -- especially health care services and distribution. The service
sector currently makes up 24% of employment, with manufacturing and trade
employing 23% of the state's populace.
FRANKLIN TENNESSEE MUNICIPAL BOND FUND
Portfolio breakdown on May 31, 1995
As a percentage of total net assets
<TABLE>
<CAPTION>
% OF TOTAL
SECTOR NET ASSETS
- --------------------------------------------------------------------------------
<S> <C>
Industrial 23.0%
- --------------------------------------------------------------------------------
Utilities 22.5%
- --------------------------------------------------------------------------------
Housing 13.0%
- --------------------------------------------------------------------------------
General Obligations 12.2%
- --------------------------------------------------------------------------------
Hospitals 11.1%
- --------------------------------------------------------------------------------
Education 9.1%
- --------------------------------------------------------------------------------
Certificates of Participation 3.8%
- --------------------------------------------------------------------------------
Transportation 3.6%
- --------------------------------------------------------------------------------
Other Revenue 1.7%
- --------------------------------------------------------------------------------
</TABLE>
FOR A COMPLETE LIST OF PORTFOLIO HOLDINGS, PLEASE SEE PAGE 34 OF THIS REPORT.
The auto industry has been a major economic boost to the Tennessee economy. The
expansion of Saturn and Nissan automobile manufacturing facilities and other
automobile-related businesses have encouraged growth in this sector. In
addition, the state has been focusing much of its attention on its education and
transportation infrastructures. The work in these areas has encouraged and
supported business development throughout Tennessee.
20
<PAGE>
================================================================================
PERFORMANCE SUMMARY
The Franklin Tennessee Municipal Bond Fund's share price, as measured by net
asset value, increased to $10.53 on May 31, 1995, from $10.12 on May 31, 1994.
Your fund began paying monthly dividends in September 1994. Through the end of
the reporting period, shareholders received 43.8 cents ($0.438) per share in
dividend income (+). Due to increased income earned by the fund, we were able to
increase the monthly dividend to 4.9 cents ($0.049) per share from 4.8 cents
($0.048) per share, effective with the December 1994 distribution. Dividends
will vary based on the earnings of the fund's portfolio, and past distributions
are not necessarily predictive of future results.
At the end of the reporting period, your fund's distribution rate was 5.35%,
based on an annualization of the current monthly dividend of 4.9 cents per share
and the maximum offering price of $11.00 on May 31, 1995. This double tax-free
rate is generally higher than the after-tax return on a comparable taxable
investment. For example, if you are in the maximum combined federal and
Tennessee state personal income tax bracket of 43.2%, you would have to earn
9.42% from a taxable investment to match your fund's tax-free distribution rate.
GRAPHIC MATERIAL 10 OMITTED SEE APPENDIX AT END OF DOCUMENT
The Franklin Tennessee Municipal Bond Fund provided a total return of +8.97% for
the one-year period ended May 31, 1995. Total return measures the change in
value of an investment during the period indicated, assuming reinvestment of
dividends and capital gains, if any. This calculation does not include the
initial sales charge. Past performance is not predictive of future results.
The chart on the following page compares the fund's performance with that of the
Lehman Brothers Municipal Bond Index and the Consumer Price Index (CPI). The
Lehman Brothers Index has some inherent performance differentials over any fund
as it holds no cash in its portfolio and
(+) 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 and total return calculations include all income earned by the
fund during the reporting period.
21
<PAGE>
================================================================================
GRAPHIC MATERIAL 11 OMITTED SEE APPENDIX AT END OF DOCUMENT
involves no sales charges or management expenses. In addition, the index
includes municipal securities from across the country while your fund is
composed primarily of Tennessee municipal bonds. Please remember that an
index is simply a measure of performance and cannot be invested in directly.
Your fund's managers maintain a long-term investment perspective and we
encourage our shareholders to do the same. While the fund may experience
volatility from time to time, we believe that its performance will be rewarding
over the long term.
FRANKLIN TENNESSEE MUNICIPAL BOND FUND
Period ended May 31, 1995
<TABLE>
<CAPTION>
SINCE
INCEPTION
1-YEAR (05/09/94)
- --------------------------------------------------------------------------------
<S> <C> <C>
Cumulative Total Return(1) 8.97% 10.01%
Average Annual Total Return(2) 4.35% 5.05%
Distribution Rate(3) 5.35%
Taxable Equivalent Distribution Rate(4) 9.42%
30-Day Standardized Yield(5) 5.78%
Taxable Equivalent Yield(4) 10.18%
- --------------------------------------------------------------------------------
</TABLE>
(1). Cumulative total return measures the change in value of an investment over
the periods indicated and does not include the maximum 4.25% initial sales
charge stated in the prospectus. See note below.
(2). Average annual total return represents the average annual change in value
of an investment over the specified periods and includes the maximum 4.25%
initial sales charge. See note below.
(3). Based on an annualization of the fund's current 4.9 cent per share monthly
dividend and the maximum offering price of $11.00 on May 31, 1995.
(4). Taxable equivalent distribution rate and yield assume the 1995 maximum
combined federal and Tennessee state income tax bracket of 43.2%, based on the
39.6% federal income tax rate.
(5). Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended 5/31/95.
Note: All total return calculations assume reinvestment of dividends and capital
gains at net asset value. 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.
The fund's manager has agreed in advance to waive a portion of the 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 4.00%. The fee waiver may be discontinued at any time upon advance notice
to the fund's Board of Trustees.
*This performance graph assumes an initial $10,000 investment and includes the
maximum 4.25% sales charge, all fund expenses and account fees. It also assumes
that your dividends and capital gains were reinvested at net asset value. The
Lehman Brothers Municipal Bond Index includes price appreciation or depreciation
and distributions as a percentage of the original investment. Past performance
cannot guarantee future results.
22
<PAGE>
FRANKLIN WASHINGTON MUNICIPAL BOND FUND
================================================================================
FUND OBJECTIVE
Managed to provide shareholders with a high level of current income exempt from
regular federal income tax while seeking preservation of capital by in vesting
primarily in a portfolio of Washington municipal securities.*
As bond yields increased, we took the opportunity to sell some of the fund's
lower coupon bonds, and bought current coupon bonds, a strategy which enabled us
to slightly increase the fund's income. In response, the fund's average coupon
rose to 6.10% on May 31, 1995, from 5.92% on May 31, 1994.
While our investment strategy focuses on income rather than total return, the
fund reported a total return of +10.10% for the one-year period -- better than
the average total return of other Washington municipal bond funds. According to
Lipper Analytical Services, Inc., the average total return of Washington
municipal bond funds was 9.22% for the year ended May 31, 1995.**
We remain conservative in our management of the fund. The chart below
illustrates that, at the end of the fiscal year, over 40% of the fund's
securities were rated AAA at the time of purchase -- the highest rating possible
- -- from Standard & Poor's, or were judged to be of comparable credit quality by
the fund's managers. We evaluate each issue on an individual basis, favoring
highly rated "essential service" bonds. These securities tend to have a more
reliable income stream as they are backed by dependable revenue generated from
projects such as utilities, transportation and water,
GRAPHIC MATERIAL 15 OMITTED SEE APPENDIX AT END OF DOCUMENT
*The fund may invest as much as 100% of its assets in bonds that pay interest
subject to the 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. The risks of investing in a non-diversified fund, such as
increased susceptibility to adverse economic or regulatory developments, are
described in the prospectus.
**The fund was ranked #2 out of 8 Washington municipal bond funds in total
return for the one-year period ended May 31, 1995, as measured by Lipper
Analytical Services, Inc., a nationally recognized mutual fund rating
organization. Lipper rankings do not include sales charges; past and present
expense reductions by the fund's manager increased the fund's total returns.
Rankings may have been different if these factors had been considered. Past
performance cannot guarantee future results.
23
<PAGE>
===============================================================================
FRANKLIN WASHINGTON MUNICIPAL BOND FUND
power and sewer works, to name a few. As a result, these bonds tend to be less
affected by budgetary and political changes, and are believed to be very
attractive in a municipal cost-cutting environment. Like all mutual funds,
however, the principal value of the fund's holdings as well as the price of its
shares will vary with market conditions.
We also seek to reduce the fund's risk by spreading its assets among a broad
range of cities and counties throughout Washington. Additionally, we purchase
securities from a variety of municipal sectors, as shown in the table to the
right.
Our outlook for the fund is positive. Recent economic reports indicate that U.S.
economic growth has stabilized at a healthy and sustainable level, while
inflation has remained subdued. Signs of a slowing economy should eventually
result in a gradual decline in interest rates, which could positively affect
bond prices and, thus, the fund's price per share.
Washington continues to enjoy a broadly diversified economic base. Tourism,
computers, military and agriculture compose a healthy portion of the state's
economy. However, the state still faces new fiscal and economic challenges.
Boeing, whose 100,000 employees represent roughly 5% of employment in the state,
is expected to reduce its workforce by 29,000 employees by the end of 1995.
Additionally, Initiative 601, which imposes spending limits, earned voter
approval in November 1993 and should significantly constrain fiscal flexibility.
However, Washington's bountiful resources and favorable tax circumstances should
continue to support its growth. Sound debt policies and government support of
employment growth should help Washington expand and build upon its reputation as
one of the nation's favored living locations.
Portfolio Breakdown on May 31,1995
As a percentage of total net assets
<TABLE>
<CAPTION>
% of TOTAL
SECTOR NET ASSETS
- -------------------------------------------------------------------------------
<S> <C>
Utilities 25.9%
- -------------------------------------------------------------------------------
General Obligations 24.7%
- -------------------------------------------------------------------------------
Industrial 13.0%
- -------------------------------------------------------------------------------
Education 12.6%
- -------------------------------------------------------------------------------
Hospitals 10.3%
- -------------------------------------------------------------------------------
Housing 8.4%
- -------------------------------------------------------------------------------
Transportation 8.4%
- -------------------------------------------------------------------------------
Certificates of Participation 1.7%
- -------------------------------------------------------------------------------
</TABLE>
FOR A COMPLETE LIST OF PORTFOLIO HOLDINGS, PLEASE SEE PAGE 38 OF THIS REPORT.
24
<PAGE>
================================================================================
PERFORMANCE SUMMARY
The Franklin Washington Municipal Bond Fund's share price, as measured by net
asset value, increased to $9.90 on May 31, 1995, from $9.55 on May 31, 1994.
The fund continued to meet its investment objective of providing high current
income to its shareholders. For the one-year period ended May 31, 1995, your(+)
fund paid monthly income distributions totaling 56.4 cents ($0.564) per share.
Due to increased income earned by the fund, we were able to adjust your monthly
dividend to 4.7 cents ($0.047) per share from 4.6 cents ($0.046) per share,
effective with the September 1994 distribution. The monthly dividend was further
adjusted to 4.8 cents ($0.048) per share with the March 1995 distribution.
Dividends will vary based on the earnings of the fund's portfolio, and past
distributions are not necessarily predictive of future results.
At the end of the reporting period, your fund's distribution rate was 5.57%,
based on an annualization of the current monthly dividend of 4.8 cents per share
and the maximum offering price of $10.34 on May 31, 1995. This tax-free rate is
generally higher than the after-tax return on a comparable taxable investment.
For example, if you are in the maximum federal income tax bracket of 39.6%, you
would have to earn 9.22% from a taxable investment to match your fund's tax-free
distribution rate.
The Franklin Washington Municipal Bond Fund provided a total return of +10.10%
for the one-year period ended May 31, 1995. Total return measures the change in
value of an investment during the period indicated, assuming reinvestment of
dividends and capital gains, if any. This calculation does not include the
initial sales charge, and past performance is not predictive of future results.
GRAPHIC MATERIAL 13 OMITTED SEE APPENDIX AT END OF DOCUMENT
Since 1993, the Franklin Washington Municipal Bond Fund has exceeded the
Consumer Price Index (CPI), keeping your purchasing power well ahead of
inflation -- a primary goal of any investment. The fund, however, has slightly
underperformed the unmanaged Lehman Brothers Municipal Bond Index, as
illustrated by the chart on the following page. The index has some inherent
+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 and total return calculations include all income earned by
the fund during the reporting period.
25
<PAGE>
================================================================================
GRAPHIC MATERIAL 14 OMITTED SEE APPENDIX AT END OF DOCUMENT
performance differentials over any fund as it holds no cash in its portfolio and
involves no sales charges or management expenses. In addition, the index
includes municipal securities from across the country while your fund is
composed primarily of Washington municipal bonds. Please remember that an index
is simply a measure of performance and cannot be invested in directly.
Your fund's managers maintain a long-term investment perspective and we
encourage our shareholders to do the same. While the fund may experience
volatility from time to time, we believe that its performance will be rewarding
over the long term.
FRANKLIN WASHINGTON MUNICIPAL BOND FUND
Period ended May 31, 1995
<TABLE>
<CAPTION>
SINCE
INCEPTION
1-YEAR (05/03/93)
- ----------------------------------------------------------
<S> <C> <C>
Cumulative Total Return(1) 10.10% 10.16%
Average Annual Total Return(2) 5.46% 2.62%
Distribution Rate(3) 5.57%
Taxable Equivalent
Distribution Rate(4) 9.22%
30-Day Standardized Yield(5) 5.80%
Taxable Equivalent Yield(4) 9.60%
- ----------------------------------------------------------
</TABLE>
(1). Cumulative total return measures the change in value of an investment over
the periods indicated and does not include the maximum 4.25% initial sales
charge stated in the prospectus. See note below.
(2). Average annual total return represents the average annual change in value
of an investment over the specified periods. The figures have been restated to
reflect the maximum 4.25% initial sales charge. See note below.
(3). Based on an annualization of the fund's current 4.8 cent per share monthly
dividend and the maximum offering price of $10.34 on May 31, 1995.
(4). Taxable equivalent distribution rate and yield assume the 1995 maximum
federal income tax bracket 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 5/31/95.
Note: Prior to July 1, 1994, fund shares were offered at a higher initial sales
charge. Thus, total returns for purchasers of shares during that period would
have been somewhat different than noted above. All total return calculations
assume reinvestment of dividends and capital gains at net asset value.
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.
The fund's manager has agreed in advance to waive a portion of the 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 4.22%. The fee waiver may be discontinued at any time upon advance notice
to the fund's Board of Trustees.
*This performance graph assumes an initial $10,000 investment and includes the
maximum 4.25% sales charge, all fund expenses and account fees. It also assumes
that your dividends and capital gains were reinvested at net asset value. The
Lehman Brothers Municipal Bond Index includes price appreciation or depreciation
and distributions as a percentage of the original investment. Past performance
cannot guarantee future results.
26
<PAGE>
FRANKLIN MUNICIPAL SECURITIES TRUST
================================================================================
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MAY 31, 1995
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT FRANKLIN ARKANSAS MUNICIPAL BOND FUND (NOTE 1)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BONDS 93.1%
Arkansas Development Financing Authority,
$ 130,000 SFMR, MBS Program, Series D, 6.85%, 01/01/27........................................ $ 136,196
175,000 Water Revenue, Revolving Loan Fund, Series A, MBIA Insured, 5.75%, 06/01/18......... 176,843
130,000 Arkansas GO, Refunding, Waste Disposal and Pollution, Series B, 6.25%, 07/01/20...... 135,099
100,000 Blytheville Solid Waste Recycling and Sewage Treatment Revenue, Nucor Corp. Project,
6.375%, 01/01/23.................................................................... 102,987
250,000 Camden Environmental Improvement Revenue, International Paper Co. Project, Series A,
7.625%, 11/01/18.................................................................... 280,173
130,000 Fort Smith Water and Sewer Revenue, Refunding and Construction, MBIA Insured,
6.00%, 10/01/12..................................................................... 135,450
130,000 Fouke School District No. 15, Refunding and Construction, MBIA Insured, 6.60%,
04/01/19 ........................................................................... 137,636
115,000 Greenland School District No. 95, Washington County, Refunding and Construction,
MBIA Insured, 6.50%, 05/01/13....................................................... 120,123
125,000 Guam Airport Authority Revenue, Series B, 6.60%, 10/01/10............................ 128,084
400,000 Jefferson County PCR, Refunding, Arkansas Power & Light Co., 6.30%, 06/01/18......... 411,488
140,000 Little Rock Capital Improvement, Refunding, 6.30%, 02/01/09.......................... 144,991
130,000 Little Rock Municipal Airport Revenue, Refunding, MBIA Insured, 6.00%, 11/01/14 ..... 133,026
120,000 Little Rock School District, Refunding, 6.25%, 12/01/07.............................. 121,129
250,000 Puerto Rico Commonwealth GO, 6.50%, 07/01/23 ........................................ 263,088
175,000 Puerto Rico Electric Power Authority Revenue, Series R, 6.25%, 07/01/17.............. 178,997
175,000 Puerto Rico SFMR, Bank and Financial Agency, Affordable Housing Mortgage,
Portfolio I, 6.25%, 04/01/29........................................................ 176,580
125,000 Pulaski County Health Facilities Board Revenue, Refunding, Nazareth Sisters of
Charity, St. Vincent's Infirmary, MBIA Insured, 6.05%, 11/01/09..................... 133,960
600,000 Pulaski County Public Facilities Board, MFR, Refunding, South Oaks Apartments,
Series A, 6.50%, 10/20/29........................................................... 611,526
195,000 Saline County, Retirement Housing and Healthcare Facilities, Board Revenue,
Refunding, AMBAC Insured, 5.80%, 06/01/11........................................... 194,184
125,000 University of Southern Arkansas, Student Fees, MBIA Insured, 6.00%, 10/01/13......... 127,951
----------
TOTAL BONDS (COST $3,711,477)................................................ 3,849,511
----------
(a)SHORT TERM INVESTMENTS 2.4%
100,000 Arkansas Hospital Equipment Finance Authority Revenue, Jefferson Hospital
Association Project, Weekly VRDN and Put, 3.75%, 12/01/99 (COST $100,000)........... 100,000
----------
TOTAL INVESTMENTS (COST $3,811,477) 95.5%.............................. 3,949,511
OTHER ASSETS AND LIABILITIES, NET 4.5% ................................ 184,230
----------
NET ASSETS 100.0% ..................................................... $4,133,741
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
27
<PAGE>
FRANKLIN MUNICIPAL SECURITIES TRUST
================================================================================
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MAY 31, 1995 (CONT.)
<TABLE>
<CAPTION>
VALUE
FRANKLIN ARKANSAS MUNICIPAL BOND FUND (NOTE 1)
- ---------------------------------------------------------------------------------------------------------------
<S> <C>
At May 31, 1995, the net unrealized appreciation based on the cost
of investments for income tax purposes of $3,811,477 was as follows:
Aggregate gross unrealized appreciation for all investments in which there was an
excess of value over tax cost..................................................... $ 138,034
Aggregate gross unrealized depreciation for all investments in which there was an
excess of tax cost over value..................................................... --
---------
Net unrealized appreciation........................................................ $ 138,034
=========
</TABLE>
PORTFOLIO ABBREVIATIONS:
AMBAC - American Municipal Bond Assurance Corp.
GO - General Obligation
MBIA - Municipal Bond Investors Assurance Corp.
MBS - Mortgage-Backed Securities
MFR - Multi-Family Revenue
PCR - Pollution Control Revenue
SFMR - Single Family Mortgage Revenue
(a)Variable rate demand notes (VRDN's) 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 upon short notice prior to specified dates. The interest rate may
change on specified dates in relationship with changes in a designated rate
(such as the prime interest rate or U.S. Treasury bills rate).
The accompanying notes are an integral part of these financial statements.
28
<PAGE>
FRANKLIN MUNICIPAL SECURITIES TRUST
================================================================================
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MAY 31, 1995
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND (NOTE 1)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BONDS 95.3%
$ 1,160,000 Adelanto Improvement Agency, Tax Allocation, Refunding & Improvement Project, Series C,
7.75%, 12/01/29................................................................................ $ 1,004,850
495,000 Antioch Improvement Board, 1915 Act, AD No. 27, Series D, 7.30%, 09/02/13 ....................... 509,929
1,510,000 Belmont RDA, Tax Allocation, Los Costanos Community Development, Series A, 6.80%, 08/01/24....... 1,577,044
575,000 Benicia, 1915 Act, Refunding, Fleetside Industrial Park Assessment, 7.00%, 09/02/14 ............. 592,198
1,800,000 California Health Facilities Financing Authority Revenue, Cedarknoll Insured, Series B,
7.50%, 08/01/20................................................................................ 1,922,958
1,235,000 California Health Facilities Financing Authority Revenue, Clinicas Del Camino, Insured,
Series A, 6.55%, 05/01/25 .................................................................... 1,249,141
California HFAR, Home Mortgage,
1,150,000 Series B, 7.125%, 02/01/26..................................................................... 1,218,563
1,800,000 Series F-1, 7.00%, 08/01/26.................................................................... 1,853,244
1,000,000 California PCFA, Solid Waste Disposal Revenue, Browning-Ferris Industry, 6.75%, 09/01/19......... 1,045,670
85,000 California Special District Association Finance Corp., COP, Series V, 7.50%, 05/01/13 ........... 87,417
1,800,000 California Statewide Communities Development Authority Revenue, COP, 7.25%, 12/01/22............. 1,944,360
1,000,000 Capistrano USD, CFD, Special Tax No. 92-1, 7.00%, 09/01/18....................................... 952,590
2,600,000 Hesperia Public Financing Authority, Improvement Revenue, Series B, 7.375%, 10/01/23............. 2,628,340
Irvine Ranch Water District Joint Powers Agency, Local Pool Revenue,
1,000,000 Issue I, 7.875%, 02/15/23.................................................................... 1,045,280
2,000,000 Issue II, 8.25%, 08/15/23.................................................................... 2,127,380
1,500,000 John C. Fremont Hospital District Revenue, California Health Facilities Insured,
6.75%, 06/01/13................................................................................ 1,563,765
1,265,000 Lake Elsinore, 1915 Act, AD No. 93-1, Series A, 7.90%, 09/02/24 ................................. 1,307,846
140,000 Long Beach Special Tax, CFD No. 2, Long Beach, 7.50%, 09/01/11................................... 144,515
1,150,000 Los Angeles MFR, Refunding, Series J-2, 8.50%, 01/01/24.......................................... 1,110,532
1,480,000 Millbrae Elementary School District, COP, Financing Project, 6.90%, 03/01/22 .................... 1,536,610
1,630,000 Orinda 1915 Act, AD No. 94-1, Oak Springs, 8.25%, 09/02/19....................................... 1,678,704
10,000,000 Palmdale Special Tax, CFD, No. 93-1, Ritter Ranch Project, Series A, 8.50%, 09/01/17 ............ 10,200,500
500,000 Perris Public Financing Authority, Local Agency Revenue, Series B, 7.25%, 08/15/23 .............. 506,030
1,125,000 Richmond Joint Powers Financing Authority, 1915 ACT, ID Nos. 851 and 853, Series B,
8.50%, 09/02/19................................................................................. 1,160,078
100,000 Sacramento County, 1915 ACT, Refunding, Sunrise/U.S. Corridor Assessment, 7.00%, 09/02/09 ....... 99,628
1,750,000 San Buenaventura COP, Capital Improvement Projects, 6.85%, 08/01/16 ............................. 1,781,325
800,000 San Francisco City and County Revenue, Irwin Memorial Blood Centers, Series A 6.80%, 12/01/21 .. 825,432
400,000 San Joaquin Hills, Transportation Corridor Agency, Toll Road Revenue, Senior Lien,
7.00%, 01/01/30 ............................................................................... 410,620
1,500,000 San Ramon Public Financing Authority, Refunding, Tax Allocation, 6.90%, 02/01/24................. 1,539,705
</TABLE>
The accompanying notes are an integral part of these financial statements.
29
<PAGE>
FRANKLIN MUNICIPAL SECURITIES TRUST
================================================================================
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MAY 31, 1995 (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND (NOTE 1)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BONDS (CONT.)
$ 1,500,000 Santa Rosa, 1915 Act, Fountain/Grove Parkway Extension Assessment, 7.625%,
09/02/19........................................................................ $ 1,545,015
1,200,000 Tracy COP, I-205 Corridor Improvement Project, 7.00%, 10/01/27................... 1,232,496
2,250,000 West Covina COP, Refunding, Civic Center, 6.875%, 09/01/14....................... 2,303,819
-----------
TOTAL BONDS (COST $47,341,065)............................................. 48,705,584
-----------
(b)ZERO COUPON/STEP-UP BONDS 1.3%
1,000,000 San Gabriel USD, COP, Convertible Facility Development Program B, FSA Insured,
zero coupon to 09/01/02, (original accretion rate 6.60%), 6.60% thereafter,
09/01/15 (COST $619,910)........................................................ 653,240
-----------
TOTAL LONG TERM INVESTMENTS (COST $47,960,975)................................... 49,358,824
-----------
(a)SHORT TERM INVESTMENTS 0.8%
200,000 Irvine, 1915 ACT, AD No. 89-10, Daily VRDN and Put, 4.25%, 09/02/15.............. 200,000
200,000 Orange County, 1915 Act, Irvine Coast, AD No. 88-1, Daily VRDN and Put,
4.50%, 09/02/18 ................................................................ 200,000
-----------
TOTAL SHORT TERM INVESTMENTS (COST $400,000)............................... 400,000
-----------
Total Investments (Cost $48,360,975) 97.4%............................ 49,758,824
Other Assets and Liabilities, Net 2.6%................................ 1,342,718
-----------
NET ASSETS 100.0% ......................................................... $51,101,542
===========
At May 31, 1995, the net unrealized appreciation based on the cost of
investments for income tax purposes of $48,360,975 was as follows:
Aggregate gross unrealized appreciation for all investments in which there
was an excess of value over tax cost.......................................... $ 1,615,315
Aggregate gross unrealized depreciation for all investments in which there
was an excess of tax cost over value.......................................... (217,466)
-----------
Net unrealized appreciation.................................................... $ 1,397,849
===========
</TABLE>
PORTFOLIO ABBREVIATIONS
1915 ACT - Improvement Bond Act of 1915
AD - Assessment District
CFD - Community Facilities District
COP - Certificate of Participation
FSA - Financial Security Assistance
HFAR - Housing Finance Agency Revenue
ID - Improvement District
MFR - Multi Family Revenue
PCFA - Pollution Control Financing Authority
RDA - Redevelopment Agency
USD - Unified School District
(a) Variable rate demand notes (VRDN's) 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 upon short notice prior to specified dates. The interest rate may
change on specified dates in relationship with changes in a designated rate
(such as the prime interest rate or U.S. Treasury bills rate).
(b) Zero coupon/step-up bonds. The current effective yield may vary. The
original accretion rate will remain constant.
The accompanying notes are an integral part of these financial statements.
30
<PAGE>
FRANKLIN MUNICIPAL SECURITIES TRUST
================================================================================
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MAY 31, 1995
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT FRANKLIN HAWAII MUNICIPAL BOND FUND (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BONDS 83.9%
Guam Airport Authority Revenue,
$ 200,000 Series B, 6.60%, 10/01/10 ....................................................... $ 204,934
1,000,000 Series B, 6.70%, 10/01/23 ....................................................... 1,016,990
280,000 Guam Government Limited Obligation Highway, Refunding, Series A, CGIC Insured,
6.30%, 05/01/12 ................................................................... 294,571
300,000 Guam Power Authority Revenue, Series A, 6.30%, 10/01/22 ............................ 300,594
Hawaii County GO, Refunding & Improvement,
250,000 Series A, FGIC Insured, 5.60%, 05/01/12.......................................... 251,615
500,000 Series A, FGIC Insured, 5.60%, 05/01/13.......................................... 500,530
Hawaii State Airport System Revenue,
300,000 Refunding, Third Series 1994, AMBAC Insured, 5.75%, 07/01/09 .................... 303,414
60,000 Second Series 1990, FGIC Insured, 7.50%, 07/01/20 ............................... 66,687
1,520,000 Second Series 1991, 7.00%, 07/01/18 ............................................. 1,614,985
200,000 Second Series 1991, MBIA Insured, 6.75%, 07/01/21 ............................... 211,300
400,000 Second Series 1992, MBIA Insured, 6.90%, 07/01/12 ............................... 451,448
Hawaii State Department Budget and Finance, Special Purpose Mortgage Revenue,
100,000 Hawaii Electric Co., Series A, FGIC Insured, 7.20%, 12/01/14 .................... 106,540
1,100,000 Hawaii Electric Co., Series A, MBIA Insured, 6.60%, 01/01/25 .................... 1,163,393
3,200,000 Hawaii Electric Light Co. and Subsidiaries, MBIA Insured, 6.55%, 12/01/22 ....... 3,358,848
600,000 Hawaii Electric Light Co. and Subsidiaries, MBIA Insured, 5.45%, 11/01/23 ....... 562,188
105,000 Pali Momi Medical Center Project, Pre-Refunded, 7.65%, 07/01/19 ................. 123,374
500,000 Queens Medical Center Project, FGIC Insured, 6.20%, 07/01/22 .................... 511,800
25,000 Refunding, Hawaii Electric Co., 6.875%, 04/01/12 ................................ 25,857
100,000 Refunding, Kaiser Permanente, Series A, 6.25%, 03/01/21 ......................... 101,086
600,000 Refunding, Kapiolani Health Care System, 6.40%, 07/01/13 ........................ 620,652
1,075,000 Refunding, Kapiolani Health Care System, 6.00%, 07/01/19 ........................ 1,079,773
725,000 Refunding, Queens Medical Center Project, FGIC Insured, 6.50%, 07/01/12 ......... 749,085
1,100,000 Refunding, Wahiawa General Hospital Project, 7.50%, 07/01/12..................... 1,165,120
1,100,000 St. Francis Medical Centers, CGIC Insured, 6.50%, 07/01/22 ...................... 1,144,990
875,000 Hawaii State Department Transport, Special Facilities Revenue, Refunding,
Matson Terminals, Inc., 5.75%, 03/01/13 ........................................... 856,826
Hawaii State GO,
100,000 Series BT, Pre-Refunded, 6.125%, 02/01/11 ....................................... 107,503
100,000 Series BW, 6.375%, 03/01/11 ..................................................... 109,234
100,000 Series CA, 6.00%, 01/01/09 ...................................................... 105,319
500,000 Series CJ, 6.25%, 01/01/13 ...................................................... 521,910
Hawaii State Harbor Capital Improvement Revenue,
1,000,000 Refunding, Series 1994, FGIC Insured, 6.25%, 07/01/15 ........................... 1,031,370
500,000 Refunding, Series 1994, FGIC Insured, 6.375%, 07/01/24 .......................... 518,660
70,000 Series 1990, MBIA Insured, 7.25%, 07/01/10 ...................................... 77,034
</TABLE>
The accompanying notes are an integral part of these financial statements.
31
<PAGE>
FRANKLIN MUNICIPAL SECURITIES TRUST
================================================================================
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MAY 31, 1995 (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT FRANKLIN HAWAII MUNICIPAL BOND FUND (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BONDS (CONT.)
Hawaii State Harbor Capital Improvement Revenue, (cont.)
$ 80,000 Series 1990, MBIA Insured, 7.00%, 07/01/17 ...................................... $ 86,788
200,000 Series 1992, FGIC Insured, 6.50%, 07/01/19 ...................................... 208,892
200,000 Hawaii State Highway Revenue, 5.00%, 07/01/12....................................... 184,022
1,000,000 Hawaii State Housing Finance and Development Corp., Rental Housing System
Revenue, Refunding, Series A, 5.60%, 07/01/12.................................... 947,370
Hawaii State Housing Finance and Development Corp., SFM Purchase Revenue,
465,000 Series A, 7.10%, 07/01/24........................................................ 481,680
2,000,000 Series B, 5.85%, 07/01/17........................................................ 1,970,660
Honolulu, Hawaii, City and County,
150,000 Refunding, Series 1992, 6.00%, 12/01/14 ......................................... 156,332
85,000 Series A, 6.30%, 03/01/08 ....................................................... 90,323
100,000 Series A, 6.30%, 03/01/11 ....................................................... 105,195
75,000 Series A, Pre-Refunded, 6.70%, 08/01/07 ......................................... 83,915
100,000 Series A, Pre-Refunded, 6.70%, 08/01/11 ......................................... 111,886
1,000,000 Series B, 6.125%, 06/01/14....................................................... 1,043,450
Honolulu, Hawaii, City and County, MFHR,
150,000 Hale Pauahi Project, Series A, FHA Mortgage Insured, MBIA Insured,
8.70%, 12/01/28.................................................................. 157,023
1,205,000 Waipahu Towers Project, Series A, 6.90%, 06/20/35 ............................... 1,230,642
220,000 Kauai County, GO, Refunding, Series C, AMBAC Insured, 5.95%, 08/01/10 .............. 232,626
100,000 Maui County Board, Water Supply Revenue, Series A, FGIC Insured, Pre-Refunded,
6.70%, 12/01/11.................................................................... 112,401
Maui County, GO, Refunding,
50,000 Series 1992, 6.05%, 09/01/07 .................................................... 52,209
300,000 Series 1992, 6.10%, 09/01/08 .................................................... 312,537
385,000 Series A, FGIC Insured, 5.75%, 01/01/11 ......................................... 391,110
25,000 Series B, C, D & E, FGIC Insured, 5.00%, 09/01/08 ............................... 23,970
350,000 Series B, C, D & E, FGIC Insured, 5.25%, 09/01/06 ............................... 351,621
145,000 Puerto Rico Commonwealth, Aqueduct and Sewer Authority Revenue, Series A,
7.00%, 07/01/19.................................................................... 152,920
Puerto Rico Commonwealth, Electric Power Authority Revenue, Refunding,
Water Resources,
55,000 Series O, Pre-Refunded, 7.125%, 07/01/14 ........................................ 61,432
60,000 Series O, 7.125%, 07/01/14 ...................................................... 65,142
500,000 Series U, 6.00%, 07/01/14 ....................................................... 503,185
1,000,000 Puerto Rico Commonwealth, GO, Series A, MBIA Insured, 5.75%, 07/01/24 .............. 997,140
315,000 Puerto Rico Commonwealth, Highway and Transportation Authority Revenue,
Series T, 6.625%, 07/01/18 ........................................................ 331,518
350,000 Puerto Rico Industrial Medical and Environmental Facilities Revenue PCFA,
PepsiCo., Inc. Project, 6.25%, 11/15/13 ........................................... 372,623
</TABLE>
The accompanying notes are an integral part of these financial statements.
32
<PAGE>
FRANKLIN MUNICIPAL SECURITIES TRUST
================================================================================
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MAY 31, 1995 (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT FRANKLIN HAWAII MUNICIPAL BOND FUND (NOTE 1)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BONDS (CONT.)
$ 215,000 Puerto Rico PBA, Guaranteed, Public Education and Health Facilities, Series L,
Pre-Refunded, 6.875%, 07/01/21................................................... $ 247,961
230,000 Puerto Rico Telephone Authority Revenue, Refunding, Series L, 6.125%, 01/01/22 ... 233,582
325,000 University of Hawaii System Revenue, Series G, AMBAC Insured, 5.70%, 10/01/17 .... 322,536
-----------
TOTAL BONDS (Cost $30,092,257).................................................... 30,880,321
-----------
(a)SHORT TERM INVESTMENTS .3%
100,000 Hawaii State Housing Finance and Development Corp., Revenue, Rental Housing
Systems, Series A, Weekly VRDN and Put, 3.85%, 07/01/24 (COST $100,000).......... 100,000
-----------
TOTAL INVESTMENTS (COST $30,192,257) 84.2%............................. 30,980,321
OTHER ASSETS AND LIABILITIES, NET 15.8%................................ 5,847,047
-----------
NET ASSETS 100.0%...................................................... $36,827,368
===========
At May 31, 1995, the net unrealized appreciation based on the cost of investments
for income tax purposes of $30,192,257 was as follows:
Aggregate gross unrealized appreciation for all investments in which there
was an excess of value over tax cost......................................... $ 934,653
Aggregate gross unrealized depreciation for all investments in which there
was an excess of tax cost over value......................................... (146,589)
-----------
Net unrealized appreciation................................................... $ 788,064
===========
</TABLE>
PORTFOLIO ABBREVIATIONS:
AMBAC - American Municipal Bond Assurance Corp.
CGIC - Capital Guaranty Insurance Co.
FGIC - Financial Guaranty Insurance Corp.
FHA - Federal Housing Agency/Authority
GO - General Obligation
MBIA - Municipal Bond Investors Assurance Corp.
MFHR - Multi-Family Housing Revenue
PBA - Public Building Authority
PCFA - Pollution Control Financing Authority
SFM - Single Family Mortgage
(a) Variable rate demand notes (VRDN's) 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 upon short notice prior to specified dates. The interest rate may
change on specified dates in relationship with changes in a designated rate
(such as the prime interest rate or U.S. Treasury bills rate).
The accompanying notes are an integral part of these financial statements.
33
<PAGE>
FRANKLIN MUNICIPAL SECURITIES TRUST
================================================================================
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MAY 31, 1995
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT FRANKLIN TENNESSEE MUNICIPAL BOND FUND (NOTE 1)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BONDS 99.7%
$ 100,000 Bristol Health and Educational Facilities Board Revenue, Refunding, Bristol Memorial
Hospital, FGIC Insured, 5.125%, 09/01/13 ............................................... $ 93,631
500,000 Carroll County, IDB, IDR, Refunding, Henry I, Siegel Co., Inc. Project, 7.20%, 04/01/05.. 506,170
600,000 Humphreys County IDB, Solid Waste Disposal Revenue, Du Pont (E.I.) De Nemours & Co.
Project, 6.70%, 05/01/24 ............................................................... 636,156
100,000 Johnson City Public Improvement, GO, Series B, AMBAC Insured, 6.70%, 05/01/20............ 107,356
100,000 Johnson City Solid Waste, AMBAC Insured, 5.80%, 05/01/09................................. 102,593
100,000 Knox-Chapman Utility District, Knox County Water and Sewer Revenue, Refunding,
MBIA Insured, 6.10%, 01/01/19........................................................... 102,419
145,000 Knox County Public Improvement, 6.875%, 04/01/14......................................... 156,251
225,000 Loudon County, IDB, Solid Waste Disposal Revenue, Kimberly-Clark Corp. Project,
6.20%, 02/01/23 ........................................................................ 227,417
150,000 Macon County GO, FGIC Insured, 5.90%, 09/01/13 .......................................... 151,827
220,000 Maury County IDB, PCR, Multi-Modal, Refunding, Saturn Corp. Project, 6.50%, 09/01/24..... 225,078
Memphis Health Educational and Housing Facilities Board Mortgage Revenue, Refunding,
150,000 Edgewater Territory, FHA/GNMA Insured, 7.375%, 01/20/27................................ 159,372
100,000 MF, River Trace II, Series A, 6.45%, 04/01/26.......................................... 101,593
100,000 Memphis-Shelby County Airport Authority, Special Facilities and Project Revenues,
Refunding, Federal Express Corp., 6.75%, 09/01/12....................................... 104,238
100,000 Metropolitan Government of Nashville and Davidson County, 6.125%, 05/15/19............... 102,869
200,000 Metropolitan Government of Nashville and Davidson County, Electric Revenue, Refunding,
Series A, 6.00%, 05/15/17............................................................... 204,288
205,000 Metropolitan Nashville Airport Authority Revenue, Series C, FGIC Insured, 6.60%,
07/01/15................................................................................ 217,058
Metropolitan Nashville and Davidson County, Health and Educational Facilities
Board Revenue,
200,000 (c)Adventist Health Systems, MBIA Insured, 5.75%, 11/15/25 ............................ 194,640
150,000 Meharry Medical College Project, AMBAC Insured, 6.875%, 12/01/24.................... 163,608
180,000 Milan Special School District, AMBAC Insured, 6.625%, 04/01/11 .......................... 192,386
100,000 Pigeon Forge Public Improvement, MBIA Insured, 5.90%, 06/01/09........................... 103,206
185,000 Puerto Rico Commonwealth, Aqueduct and Sewer Authority Revenue, Series A, 7.00%,
07/01/19................................................................................ 195,105
100,000 Puerto Rico Commonwealth, Electric Power Authority Revenue, Water Resources, Series R,
6.25%, 07/01/17......................................................................... 102,284
100,000 Puerto Rico Commonwealth, GO, 6.50%, 07/01/23............................................ 105,235
200,000 Puerto Rico Industrial Tourist Educational Medical and Environmental Control,
Facilities Financing Authority Hospital Revenue, Auxilio Mutuo Obligation Group,
Series A, MBIA Insured, 6.25%, 07/01/24................................................. 209,386
100,000 Sevier County IDB, IDR, Refunding, Kmart Corp. Project, 7.00%, 10/01/06.................. 101,181
100,000 Shelby County GO, Series A, 5.90%, 03/01/15.............................................. 101,900
</TABLE>
The accompanying notes are an integral part of these financial statements.
34
<PAGE>
FRANKLIN MUNICIPAL SECURITIES TRUST
================================================================================
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MAY 31, 1995 (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT FRANKLIN TENNESSEE MUNICIPAL BOND FUND (NOTE 1)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BONDS (CONT.)
Tennessee HDA, Mortgage Finance,
$200,000 Series A, 6.90%, 07/01/25........................................................ $ 207,508
300,000 Series B, 6.60%, 07/01/25........................................................ 304,212
100,000 Tennessee State Local Development Authority Revenue, Community Provider Pooled
Loan Program, 6.55%, 10/01/23...................................................... 103,380
100,000 Tennessee State School Board Authority, Higher Education Facilities, Series A,
6.25%, 05/01/22.................................................................... 103,042
150,000 (c)Trenton Special School District, Series 1995, AMBAC Insured, 5.75%, 11/01/20........ 148,019
200,000 Tullahoma IDBR, Refunding, First Mortgage, 6.875%, 06/15/06 ........................ 207,541
220,000 Wilson County COP, Educational Facilities, 6.125%, 06/30/10......................... 225,948
----------
TOTAL BONDS (COST $5,712,333)................................................ 5,966,897
----------
(a)SHORT TERM INVESTMENTS 1.7%
100,000 Bradley County IDBR, Refunding, Olin Corp. Project, Series C, Daily VRDN and Put,
4.20%, 11/01/17 (COST $100,000).................................................... 100,000
----------
TOTAL INVESTMENTS (COST $5,812,333) 101.4%............................... 6,066,897
LIABILITIES IN EXCESS OF OTHER ASSETS, NET (1.4)% ....................... (80,919)
----------
NET ASSETS 100.0%........................................................ $5,985,978
==========
At May 31, 1995, the net unrealized appreciation based on the cost of investments
for income tax purposes of $5,812,333 was as follows:
Aggregate gross unrealized appreciation for all investments in which there was
an excess of value over tax cost................................................ $ 254,564
Aggregate gross unrealized depreciation for all investments in which there was
an excess of tax cost over value................................................ --
----------
Net unrealized appreciation...................................................... $ 254,564
==========
</TABLE>
PORTFOLIO ABBREVIATIONS:
AMBAC - American Municipal Bond Assurance Corp.
COP - Certificate of Participation
FGIC - Financial Guaranty Insurance Co.
FHA - Federal Housing Authority/Agency
GNMA - Government National Mortgage Association
GO - General Obligation
HDA - Housing Development Authority/Agency
IDB - Industrial Development Board
IDBR - Industrial Development Board Revenue
IDR - Industrial Development Revenue
MBIA - Municipal Bond Investors Assurance Corp.
PCR - Pollution Control Revenue
(a) Variable rate demand notes (VRDN's) 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 upon short notice prior to specified dates. The interest rate may
change on specified dates in relationship with changes in a designated rate
(such as the prime interest rate or U.S. Treasury bills rate).
(c) See Note 1(e) regarding securities purchased on a when-issued basis.
The accompanying notes are an integral part of these financial statements.
35
<PAGE>
FRANKLIN MUNICIPAL SECURITIES TRUST
================================================================================
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MAY 31, 1995
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT FRANKLIN WASHINGTON MUNICIPAL BOND FUND (NOTE 1)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BONDS 102.2%
$ 100,000 Aberdeen GO, Series A, MBIA Insured, 5.80%, 12/01/12 .................................... $ 100,264
100,000 Bellevue Water and Sewer Revenue, Refunding, 5.875%, 07/01/10............................ 101,929
200,000 Bellingham Housing Authority Revenue, Cascade Meadows Project, 7.10%, 11/01/23 .......... 208,610
400,000 Conservation and Renewable Energy System Revenue, Washington Conservation Project,
6.50%, 10/01/14......................................................................... 418,892
100,000 Douglas County PUD No. 1, Electric District Systems Revenue, MBIA Insured,
6.00%, 01/01/15 ........................................................................ 101,747
100,000 Federal Way Washington GO, Refunding, 5.85%, 12/01/21 ................................... 98,281
175,000 (c)King County Housing Authority Revenue, Woodridge Park Project, 6.25%, 05/01/15........... 174,591
100,000 King County School District No. 412, Shoreline, 6.10%, 06/01/13.......................... 101,491
150,000 Kirkland GO, 5.70%, 12/01/14............................................................. 146,891
125,000 Kitsap County School District No. 400, North Kitsap, FGIC Insured, 5.50%, 06/01/13....... 120,710
175,000 Pierce County EDC Revenue, Solid Waste, Occidental Petroleum Corp., 5.80%, 09/01/29...... 157,365
650,000 Pilchuck Development Public Corp., Special Facilities Revenue, Airport Tramco, Inc.
Project, 6.00%, 08/01/23................................................................ 603,460
200,000 Port Chelan County GO, MBIA Insured, 6.25%, 12/01/15..................................... 203,846
200,000 Port of Seattle Revenue, Series B, 6.00%, 11/01/17 ...................................... 200,104
100,000 Richland Water and Sewer Improvement Revenue, MBIA Insured, 5.625%, 04/01/12 ............ 98,760
450,000 Seatac GO, MBIA Insured, 6.50%, 12/01/13................................................. 477,383
100,000 Seattle Municipal Light and Power Revenue, Series A, 5.75%, 08/01/17 .................... 98,880
Seattle Municipality Metropolitan Sewer Revenue, Refunding,
100,000 Series V, 6.20%, 01/01/32............................................................. 100,720
100,000 Series Y, FGIC Insured, 5.70%, 01/01/15............................................... 98,719
100,000 Snohomish County GO, MBIA Insured, 5.90%, 12/01/15....................................... 100,792
100,000 Spokane County Water District No. 3 Revenue, Refunding, 5.90%, 01/01/14 ................. 100,738
300,000 Stevens County Public Corp., PCR, Refunding, Water Power Co. Project, 6.00%, 12/01/23.... 287,766
100,000 Sunnyside GO, MBIA Insured, 6.10%, 12/01/14.............................................. 102,309
100,000 Tacoma Refuse Utility Revenue, AMBAC Insured, 7.00%, 12/01/19............................ 109,512
500,000 University of Washington, Aluminum Association, Lease Revenue, Roosevelt University
Medical Center CGIC Insured, 6.30%, 08/15/14............................................ 519,365
100,000 Washington State COP, Office Building Project, Series A, MBIA Insured, 6.00%, 04/01/12... 100,795
100,000 Washington State GO, Series 1993-A, 5.75%, 10/01/17...................................... 98,630
Washington State Health Care Facilities Authority Revenue,
100,000 Harrison Memorial Hospital, AMBAC Insured, 5.40%, 08/15/23............................ 93,032
100,000 Multicare Medical Center, FGIC Insured, 5.75%, 08/15/22 .............................. 96,658
150,000 Refunding, Dominican Health Services, Connie Lee Insured, 5.75%, 06/01/13 ............ 147,036
125,000 Refunding, Franciscan Health, St. Joseph Hospital, MBIA Insured, 5.625%, 01/01/13..... 121,000
150,000 Refunding, Northwest Hospital, AMBAC Insured, 5.75%, 11/15/23......................... 144,906
</TABLE>
The accompanying notes are an integral part of these financial statements.
36
<PAGE>
FRANKLIN MUNICIPAL SECURITIES TRUST
================================================================================
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MAY 31, 1995 (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT FRANKLIN WASHINGTON MUNICIPAL BOND FUND (NOTE 1)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BONDS (CONT.)
$100,000 Washington State Housing Finance, SFMR, MBS Program, Series A, 7.05%, 07/01/22 ...... $ 104,383
125,000 Washington State Motor Vehicle Fuel Tax, Series D, 6.00%, 09/01/20 .................. 126,414
----------
TOTAL INVESTMENTS (COST $5,833,334) 102.2%................................ 5,865,979
LIABILITIES IN EXCESS OF OTHER ASSETS, NET (2.2)%......................... (125,182)
----------
NET ASSETS 100.0%......................................................... $5,740,797
==========
At May 31, 1995, the net unrealized appreciation based on the cost of investments
for income tax purposes of $5,833,334 was as follows:
Aggregate gross unrealized appreciation for all investments in which there was
an excess of value over tax cost................................................. $ 127,113
Aggregate gross unrealized depreciation for all investments in which there was
an excess of tax cost over value................................................. (94,468)
----------
$ 32,645
==========
</TABLE>
PORTFOLIO ABBREVIATIONS:
AMBAC - American Municipal Bond Assurance Corp.
CGIC - Capital Guaranty Insurance Co.
COP - Certificate of Participation
EDC - Economic Development Corp.
FGIC - Financial Guaranty Insurance Co.
GO - General Obligation
MBIA - Municipal Bond Investors Assurance Corp.
MBS - Mortgage Backed Securities
PCR - Pollution Control Revenue
PUD - Public Utility District
SFMR - Single Family Mortgage Revenue
(c) See Note 1(e) regarding securities purchased on a when-issued basis.
The accompanying notes are an integral part of these financial statements.
37
<PAGE>
FRANKLIN MUNICIPAL SECURITIES TRUST
================================================================================
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES
MAY 31, 1995
<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:
At identified cost........................... $3,811,477 $48,360,975 $30,192,257 $5,812,333 $5,833,334
========== =========== =========== ========== ==========
At value..................................... 3,949,511 49,758,824 30,980,321 6,066,897 5,865,979
Cash.......................................... 46,098 128,817 183,760 150,817 35,687
Receivables:
Interest..................................... 59,889 1,001,268 681,907 97,569 108,739
Capital shares sold.......................... 86,159 315,364 5,038,224 23,942 --
From affiliates.............................. -- -- -- -- 2,114
Unamortized organization costs (Note 2)....... -- -- 2,544 -- --
---------- ----------- ----------- ---------- ----------
Total assets............................. 4,141,657 51,204,273 36,886,756 6,339,225 6,012,519
---------- ----------- ----------- ---------- ----------
Liabilities:
Payables:
Investment securities purchased:
When-issued basis (Note 1).................. -- -- -- 342,902 172,753
Distributions payable to shareholders........ 5,809 74,505 40,962 8,351 7,802
Capital shares repurchased................... -- 687 2,074 -- 90,680
Distribution fees............................ 332 4,263 2,653 477 487
Accrued expenses and other liabilities........ 1,775 23,276 13,699 1,517 --
---------- ----------- ----------- ---------- ----------
Total liabilities........................ 7,916 102,731 59,388 353,247 271,722
---------- ----------- ----------- ---------- ----------
Net assets, at value........................... $4,133,741 $51,101,542 $36,827,368 $5,985,978 $5,740,797
========== =========== =========== ========== ==========
Net assets consist of:
Undistributed net investment income........... $ 31,781 $ 96,559 $ 115,269 $ 42,120 $ 36,472
Unrealized appreciation
on investments............................... 138,034 1,397,849 788,064 254,564 32,645
Accumulated net realized loss................. (36,658) (1,769,137) (722,000) (4,743) (84,798)
Capital shares................................ 4,000,584 51,376,271 36,646,035 5,694,037 5,756,478
---------- ----------- ----------- ---------- ----------
Net assets, at value........................... $4,133,741 $51,101,542 $36,827,368 $5,985,978 $5,740,797
========== =========== =========== ========== ==========
Shares outstanding............................. 400,569 5,145,872 3,452,783 568,467 579,874
========== =========== =========== ========== ==========
Net asset value per share...................... $ 10.32 $ 9.93 $ 10.67 $ 10.53 $ 9.90
========== =========== =========== ========== ==========
Representative computation (Franklin Arkansas
Municipal Bond Fund) of net asset value and
offering price per share:
Net asset value per share* ($4,133,741
divided by 400,569)......................... $ 10.32
==========
Maximum offering price (100/95.75
of $10.32).................................. $ 10.78
==========
</TABLE>
* Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
The accompanying notes are an integral part of these financial statements.
38
<PAGE>
FRANKLIN MUNICIPAL SECURITIES TRUST
================================================================================
FINANCIAL STATEMENTS (CONT.)
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED MAY 31, 1995
<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>
Investment income:
Interest (Note 1)..................................... $171,186 $2,906,912 $1,747,814 $220,937 $297,529
-------- ---------- ---------- -------- --------
Expenses:
Management fees (Note 6).............................. -- -- -- -- --
Distribution fees (Note 6)............................ 898 35,842 19,175 1,672 2,286
Professional fees..................................... 1,862 15,900 10,518 1,641 2,069
Reports to shareholders............................... -- 17,022 10,077 -- --
Registration and filing fees.......................... -- 10,093 7,197 -- --
Custodian fees........................................ 218 3,892 2,663 279 439
Other................................................. -- -- 5,476 -- --
-------- ---------- ---------- -------- --------
Total expenses................................... 2,978 82,749 55,106 3,592 4,794
-------- ---------- ---------- -------- --------
Net investment income............................ 168,208 2,824,163 1,692,708 217,345 292,735
-------- ---------- ---------- -------- --------
Realized and unrealized gain (loss) on investments:
Net realized loss................................ (36,658) (1,402,544) (551,385) (4,742) (53,725)
Net unrealized appreciation during the year...... 127,376 2,759,666 1,468,052 232,907 282,570
-------- ---------- ---------- -------- --------
Net realized and unrealized gain on investments........ 90,718 1,357,122 916,667 228,165 228,845
-------- ---------- ---------- -------- --------
Net increase in net assets resulting from operations... $258,926 $4,181,285 $2,609,375 $445,510 $521,580
======== ========== ========== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
39
<PAGE>
FRANKLIN MUNICIPAL SECURITIES TRUST
================================================================================
FINANCIAL STATEMENTS (CONT.)
STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEARS ENDED MAY 31, 1995 AND 1994
(EXCEPT AS NOTED)
<TABLE>
<CAPTION>
FRANKLIN ARKANSAS FRANKLIN CALIFORNIA HIGH FRANKLIN HAWAII
MUNICIPAL BOND FUND YIELD MUNICIPAL FUND MUNICIPAL BOND FUND
----------------------- -------------------------- -------------------------
1995 1994* 1995 1994 1995 1994
---------- ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income.............. $ 168,208 $ 2,543 $ 2,824,163 $ 1,094,853 $ 1,692,708 $ 1,401,468
Net realized loss from security
transactions...................... (36,658) -- (1,402,544) (339,852) (551,385) (159,863)
Net unrealized appreciation
(depreciation) on
investments....................... 127,376 10,658 2,759,666 (1,350,386) 1,468,052 (1,254,988)
---------- ---------- ----------- ----------- ----------- -----------
Net increase (decrease)
in net assets resulting
from operations............... 258,926 13,201 4,181,285 (595,385) 2,609,375 (13,383)
Distributions to shareholders from:
Undistributed net investment
income............................. (138,970) -- (2,727,267) (1,102,059) (1,655,958) (1,334,899)
Net realized capital gains.......... -- -- -- (25,621) -- --
Increase in net assets from
capital share transactions
(Note 3)............................ 1,800,584 2,200,000 17,709,221 31,416,649 8,969,891 9,595,395
---------- ---------- ----------- ----------- ----------- -----------
Net increase
in net assets................. 1,920,540 2,213,201 19,163,239 29,693,584 9,923,308 8,247,113
Net assets:
Beginning of year................... 2,213,201 -- 31,938,303 2,244,719 26,904,060 18,656,947
---------- ---------- ----------- ----------- ----------- -----------
End of year......................... $4,133,741 $2,213,201 $51,101,542 $31,938,303 $36,827,368 $26,904,060
========== ========== =========== =========== =========== ===========
Undistributed net investment
income included in net assets:
Beginning of year.................. $ 2,543 $ -- $ (337) $ 6,869 $ 78,519 $ 11,950
========== ========== =========== =========== =========== ===========
End of year........................ $ 31,781 $ 2,543 $ 96,559 $ (337) $ 115,269 $ 78,519
========== ========== =========== =========== =========== ===========
</TABLE>
*For the period May 10, 1994 (effective date of registration) to May 31, 1994.
The accompanying notes are an integral part of these financial statements.
40
<PAGE>
FRANKLIN MUNICIPAL SECURITIES TRUST
===============================================================================
FINANCIAL STATEMENTS (CONT.)
STATEMENTS OF CHANGES IN NET ASSETS (CONT.) FOR THE YEARS ENDED MAY 31, 1995 AND
1994 (EXCEPT AS NOTED)
<TABLE>
<CAPTION>
FRANKLIN TENNESSEE FRANKLIN WASHINGTON
MUNICIPAL BOND FUND MUNICIPAL BOND FUND
------------------------ ------------------------
1995 1994* 1995 1994
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income.................................... $ 217,345 $ 2,413 $ 292,735 $ 202,419
Net realized loss from security transactions............. (4,742) (1) (53,725) (26,074)
Net unrealized appreciation (depreciation)
on investments......................................... 232,907 21,657 282,570 (241,899)
---------- ---------- ---------- ----------
Net increase (decrease) in net assets resulting
from operations.................................... 445,510 24,069 521,580 (65,554)
Distributions to shareholders from:
Undistributed net investment income....................... (177,638) -- (287,372) (177,395)
Net realized capital gains................................ -- -- -- (4,999)
Increase in net assets from capital share transactions
(Note 3).................................................. 3,494,037 2,200,000 1,234,321 2,322,157
---------- ---------- ---------- ----------
Net increase in net assets........................... 3,761,909 2,224,069 1,468,529 2,074,209
Net assets:
Beginning of year......................................... 2,224,069 -- 4,272,268 2,198,059
---------- ---------- ---------- ----------
End of year............................................... $5,985,978 $2,224,069 $5,740,797 $4,272,268
========== ========== ========== ==========
Undistributed net investment income included in net assets:
Beginning of year........................................ $ 2,413 $ -- $ 31,109 $ 6,085
========== ========== ========== ==========
End of year.............................................. $ 42,120 $ 2,413 $ 36,472 $ 31,109
========== ========== ========== ==========
</TABLE>
*For the period May 10, 1994 (effective date of registration) to May 31, 1994.
The accompanying notes are an integral part of these financial statements.
41
<PAGE>
FRANKLIN MUNICIPAL SECURITIES TRUST
================================================================================
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Franklin Municipal Securities Trust (the Trust) is an open-end management
investment company (mutual fund) registered under the Investment Company Act of
1940 as amended. The Trust currently operates five separate non-diversified
funds (the Funds), consisting of the Franklin Arkansas Municipal Bond Fund (the
Arkansas Fund), Franklin California High Yield Municipal Fund (the California
High Yield Fund), Franklin Hawaii Municipal Bond Fund (the Hawaii Fund),
Franklin Tennessee Municipal Bond Fund (the Tennessee Fund), and Franklin
Washington Municipal Bond Fund (the Washington Fund). Each of the Funds issues a
separate series of the Trust's shares and maintains a totally separate
investment portfolio.
The following is a summary of significant accounting policies consistently
followed by the Funds in the preparation of their financial statements. The
policies are in conformity with generally accepted accounting principles for
investment companies.
a. SECURITY VALUATION:
Tax-free bonds generally trade in the over-the-counter market rather than on a
national securities exchange. Often there are no transactions in a particular
security on any given day. In the absence of a recorded 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 the
security. The Trust may also 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. Other securities for which market
quotations are not available, if any, are valued in accordance with procedures
established by the Board of Trustees.
b. INCOME TAXES:
The Trust intends to continue to qualify for the tax treatment applicable to
regulated investment companies under the Internal Revenue Code and to make the
requisite distributions to its shareholders which will be sufficient to relieve
it from income and excise taxes. Therefore, no income tax provision is required.
Each Fund is treated as a separate entity in the determination of compliance
with the Internal Revenue Code.
c. SECURITY TRANSACTIONS:
Security transactions are accounted for on the date the securities are purchased
or sold (trade date). Realized gains and losses on security transactions are
determined on the basis of specific identification for both financial statement
and income tax purposes.
d. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS:
Distributions to shareholders are recorded on the ex-dividend date. Interest
income and estimated expenses are accrued daily. Bond discount and premium, if
any, are amortized as required by the Internal Revenue Code. The Fund normally
declares dividends from its net investment income daily and distributes monthly.
Daily allocations of net investment income will commence on the date of receipt
of an investor's funds. Dividends are normally declared each day the New York
Stock Exchange is open for business equal to an amount per day set from time to
time by the Board of Trustees, and are payable to shareholders of record at the
beginning of business on the ex-date. Once each month, dividends are reinvested
in additional shares of the Funds, or paid in cash as requested by the
shareholders.
e. SECURITIES PURCHASED ON A WHEN-ISSUED BASIS:
The Trust may trade securities on a when-issued or delayed delivery basis, with
payment and delivery scheduled for a future date. These transactions are subject
to market fluctuations and are subject to the risk that the value at delivery
may be more or less than the trade date purchase price. Although the Trust will
generally purchase these securities with the intention of acquiring such
securities, they may sell such securities before the settlement date. These
securities are identified on the accompanying statement of investments in
securities and net assets. The Trust has set aside sufficient investment
securities as collateral for these purchase commitments.
42
<PAGE>
FRANKLIN MUNICIPAL SECURITIES TRUST
================================================================================
NOTES TO FINANCIAL STATEMENTS (CONT.)
1. SIGNIFICANT ACCOUNTING POLICIES (CONT.)
f. EXPENSE ALLOCATION:
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. In all other
respects, expenses are charged to each Fund as incurred on a specific
identification basis.
2. UNAMORTIZED ORGANIZATION COSTS
The organization costs of the Hawaii Fund are amortized on a straight-line basis
over a period of five years from February 26, 1992 (the effective date of
registration under the Securities Act of 1933). In the event Franklin Resources,
Inc. (which was the sole shareholder prior to February 26, 1992) redeems its
shares within the five-year period, the pro rata share of the then-unamortized
deferred organization costs will be deducted from the redemption price paid to
Franklin Resources, Inc. New investors purchasing shares of the Hawaii Fund
subsequent to that date bear such costs during the amortization period only as
such charges are accrued daily against investment income. Franklin Advisers,
Inc. had advanced all of the organization costs of the Hawaii Fund, which
approximated $7,269. In an effort to reduce the Fund's expenses, Franklin
Advisers, Inc. agreed in advance to waive the repayment of the amount of the
current period's amortization of $1,454. The remaining unamortized balance of
such costs at May 31, 1995 was $2,544.
3. TRUST SHARES
At May 31, 1995, there were an unlimited number of no par value shares of
beneficial interest authorized. Transactions in Trust shares were as follows:
<TABLE>
<CAPTION>
FRANKLIN ARKANSAS FRANKLIN CALIFORNIA FRANKLIN HAWAII
MUNICIPAL BOND FUND HIGH YIELD MUNICIPAL FUND MUNICIPAL BOND FUND
-------------------- ------------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------- ---------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Year Ended May 31, 1995
Shares sold............................. 146,322 $1,458,232 1,405,516 $13,498,165 1,051,753 $10,928,396
Shares issued in reinvestment of
distributions.......................... 12,161 119,791 105,767 1,008,368 90,526 918,020
Shares redeemed......................... (8,622) (85,760) (363,980) (3,422,710) (432,587) (4,337,679)
Changes from exercise of exchange
privilege:
Shares sold........................... 31,203 313,265 1,471,739 13,772,479 246,439 2,459,733
Shares redeemed....................... (495) (4,944) (756,537) (7,147,081) (100,947) (998,579)
------- ---------- --------- ----------- --------- -----------
Net increase....................... 180,569 $1,800,584 1,862,505 $17,709,221 855,184 $ 8,969,891
======= ========== ========= =========== ========= ===========
Year Ended May 31, 1994+
Shares sold............................. 220,000 $2,200,000 2,507,494 $25,732,228 943,538 $10,385,467
Shares issued in reinvestment of
distributions.......................... -- -- 51,770 523,496 70,151 764,282
Shares redeemed......................... -- -- (181,366) (1,829,597) (218,807) (2,362,214)
Changes from exercise of exchange
privilege:
Shares sold........................... -- -- 897,709 9,167,457 127,875 1,386,820
Shares redeemed....................... -- -- (217,294) (2,176,935) (53,402) (578,960)
------- ---------- --------- ----------- --------- -----------
Net increase....................... 220,000 $2,200,000 3,058,313 $31,416,649 869,355 $ 9,595,395
======= ========== ========= =========== ========= ===========
</TABLE>
+ For the Arkansas Fund, period May 10, 1994 (effective date of registration) to
May 31, 1994.
43
<PAGE>
FRANKLIN MUNICIPAL SECURITIES TRUST
================================================================================
NOTES TO FINANCIAL STATEMENTS (CONT.)
3. TRUST SHARES (CONT.)
<TABLE>
<CAPTION>
FRANKLIN TENNESSEE FRANKLIN WASHINGTON
MUNICIPAL BOND FUND MUNICIPAL BOND FUND
------------------- -------------------
SHARES AMOUNT SHARES AMOUNT
------ --------- ------ ---------
<S> <C> <C> <C> <C>
Year Ended May 31, 1995
Shares sold......................................................... 244,843 $2,472,558 101,086 $ 943,550
Shares issued in reinvestment of distributions...................... 13,285 133,124 23,137 216,457
Shares redeemed..................................................... (1,364) (13,923) (44,411) (405,642)
Changes from exercise of exchange privilege:
Shares sold........................................................ 133,558 1,323,485 91,931 844,196
Shares redeemed.................................................... (41,855) (421,207) (39,231) (364,240)
------- ---------- ------- ----------
Net increase................................................... 348,467 $3,494,037 132,512 $1,234,321
======= ========== ======= ==========
Year Ended May 31, 1994(+)
Shares sold......................................................... 220,000 $2,200,000 183,326 $1,875,000
Shares issued in reinvestment of distributions...................... -- -- 13,870 140,305
Shares redeemed..................................................... -- -- (1,102) (10,931)
Changes from exercise of exchange privilege:
Shares sold........................................................ -- -- 32,417 329,194
Shares redeemed.................................................... -- -- (1,149) (11,411)
------- ---------- ------- ----------
Net increase................................................... 220,000 $2,200,000 227,362 $2,322,157
======= ========== ======= ==========
</TABLE>
+ For the Tennessee Fund, period May 10, 1994 (effective date of registration)
to May 31, 1994.
4. DISTRIBUTIONS AND CAPITAL LOSS CARRYOVERS
At May 31, 1995, for tax purposes, the Trust had capital loss carryovers 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>
Capital loss carryovers expiring:
2001........................................... $ -- $ -- $ 10,752 $ -- $ --
2002........................................... -- -- 159,863 1 --
2003........................................... 36,658 1,769,137 551,385 4,742 84,798
------- ---------- -------- ------ -------
$36,658 $1,769,137 $722,000 $4,743 $84,798
======= ========== ======== ====== =======
</TABLE>
For income tax purposes, the aggregate cost of securities and unrealized
appreciation of the Trust are the same as for financial reporting purposes at
May 31, 1995.
44
<PAGE>
FRANKLIN MUNICIPAL SECURITIES TRUST
================================================================================
NOTES TO FINANCIAL STATEMENTS (CONT.)
5. PURCHASES AND SALES OF SECURITIES
Aggregate purchases and sales of securities (excluding purchases and sales of
short-term securities) for the year ended May 31, 1995 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............ $4,706,261 $39,033,060 $9,676,640 $4,908,176 $2,336,797
========== =========== ========== ========== ==========
Sales................ $2,085,070 $22,033,307 $6,265,190 $ 860,600 $ 859,608
========== =========== ========== ========== ==========
</TABLE>
6. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
Franklin Advisers, Inc. ("Manager"), under the terms of a management agreement,
provides investment advice, office space and facilities to each Fund, and
receives fees computed monthly based on the average daily net assets of each
Fund at an annual rate of 5/8 of 1% of the first $100 million of net assets; 1/2
of 1% of net assets in excess of $100 million up to and including $250 million;
and 45/100 of 1% of net assets in excess of $250 million. The terms of the
management agreement provide that annual aggregate expenses of the Funds be
limited to the extent necessary to comply with the limitations set forth in the
laws, regulations, and administrative interpretations of the states in which the
Funds' shares are registered. The Funds' expenses did not exceed these
limitations; however, for the year ended May 31, 1995, Franklin Advisers, Inc.
agreed in advance to waive the management fees and made payments for other
expenses which are not reflected in the Statements of Operations 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>
Management fees............. $18,634 $256,329 $175,686 $22,569 $29,848
======= ======== ======== ======= =======
Other expenses.............. $11,402 $ 21,725 $ 13,758 $ 7,048 $15,522
======= ======== ======== ======= =======
</TABLE>
In its capacity as underwriter for the shares of the Funds, Franklin/Templeton
Distributors, Inc. received commissions on sales of the Trust's shares.
Commissions are deducted from the gross proceeds received from the sale of the
Trust's shares, and as such are not expenses of the Funds. Franklin/Templeton
Distributors, Inc. may also make payments, out of its own resources, to dealers
for certain sales of the Trust's shares. Commissions received by
Franklin/Templeton Distributors, Inc. and the amounts paid to other dealers for
the year ended May 31, 1995 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>
Total commissions received....... $62,191 $475,044 $185,598 $98,793 $34,183
======= ======== ======== ======= =======
Paid to other dealers............ $59,655 $440,761 $181,125 $94,151 $32,011
======= ======== ======== ======= =======
</TABLE>
Under the terms of a Distribution Agreement pursuant to Rule 12b-1 of the
Investment Company Act of 1940, the Hawaii Fund will reimburse
Franklin/Templeton Distributors, Inc., in an amount up to 0.10% per annum of its
average daily net assets while the Arkansas Fund, California High Yield Fund,
Tennessee Fund and Washington Fund will reimburse up to 0.15% per annum of the
Funds' average daily net assets for costs incurred in the promotion, offering
and marketing of the Funds' shares.
45
<PAGE>
FRANKLIN MUNICIPAL SECURITIES TRUST
================================================================================
NOTES TO FINANCIAL STATEMENTS (CONT.)
6. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES (CONT.)
Distribution fees incurred by the Arkansas Fund, California High Yield Fund,
Hawaii Fund, Tennessee Fund and Washington Fund under the agreements aggregated
$898, $35,842, $19,175, $1,672 and $2,286, respectively, for the year ended May
31, 1995.
Under the terms of a shareholder services agreement with Franklin/Templeton
Investor Services, Inc., the Trust pays costs on a per shareholder account
basis. Shareholder servicing costs incurred by the Funds for the year ended May
31, 1995 aggregated $15,106, all of which were paid by Franklin Advisers, Inc.
Certain officers and trustees of the Trust are also officers and/or directors of
Franklin/Templeton Distributors, Inc., Franklin Advisers, Inc., and
Franklin/Templeton Investor Services, Inc., all wholly-owned subsidiaries of
Franklin Resources, Inc.
At May 31, 1995, Franklin Resources, Inc. owned 57%, 40% and 42% of the Arkansas
Fund, Tennessee Fund and Washington Fund, respectively.
7. CREDIT RISKS
Although each of the Funds has a diversified investment portfolio, all of its
investments are in the securities of issuers within its respective state, Guam
and Puerto Rico. Such concentration may subject the Funds more significantly to
economic changes occurring within those states, Guam and Puerto Rico.
8. FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout the
periods, by fund, are as follows:
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE
- -------------------------------------------------------------------------------------------------------------
DISTRI- DISTRI-
NET ASSET NET REALIZED BUTIONS BUTIONS NET ASSET
PERIOD VALUE AT NET & UNREALIZED TOTAL FROM FROM NET FROM TOTAL VALUE
ENDED BEGINNING INVESTMENT GAIN (LOSS) INVESTMENT INVESTMENT CAPITAL DISTRI- AT END TOTAL
MAY 31 OF PERIOD INCOME ON SECURITIES OPERATIONS INCOME GAINS BUTIONS OF PERIOD RETURN++
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FRANKLIN ARKANSAS MUNICIPAL BOND FUND
1994(1) $ 10.00 $ .01 $ .050 $ .060 -- -- -- $ 10.06 .60%
1995 10.06 .51 .191 .701 (.441) -- (.441) 10.32 7.27
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND
1993(2) 10.00 .03 (.060) (.030) -- -- -- 9.97 (3.60)*
1994 9.97 .53 (.199) .331 (.558) (.013) (.571) 9.73 3.22
1995 9.73 .66 .176 .836 (.636) -- (.636) 9.93 9.08
FRANKLIN HAWAII MUNICIPAL BOND FUND
1992(3) 10.00 .09 .158 .248 (.068) -- (.068) 10.18 8.96*
1993 10.18 .63 .634 1.264 (.644) -- (.644) 10.80 12.77
1994 10.80 .62 (.459) .161 (.601) -- (.601) 10.36 1.35
1995 10.36 .60 .310 .910 (.600) -- (.600) 10.67 9.26
FRANKLIN TENNESSEE MUNICIPAL BOND FUND
1994(1) 10.00 .01 .100 .110 -- -- -- 10.11 1.10
1995 10.11 .52 .353 .873 (.453) -- (.453) 10.53 8.97
FRANKLIN WASHINGTON MUNICIPAL BOND FUND
1993(2) 10.00 .03 (.040) (.010) -- -- -- 9.99 (1.20)*
1994 9.99 .51 (.464) .046 (.472) (.014) (.486) 9.55 2.88
1995 9.55 .56 .355 .915 (.565) -- (.565) 9.90 10.10
</TABLE>
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA
------------------------------------------------
RATIO OF RATIO OF
EXPENSES NET
NET ASSETS TO AVERAGE INVESTMENT
PERIOD AT END NET ASSETS INCOME PORTFOLIO
ENDED OF PERIOD (SEE TO AVERAGE TURNOVER
MAY 31 (IN 000OS) NOTE 6)** NET ASSETS RATE
- ------------------------------------------------------------
<S> <C> <C> <C> <C>
FRANKLIN ARKANSAS MUNICIPAL BOND FUND
1994(1) $ 2,213 .03%* 2.00%* --%
1995 4,134 .10 5.64 77.63
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND
1993(2) 2,245 -- 3.85* 8.89
1994 31,938 .07 6.14 40.74
1995 51,102 .20 6.89 57.06
FRANKLIN HAWAII MUNICIPAL BOND FUND
1992(3) 2,978 -- 4.55* --
1993 18,657 -- 5.95 48.70
1994 26,904 .05 5.76 31.35
1995 36,827 .20 6.02 22.88
FRANKLIN TENNESSEE MUNICIPAL BOND FUND
1994(1) 2,224 .03* 1.89* 22.64
1995 5,986 .10 6.02 24.71
FRANKLIN WASHINGTON MUNICIPAL BOND FUND
1993(2) 2,198 -- 3.44* --
1994 4,272 .05 5.59 39.52
1995 5,741 .10 6.13 18.46
</TABLE>
46
<PAGE>
FRANKLIN MUNICIPAL SECURITIES TRUST
================================================================================
NOTES TO FINANCIAL STATEMENTS (CONT.)
8. FINANCIAL HIGHLIGHTS (CONT.)
<TABLE>
<CAPTION>
RATIO OF
EXPENSES
TO AVERAGE
NET ASSETS
----------
<S> <C>
FRANKLIN ARKANSAS MUNICIPAL BOND FUND
1994(1) ...................................... 1.20%*
1995 ......................................... 1.11
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND
1993(2) ...................................... 1.42*
1994 ......................................... .87
1995 ......................................... .88
FRANKLIN HAWAII MUNICIPAL BOND FUND
1992(3) ...................................... 1.57*
1993 ......................................... 1.06
1994 ......................................... .92
1995 ......................................... .87
FRANKLIN TENNESSEE MUNICIPAL BOND FUND
1994(1) ...................................... 1.05*
1995 ......................................... .92
FRANKLIN WASHINGTON MUNICIPAL BOND FUND
1993(2) ...................................... 1.44*
1994 ......................................... .71
1995 ......................................... 1.05
</TABLE>
*Annualized
(1) For the period May 10, 1994 (effective date of registration) to May 31,
1994.
(2) For the period May 3, 1993 (effective date of registration) to May 31, 1993.
(3) For the period February 26, 1992 (effective date of registration) to May 31,
1992.
++ Total return measures the change in value of an investment over the period
indicated. It does not include the maximum initial sales charge and assumes
reinvestment of dividends and capital gains at net asset value.
** During the periods indicated, the investment manager agreed to waive in
advance a portion of its management fees and made payments of other expenses
incurred by the Funds in the Trust. Had such action not been taken, the ratios
of operating expenses to average net assets would have been as follows:
During the fiscal year, the Trust paid distributions from undistributed net
investment income in the amounts shown in the Statement of Changes in Net
Assets. The total amount of these distributions is hereby designated as
exempt-interest dividends under Section 852(b)(5) of the Internal Revenue Code.
47
<PAGE>
FRANKLIN MUNICIPAL SECURITIES TRUST
================================================================================
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Trustees
of 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 in securities and net assets, as of May 31, 1995, 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 the periods indicated in Note 8. 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, 1995 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Funds comprising the Franklin Municipal Securities Trust as of May 31, 1995, 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 the financial
highlights for the periods indicated in Note 8, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
San Francisco, California
June 30, 1995
48
Franklin Municipal Securities Trust
APPENDIX
DESCRIPTION OF GRAPHIC MATERIAL OMITTED FROM EDGAR FILING
(PURSUANT TO ITEM 304 (a) of REGULATION S-T)
GRAPHIC MATERIAL (1)
This bar chart shows the comparison between the fund's distribution rate of
5.34% and the taxable equivalent rate of 9.51%.
GRAPHIC MATERIAL (2)
The following line graph hypothetically compares the performance of the Franklin
Arkansas Municipal Bond Fund to that of the Lehman Brothers Municipal Bond Index
and the Consumer Price Index (CPI), based on a $10,000 investment from 6/1/94 to
5/31/95.
<TABLE>
<CAPTION>
Period Ending Arkansas MBF LB Muni Index CPI
<S> <C> <C> <C>
6/1/94 9,572 10,000 10,000
6/30/94 9,486 9,939 10,034
7/31/94 9,657 10,121 10,061
8/31/94 9,677 10,156 10,101
9/30/94 9,501 10,007 10,129
10/31/94 9,209 9,829 10,136
11/30/94 8,918 9,651 10,149
12/31/94 9,206 9,863 10,149
1/31/95 9,544 10,145 10,189
2/28/95 9,864 10,441 10,230
3/31/95 9,951 10,561 10,264
4/30/95 9,978 10,573 10,298
5/31/95 10,253 10,911 10,318
</TABLE>
GRAPHIC MATERIAL (3)
This pie chart shows the breakdown of the fund's securities by quality as a
percentage of the fund's total assets.
<TABLE>
<CAPTION>
Portfolio Breakdown on 5/31/95
<S> <C>
AAA 56.4%
AA 9.5%
A 17.8%
BBB 16.3%
</TABLE>
GRAPHIC MATERIAL (4)
This bar chart shows the comparison between the fund's distribution rate of
6.13% and the taxable equivalent rate of 11.40%.
GRAPHIC MATERIAL (5)
The following line graph hypothetically compares the performance of the Franklin
California High Yield Municipal Bond Fund to that of the Lehman Brothers
Municipal Bond Index and the Consumer Price Index (CPI), based on a $10,000
investment from 5/3/93 to 5/31/95.
<TABLE>
<CAPTION>
Period Ending CA HY MBF LB Muni Index CPI
<S> <C> <C> <C>
5/3/93 9,579 10,000 10,000
5/31/93 9,550 10,056 10,014
6/30/93 9,713 10,224 10,028
7/31/93 9,703 10,237 10,028
8/31/93 9,909 10,450 10,056
9/30/93 10,059 10,569 10,077
10/31/93 10,092 10,589 10,119
11/30/93 10,039 10,496 10,126
12/31/93 10,223 10,718 10,126
1/31/94 10,346 10,840 10,153
2/28/94 10,183 10,559 10,187
3/31/94 9,726 10,129 10,222
4/30/94 9,759 10,215 10,236
5/31/94 9,843 10,304 10,244
6/30/94 9,744 10,241 10,278
7/31/94 9,931 10,429 10,306
8/31/94 10,006 10,465 10,347
9/30/94 9,906 10,312 10,375
10/31/94 9,763 10,128 10,383
11/30/94 9,538 9,945 10,396
12/31/94 9,604 10,163 10,396
1/31/95 9,892 10,454 10,438
2/28/95 10,181 10,758 10,479
3/31/95 10,397 10,882 10,514
4/30/95 10,453 10,895 10,549
5/31/95 10,736 11,243 10,569
</TABLE>
GRAPHIC MATERIAL (6)
This pie chart shows the breakdown of the fund's securities by quality as a
percentage of the fund's total assets.
<TABLE>
<CAPTION>
Portfolio Breakdown on 5/31/95
<S> <C>
AAA 1.3%
AA 6.2%
A 35.0%
BBB 22.1%
BB 35.4%
</TABLE>
GRAPHIC MATERIAL (7)
This bar chart shows the comparison between the fund's distribution rate of
5.39% and the taxable equivalent rate of 9.92%.
GRAPHIC MATERIAL (8)
The following line graph hypothetically compares the performance of the Franklin
Hawaii Municipal Bond Fund to that of the Lehman Brothers Municipal Bond Index
and the Consumer Price Index (CPI), based on a $10,000 investment from 3/1/92 to
5/31/95.
<TABLE>
<CAPTION>
Period Ending Hawaii MBF LB Muni Index Consumer
<S> <C> <C> <C>
3/1/92 9,579 10,000 10,000
3/31/92 9,579 10,004 10,051
4/30/92 9,684 10,093 10,065
5/31/92 9,804 10,212 10,079
6/30/92 9,924 10,384 10,115
7/31/92 10,326 10,695 10,137
8/31/92 10,166 10,590 10,165
9/30/92 10,171 10,659 10,194
10/31/92 10,008 10,555 10,229
11/30/92 10,280 10,744 10,244
12/31/92 10,452 10,853 10,236
1/31/93 10,596 10,979 10,287
2/28/93 10,940 11,377 10,323
3/31/93 10,923 11,256 10,359
4/30/93 10,996 11,370 10,388
5/31/93 11,058 11,433 10,402
6/30/93 11,273 11,624 10,417
7/31/93 11,293 11,639 10,417
8/31/93 11,531 11,882 10,446
9/30/93 11,718 12,017 10,468
10/31/93 11,759 12,040 10,511
11/30/93 11,603 11,934 10,518
12/31/93 11,897 12,186 10,518
1/31/94 12,035 12,325 10,547
2/28/94 11,674 12,005 10,582
3/31/94 11,011 11,517 10,618
4/30/94 11,086 11,615 10,633
5/31/94 11,205 11,716 10,641
6/30/94 11,128 11,644 10,677
7/31/94 11,346 11,857 10,706
8/31/94 11,390 11,899 10,749
9/30/94 11,192 11,724 10,778
10/31/94 10,882 11,515 10,785
11/30/94 10,629 11,307 10,799
12/31/94 10,930 11,556 10,799
1/31/95 11,278 11,886 10,842
2/28/95 11,672 12,232 10,886
3/31/95 11,785 12,373 10,922
4/30/95 11,830 12,387 10,958
5/31/95 12,241 12,783 10,979
</TABLE>
GRAPHIC MATERIAL (9)
This pie chart shows the breakdown of the fund's securities by quality as a
percentage of the fund's total assets.
<TABLE>
<CAPTION>
Portfolio Breakdown on 5/31/95
<S> <C>
AAA 51.8%
AA 15.8%
A 23.3%
BBB 9.1%
</TABLE>
GRAPHIC MATERIAL (10)
This bar chart shows the comparison between the fund's distribution rate of
5.35% and the taxable equivalent rate of 9.42%.
GRAPHIC MATERIAL (11)
The following line graph hypothetically compares the performance of the Franklin
Tennessee Municipal Bond Fund to that of the Lehman Brothers Municipal Bond
Index and the Consumer Price Index (CPI), based on a $10,000 investment from
6/1/94 to 5/31/95.
<TABLE>
<CAPTION>
Period Ending Tennessee MBF LB Muni Index CPI
<S> <C> <C> <C>
6/1/94 9,574 10,000 10,000
6/30/94 9,461 9,939 10,034
7/31/94 9,678 10,121 10,061
8/31/94 9,697 10,156 10,101
9/30/94 9,525 10,007 10,129
10/31/94 9,265 9,829 10,136
11/30/94 9,035 9,651 10,149
12/31/94 9,332 9,863 10,149
1/31/95 9,679 10,145 10,189
2/28/95 9,979 10,441 10,230
3/31/95 10,075 10,561 10,264
4/30/95 10,093 10,573 10,298
5/31/95 10,408 10,911 10,318
</TABLE>
GRAPHIC MATERIAL (12)
This pie chart shows the breakdown of the fund's securities by quality as a
percentage of the fund's total assets.
<TABLE>
<CAPTION>
Portfolio Breakdown on 5/31/95
<S> <C>
AAA 34.3%
AA 25.7%
A 20.8%
BBB 19.2%
</TABLE>
GRAPHIC MATERIAL (13)
This bar chart shows the comparison between the fund's distribution rate of
5.57% and the taxable equivalent rate of 9.22%
GRAPHIC MATERIAL (14)
The following line graph hypothetically compares the performance of the
Washington Municipal Bond Fund to that of the Lehman Brothers Municipal Bond
Index and the Consumer Price Index (CPI), based on a $10,000 investment from
5/3/93 to 5/31/95.
<TABLE>
<CAPTION>
Period Ending Washington MBF LB Muni Index CPI
<S> <C> <C> <C>
5/3/93 9,579 10,000 10,000
5/31/93 9,569 10,056 10,014
6/30/93 9,770 10,224 10,028
7/31/93 9,761 10,237 10,028
8/31/93 9,968 10,450 10,056
9/30/93 10,098 10,569 10,077
10/31/93 10,172 10,589 10,119
11/30/93 9,974 10,496 10,126
12/31/93 10,237 10,718 10,126
1/31/94 10,361 10,840 10,153
2/28/94 10,061 10,559 10,187
3/31/94 9,373 10,129 10,222
4/30/94 9,448 10,215 10,236
5/31/94 9,584 10,304 10,244
6/30/94 9,489 10,241 10,278
7/31/94 9,748 10,429 10,306
8/31/94 9,764 10,465 10,347
9/30/94 9,527 10,312 10,375
10/31/94 9,287 10,128 10,383
11/30/94 9,049 9,945 10,396
12/31/94 9,305 10,163 10,396
1/31/95 9,666 10,454 10,438
2/28/95 10,008 10,758 10,479
3/31/95 10,132 10,882 10,514
4/30/95 10,129 10,895 10,549
5/31/95 10,552 11,243 10,569
</TABLE>
GRAPHIC MATERIAL (15)
This pie chart shows the breakdown of the fund's securities by quality as a
percentage of the fund's total assets.
<TABLE>
<CAPTION>
Portfolio Breakdown on May 31, 1995
<S> <C>
AAA 48.4%
AA 26.7%
A 7.0%
BBB 17.9%
</TABLE>
<PAGE>
