SEMI ANNUAL REPORT
November 30, 1998
FRANKLIN MUNICIPAL SECURITIES TRUST
FRANKLIN ARKANSAS MUNICIPAL BOND FUND
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND
FRANKLIN HAWAII MUNICIPAL BOND FUND
FRANKLIN TENNESSEE MUNICIPAL BOND FUND
FRANKLIN WASHINGTON MUNICIPAL BOND FUND
[LOGO]FRANKLIN TEMPLETON
[LOGO] FRANKLIN TEMPLETON CELEBRATING OVER 50 YEARS
Thank you for investing with Franklin Templeton. We encourage our investors to
maintain a long-term perspective and remember that all securities markets move
both up and down, as do mutual fund share prices.
We appreciate your past support and look forward to serving your investment
needs in the years ahead.
[PICTURE]
CHARLES B. JOHNSON (right)
Chairman
Franklin Municipal Securities Trust
THOMAS J. KENNY (left)
Director
Franklin Municipal
Bond Department
<PAGE>
CONTENTS
Shareholder Letter ............................................ 1
Special Update: A Word About Municipal Bond Insurance ........ 5
Fund Reports
Franklin Arkansas Municipal Bond Fund ........................ 7
Franklin California High Yield Municipal Fund ................ 12
Franklin Hawaii Municipal Bond Fund .......................... 18
Franklin Tennessee Municipal Bond Fund ....................... 24
Franklin Washington Municipal Bond Fund ...................... 30
Municipal Bond Ratings ........................................ 36
Financial Highlights & Statement of Investments ............... 39
Financial Statements .......................................... 63
Notes to Financial Statements ................................. 69
FUND CATEGORY
[PYRAMID]
SHAREHOLDER LETTER
Dear Shareholder:
It's a pleasure to bring you Franklin Municipal Securities Trust's semiannual
report for the period ended November 30, 1998.
A TALE OF TWO ECONOMIES
During the six months under review, the U.S. economy began to appear like a tale
of two economies -- a healthy and expanding domestic sector contrasted with a
fragile and ailing export-oriented sector. Despite momentary dips in many
economic indicators, the gross domestic product grew at a 3.9% annualized rate
in the third quarter of 1998, masking much of the underlying divergence.
Consumer spending remained robust and the housing market regained its momentum,
after ebbing slightly in August and September. Consumer confidence rose in
November, after tumbling in October, signaling that consumers remained guardedly
optimistic about the economy, the stock market and their jobs. Housing starts,
which fell 2.6% in September, rose an unexpectedly strong 7.3% in October, the
biggest gain in 13 months. At the same time, existing home sales also showed
surprising strength, registering 2.1% growth for the month. Retail sales bounced
back in October as well, increasing a respectable 1.0%, compared with
September's 0.3% feeble increase.
Meanwhile, exports were hit hard by the emerging market turmoil that prevailed
for much of the reporting period, hampering the U.S. manufacturing sector and
producing record trade deficits. The National Association of Purchasing Managers
Index in
<PAGE>
November indicated that manufacturing activity declined for the fourth time in
the past six months. Durable goods orders, which include orders for cars,
appliances and other heavy machinery, fell 2.2% in October, the first decrease
in five months. The third quarter trade deficit, $44.5 billion, was the largest
on record, and the trade deficit for the first nine months of 1998, $123
billion, was 50.5% above 1997's imbalance.
Because of the problems in the world markets, many financial institutions
curtailed their lending, creating a "credit crunch." Beginning with the Russian
debt crisis and culminating with the emergency bailout of a major hedge fund,
capital worldwide became less available, adversely affecting many companies.
Taking note of these factors, the Federal Reserve Board's (the Fed's) monetary
policy panel, the Federal Open Market Committee, starting in late September, cut
the federal funds target rate three times by 0.25%, to 4.75%, in an effort to
stimulate growth. The Fed's moves were aimed at providing liquidity to the
financial system and making it easier for major corporations to obtain favorable
lending from banks.
The bond and stock markets reacted to the Fed's loosening of monetary policy in
two opposite ways. After the 30-year U.S. Treasury bond reached a record-low
yield of 4.70% on October 5, 1998, the U.S. bond market quickly lost ground as
investors became less enthusiastic about committing capital to fixed-income
markets. On November 30, 1998, the yield on the 30-year Treasury bond stood at
5.08%, 0.38% higher than the yield on October 5, 1998. The stock market was a
different story. After losing more than 20% of their value in the third quarter
correction, many stocks rebounded strongly. On November 23, 1998, the Dow
Jones(R) Industrial Average reached an all-time high of 9374.27, with many other
indices registering record highs as well.
2
<PAGE>
As of the end of the reporting period, the yields on 30-year, AAA-rated, insured
municipal bonds stood at more than 96% of the yield on a 30-year Treasury bond.
For those investors in the 39.6% tax bracket, the taxable equivalent yield on an
average municipal bond was 8.36% versus 5.08% for the Treasury bond.(1)
"While investment success is the primary objective of investment planning, one
important by-product of a good plan can be peace of mind."
STAYING ON COURSE
In times like these, it's easy to understand why people can become emotional
about their investments. That's why we believe investors should call their
investment representatives, and plan to cover three points in their
conversations. One, review their current financial plans, recalling their goals
and why they made their investment choices in the first place. Two, discuss the
value of diversification, which can help reduce the risk that any one type of
security will have a negative impact on an overall portfolio, and check if their
investments are still properly diversified. As shown during the reporting
period, the bond and stock markets often behave differently. In each of the five
years since 1973 that stocks posted negative annual returns, bonds posted
positive returns.(2) Three, review their investment timeframe to help put recent
market declines into perspective and avoid turning what could be only a
temporary paper loss into a permanent one. Maintaining a long-term outlook is
one of the keys to weathering market volatility.
An important component of a long-term approach is setting up a regular
investment plan. Investing on a scheduled basis, regardless of market
directions, can help investors take advantage of market downturns when prices
are low, and benefit from any market rallies. We encourage you to contact your
investment representative to discuss setting up a regular investment plan. While
investment
1. Source: Bloomberg.
2. Source: For bond market statistics based on the Lehman Brothers Government/
Corporate Bond Index - Lehman Brothers; for stock measured by the S&P 500 Index
- - Standard & Poor's(R).
3
<PAGE>
success is the primary objective of investment planning, one important
by-product of a good plan can be peace of mind.
Our investment philosophy remains disciplined and focused, as we strive to offer
our shareholders high, current tax-free income and relatively low price
volatility. The outlook for the municipal bond market should remain positive,
given the relatively stable U.S. economy, low inflation environment, budget
surplus, strong dollar, and the economic and market uncertainty facing many of
the world's regions. Municipal bond funds continue to be an attractive
investment for those investors seeking tax-free income as well as providing an
opportunity to diversify risk in their portfolio.
As always, we appreciate your support, welcome your questions and comments and
look forward to serving your investment needs in the years ahead.
Sincerely,
/s/ Charles B. Johnson
- ----------------------
Charles B. Johnson
Chairman
Franklin Municipal Securities Trust
/s/ Thomas J. Kenny
- ----------------------
Thomas J. Kenny
Director
Franklin Municipal Bond Department
4
<PAGE>
A WORD ABOUT MUNICIPAL BOND INSURANCE
[SPECIAL UPDATE]
Municipal bond insurers guarantee the timely payment of interest and principal
on insured bond issues, providing bond investors with additional protection
against the potential of the issuer's payment default. Moody's and Standard &
Poor's assign the four principal municipal bond insurers - MBIA, AMBAC, FGIC and
FSA - their highest rating, AAA, based on their ability to pay claims. This is
important, as once a bond is insured it no longer carries the underlying
security's rating, but the insurer's rating. At the end of 1997, the four
primary municipal bond insurers comprised more than 99% of the market, with MBIA
controlling the largest share, 42.1%.
Municipal bond insurers often work with bond reinsurers to enhance their ability
to generate new business. By purchasing portions of insured bond portfolios from
the insurers, bond reinsurers assume a portion of the risk, freeing up the
insurers' capital and enabling them to insure additional municipal bond issues.
The added capital provided by the reinsurers, in turn, increases the overall
size of the insured municipal bond market.
Currently, many municipal bond issuers favor the use of bond insurance. For the
first nine months of 1998, municipal bond insurers covered 51.6% of the
new-issue municipal bond market, involving 4,268 new issues valued at $110
billion. For issuers, obtaining bond insurance can often lower their borrowing
costs as it usually improves their credit rating, which more than makes up for
the cost of the insurance. In addition, the four primary, triple-A rated bond
insurers
5
<PAGE>
presently charge issuers comparatively inexpensive insurance premiums, due to
the extremely competitive environment for municipal bond insurance. Bond
insurance also enables issuers to market their bonds to a larger pool of
potential buyers. For example, insured municipal bond funds purchase primarily,
if not exclusively, insured bonds.
INSURERS AS A % OF MARKET SHARE*
12/31/97
<TABLE>
<S> <C>
MBIA .................. 42.1%
AMBAC ................. 23.9%
FGIC .................. 18.9%
FSA ................... 14.5%
Other ................. 0.6%
</TABLE>
*Source: The Bond Buyer, 1998
Low-cost municipal bond insurance benefits investors beyond the credit
protection it provides against payment default. As insured bonds appeal to a
wider variety of investors, insurance can lead to improved liquidity, allowing
investors to more easily buy and sell bonds.
INSURED MUNICIPAL BOND ISSUES*
As a % of muni bond market
<TABLE>
<S> <C>
1993 ...................... 37.0%
1994 ...................... 37.0%
1995 ...................... 43.0%
1996 ...................... 46.0%
1997 ...................... 49.0%
1998** .................... 51.6%
</TABLE>
*Source: Fitch IBCA.
**Through 9/30/98.
6
<PAGE>
FRANKLIN ARKANSAS MUNICIPAL BOND FUND
CREDIT QUALITY BREAKDOWN
Franklin Arkansas Municipal Bond Fund
Based on Total Long-Term Investments*
11/30/98
[PIE CHART]
<TABLE>
<S> <C>
AAA ............... 44.6%
AA ................ 7.1%
A ................. 18.5%
BBB ............... 29.8%
</TABLE>
*Quality breakdown may include internal
ratings for bonds not rated by a
national rating agency.
Your Fund's Goal: Franklin Arkansas Municipal Bond Fund seeks to provide high,
current income exempt from regular federal and Arkansas state personal income
taxes while seeking preservation of capital by investing primarily in a
portfolio of Arkansas municipal securities.(1)
STATE UPDATE
Arkansas began the six-month period under review on a positive note, buoyed by
steady employment growth and continuing diversification of its economic base.
The modest expansion maintained its momentum throughout the reporting period,
even as job growth began to slow, partly due to a lack of available labor. The
large number of jobs created in the services and construction industries more
than made up for the losses in manufacturing, resulting in an unemployment rate
below the national average. Resource-related industries, the largest being
poultry processing, contributed significantly to the state's economy while
construction remained the state's fastest-growing industry.(2)
Sound fiscal discipline and strong fundamentals underscored Arkansas' slow but
steady economy during the reporting period.
(1). The fund may invest as much as 100% of its assets in bonds that pay
interest subject to federal alternative minimum tax. All or a significant
portion of the income on these obligations may be subject to such tax.
Distributions of capital gains and of ordinary income from accrued market
discount, if any, are generally taxable.
(2). Source: Moody's Investors Service, 5/19/98. This does not indicate ratings
of the fund.
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 40 of
this report.
7
<PAGE>
DIVIDEND DISTRIBUTIONS*
Franklin Arkansas
Municipal Bond Fund - Class I
6/1/98 - 11/30/98
<TABLE>
<CAPTION>
DIVIDEND
MONTH PER SHARE
----- ---------
<S> <C>
June 4.8 cents
July 4.8 cents
August 4.8 cents
September 4.8 cents
October 4.8 cents
November 4.8 cents
TOTAL 28.8 CENTS
</TABLE>
*Assumes shares were purchased and held for the entire accrual period. Since
dividends accrue daily, your actual distributions will vary depending on the
date you purchased your shares and any account activity during the month. Income
distributions include all accrued income earned by the fund during the reporting
period.
The Revenue Stabilization Act (the Act) explicitly prohibits deficit spending,
and made the state's low per-capita debt ratios the envy of much of the nation,
at $156 versus the national median of $422. Furthermore, voters must approve all
general obligation debt. As a result, the state needed only a small percentage
of its revenues to service general obligation debt. Net general revenues,
meanwhile, continued to climb. Through March 1998, net general revenue grew at a
6.7% annual rate, eclipsing the 4.2% rate set one year earlier. Responsible
borrowing practices, as mandated by the Act, also had a beneficial impact on the
outlook of Arkansas debt, characterized as "stable," and rated Aa3 by Moody's
and AA by Standard & Poor's, two national credit rating agencies.(2)
WHAT IS THE ARKANSAS REVENUE STABILIZATION ACT?
The Arkansas Revenue Stabilization Act prohibits state spending from exceeding
revenues in any fiscal year. State expenditures are not allowed until sufficient
revenues to fund them have been collected. This Act also requires that the state
Assembly create three levels of spending priority. Under this system, medium-,
and then low-priority, spending items are funded, only after all high-priority
items have been fully supported by existing state income. By prohibiting deficit
spending, this Act ensures Arkansas will have a balanced budget.
8
<PAGE>
PORTFOLIO NOTES
During the reporting period, assets in Franklin Arkansas Municipal Bond Fund
grew from approximately $30 million in May 1998 to more than $39 million on
November 30, 1998, partially owing to the fund's positive performance. Municipal
bond supply in Arkansas was relatively robust in 1998, in stark contrast to the
sparse supply of new-issue debt during 1997. Our investment strategy remained
constant, as we sought well-structured bonds across all sectors. As a result of
this strategy, our holdings of AAA-rated bonds increased, from 43.8% of the
portfolio on May 31, 1998, to 44.6% at the end of the reporting period. Some
recently purchased bonds in the portfolio included Pulaski County Health
Facilities Board (Catholic Health Initiatives); Pine Bluff Environmental
Improvement (International Paper Co.); Little Rock Capital Improvement bonds and
Pulaski County Public Facilities Board.
Going forward, we believe that Arkansas municipal bonds will continue to be
attractive investments. We expect a relatively healthy level of new-issue supply
in 1999. Investor demand should remain strong, maintaining yields below the
national average. The fund will continue to look for bonds at a slight discount
that provide good call protection while paying high current income.
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of November 30, 1998, the end of the reporting period. However,
market and economic conditions are changing constantly, which can be expected to
affect our strategies and the fund's portfolio composition. Although historical
performance is no guarantee of future results, these insights may help you
understand our investment and management philosophy.
PORTFOLIO BREAKDOWN
Franklin Arkansas
Municipal Bond Fund
11/30/98
<TABLE>
<CAPTION>
% OF TOTAL
LONG-TERM
SECTOR INVESTMENTS
------ -----------
<S> <C>
Utilities 21.1%
Industrial 18.4%
Other Revenue 13.7%
Housing 13.2%
Hospitals 7.7%
Education 7.1%
General Obligation 7.1%
Sales Tax 6.3%
Prerefunded 2.4%
Transportation 1.9%
Health Care 1.1%
</TABLE>
9
<PAGE>
FRANKLIN ARKANSAS MUNICIPAL BOND FUND
CLASS I:
Subject to the maximum 4.25% initial sales charge. The fund's manager agreed in
advance to waive a portion of its management fees, which reduces operating
expenses and increases distribution rate, yield and total return to
shareholders. Without this waiver, the fund's distribution rate and total return
would have been lower, and yield for the period would have been 3.84%. The fee
waiver may be discontinued at any time upon notice to the fund's Board of
Trustees.
PERFORMANCE SUMMARY AS OF 11/30/98
Distributions will vary based on earnings of the fund's portfolio and any
profits realized from the sale of the portfolio's securities. Past distributions
are not indicative of future trends. All total returns include reinvested
distributions at net asset value.
PRICE AND DISTRIBUTION INFORMATION (6/1/98-11/30/98)
<TABLE>
<CAPTION>
CLASS I CHANGE 11/30/98 5/31/98
- ------- ------ -------- -------
<S> <C> <C> <C>
Net Asset Value +$0.06 $11.05 $10.99
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTIONS
-------------
<S> <C>
Dividend Income $0.288
</TABLE>
Past performance is not predictive of future results.
10
<PAGE>
PERFORMANCE
<TABLE>
<CAPTION>
SINCE
INCEPTION
CLASS I 1-YEAR 3-YEAR (5/10/94)
- ------- ------ ------ ---------
<S> <C> <C> <C>
Cumulative Total Return(1) +7.57% +23.67% +40.04%
Average Annual Total Return(2) +3.00% + 5.79% + 6.65%
Distribution Rate(3) 4.99%
Taxable Equivalent Distribution Rate(4) 8.88%
30-Day Standardized Yield(5) 4.53%
Taxable Equivalent Yield(4) 8.06%
</TABLE>
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the applicable, maximum
sales charge(s) for that class.
3. Distribution rate is based on an annualization of the current 4.8 cent per
share monthly dividend and the maximum offering price of $11.54 on November 30,
1998.
4. Taxable equivalent distribution rate and yield assume the 1998 maximum
combined federal and Arkansas state personal income tax bracket of 43.8%, based
on the federal income tax rate of 39.6%.
5. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended November 30, 1998.
Bond prices, and thus the fund's share price, generally move in the opposite
direction from interest rates. Since markets can go down as well as up,
investment return and principal value will fluctuate with market conditions, and
you may have a gain or loss when you sell your shares.
Past performance is not predictive of future results.
11
<PAGE>
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND
Your Fund's Goal: Franklin California High Yield Municipal Fund seeks to provide
high, current income exempt from regular federal and California state personal
income taxes while seeking preservation of capital by investing primarily in a
portfolio of high-yielding, medium-, lower-, and non-rated California municipal
securities.(1)
STATE UPDATE
During the six months under review, California's economy, while moderating
slightly from the previous year's period, remained strong. The state's
employment and personal income growth outpaced the national average. The
economic recovery also enabled the state to return to a more favorable financial
position and erase its accumulated deficit. However, California's reliance on
trade with troubled Asian countries negatively affected its export sector,
accounting for the lion's share of the economic moderation. For the first half
of 1998, exports to the region were down approximately 15% from the first six
months of 1997.(2)
CREDIT QUALITY BREAKDOWN
Franklin California High Yield
Municipal Fund
Based on Total Long-Term Investments*
11/30/98
<TABLE>
<S> <C>
BBB .................. 41.5%
BB ................... 21.3%
A .................... 17.3%
AAA .................. 15.6%
AA ................... 4.3%
</TABLE>
*Quality breakdown may include
internal ratings for bonds not rated by a
national rating agency.
(1). The fund may invest as much as 100% of its assets in bonds that pay
interest subject to federal alternative minimum tax. All or a significant
portion of the income on these obligations may be subject to such tax.
Distributions of capital gains and of ordinary income from accrued market
discount, if any, are generally taxable. In general, an investor is paid a
higher yield to assume a greater degree of risk.
(2). Source: Fitch IBCA, State of California, October 1998.
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 44 of
this report.
12
<PAGE>
PORTFOLIO BREAKDOWN
Franklin California High Yield
Municipal Fund
11/30/98
<TABLE>
<CAPTION>
% OF TOTAL
LONG-TERM
SECTOR INVESTMENTS
------ -----------
<S> <C>
Tax Allocation 17.4%
Transportation 16.9%
Mello-Roos 13.2%
Hospitals 8.8%
Utilities 7.8%
Special Assessment 6.5%
Certificates of
Participation 6.1%
Prerefunded 5.0%
Housing 4.2%
Education 4.1%
Other Revenue 4.0%
Marks-Roos 2.1%
Health Care 1.7%
General Obligation 1.1%
Industrial Revenue 1.1%
</TABLE>
After the recession of the early '90s, the California economy became broader and
more diversified, no longer heavily dependent on national defense spending. The
service sector remains the state's largest employer, accounting for 30.3% of all
jobs as of October 1998, followed by trade with 22.2%. Manufacturing maintained
its steady downward slide, comprising only 13.7% of jobs.(3)
On October 2, 1998, Moody's, a national credit rating agency, upgraded its
credit rating on the state's general obligation bonds to Aa3 from A1. This is
the first upgrade Moody's has given California in nine years and reflects the
state's continuing economic recovery and recent legislation meant to improve the
state's credit condition.(4)
PORTFOLIO NOTES
The improving national and state environments favorably affected Franklin
California High Yield Municipal Fund's performance during the reporting period.
The value of many of the portfolio's bonds increased, as interest rates
declined. For example, the yield on the 30-year Treasury bond fell from 5.86% at
the start of the year, to a low of 4.70%, before moving back up to 5.08% on
November 30, 1998. Lower interest rates led to higher municipal supply as
issuers took advantage of the rate environment to issue new or refunded debt.
Issuance should approach $300 billion by year-end, far outpacing the $220
billion issued in 1997.
Franklin California High Yield Municipal Fund performed very well over the
six-month reporting period, and Class I shares had a 30-day SEC yield of 4.76%
and a 4.99% distribution rate for the period ended November 30, 1998. Partially
because of the fund's robust performance during the period, total net assets
grew from $452 million
(3). Source: California Employment & Development Dept., California Labor Force &
Industry Employment, October 1998.
(4). Source: Moody's Investors Service, State of California, October 1998. This
does not indicate Moody's rating of the fund.
13
<PAGE>
on May 31, 1998, to approximately $573 million at the end of the reporting
period, giving the fund an increasingly stable and diversified asset base.
However, the fund's substantial new investments within the historically low,
current interest-rate environment increased pressure on the dividend payment.
Additionally, the growth of insurance in the municipal bond market led to
smaller interest-rate differences between higher- and lower-rated bonds. As the
supply of non-rated issues diminished, more competition and lower yields
resulted. We still found sufficient opportunities remained in the high-yield
marketplace for Franklin California High Yield Municipal Fund, as Franklin's
research capabilities and size often give us the first look at new issues coming
to market.
The fund was able to take advantage of Franklin's presence in California to
structure and control issues to fit the portfolio's needs. In managing over $20
billion in California municipal assets, Franklin believes it has a distinct
advantage over its competitors in locating value. Consequently, Franklin
California High Yield Municipal Fund is able to use the buying power of the
entire fund group to find new high-yield issues. Many dealers, underwriters and
issuers know and trust Franklin and will come to us to help them structure and
price new issues, giving the fund more leverage in defining the marketplace.
Recent purchases in the fund included Vallejo Hiddenbrooke Improvement District.
Hiddenbrooke is a new, private, 586-acre, 1,400-unit golf course community in
Vallejo, CA. The single-family housing development surrounds a completed Arnold
Palmer championship golf course, which will include a soon-to-be-completed $11
million clubhouse, banquet facility and fitness center. The bonds were priced to
yield 6.5% with a 30-year maturity.
14
<PAGE>
We continue to follow our strategy of investing for income, price stability and
tax efficiency. The fund should perform well into the next reporting period,
aided by stable interest rates and ample supply of new bonds.
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of November 30, 1998, the end of the reporting period. However,
market and economic conditions are changing constantly, which can be expected to
affect our strategies and the fund's portfolio composition. Although historical
performance is no guarantee of future results, these insights may help you
understand our investment and management philosophy.
DIVIDEND DISTRIBUTIONS*
Franklin California High Yield Municipal Fund
6/1/98 - 11/30/98
<TABLE>
<CAPTION>
DIVIDEND PER SHARE
------------------
MONTH CLASS I CLASS II
- ----- ------- --------
<S> <C> <C>
June 5.0 cents 4.10 cents
July 5.0 cents 4.46 cents
August 5.0 cents 4.46 cents
September 5.0 cents 4.46 cents
October 5.0 cents 4.65 cents
November 5.0 cents 4.65 cents
TOTAL 30.0 cents 26.78 cents
</TABLE>
*Assumes shares were purchased and held for the entire accrual period. Since
dividends accrue daily, your actual distributions will vary depending on the
date you purchased your shares and any account activity during the month. Income
distributions include all accrued income earned by the fund during the reporting
period.
15
<PAGE>
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND
CLASS I:
Subject to the current, maximum 4.25% initial sales charge. Prior to July 1,
1994, fund shares were offered at a higher initial sales charge; thus actual
returns would have been lower. The fund's manager agreed in advance to waive a
portion of its management fees, which reduces operating expenses and increases
distribution rate, yield and total return to shareholders. Without this waiver,
the fund's distribution rate and total return would have been lower, and yield
for the period would have been 4.58%. The fee waiver may be discontinued at any
time upon notice to the fund's Board of Trustees.
CLASS II:
Subject to 1% initial sales charge and 1% contingent deferred sales charge for
shares redeemed within 18 months of investment. These shares have higher annual
fees and expenses than Class I shares. The fund's manager agreed in advance to
waive a portion of its management fees, which reduces operating expenses and
increases distribution rate, yield and total return to shareholders. Without
this waiver, the fund's distribution rate and total return would have been
lower, and yield for the period would have been 4.19%. The fee waiver may be
discontinued at any time upon notice to the fund's Board of Trustees.
PERFORMANCE SUMMARY AS OF 11/30/98
Distributions will vary based on earnings of the fund's portfolio and any
profits realized from the sale of the portfolio's securities. Past distributions
are not indicative of future trends. All total returns include reinvested
distributions at net asset value.
PRICE AND DISTRIBUTION INFORMATION (6/1/98-11/30/98)
<TABLE>
<CAPTION>
CLASS I CHANGE 11/30/98 5/31/98
- ------- ------ -------- -------
<S> <C> <C> <C>
Net Asset Value +$0.18 $10.83 $10.65
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTIONS
-------------
<S> <C>
Dividend Income $0.30
</TABLE>
<TABLE>
<CAPTION>
CLASS II CHANGE 11/30/98 5/31/98
- -------- ------ -------- -------
<S> <C> <C> <C>
Net Asset Value +$0.18 $10.86 $10.68
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTIONS
-------------
<S> <C>
Dividend Income $0.2678
</TABLE>
Past performance is not predictive of future results.
16
<PAGE>
PERFORMANCE
<TABLE>
<CAPTION>
SINCE
INCEPTION
CLASS I 1-YEAR 5-YEAR (5/3/93)
- ------- ------ ------ --------
<S> <C> <C> <C>
Cumulative Total Return(1) +8.86% +44.67% +51.81%
Average Annual Total Return(2) +4.21% + 6.73% + 6.94%
Distribution Rate(3) 4.99%
Taxable Equivalent Distribution Rate(4) 9.11%
30-Day Standardized Yield(5) 4.76%
Taxable Equivalent Yield(4) 8.69%
</TABLE>
<TABLE>
<CAPTION>
SINCE
INCEPTION
CLASS II 1-YEAR (5/1/96)
- -------- ------ --------
<S> <C> <C>
Cumulative Total Return(1) +8.28% +27.28%
Average Annual Total Return(2) +6.17% + 9.36%
Distribution Rate(3) 4.76%
Taxable Equivalent Distribution Rate(4) 8.69%
30-Day Standardized Yield(5) 4.38%
Taxable Equivalent Yield(4) 8.00%
</TABLE>
(1). Cumulative total return represents the change in value of an investment
over the periods indicated and does not include sales charges.
(2). Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes the current,
applicable, maximum sales charge(s) for that class.
(3). Distribution rate is based on an annualization of the respective class's
current monthly dividend and the maximum offering price per share on November
30, 1998.
(4). Taxable equivalent distribution rate and yield assume the 1998 maximum
combined federal and California personal income tax bracket of 45.2%, based on
the federal income tax rate of 39.6%.
(5). Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended November 30, 1998.
Bond prices, and thus the fund's share price, generally move in the opposite
direction from interest rates. Since markets can go down as well as up,
investment return and principal value will fluctuate with market conditions, and
you may have a gain or loss when you sell your shares.
Past performance is not predictive of future results.
17
<PAGE>
FRANKLIN HAWAII
MUNICIPAL BOND FUND
Your Fund's Goal: Franklin Hawaii Municipal Bond Fund seeks to provide high,
current income exempt from regular federal and Hawaii state personal income
taxes while seeking preservation of capital by investing primarily in a
portfolio of Hawaii municipal securities.(1)
STATE UPDATE
Tourism, the driving force behind the state economy, presently accounts for 25%
of the gross state product and six out of every 10 jobs. It remains one of the
key factors in stimulating the other sectors of the local economy such as
construction, lodging and retail sales. Hawaii currently derives a majority of
its tourism customer base from two sources, California and Japan. Although many
Californians chose to vacation in Hawaii during the reporting period, Japan's
long-term anemic economic performance, exacerbated by the Asian financial crisis
and the yen's depreciation, kept Japanese tourism to the Aloha State at its
lowest levels since 1991.
CREDIT QUALITY BREAKDOWN
Franklin Hawaii Municipal Bond Fund
Based on Total Long-Term Investments*
11/30/98
[PIE CHART]
<TABLE>
<S> <C>
AAA 45.0%
AA 12.3%
A 19.5%
BBB 23.2%
</TABLE>
* Quality breakdown may include internal ratings for bonds not rated by a
national rating agency.
(1). The fund may invest as much as 100% of its assets in bonds that pay
interest subject to federal alternative minimum tax. All or a significant
portion of the income on these obligations may be subject to such tax.
Distributions of capital gains and of ordinary income from accrued market
discount, if any, are generally taxable.
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 52 of
this report.
18
<PAGE>
Compounding woes, rising overall debt levels and successive downward revenue
revisions led Moody's, a national credit rating agency, to downgrade the state's
general obligation debt to A1 from Aa3. At $2,848 per capita, state debt is more
than six times the national median of $422, making Hawaii second only to Alaska
in overall debt burden. That said, Hawaii's debt ratios are difficult to compare
with other states, as many of the roles traditionally left to municipalities,
such as local education, health and welfare, are centralized at the state
level.(2)
The outlook for Hawaii's economy is considered stable and improving. In part,
this is a reflection of dynamic management and political stability during lean
times. Governor Ben Cayetano, recently re-elected, took advantage of the
current, low interest-rate environment and refunded some of the state's
high-cost debt. The Economic Revitalization Task Force further identified
several aggressive options, including stimulus packages and a cut in the income
tax rate in 1999. In addition, the 50,000 military personnel stationed in Hawaii
somewhat counterbalanced the state's deteriorating economic fundamentals.
Geographically strategic to the nation's defense, Hawaii's large military
presence is, for the most part, immune to the wholesale base closures that
affected the rest of the country during the past several years and should
continue to be a steadying influence to the state's economy.(2)
DIVIDEND DISTRIBUTIONS*
Franklin Hawaii
Municipal Bond Fund - Class I
6/1/98 - 11/30/98
<TABLE>
<CAPTION>
DIVIDEND
MONTH PER SHARE
- ----- ---------
<S> <C>
June 4.9 cents
July 4.9 cents
August 4.9 cents
September 4.9 cents
October 4.9 cents
November 4.9 cents
TOTAL 29.4 CENTS
</TABLE>
*Assumes shares were purchased and held for the entire accrual period. Since
dividends accrue daily, your actual distributions will vary depending on the
date you purchased your shares and any account activity during the month. Income
distributions include all accrued income earned by the fund during the reporting
period.
(2). Source: Moody's Investors Service, State of Hawaii, 4/9/98. This does not
indicate Moody's rating of the fund.
19
<PAGE>
PORTFOLIO BREAKDOWN
Franklin Hawaii
Municipal Bond Fund
11/30/98
<TABLE>
<CAPTION>
% OF TOTAL
LONG-TERM
SECTOR INVESTMENTS
- ------ -----------
<S> <C>
Hospitals 25.8%
Utilities 22.2%
Transportation 17.2%
Prerefunded 9.6%
Housing 8.7%
General Obligation 7.6%
Other Revenue 4.1%
Certificates of Participation 3.8%
Industrial 1.0%
</TABLE>
PORTFOLIO NOTES
In spite of the recent state downgrades, the demand for Hawaii municipal bonds
still remains relatively strong, primarily due to the limited supply of issuance
in the state. In times like these, we may purchase Puerto Rico municipal bonds,
as they also offer tax-free income in many states including Hawaii. During the
reporting period, we increased our holdings of AAA-rated bonds to 45.0% of total
long-term investments on November 30, 1998, compared with 44.7% from May 31,
1998. Purchases for the fund during the period included Maui County General
Obligation; Hawaii State Department of Budget and Finance Special Purpose
Revenue, Queens Health System; and Puerto Rico Industrial Tourist, Medical and
Environmental Facilities, Guaynabo Warehouse.
Our investment strategy remains consistent. We strive to provide shareholders
with a relatively high level of tax-free income and preservation of principal.
20
<PAGE>
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of November 30, 1998, the end of the reporting period. However,
market and economic conditions are changing constantly, which can be expected to
affect our strategies and the fund's portfolio composition. Although historical
performance is no guarantee of future results, these insights may help you
understand our investment and management philosophy.
21
<PAGE>
FRANKLIN HAWAII
MUNICIPAL BOND FUND
CLASS I:
Subject to the current, maximum 4.25% initial sales charge. Prior to July 1,
1994, fund shares were offered at a higher initial sales charge; thus actual
returns would have been lower. The fund's manager agreed in advance to waive a
portion of its management fees, which reduces operating expenses and increases
distribution rate, yield and total return to shareholders. Without this waiver,
the fund's distribution rate and total return would have been lower, and yield
for the period would have been 3.76%. The fee waiver may be discontinued at any
time upon notice to the fund's Board of Trustees.
PERFORMANCE SUMMARY AS OF 11/30/98
Distributions will vary based on earnings of the fund's portfolio and any
profits realized from the sale of the portfolio's securities. Past distributions
are not indicative of future trends. All total returns include reinvested
distributions at net asset value.
PRICE AND DISTRIBUTION INFORMATION (6/1/98-11/30/98)
<TABLE>
<CAPTION>
CLASS I CHANGE 11/30/98 5/31/98
- ------- ------ -------- -------
<S> <C> <C> <C>
Net Asset Value +$0.13 $ 11.29 $ 11.16
DISTRIBUTIONS
Dividend Income $0.294
</TABLE>
Past performance is not predictive of future results.
22
<PAGE>
PERFORMANCE
<TABLE>
<CAPTION>
SINCE
INCEPTION
CLASS I 1-YEAR 5-YEAR (2/26/92)
- ------- ------ ------ ---------
<S> <C> <C> <C>
Cumulative Total Return(1) +7.24% +35.25% +64.01%
Average Annual Total Return(2) +2.70% + 5.31% + 6.91%
Distribution Rate(3) 4.99%
Taxable Equivalent Distribution Rate(4) 9.18%
30-Day Standardized Yield(5) 4.16%
Taxable Equivalent Yield(4) 7.65%
</TABLE>
(1). Cumulative total return represents the change in value of an investment
over the periods indicated and does not include sales charges.
(2). Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes the current,
applicable, maximum sales charge(s) for that class.
(3). Distribution rate is based on an annualization of the current 4.9 cent per
share monthly dividend and the maximum offering price of $11.79 on November 30,
1998.
(4). Taxable equivalent distribution rate and yield assume the 1998 maximum
combined federal and Hawaii State personal income tax bracket of 45.6%, based on
the federal income tax rate of 39.6%.
(5). Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended November 30, 1998.
Bond prices, and thus the fund's share price, generally move in the opposite
direction from interest rates. Since markets can go down as well as up,
investment return and principal value will fluctuate with market conditions, and
you may have a gain or loss when you sell your shares.
Past performance is not predictive of future results.
23
<PAGE>
FRANKLIN TENNESSEE
MUNICIPAL BOND FUND
Your Fund's Goal: Franklin Tennessee Municipal Bond Fund seeks to provide high,
current income exempt from regular federal and Tennessee state personal income
taxes while seeking preservation of capital by investing primarily in a
portfolio of Tennessee municipal securities.(1)
STATE UPDATE
During the six-month period under review, Tennessee's sound economy continued to
expand and diversify. The state added employment in services, trade and durable
manufacturing, which more than made up for losses in the once important textile
and apparel manufacturing industries. The improving auto manufacturing sector
has been a key component of the state's economy throughout the 1990s. In recent
years, Nissan, Peterbilt and Saturn built manufacturing plants in Tennessee,
owing to a skilled workforce and low-cost power available through the Tennessee
Valley Authority.(2) While industrial expansion has in general improved many
state residents' standard of living, it has also left the state vulnerable to
national economic cycles as well as international competition.
CREDIT QUALITY BREAKDOWN
Franklin Tennessee Municipal Bond Fund
Based on Total Long-Term Investments*
11/30/98
[PIE CHART]
<TABLE>
<S> <C>
AAA ................... 52.7%
AA .................... 30.5%
BBB ................... 10.5%
A ..................... 5.4%
BB .................... 0.9%
</TABLE>
*Quality breakdown may include
internal ratings for bonds not rated by a
national rating agency.
(1). The fund may invest as much as 100% of its assets in bonds that pay
interest subject to federal alternative minimum tax. All or a significant
portion of the income on these obligations may be subject to such tax.
Distributions of capital gains and of ordinary income from accrued market
discount, if any, are generally taxable.
(2). Source: Moody's Investors Service, State of Tennessee, 8/10/98.
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 56 of
this report.
24
<PAGE>
Tennessee's strong financial position resulted largely from the state's
conservative financial management. The state's debt burden, at $216 per capita,
is one of the lowest in the nation. Prudent use of debt has resulted in balanced
financial operations. For example, while the state debt service limit is $392
million, currently the service is running at $125 million, only 32% of the
limit.(3)
New-issue bond supply should be moderate, but sufficient. The low debt burden
per capita combined with the growing need for new infrastructure such as
highways, schools and affordable housing should sustain the demand for new
borrowing. If interest rates remain low, refunding issues resulting from lower
borrowing costs available to issuers could add to the new-issue supply.
PORTFOLIO NOTES
For the six months ending November 30, 1998, Franklin Tennessee Municipal Bond
Fund experienced strong asset growth. The fund's total net assets increased 30%,
from $44.5 million on May 31, 1998, to $58.1 million at the end of the reporting
period. The fund strives to always remain fully invested and seeks investments
in tax-exempt municipal securities with good call protection, in an effort to
keep within its stated objective of providing long-term income to shareholders.
As a result, the fund boasts excellent call protection with a weighted average
life to first call of more than eight years.
PORTFOLIO BREAKDOWN
Franklin Tennessee
Municipal Bond Fund
11/30/98
<TABLE>
<CAPTION>
% OF TOTAL
LONG-TERM
SECTOR INVESTMENTS
- ------ -----------
<S> <C>
Hospitals 24.1%
Utilities 23.3%
Housing 10.3%
General Obligation 8.8%
Prerefunded 7.9%
Education 7.7%
Industrial 7.5%
Other Revenue 5.3%
Transportation 2.9%
Certificates of Participation 2.2%
</TABLE>
(3). Source: Standard & Poor's CreditWeek Municipal, Tennessee, 5/11/98.
25
<PAGE>
DIVIDEND DISTRIBUTIONS*
Franklin Tennessee
Municipal Bond Fund - Class I
6/1/98 - 11/30/98
<TABLE>
<CAPTION>
DIVIDEND
MONTH PER SHARE
- ----- ---------
<S> <C>
June 4.7 cents
July 4.7 cents
August 4.7 cents
September 4.6 cents
October 4.6 cents
November 4.6 cents
Total 27.9 cents
</TABLE>
We closely monitor the supply of Tennessee tax-exempt municipal bonds. For the
first nine months of 1998, the state issued a total of $3.8 billion of new
bonds, a 106.1% increase from the first nine months of 1997. Noteworthy
positions added to the portfolio during the reporting period included Harpeth
Valley Utilities District Improvement Revenue; Knoxville Electric Revenue
Refunding and Improvement Systems and Johnson City Health and Educational
Facilities Board, Johnson City Medical Center.
We continue to maintain broad sector diversification in the portfolio holdings.
Such diversification helps us reduce the fund's exposure to risk and volatility
that may affect any one sector. In addition, the fund's superior credit quality,
with 80% of the portfolio invested in bonds rated AA or higher, further
increases the fund's stability. As a result, Franklin Tennessee Municipal Bond
Fund performed strongly for the period, resulting in a 4.63% distribution rate.
Looking forward, we will continue to follow our investment strategy of investing
for income, price stability and tax efficiency. We intend to maintain our
fiscally responsible management style by avoiding interest-rate speculation and
the use of derivatives. The fund should perform well into the next reporting
period, aided by stable interest rates and ample supply of new bonds.
*Assumes shares were purchased and held for the entire accrual period. Since
dividends accrue daily, your actual distributions will vary depending on the
date you purchased your shares and any account activity during the month. Income
distributions include all accrued income earned by the fund during the reporting
period.
26
<PAGE>
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of November 30, 1998, the end of the reporting period. However,
market and economic conditions are changing constantly, which can be expected to
affect our strategies and the fund's portfolio composition. Although historical
performance is no guarantee of future results, these insights may help you
understand our investment and management philosophy.
27
<PAGE>
FRANKLIN TENNESSEE
MUNICIPAL BOND FUND
CLASS I:
Subject to the maximum 4.25% initial sales charge. The fund's manager agreed in
advance to waive a portion of its management fees, which reduces operating
expenses and increases distribution rate, yield and total return to
shareholders. Without this waiver, the fund's distribution rate and total return
would have been lower, and yield for the period would have been 3.97%. The fee
waiver may be discontinued at any time upon notice to the fund's Board of
Trustees.
PERFORMANCE SUMMARY AS OF 11/30/98
Distributions will vary based on earnings of the fund's portfolio and any
profits realized from the sale of the portfolio's securities. Past distributions
are not indicative of future trends. All total returns include reinvested
distributions at net asset value.
PRICE AND DISTRIBUTION INFORMATION (6/1/98-11/30/98)
<TABLE>
<CAPTION>
CLASS I CHANGE 11/30/98 5/31/98
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value +$0.15 $11.42 $11.27
DISTRIBUTIONS
-----------------------------------------------------
Dividend Income $0.279
</TABLE>
Past performance is not predictive of future results.
28
<PAGE>
PERFORMANCE
<TABLE>
<CAPTION>
SINCE
INCEPTION
CLASS I 1-YEAR 3-YEAR (5/10/94)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) +8.23% +24.72% +44.28%
Average Annual Total Return(2) +3.65% +6.09% +7.35%
Distribution Rate(3) 4.63%
Taxable Equivalent Distribution Rate(4) 8.15%
30-Day Standardized Yield(5) 4.35%
Taxable Equivalent Yield(4) 7.66%
</TABLE>
(1). Cumulative total return represents the change in value of an investment
over the periods indicated and does not include sales charges.
(2). Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes the applicable, maximum
sales charge(s) for that class.
(3). Distribution rate is based on an annualization of the current 4.6 cent per
share monthly dividend and the maximum offering price of $11.93 on November 30,
1998.
(4). Taxable equivalent distribution rate and yield assume the 1998 maximum
combined federal and Tennessee state personal income tax bracket of 43.2%, based
on the federal income tax rate of 39.6%.
(5). Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended November 30, 1998.
Bond prices, and thus the fund's share price, generally move in the opposite
direction from interest rates. Since markets can go down as well as up,
investment return and principal value will fluctuate with market conditions, and
you may have a gain or loss when you sell your shares.
Past performance is not predictive of future results.
29
<PAGE>
CREDIT QUALITY BREAKDOWN
Franklin Washington Municipal Bond Fund
Based on Total Long-Term Investments*
11/30/98
<TABLE>
<S> <C>
AAA ..................... 60.2%
AA ...................... 21.6%
A ....................... 12.0%
BBB ..................... 6.2%
</TABLE>
*Quality breakdown may include
internal ratings for bonds not rated by a
national rating agency.
FRANKLIN WASHINGTON
MUNICIPAL BOND FUND
Your Fund's Goal: Franklin Washington Municipal Bond Fund seeks to provide high,
current income exempt from regular federal income tax while seeking preservation
of capital by investing primarily in a portfolio of Washington municipal
securities.(1)
STATE UPDATE
Washington's escalating population growth and ongoing economic restructuring led
to the state's improved economic condition during the six months under review.
Broad diversification helped buffer this formerly one-dimensional,
aerospace-oriented economy from the Asian financial woes affecting many Pacific
Northwest states. For instance, Microsoft's market capitalization leaves the
software giant ranked as one of the largest companies in the world. Still,
Washington is not immune from international forces, as more than half of the
state's exports are destined for Asia.(2)
(1). The fund may invest as much as 100% of its assets in bonds that pay
interest subject to federal alternative minimum tax. All or a significant
portion of the income on these obligations may be subject to such tax.
Distributions of capital gains and of ordinary income from accrued market
discount, if any, are generally taxable.
(2). Source: Fitch IBCA, State of Washington, 8/28/98.
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 60 of
this report.
30
<PAGE>
The diversified economic base and above-average economic growth trends bolstered
the state's financial status. During the reporting period, Washington enjoyed
Aa3 and AA+ ratings, from Moody's and Standard & Poor's, respectively, two
national credit rating agencies. Conservative fiscal management, enforced by
Initiative 601 which places limits on tax and spending increases, kept the
budget in check. The debt burden, at $1,375 per capita, is about three times the
national average of $422; however, this represents a disproportionately small
4.6% of personal income in this relatively wealthy state. Meanwhile, record low
unemployment and population growth support forecasts by Moody's that the state
is poised for continued growth through fiscal 2001.(3)
DIVIDEND DISTRIBUTIONS*
Franklin Washington
Municipal Bond Fund - Class I
6/1/98 - 11/30/98
<TABLE>
<CAPTION>
DIVIDEND
MONTH PER SHARE
- ------------------------------
<S> <C>
June 4.9 cents
July 4.9 cents
August 4.9 cents
September 4.9 cents
October 4.9 cents
November 4.9 cents
- ------------------------------
TOTAL 29.4 CENTS
</TABLE>
*Assumes shares were purchased and held for the entire accrual period. Since
dividends accrue daily, your actual distributions will vary depending on the
date you purchased your shares and any account activity during the month. Income
distributions include all accrued income earned by the fund during the reporting
period.
3. Source: Moody's Investor Service, State of Washington, 7/2/98. This does not
indicate Moody's or Standard & Poor's ratings of the fund.
31
<PAGE>
PORTFOLIO BREAKDOWN
Franklin Washington
Municipal Bond Fund
11/30/98
<TABLE>
<CAPTION>
% OF TOTAL
LONG-TERM
SECTOR INVESTMENTS
- -----------------------------------------------------
<S> <C>
Utilities 31.6%
General Obligation 16.6%
Housing 12.4%
Industrial 10.7%
Hospitals 10.2%
Education 9.7%
Prerefunded 6.2%
Transportation 1.7%
Certificates of Participation 0.9%
</TABLE>
PORTFOLIO NOTES
In our opinion, Washington offered attractive buying opportunities in the
state's municipal bond market, allowing us to purchase bonds that not only
provided strong income sources, but also improved the fund's credit quality.
During the period, we increased our holdings of AAA-rated bonds to 60.2% of
total long-term investments on November 30, 1998, compared with 52.4% on May 31,
1998. Recent purchases included Seattle Water Systems Revenue, FGIC insured;
Washington State Health Care Facilities Authority Revenue-Childrens Hospital and
Regional Medical Center, FSA insured; and Washington State Health Care
Facilities Authority Revenue-Multicare Health Systems, MBIA insured.
Going forward, we will continue to manage the fund with the primary intentions
of maintaining its competitive yield and protecting its share value. We
anticipate further economic growth in Washington, rather mild inflation and
relatively stable interest rates. Under such circumstances, we believe the fund
is positioned for positive performance.
32
<PAGE>
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of November 30, 1998, the end of the reporting period. However,
market and economic conditions are changing constantly, which can be expected to
affect our strategies and the fund's portfolio composition. Although historical
performance is no guarantee of future results, these insights may help you
understand our investment and management philosophy.
33
<PAGE>
FRANKLIN WASHINGTON
MUNICIPAL BOND FUND
CLASS I:
Subject to the current, maximum 4.25% initial sales charge. Prior to July 1,
1994, fund shares were offered at a higher initial sales charge; thus actual
returns would have been lower. The fund's manager agreed in advance to waive a
portion of its management fees, which reduces operating expenses and increases
distribution rate, yield and total return to shareholders. Without this waiver,
the fund's distribution rate and total return would have been lower, and yield
for the period would have been 3.73%. The fee waiver may be discontinued at any
time upon notice to the fund's Board of Trustees.
PERFORMANCE SUMMARY AS OF 11/30/98
Distributions will vary based on earnings of the fund's portfolio and any
profits realized from the sale of the portfolio's securities. Past distributions
are not indicative of future trends. All total returns include reinvested
distributions at net asset value.
PRICE AND DISTRIBUTION INFORMATION (6/1/98-11/30/98)
<TABLE>
<CAPTION>
CLASS I CHANGE 11/30/98 5/31/98
- ---------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value +$0.12 $10.60 $10.48
DISTRIBUTIONS
- ---------------------------------------------------------------
Dividend Income $0.294
</TABLE>
Past performance is not predictive of future results.
34
<PAGE>
PERFORMANCE
<TABLE>
<CAPTION>
SINCE
INCEPTION
CLASS I 1-YEAR 5-YEAR (5/3/93)
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) +8.23% +38.35% +44.21%
Average Annual Total Return(2) +3.63% +5.79% +5.96%
Distribution Rate(3) 5.31%
Taxable Equivalent Distribution Rate(4) 8.79%
30-Day Standardized Yield(5) 4.47%
Taxable Equivalent Yield(4) 7.40%
</TABLE>
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the current, applicable,
maximum sales charge(s) for that class.
3. Distribution rate is based on an annualization of the current 4.9 cent per
share monthly dividend and the maximum offering price of $11.07 on November 30,
1998.
4. Taxable equivalent distribution rate and yield assume the maximum federal
income tax rate of 39.6%.
5. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended November 30, 1998.
Bond prices, and thus the fund's share price, generally move in the opposite
direction from interest rates. Since markets can go down as well as up,
investment return and principal value will fluctuate with market conditions, and
you may have a gain or loss when you sell your shares.
Bond prices, and thus the fund's share price, generally move in the opposite
direction from interest rates. Since markets can go down as well as up,
investment return and principal value will fluctuate with market conditions, and
you may have a gain or loss when you sell your shares.
35
Past performance is not predictive of future results.
<PAGE>
MUNICIPAL BOND RATINGS
MOODY'S
Aaa: Best quality. They carry the smallest degree of investment risk and
generally are referred to as "gilt-edged." Interest payments are protected by a
large or exceptionally stable margin, and principal is secure. Although the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
Aa: High quality by all standards. Together with the Aaa group, they comprise
what generally are known as high-grade bonds. Aa bonds are rated lower than Aaa
because margins of protection may not be as large, fluctuation of protective
elements may be of greater amplitude, or there may be other elements which make
the long-term risks appear larger.
A: Possess many favorable investment attributes and are considered upper
medium-grade obligations. Factors giving security to principal and interest are
considered adequate, but elements may be present which suggest a susceptibility
to impairment sometime in the future.
Baa: Medium-grade obligations, i.e., they are neither highly protected nor
poorly secured. Interest payments and principal security appear adequate for the
present, but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time.
36
<PAGE>
Ba: Contain speculative elements. Often the protection of interest and principal
payments may be very moderate and, thereby, not well safeguarded during both
good and bad times over the future. Uncertainty of position characterizes bonds
in this class.
B: Generally lack characteristics of the desirable investment. Assurance of
interest and principal payments or of maintenance of other terms of the contract
over any long period of time may be small.
Caa: Poor standing. Such issues may be in default, or elements of danger with
respect to principal or interest may be present.
Ca: Obligations that are highly speculative. Such issues are often in default or
have other marked shortcomings.
C: Lowest-rated class of bonds. Issues rated C can be regarded as having
extremely poor prospects of ever attaining any real investment standing.
S&P(R)
AAA: The highest rating assigned by S&P to a debt obligation and indicates the
ultimate degree of protection as to principal and interest.
AA: Also qualify as high-grade obligations, and, in the majority of instances,
differ from AAA issues only in a small degree.
A: Generally regarded as upper medium-grade. They have considerable investment
strength but are not entirely free from adverse effects of changes in economic
and trade conditions. Interest and principal are regarded as safe.
BBB: Regarded as having an adequate capacity to pay principal and interest.
Whereas they normally exhibit adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a weakened
capacity to pay principal and interest for bonds in this category than for bonds
in the A category.
37
<PAGE>
BB, B, CCC, CC: Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds likely will have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C: Reserved for income bonds on which no interest is being paid.
D: Debt rated "D" is in default and payment of interest and/or repayment of
principal is in arrears.
38
<PAGE>
FRANKLIN MUNICIPAL SECURITIES TRUST
Financial Highlights
FRANKLIN ARKANSAS MUNICIPAL BOND FUND
<TABLE>
<CAPTION>
CLASS I
--------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED MAY 31,
NOVEMBER 30, 1998 ----------------------------------------------------------------
(UNAUDITED) 1998 1997 1996 1995 1994+
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ........ $ 10.99 $ 10.51 $ 10.21 $ 10.32 $ 10.06 $ 10.00
---------- ---------- ---------- ---------- ---------- ----------
Income from investment operations:
Net investment income ...................... .29 .56 .58 .55 .51 .01
Net realized and unrealized gains (losses) . .07 .50 .31 (.08) .19 .05
---------- ---------- ---------- ---------- ---------- ----------
Total from investment operations ............ .36 1.06 .89 .47 .70 .06
---------- ---------- ---------- ---------- ---------- ----------
Less distributions from net investment income (.29) (.58) (.59) (.58) (.44) --
---------- ---------- ---------- ---------- ---------- ----------
Net asset value, end of period .............. $ 11.06 $ 10.99 $ 10.51 $ 10.21 $ 10.32 $ 10.06
========== ========== ========== ========== ========== ==========
Total return* ............................... 3.23% 10.31% 8.90% 4.65% 7.27% .60%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ........... $ 39,701 $ 30,377 $ 13,140 $ 8,166 $ 4,134 $ 2,213
Ratios to average net assets:
Expenses ................................... .10%** .10% .10% .10% .10% .03%**
Expenses excluding waiver and payments
by affiliate ............................... .80%** .83% .87% 1.04% 1.11% 1.20%**
Net investment income ...................... 5.22%** 5.30% 5.71% 5.69% 5.64% 2.00%**
Portfolio turnover rate ..................... 3.58% 18.75% 6.61% 19.22% 77.63% --
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
**Annualized
+For the period May 10, 1994 (effective date) to May 31, 1994.
See notes to financial statements.
39
<PAGE>
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, NOVEMBER 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN ARKANSAS MUNICIPAL BOND FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS 90.5%
Arkansas GO, Waste Disposal and Pollution, Refunding, Series B, 6.25%, 7/01/20 ...................... $ 130,000 $ 137,787
Arkansas State Development Finance Authority,
Drivers License Revenue, State Police Headquarters, Wireless Data, FGIC Insured, 5.40%, 6/01/18 .. 950,000 988,703
HMR, Series B-1, 5.80%, 1/01/23 .................................................................. 495,000 511,983
SFMR, MBS Program, 5.375%, 7/01/30 ............................................................... 560,000 565,023
SFMR, MBS Program, Series B, 6.10%, 1/01/29 ...................................................... 1,000,000 1,050,630
SFMR, MBS Program, Series D, 6.85%, 1/01/27 ...................................................... 110,000 119,193
Waste Water System Revenue, Revolving Loan Fund, Series A, 5.85%, 12/01/19 ....................... 1,000,000 1,058,210
Arkansas State Student Loan Authority Revenue, Refunding, Sub Series B,
6.25%, 6/01/10 ................................................................................... 500,000 536,485
5.60%, 6/01/14 ................................................................................... 325,000 331,042
Arkansas State Water Resources Development,
Series A, 5.70%, 7/01/26 ......................................................................... 560,000 580,647
Series B, 5.75%, 7/01/25 ......................................................................... 300,000 316,938
Blytheville Solid Waste Recycling and Sewage Treatment Revenue, Nucor Corp. Project, 6.375%, 1/01/23 100,000 107,491
Camden Environmental Improvement Revenue, International Paper Co. Project, Series A, 7.625%, 11/01/18 250,000 291,285
Conway Public Facilities Board, Capital Improvement Revenue, Hendrix College Project, 6.00%, 10/01/26 500,000 524,755
Conway Sales and Use Tax Revenue, Capital Improvement, Series A, FSA Insured, 5.35%, 12/01/17 ....... 1,975,000 2,069,761
Fort Smith Water and Sewer Revenue, Refunding and Construction, MBIA Insured, 6.00%, 10/01/12 ....... 130,000 143,475
Fouke School District No. 15, Refunding and Construction, MBIA Insured, Pre-Refunded, 6.60%, 4/01/19 130,000 147,064
Greenland School District No. 95, Washington County, Refunding and Construction, MBIA Insured,
6.50%, 5/01/13 ...................................................................................... 115,000 119,447
Guam Airport Authority Revenue, Series B, 6.60%, 10/01/10 ........................................... 125,000 137,481
Guam Power Authority Revenue, Series A, 5.25%, 10/01/23 ............................................. 200,000 200,440
Gurdon PCR, International Paper Co. Project, Refunding, Series A, 5.375%, 3/01/20 ................... 2,160,000 2,175,228
Jefferson County PCR,
Arkansas Power and Light Co. Project, Refunding, 6.30%, 6/01/18 .................................. 400,000 432,620
Entergy Arkansas Inc. Project, Refunding, 5.60%, 10/01/17 ........................................ 2,900,000 2,944,167
Jonesboro City Water and Light Plant, Public Utilities System Revenue,
MBIA Insured, 5.40%, 11/15/13 .................................................................... 100,000 107,402
Refunding, AMBAC Insured, 5.25%, 12/01/13 ........................................................ 200,000 207,276
Jonesboro Residential Housing and Health Care Facilities Board, Hospital Revenue, St. Bernard's
Regional Medical Center, Refunding, Series B, AMBAC Insured, 5.90%, 7/01/16 ......................... 450,000 491,913
Little River County Revenue, Georgia-Pacific Corp. Project, Refunding, 5.60%, 10/01/26 .............. 3,000,000 3,002,160
Little Rock Capital Improvement, Refunding, 6.30%, 2/01/09 .......................................... 140,000 143,947
Little Rock Capital Improvement Revenue, Infrastructure Improvements, Series A, AMBAC Insured,
5.00%, 10/01/19 ..................................................................................... 1,000,000 993,530
Little Rock Municipal Airport Revenue, Refunding, MBIA Insured, 6.00%, 11/01/14 ..................... 130,000 138,112
Little Rock School District GO, Refunding, 6.25%, 12/01/07 .......................................... 120,000 121,415
FSA Insured, 5.60%, 1/01/20 ...................................................................... 100,000 102,095
Little Rock Waste Disposal Revenue, 5.80%, 5/01/16 .................................................. 440,000 464,015
North Little Rock Health Facilities Board, Health Care Revenue,
Baptist Health Facility, Series A, MBIA Insured, 5.50%, 12/01/21 .................................... 800,000 839,920
Paragould Hospital Revenue, 6.375%, 10/01/17 ........................................................ 400,000 435,224
Pine Bluff Environmental Improvement Revenue, International Paper Co. Project, 5.55%, 11/01/22 ...... 500,000 503,225
Pope County PCR, Arkansas Power and Light Co. Project, Refunding, 6.30%, 11/01/20 ................... 500,000 521,710
Puerto Rico Commonwealth GO,
AMBAC Insured, 5.40%, 7/01/25 .................................................................... 250,000 260,230
Pre-Refunded, 6.50%, 7/01/23 ..................................................................... 250,000 285,993
Public Improvement, Refunding, 5.75%, 7/01/17 .................................................... 250,000 269,025
</TABLE>
40
<PAGE>
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, NOVEMBER 30, 1998 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN ARKANSAS MUNICIPAL BOND FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
Puerto Rico Commonwealth Highway and Transportation Authority Revenue,
Series A, 5.00%, 7/01/38 ................................................................. $ 3,000,000 $ 2,954,100
Series Y, 5.50%, 7/01/26 ................................................................. 350,000 365,614
Puerto Rico Commonwealth Highway Authority Highway Revenue, Series Q,
Pre-Refunded, 6.00%, 7/01/20 ............................................................... 165,000 171,531
Puerto Rico Electric Power Authority Revenue,
Refunding, Series X, 5.50%, 7/01/25 ...................................................... 200,000 206,104
Series R, Pre-Refunded, 6.25%, 7/01/17 ................................................... 175,000 192,122
Series T, 5.50%, 7/01/20 ................................................................. 400,000 413,940
Puerto Rico Housing Bank and Financing Authority SFMR,
Affordable Housing Mortgage, First Portfolio, 6.25%, 4/01/29 ............................. 135,000 144,470
Puerto Rico Industrial, Tourist, Educational, Medical and Environmental Control
Facilities Financing Authority, Industrial Revenue, Teacher's Retirement
System Revenue, Series B, 5.50%, 7/01/21 ................................................. 250,000 259,990
Pulaski County Health Facilities Board Revenue, Nazareth Sisters of
Charity, St. Vincent's Infirmary, Refunding, MBIA Insured, 6.05%, 11/01/09 ................. 125,000 145,666
Pulaski County Public Facilities Board,
MFR, South Oaks Apartments, Refunding, Series A, GNMA Secured, 6.50%, 10/20/29 ........... 600,000 644,118
Mortgage, College Projects, Refunding, Series A, GNMA Secured, 5.55%, 6/20/27 ............ 1,300,000 1,326,013
Saline County Hospital Revenue, Refunding, Connie Lee Insured, 6.00%, 9/01/19 ............... 700,000 760,977
Saline County Retirement Housing and Healthcare Facilities Board Revenue,
Refunding, AMBAC Insured, 5.80%, 6/01/11 ................................................. 195,000 212,638
Sebastian County, Community Junior College District, Refunding and
Improvement, AMBAC Insured, 5.60%, 4/01/17 ................................................. 600,000 645,186
Texarkana Public Facilities Board, Waterworks Facilities Revenue,
Refunding, FGIC Insured, 5.40%, 9/01/15 .................................................... 200,000 210,662
University of Arkansas Revenues, Various Facilities, Fayetteville Campus,
5.25%, 11/01/17 .......................................................................... 300,000 304,680
5.30%, 11/01/17 .......................................................................... 340,000 347,140
University of Central Arkansas Revenue, Athletic Facilities,
Series C, AMBAC Insured, 6.125%, 4/01/26 ................................................. 375,000 414,098
University of Puerto Rico, University System Revenues, Series M, MBIA Insured, 5.25%, 6/01/25 285,000 292,262
University of Southern Arkansas, Student Fees, MBIA Insured, 6.00%, 10/01/13 ................ 125,000 129,400
Virgin Islands Public Finance Authority Revenue, Senior Lien, Fund Loan Notes, Refunding,
Series A, 5.50%, 10/01/18 ................................................................ 1,400,000 1,421,797
-----------
TOTAL LONG TERM INVESTMENTS (COST $34,608,691) ............................................... 35,939,555
-----------
(a) SHORT TERM INVESTMENTS 6.8%
Arkansas State Development Finance Authority, Higher Education,
Capital Asset, Series A, FGIC Insured, Weekly VRDN and Put, 3.15%, 12/01/15 ................ 600,000 600,000
Clark County, Solid Waste Disposal Revenue, Reynolds Metals Co. Project,
Weekly VRDN and Put, 3.25%, 8/01/22 ........................................................ 100,000 100,000
Puerto Rico Commonwealth Highway and Transportation Authority,
Transportation Revenue, Series A, AMBAC Insured, Weekly VRDN and Put, 2.75%, 7/01/28 ....... 1,800,000 1,800,000
University of Arkansas Revenues, Various Facilities, UAMS Campus,
Refunding, Weekly VRDN and Put, 3.15%, 12/01/19 ............................................ 200,000 200,000
-----------
TOTAL SHORT TERM INVESTMENTS (COST $2,700,000) .............................................. 2,700,000
-----------
TOTAL INVESTMENTS (COST $37,308,691) 97.3% .................................................. 38,639,555
OTHER ASSETS, LESS LIABILITIES 2.7% ......................................................... 1,061,058
-----------
NET ASSETS 100.0% ........................................................................... $39,700,613
===========
</TABLE>
See Glossary of Terms on page 62.
(a) Variable rate demand notes (VRDNs) are tax-exempt obligations which contain
a floating or variable interest rate adjustment formula and an unconditional
right of demand to receive payment of the principal balance plus accrued
interest at specified dates.
See notes to financial statements.
41
<PAGE>
FRANKLIN MUNICIPAL SECURITIES TRUST
Financial Highlights
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND
<TABLE>
<CAPTION>
CLASS I
-----------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED MAY 31,
NOVEMBER 30, 1998 -------------------------------------------------------------------
(UNAUDITED) 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ...... $ 10.65 $ 10.10 $ 9.81 $ 9.93 $ 9.73 $ 9.97
----------- ----------- ----------- ----------- ----------- -----------
Income from investment operations:
Net investment income .................... .29 .62 .63 .64 .66 .53
Net realized and unrealized gains (losses) .19 .55 .29 (.10) .18 (.20)
----------- ----------- ----------- ----------- ----------- -----------
Total from investment operations .......... .48 1.17 .92 .54 .84 .33
----------- ----------- ----------- ----------- ----------- -----------
Less distributions from:
Net investment income .................... (.29) (.62) (.63)++ (.66) (.64) (.56)
In excess of net investment income ....... (.01) -- -- -- -- --
Net realized gains ....................... -- -- -- -- -- (.01)
----------- ----------- ----------- ----------- ----------- -----------
Total distributions ....................... (.30) (.62) (.63) (.66) (.64) (.57)
----------- ----------- ----------- ----------- ----------- -----------
Net asset value, end of period ............ $ 10.83 $ 10.65 $ 10.10 $ 9.81 $ 9.93 $ 9.73
=========== =========== =========== =========== =========== ===========
Total return* ............................. 4.58% 11.78% 9.64% 5.55% 9.08% 3.22%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ......... $ 511,420 $ 412,211 $ 213,396 $ 118,313 $ 51,102 $ 31,938
Ratios to average net assets:
Expenses ................................. .42%** .35% .34% .35% .20% .07%
Expenses excluding waiver and payments
by affiliate ........................... .64%** .69% .75% .81% .88% .87%
Net investment income .................... 5.38%** 5.81% 6.24% 6.49% 6.89% 6.14%
Portfolio turnover rate ................... 5.13% 37.75% 33.79% 28.02% 57.06% 40.74%
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized. Prior to May 1, 1994, dividends from net
investment income were reinvested at the offering price.
**Annualized
++Includes distributions in excess of net investment income in the amount
of $.001.
42
<PAGE>
FRANKLIN MUNICIPAL SECURITIES TRUST
Financial Highlights (continued)
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND (CONT.)
<TABLE>
<CAPTION>
CLASS II
------------------------------------------------------------
SIX MONTHS ENDED
NOVEMBER 30, 1998 YEAR ENDED MAY 31,
(UNAUDITED) 1998 1997 1996+
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ......................... $ 10.68 $ 10.12 $ 9.82 $ 9.82
--------- --------- --------- ---------
Income from investment operations:
Net investment income ....................................... .26 .56 .57 .05
Net realized and unrealized gains ........................... .19 .56 .30 --
--------- --------- --------- ---------
Total from investment operations ............................. .45 1.12 .87 .05
--------- --------- --------- ---------
Less distributions from:
Net investment income ....................................... (.26) (.56) (.57)++ (.05)
In excess of net investment income .......................... (.01) -- -- --
--------- --------- --------- ---------
Total distributions .......................................... (.27) (.56) (.57) (.05)
--------- --------- --------- ---------
Net asset value, end of period ............................... $ 10.86 $ 10.68 $ 10.12 $ 9.82
========= ========= ========= =========
Total return* ................................................ 4.27% 11.30% 9.08% .54%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ............................ $ 61,404 $ 40,363 $ 10,624 $ 212
Ratios to average net assets:
Expenses .................................................... .97%** .90% .90% .91%**
Expenses excluding waiver and payments by affiliate ......... 1.20%** 1.24% 1.31% 1.81%**
Net investment income ....................................... 4.82%** 5.23% 5.68% 5.73%**
Portfolio turnover rate ...................................... 5.13% 37.75% 33.79% 28.02%
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
**Annualized
+For the period May 1, 1996 (effective date) to May 31, 1996.
++Includes distributions in excess of net investment income in the amount of
$.001.
See notes to financial statements.
43
<PAGE>
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, NOVEMBER 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS 99.2%
ABAG Finance Authority for Nonprofit Corporations, COP,
California Mortgage Insured, 6.15%, 1/01/22 ................................................ $ 1,490,000$ $1,654,243
Rhoda Haas Goldman Plaza, California Mortgage Insured, 5.125%, 5/15/23 ..................... 3,000,000 2,997,840
Adelanto Water Authority Revenue,
Parity Water Systems Acquisition Project, Series A, 7.50%, 9/01/28 ......................... 3,445,000 3,782,438
Subordinated Lien, Water Systems Acquisition Project, Series A, 7.50%, 9/01/28 ............. 2,000,000 2,195,900
Alameda CFD No. 2, Special Tax, 6.125%, 9/01/16 ............................................... 1,240,000 1,295,825
Alameda PFA, Local Agency Revenue, Special Tax, Community Facility District No. 1-A,
6.70%, 8/01/12 ............................................................................. 3,400,000 3,644,358
7.00%, 8/01/19 ............................................................................. 4,015,000 4,408,189
American Canyon Joint Powers Financing Authority, Lease Revenue,
Civic/Recreation Facilities, 6.40%, 6/01/22 .................................................. 1,000,000 1,059,880
Antioch 1915 Act, AD No. 27, Series D, 7.30%, 9/02/13 ......................................... 460,000 474,531
Avenal PFA Revenue, Refunding,
7.00%, 9/02/10 ............................................................................. 1,635,000 1,671,918
7.25%, 9/02/27 ............................................................................. 3,665,000 3,800,092
Beaumont Financing Authority, Local Agency Revenue, Sewer Enterprise Project,
Refunding, Series A, 6.75%, 9/01/25 .......................................................... 5,000,000 5,202,400
Belmont RDA, Tax Allocation, Los Costanos Community Development, Series A, 6.80%, 8/01/24 ..... 1,510,000 1,713,352
Benicia 1915 Act, Fleetside Industrial Park Assessment, Refunding, 7.00%, 9/02/14 ............. 445,000 459,124
Blythe RDA, Project No.1, Tax Allocation, Refunding, 5.80%, 5/01/28 ........................... 1,000,000 1,053,640
Brea Olinda CFD No. 97-1, Special Tax, 5.875%, 9/01/28 ........................................ 1,400,000 1,415,764
Brea Olinda USD, CFD No. 95-1, Special Tax,
5.625%, 9/01/18 ............................................................................ 1,100,000 1,097,943
5.75%, 9/01/28 ............................................................................. 1,300,000 1,304,485
Brentwood 1915 Act, Capital Improvement Finance Program, No. 94-1,
Infrastructure Financing, 5.875%, 9/02/17 .................................................... 775,000 787,733
6.00%, 9/02/27 ............................................................................. 1,000,000 1,029,900
Calexico Special Financing Authority, Sales Tax Revenue, 7.40%,
1/01/99 .................................................................................... 10,000 10,013
1/01/00 .................................................................................... 125,000 127,065
1/01/01 .................................................................................... 165,000 169,470
1/01/02 .................................................................................... 175,000 181,333
1/01/03 .................................................................................... 220,000 229,449
1/01/04 .................................................................................... 235,000 246,172
1/01/05 .................................................................................... 285,000 298,560
1/01/06 .................................................................................... 340,000 356,330
1/01/18 .................................................................................... 7,680,000 8,000,410
California Educational Facilities Authority Revenue,
Los Angeles College of Chiropractic, Refunding, 5.60%, 11/01/17 ............................ 1,500,000 1,562,100
Pooled College and University Projects, Series B, 6.30%, 4/01/21 ........................... 1,000,000 1,119,040
Student Loan Program, Series A, MBIA Insured, 6.00%, 3/01/16 ............................... 4,000,000 4,270,960
California Health Facilities Financing Authority Revenue,
(b) atholic Healthcare West, Series A, 5.00%, 7/01/18 ....................................... 10,000,000 9,876,700
Health Facility Clinic, Series A, California Mortgage Insured, 5.25%, 6/01/23 .............. 2,435,000 2,453,092
Kaiser Permanente, Series A, 5.55%, 8/15/25 ................................................ 3,750,000 3,791,813
Kaiser Permanente, Series A, 5.40%, 5/01/28 ................................................ 5,000,000 5,085,950
Marshall Hospital, Refunding, Series A, 5.25%, 11/01/18 .................................... 3,215,000 3,271,616
</TABLE>
44
<PAGE>
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, NOVEMBER 30, 1998 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
California Health Facilities Financing Authority Revenue, (cont.)
Sacramento Medical Health Facility, Series A, California Mortgage Insured, 5.25%, 5/01/21 ...... $ 2,320,000 $ 2,338,398
Thessalonika Family, Series A, MBIA Insured, 6.20%, 12/01/15 ................................... 990,000 1,097,593
California HFA Revenue, Home Mortgage,
MFHR, Series B, AMBAC Insured, 6.15%, 8/01/22 .................................................. 5,000,000 5,348,900
Series B, 7.125%, 2/01/26 ...................................................................... 765,000 792,815
Series D, Pre-Refunded, 7.50%, 8/01/20 ......................................................... 1,800,000 1,953,666
Series F-1, 7.00%, 8/01/26 ..................................................................... 1,795,000 1,920,650
Series H, 6.25%, 8/01/27 ....................................................................... 2,475,000 2,641,122
Series R, MBIA Insured, 6.15%, 8/01/27 ......................................................... 3,285,000 3,485,155
California PCFA Revenue,
PG&E Corp., Series B, 5.85%, 12/01/23 .......................................................... 5,000,000 5,242,250
Southern California Edison Co., Series B, 6.40%, 12/01/24 ...................................... 2,000,000 2,196,460
California PCFA, Solid Waste Disposal Revenue, Browning-Ferris
Industries, Inc., 6.75%, 9/01/19 ................................................................. 1,000,000 1,113,150
California Special District Association Finance Corp., COP, Series V, 7.50%, 5/01/13 .............. 55,000 59,803
California State GO,
FGIC Insured, 6.00%, 8/01/19 ................................................................... 30,000 33,136
FGIC Insured, Pre-Refunded, 6.00%, 8/01/19 ..................................................... 1,470,000 1,657,013
Veterans Bonds, Series BD, BE, and BF, 6.40%, 2/01/22 .......................................... 1,250,000 1,267,675
Veterans Bonds, Series BH, 5.50%, 12/01/18 ..................................................... 5,000,000 5,151,950
California State HFA, Mortgage Revenue, Series L, MBIA Insured, 6.40%, 8/01/27 .................... 3,000,000 3,213,930
California Statewide CDA, Lease Revenue, Special Facilities,
United Air Lines, Inc., Los Angeles, 5.625%, 10/01/34 ............................................ 26,955,000 27,667,421
California Statewide CDA Revenue, COP,
Auxiliary Organization, California State University Foundation, MBIA Insured, 5.20%, 6/01/24 ..... 7,165,000 7,301,708
CHFCLP Insured, 7.25%, 12/01/22 ................................................................ 1,800,000 2,105,874
Capistrano USD, CFD, Special Tax No. 92-1, Pre-Refunded, 7.00%, 9/01/18 ........................... 1,000,000 1,156,750
Carlsbad 1915 Act, Escrow-AD No. 96-1,
5.50%, 9/02/28 ................................................................................. 4,775,000 4,726,247
5.55%, 9/02/28 ................................................................................. 1,745,000 1,729,766
Central Valley Financing Authority, Cogeneration Project Revenue,
Carson Ice General Project, Refunding, MBIA Insured, 5.00%, 7/01/18 ............................. 1,000,000 1,006,080
Chaffey Community College District, COP, 5.20%, 9/01/23 ........................................... 3,060,000 3,105,472
(b)Clovis 1915 Act, Special Assessment, AD No. 98-1, Temperance, 6.375%, 9/02/18 ................... 1,620,000 1,624,034
Compton Sewer Revenue, Refunding,
5.125%, 9/01/13 ................................................................................ 1,565,000 1,590,447
5.375%, 9/01/23 ................................................................................ 2,000,000 2,025,040
Duarte RDA, Tax Allocation,
Davis Addition Project Area, Refunding, 6.70%, 9/01/14 ......................................... 2,615,000 2,857,044
Davis Addition Project Area, Refunding, 6.90%, 9/01/18 ......................................... 4,120,000 4,515,644
Rancho Duarte Phase I Project Area, Pre-Refunded, 6.80%, 9/01/16 ............................... 805,000 981,263
El Cajon RDA, Tax Allocation, Redevelopment Project, Refunding, AMBAC Insured, 5.35%, 10/01/22 .... 1,000,000 1,028,920
El Monte PFA,
Housing Set Aside Revenue, 5.75%, 6/01/28 ...................................................... 2,570,000 2,570,000
Tax Allocation Revenue, Multiple Redevelopment District No. 86-1,
Series R, 5.75%, 6/01/28 ......................................................................... 6,215,000 6,215,000
Escondido GO, 1915 Act, AD No. 86-1, Refunding, Series R, 5.625%, 9/02/18 .......................... 1,150,000 1,181,073
Fontana RDA, Tax Allocation, Jurupa Hills Redevelopment
Project, Refunding, Series A, 5.50%, 10/01/19 ..................................................... 5,000,000 5,160,250
</TABLE>
45
<PAGE>
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, NOVEMBER 30, 1998 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
Fontana Special Tax,
CFD No. 7, 6.125%, 9/01/28 ..................................................................... $ 1,280,000 $1,318,426
Refunding, Subordinated CFD No. 2, Series B, 5.70%, 9/01/12 .................................... 1,960,000 1,969,996
Foothill/Eastern Transportation Corridor Agency, Toll Road Revenue,
Senior Lien, Series A,
6.50%, 1/01/32 ................................................................................. 5,500,000 6,172,320
6.00%, 1/01/34 ................................................................................. 8,235,000 9,001,596
Garden Grove Housing Authority MFHR, Set-Aside Tax Increment,
Series C, 6.70%, 7/01/24 ......................................................................... 6,375,000 6,786,889
Gateway Improvement Authority Revenue, Marin City CFD, Series A,
Pre-Refunded, 7.75%, 9/01/25 ..................................................................... 2,500,000 3,067,400
Gateway Refinancing Authority Revenue, Refunding, Series A, 5.55%, 9/01/25 ........................ 5,500,000 5,662,965
Granada Sanitation District, 1915 Act, Sewage Treatment Facilities,
Financing District, Series A,
7.125%, 9/02/16 ................................................................................ 940,000 969,591
7.25%, 9/02/22 ................................................................................. 960,000 990,336
Hawaiian Gardens RDA, Project No. 1, Tax Allocation, Refunding, 6.35%, 12/01/33 ................... 4,000,000 4,263,760
Hesperia PFA, Improvement Revenue, Series B, 7.375%, 10/01/23 ..................................... 1,930,000 2,047,383
Hi Desert Memorial Health Care District Revenue, Refunding, 5.50%,
10/01/15 ....................................................................................... 1,000,000 980,570
10/01/19 ....................................................................................... 2,000,000 1,944,300
Huntington Beach PFA Revenue, Huntington Beach Redevelopment Projects, Refunding, 7.00%, 8/01/24 .. 1,000,000 1,057,230
Irvine 1915 Act,
AD No. 94-15, 6.70%, 9/02/20 ................................................................... 2,500,000 2,565,550
AD No. 95-12, Group Three, 5.50%, 9/02/21 ...................................................... 3,000,000 3,010,500
Irvine Meadows Mobile Home Park Revenue, Series A, 5.70%,
3/01/18 ........................................................................................ 2,300,000 2,363,227
3/01/28 ........................................................................................ 5,000,000 5,074,150
Irwindale PFA, Special Tax, CFD No. 1, Refunding, 6.00%, 11/01/20 ................................. 4,450,000 4,514,036
John C. Fremont Hospital District Revenue, California Health Facilities, Insured, 6.75%, 6/01/13 .. 1,500,000 1,696,365
La Mirada RDA, Special Tax, CFD No. 89-1, Refunding, 5.70%, 10/01/20 .............................. 3,025,000 3,068,711
Lake Elsinore 1915 Act, AD No. 93-1, Series A, 7.90%, 9/02/24 ..................................... 1,265,000 1,342,279
Lake Elsinore School Financing Authority Revenue, Refunding, 6.125%, 9/01/19 ...................... 1,000,000 1,070,710
Lancaster RDA, Tax Allocation, Sub-Residential Redevelopment Project,
Subordinated Lien, Refunding, 6.65%, 9/01/27 ..................................................... 2,500,000 2,681,050
Lemon Grove School District, COP, Vista La Mesa Elementary School Construction, 6.40%, 9/01/26 .... 2,000,000 2,114,220
Long Beach IDR, California State University Foundation, Refunding, Series A, 5.25%,
2/01/13 ........................................................................................ 1,000,000 1,026,280
2/01/23 ........................................................................................ 1,000,000 1,004,960
Long Beach Special Tax, CFD No. 2, 7.50%, 9/01/11 ................................................. 140,000 141,189
Los Angeles Harbor Department Revenue, Series B,
6.00%, 8/01/14 ................................................................................. 3,500,000 3,883,285
5.375%, 11/01/23 ............................................................................... 2,465,000 2,526,748
Los Angeles MFR, Refunding, Series J-2C, 8.50%, 1/01/24 ........................................... 1,150,000 1,185,144
Lynwood PFA Revenue, Water System Improvement Project, 6.50%, 6/01/21 ............................. 1,175,000 1,316,599
Millbrae Elementary School District, COP, Financing Project, Pre-Refunded, 6.90%, 3/01/22 ......... 1,480,000 1,654,551
Modesto PFA, Lease Revenue, John Thurman Field Renovation Project, 6.125%, 11/01/16 ............... 1,700,000 1,841,967
Monrovia USD,
COP, Financing Project, MBIA Insured, 5.30%, 4/01/26 ........................................... 1,100,000 1,130,756
Special Tax, CFD No. 89-1, 5.65%, 9/01/23 ...................................................... 2,200,000 2,233,022
</TABLE>
46
<PAGE>
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, NOVEMBER 30, 1998 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
Monterey Park PFA, Tax Allocation Revenue, Merged Redevelopment Project Area,
5.25%, 3/01/18 ...................................................................................... $ 1,900,000 $ 1,859,321
5.30%, 3/01/28 ...................................................................................... 3,000,000 2,917,200
National City Community Development Commission, MFHR, Park Villas Apartments, Series A, GNMA Secured,
5.85%, 7/20/19 ...................................................................................... 1,545,000 1,626,113
Newman RDA, Tax Allocation, Redevelopment and Housing Project No.1, 5.375%, 8/01/27 .................... 1,285,000 1,272,844
Northern Mariana Islands, Commonwealth Ports Authority,
Airport Revenue, Senior Lien, Series A, 6.25%, 3/15/28 .............................................. 5,050,000 5,119,640
Seaport Revenue, Series A, 6.40%, 3/15/28 ........................................................... 2,000,000 1,980,940
Oakland Revenue, YMCA of the East Bay Project, Refunding, 7.10%, 6/01/10 ............................... 2,815,000 3,168,677
Orange County CFD No. 86-2, Special Tax, Rancho Santa Margarita, Refunding, Series A,
5.55%, 8/15/17 ...................................................................................... 1,000,000 1,022,590
Orinda 1915 Act, AD No. 94-1, Oak Springs, 8.25%, 9/02/19 .............................................. 1,515,000 1,564,207
Oroville Hospital Revenue, Oroville Hospital, Series A, CHFCLP Insured, 5.40%, 12/01/17 ................ 1,140,000 1,168,557
Palm Desert Financing Authority, Tax Allocation, Housing Set-Aside Revenue, MBIA Insured,
5.10%, 10/01/27 ..................................................................................... 1,875,000 1,894,800
Palmdale Special Tax, CFD No. 93-1, Ritter Ranch Project, Series A, 8.50%, 9/01/17 ..................... 10,000,000 9,000,000
Paramount RDA, Tax Allocation, Redevelopment Project Area 1, Refunding, MBIA Insured, 8/01/26 .......... 14,050,000 3,451,523
Perris PFA, Local Agency Revenue, Series B, 7.25%, 8/15/23 ............................................. 500,000 528,985
Pittsburg 1915 Act, Infrastructure Financing Authority Reassessment Revenue,
Series A, 5.60%, 9/02/24 ............................................................................ 1,000,000 1,022,380
Sub Series B, 6.00%, 9/02/24 ........................................................................ 2,710,000 2,767,100
Pomona RDA, Tax Allocation, Series Y,
5.45%, 5/01/22 ...................................................................................... 2,360,000 2,397,500
5.50%, 5/01/32 ...................................................................................... 4,380,000 4,460,899
Richmond Revenue, YMCA of the East Bay Project, Refunding, 7.25%, 6/01/17 .............................. 3,010,000 3,340,588
Riverside County CFD No. 87-5, Special Tax, Senior Lien, Refunding, Series A, 7.00%, 9/01/13 ........... 7,335,000 7,946,006
Riverside County PFA, Tax Allocation Revenue, Redevelopment Projects, Series A, 5.50%, 10/01/22 ........ 2,710,000 2,784,335
Roseville Special Tax, CFD No. 1, 5.75%, 9/01/23 ....................................................... 5,000,000 5,061,450
Sacramento County Special Tax, CFD No.1, Refunding,
5.60%, 12/01/12 ..................................................................................... 1,515,000 1,542,391
5.70%, 12/01/20 ..................................................................................... 2,410,000 2,463,333
6.30%, 9/01/21 ...................................................................................... 1,575,000 1,656,443
Salinas COP, Capital Improvement Projects, Series A, 5.70%, 10/01/28 ................................... 2,665,000 2,776,290
Salinas Valley Solid Waste Authority Revenue,
5.75%, 8/01/18 ...................................................................................... 500,000 515,275
5.80%, 8/01/27 ...................................................................................... 1,100,000 1,129,755
San Bernardino Associated Communities Financing Authority, Granada Hills Health Care, COP,
Refunding and Improvement, Series A, 6.90%, 5/01/27 ................................................. 10,000,000 10,514,700
San Bernardino Joint Powers Financing Authority, Lease Revenue, Department of Transportation Lease,
Series A, 5.50%, 12/01/20 ........................................................................... 4,000,000 4,187,680
San Diego Certificates of Undivided Interest, Water Utilities Fund Net System Revenue, FGIC Insured,
5.00%, 8/01/21 ...................................................................................... 6,000,000 6,025,920
San Diego County Educational Facilities Authority No. 1, Lease Revenue, 6.50%, 8/15/15 ................. 850,000 927,971
San Diego Housing Authority MFHR, MBS, Series C, GNMA Secured, 5.25%, 1/20/40 .......................... 3,880,000 3,904,328
San Diego Special Tax, CFD No. 1, Series B, Pre-Refunded, 7.10%, 9/01/20 ............................... 3,500,000 4,212,250
San Francisco Bay Area Rapid Transit District Sales Tax Revenue, Refunding, AMBAC Insured,
5.00%, 7/01/28 ...................................................................................... 5,000,000 4,999,800
San Francisco City and County Airport Commission, International Airport Revenue,
Issue 8A, Second Series, FGIC Insured, 6.25%, 5/01/20 ............................................... 1,570,000 1,728,806
Issue 16A, Second Series, FSA Insured, 5.125%, 5/01/23 .............................................. 2,000,000 2,007,620
</TABLE>
47
<PAGE>
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, NOVEMBER 30, 1998 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
San Francisco City and County Redevelopment Financing Authority, Tax Allocation Revenue,
Redevelopment Projects, Refunding, Series C, 5.30%, 8/01/25 ............................... $ 1,635,000 $ 1,651,677
Series A, 5.50%, 8/01/22 .................................................................. 1,180,000 1,194,266
San Francisco City and County Revenue, Irwin Memorial Blood Center, Series A,
6.80%, 12/01/21 ........................................................................... 800,000 872,080
San Joaquin Area Flood Control Agency, 1915 Act, Flood Protection and Restoration
Assessment, FSA Insured, 6.00%, 9/02/14 ................................................... 970,000 1,003,892
San Joaquin Hills Transportation Corridor Agency, Toll Road Revenue,
Junior Lien, ETM, 1/01/28 ................................................................. 19,150,000 4,491,058
Refunding, Series A, 5.50%, 1/15/28 ....................................................... 20,710,000 21,258,194
Senior Lien, Pre-Refunded, 7.00%, 1/01/30 ................................................. 675,000 770,195
Senior Lien, Pre-Refunded, 6.75%, 1/01/32 ................................................. 3,450,000 3,904,193
San Jose Financing Authority Revenue, Convention Center Project, Refunding,
Series C, 6.40%, 9/01/17 .................................................................. 5,000,000 5,384,700
San Jose RDA, Tax Allocation, Merged Area Redevelopment Project, 5.25%, 8/01/29 .............. 6,750,000 6,867,383
San Luis Obispo COP, Vista Hospital System, Inc., 8.375%, 7/01/29 ............................ 6,660,000 7,175,617
San Marcos Public Facilities Authority Revenue, Refunding, 5.80%, 9/01/27 .................... 3,000,000 3,061,200
San Marcos RDA, Tax Allocation, Affordable Housing Project, Series A, 5.65%, 10/01/28 ........ 3,000,000 3,115,500
San Mateo RDA, Tax Allocation, Merged Area, Series A, 5.50%,
8/01/17 ................................................................................... 1,330,000 1,384,344
8/01/22 ................................................................................... 4,820,000 4,980,699
San Ramon PFA, Tax Allocation Revenue,
Pre-Refunded, 6.90%, 2/01/24 .............................................................. 700,000 818,909
Refunding, 6.90%, 2/01/24 ................................................................. 800,000 899,256
Sand City RDA, Tax Allocation Revenue, Redevelopment Project, 6.00%, 11/01/26 ................ 3,900,000 4,194,138
Santa Ana Financing Authority Revenue, Mainplace Project, Refunding, Series D,
5.50%, 9/01/15 ............................................................................ 1,250,000 1,264,988
5.60%, 9/01/19 ............................................................................ 2,000,000 2,027,320
Santa Rosa 1915 Act, Fountaingrove Parkway Extension Assessment, 7.625%, 9/02/19 ............. 1,500,000 1,548,015
Southern California Public Power Authority, Southern Transmission Project,
Sub-Crossover Refunding, 6.125%, 7/01/18 .................................................. 1,140,000 1,228,635
Stockton CFD No. 1, Special Tax, Mello Roos, Weston Ranch, Series A,
5.45%, 9/01/08 ............................................................................ 1,775,000 1,812,524
5.80%, 9/01/14 ............................................................................ 4,000,000 4,098,280
6.00%, 9/01/18 ............................................................................ 1,000,000 1,031,900
6.00%, 9/01/24 ............................................................................ 1,100,000 1,126,774
Stockton Health Facilities Revenue, Dameron Hospital Association, Refunding,
Series A, 5.70%, 12/01/14 ................................................................. 2,300,000 2,395,381
Suisun City PFA, Tax Allocation Revenue, Redevelopment Project,
Escrow Term, Series A, 5.20%, 10/01/28 .................................................... 3,000,000 3,020,880
Series A, 5.20%, 10/01/23 ................................................................. 275,000 276,914
Taft PFA, Lease Revenue, Community Correctional Facility Project, Series A,
6.05%, 1/01/17 ............................................................................ 3,235,000 3,525,050
Torrance RDA, Tax Allocation,
Downtown Redevelopment, Refunding, Series A, 5.55%, 9/01/18 ............................... 1,695,000 1,736,019
Downtown Redevelopment, Refunding, Series A, 5.60%, 9/01/28 ............................... 1,500,000 1,533,570
Subordinated Lien, Refunding, Series B, 5.625%, 9/01/28 ................................... 1,500,000 1,523,715
Tracy COP, I-205 Corridor Improvement Project, Pre-Refunded, 7.00%, 10/01/27 ................. 1,200,000 1,332,096
Union City CFD No. 1997-1, Special Tax,
5.70%, 9/01/18 ............................................................................ 1,000,000 1,015,310
5.80%, 9/01/28 ............................................................................ 2,180,000 2,231,099
University Revenues, Multiple Purpose Projects, Refunding, Series E, MBIA Insured,
5.125%, 9/01/20 ........................................................................... 625,000 635,025
Upland COP, Refunding, California Mortgage Insured, 5.50%, 6/01/21 ........................... 2,000,000 2,074,860
</TABLE>
48
<PAGE>
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, NOVEMBER 30, 1998 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
Vallejo COP, Marine World Foundation Project, Refunding, 7.40%, 2/01/28 ................... $ 9,345,000 $ 10,409,396
Vallejo Hiddenbrooke Improvement District No. 1, Series A, 6.50%, 9/01/31 ................. 12,830,000 13,287,390
Victor Valley Union High School District, COP, Instructional Academy Project,
MBIA Insured, 5.80%, 11/15/21 .......................................................... 1,000,000 1,112,230
Virgin Islands PFA Revenue, Sub-Lien, Fund Loan Notes, Refunding, Series E,
5.75%, 10/01/13 ........................................................................ 1,595,000 1,661,623
5.875%, 10/01/18 ....................................................................... 1,665,000 1,734,813
6.00%, 10/01/22 ........................................................................ 2,650,000 2,781,361
Vista Mobile Home Park Revenue, Estrella De Oro Mobile Home, Series A, 5.875%, 2/01/28 .... 1,685,000 1,727,142
West Sacramento Financing Authority, Lease Revenue, City Administration Facilities
Project, MBIA Insured,
5.30%, 9/01/30 ......................................................................... 1,020,000 1,049,386
West Sacramento Redevelopment Agency, Tax Allocation, West Sacramento Redevelopment
Project, MBIA Insured,
5.00%, 9/01/29 ......................................................................... 2,235,000 2,234,821
Western Placer Waste Management Authority Revenue, 6.75%, 7/01/14 ......................... 7,400,000 8,162,274
Westminster COP, Public Improvements Project, Pre-Refunded, 6.00%, 6/01/22 ................ 2,060,000 2,310,867
Whittier School District COP, School Facilities Project,
5.375%, 9/01/22 ........................................................................ 1,055,000 1,061,666
5.40%, 9/01/29 ......................................................................... 1,725,000 1,732,620
Winton Water and Sanitation District, COP, Wastewater System Improvement Project,
Refunding, MBIA Insured,
5.25%, 3/01/28 ......................................................................... 1,500,000 1,535,700
-----------
TOTAL LONG TERM INVESTMENTS (COST $539,242,079) ........................................... 568,054,550
===========
</TABLE>
49
<PAGE>
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, NOVEMBER 30, 1998 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(a)SHORT TERM INVESTMENTS 1.6%
California Health Facilities Financing Authority Revenue, Saint Joseph Health
System, Refunding, Series A, Daily VRDN and Put, 3.20%, 7/01/13 ............ $ 1,900,000 $ 1,900,000
California PCFA Revenue, Shell Oil Co., Refunding, Series A, Daily VRDN and Put,
3.20%, 10/01/07 ............................................................. 600,000 600,000
Chula Vista IDR, San Diego Gas, Refunding, Series A, Daily VRDN and Put, 3.10%,
7/01/21 ..................................................................... 2,800,000 2,800,000
Irvine 1915 Act, AD No. 89-10, Daily VRDN and Put, 3.25%, 9/02/15 .............. 100,000 100,000
Irvine 1915 Act, AD No. 97-16, Northwest Irvine Project, Daily VRDN and Put,
3.25%, 9/02/22 .............................................................. 1,800,000 1,800,000
Irvine Ranch Water District,
Construction Bonds, Daily VRDN and Put, 3.25%, 10/01/05 ..................... 1,000,000 1,000,000
COP, Capital Improvement Project, Daily VRDN and Put, 3.10%, 8/01/16 ........ 1,000,000 1,000,000
-------------
TOTAL SHORT TERM INVESTMENTS (COST $9,200,000) ................................. 9,200,000
-------------
TOTAL INVESTMENTS (COST $548,442,079) 100.8% ................................... 577,254,550
OTHER ASSETS, LESS LIABILITIES (.8)% ........................................... (4,430,492)
-------------
NET ASSETS 100.0% .............................................................. $ 572,824,058
=============
</TABLE>
See Glossary of Terms on page 62.
(a)Variable rate demand notes (VRDNs) are tax-exempt obligations which contain a
floating or variable interest rate adjustment formula and an unconditional right
of demand to receive payment of the principal balance plus accrued interest at
specified dates.
(b)Sufficient collateral has been segregated for securities traded on the
when-issued or delayed delivery basis.
50 See notes to financial statements.
<PAGE>
FRANKLIN MUNICIPAL SECURITIES TRUST
Financial Highlights
FRANKLIN HAWAII MUNICIPAL BOND FUND
<TABLE>
<CAPTION>
CLASS I
------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED MAY 31,
NOVEMBER 30, 1998 --------------------------------------------------------
(UNAUDITED) 1998 1997 1996 1995 1994
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............... $ 11.16 $ 10.79 $ 10.54 $ 10.67 $ 10.36 $ 10.80
------------------------------------------------------------------------------
Income from investment operations:
Net investment income ............................. .29 .58 .60 .60 .60 .62
Net realized and unrealized gains (losses) ........ .14 .38 .25 (.13) .31 (.46)
------------------------------------------------------------------------------
Total from investment operations ................... .43 .96 .85 .47 .91 .16
------------------------------------------------------------------------------
Less distributions from net investment income ...... (.30) (.59) (.60) (.60) (.60) (.60)
------------------------------------------------------------------------------
Net asset value, end of period ..................... $ 11.29 $ 11.16 $ 10.79 $ 10.54 $ 10.67 $ 10.36
==============================================================================
Total return* ...................................... 3.87% 9.10% 8.23% 4.49% 9.26% 1.35%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) .................. $49,082 $45,138 $40,003 $38,805 $36,827 $26,904
Ratios to average net assets:
Expenses .......................................... .40%** .40% .39% .35% .20% .05%
Expenses excluding waiver and payments by affiliate .82%** .81% .83% .84% .87% .92%
Net investment income ............................. 5.18%** 5.32% 5.59% 5.63% 6.02% 5.76%
Portfolio turnover rate ............................ 1.97% 23.18% 13.40% 16.01% 22.88% 31.35%
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized. Prior to May 1, 1994, dividends from net
investment income were reinvested at the offering price.
**Annualized
See notes to financial statements. 51
<PAGE>
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, NOVEMBER 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN HAWAII MUNICIPAL BOND FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS 98.1%
Guam Airport Authority Revenue, Series B,
6.60%, 10/01/10 ............................................................... $ 200,000 $ 219,970
6.70%, 10/01/23 ............................................................... 1,000,000 1,094,110
Guam Government, Limited Obligation Highway, Refunding, Series A, FSA Insured,
6.30%, 5/01/12 ................................................................ 280,000 304,755
Guam Power Authority Revenue, Series A, 6.30%, 10/01/22 .......................... 300,000 319,131
Hawaii State Airport System Revenue,
Refunding, Third Series 1994, AMBAC Insured, 5.75%, 7/01/09 ................... 300,000 325,623
Second Series 1990, FGIC Insured, 7.50%, 7/01/20 .............................. 60,000 64,526
Second Series 1991, 7.00%, 7/01/18 ............................................ 1,520,000 1,634,304
Second Series 1991, MBIA Insured, 6.75%, 7/01/21 .............................. 200,000 216,690
Second Series 1992, MBIA Insured, 6.90%, 7/01/12 .............................. 400,000 479,072
(b)Hawaii State COP, Kapolei State Office Building, Series A, AMBAC Insured,
5.00%, 5/01/18 ................................................................ 1,000,000 988,940
Hawaii State Department of Budget and Finance, Special Purpose Revenue,
Hawaii Electric Light Co. Project, Mortgage, 7.20%, 12/01/14 .................. 100,000 105,061
Hawaiian Electric Co. and Subsidiaries, Mortgage, MBIA Insured, 6.55%, 12/01/22 3,425,000 3,801,613
Hawaiian Electric Co., Mortgage, Series A, MBIA Insured, 6.60%, 1/01/25 ....... 1,950,000 2,201,511
Hawaiian Electric Co. Project, Series B, MBIA Insured, 5.875%, 12/01/26 ....... 500,000 547,080
Kaiser Permanente, Refunding, Series A, 6.25%, 3/01/21 ........................ 100,000 105,234
Kapiolani Health Care System, Mortgage, Refunding, 6.40%, 7/01/13 ............. 600,000 648,150
Kapiolani Health Care System, Mortgage, Refunding, 6.00%, 7/01/19 ............. 125,000 132,628
Kapiolani Health Obligation, 6.25%, 7/01/21 ................................... 1,100,000 1,198,010
Pali Momi Medical Center Project, Mortgage, Pre-Refunded, 7.65%, 7/01/19 ...... 105,000 117,153
Queens Health System, Refunding, Series A, 6.05%, 7/01/16 ..................... 1,000,000 1,095,890
Queens Health System, Refunding, Series A, 6.00%, 7/01/20 ..................... 120,000 130,328
Queens Health System, Refunding, Series A, 5.75%, 7/01/26 ..................... 1,500,000 1,578,885
Queens Health System, Series B, MBIA Insured, 5.25%, 7/01/23 .................. 500,000 511,305
Queens Health System, Series B, MBIA Insured, 5.00%, 7/01/28 .................. 750,000 757,200
Queens Medical Center Project, FGIC Insured, Pre-Refunded, 6.20%, 7/01/22 ..... 500,000 549,395
St. Francis Medical Centers, Mortgage, Refunding, FSA Insured, 6.50%, 7/01/22 . 1,100,000 1,209,494
Wilcox Memorial Hospital Projects, 5.25%, 7/01/13 ............................. 600,000 602,040
Wilcox Memorial Hospital Projects, 5.35%, 7/01/18 ............................. 2,040,000 2,045,141
Wilcox Memorial Hospital Projects, 5.50%, 7/01/28 ............................. 2,410,000 2,436,847
Hawaii State Department of Transportation, Special Facilities Revenue, Matson
Terminals, Inc., Refunding, 5.75%, 3/01/13 .................................... 75,000 78,470
Hawaii State GO,
Series BW, 6.375%, 3/01/11 .................................................... 100,000 117,083
Series CA, 6.00%, 1/01/09 ..................................................... 100,000 113,430
Series CP, FGIC Insured, 5.00%, 10/01/16 ...................................... 900,000 905,931
Hawaii State Harbor, Capital Improvement Revenue,
Refunding, Series 1994, FGIC Insured, 6.25%, 7/01/15 .......................... 1,000,000 1,103,130
Refunding, Series 1994, FGIC Insured, 6.375%, 7/01/24 ......................... 500,000 554,360
Series 1990, MBIA Insured, 7.25%, 7/01/10 ..................................... 70,000 74,802
Series 1990, MBIA Insured, 7.00%, 7/01/17 ..................................... 80,000 85,185
Series 1992, FGIC Insured, 6.50%, 7/01/19 ..................................... 200,000 219,766
Hawaii State Housing Finance and Development Corp. Revenue, Affordable Rental
Housing Program, Series A,
6.00%, 7/01/15 ................................................................ 1,000,000 1,058,290
6.05%, 7/01/22 ................................................................ 750,000 793,095
6.10%, 7/01/30 ................................................................ 250,000 264,335
</TABLE>
52
<PAGE>
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, NOVEMBER 30, 1998 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN HAWAII MUNICIPAL BOND FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
Hawaii State Housing Finance and Development Corp., SFM Purchase Revenue, Series A,
7.10%, 7/01/24 ................................................................. $ 465,000 $ 495,458
6.00%, 7/01/26 ................................................................. 255,000 263,438
Honolulu City and County GO,
Refunding, Series 1992, 6.00%, 12/01/14 ........................................ 150,000 170,661
Series A, Pre-Refunded, 6.70%, 8/01/07 ......................................... 75,000 81,428
Series A, Pre-Refunded, 6.70%, 8/01/11 ......................................... 100,000 108,570
Series B, 5.00%, 11/01/17 ...................................................... 600,000 602,982
Series B, Pre-Refunded, 6.125%, 6/01/14 ........................................ 1,000,000 1,111,930
Honolulu City and County, MFHR, Waipahu Towers Project, Series A, 6.90%, 6/20/35 .. 1,205,000 1,305,244
Honolulu City and County Water Supply Board, Water System Revenue, 5.80%, 7/01/21 . 1,785,000 1,945,275
Kauai County GO, Refunding, Series C, AMBAC Insured, 5.95%, 8/01/10 ............... 220,000 250,831
Maui County Board, Water Supply Revenue, Series A, FGIC Insured, Pre-Refunded,
6.70%, 12/01/11 ................................................................ 100,000 109,475
Maui County GO,
Refunding, Series 1992, Pre-Refunded, 6.05%, 9/01/07 ........................... 50,000 52,607
Refunding, Series 1992, Pre-Refunded, 6.10%, 9/01/08 ........................... 300,000 315,894
Series A, FGIC Insured, Pre-Refunded, 5.75%, 1/01/11 ........................... 385,000 404,993
Series A, FGIC Insured, Pre-Refunded, 5.75%, 1/01/13 ........................... 150,000 157,790
Series C, FGIC Insured, 5.20%, 3/01/17 ......................................... 575,000 587,736
Northern Mariana Islands, Commonwealth Ports Authority, Seaport Revenue, Series A,
6.40%, 3/15/28 ................................................................. 1,000,000 990,470
Puerto Rico Commonwealth Highway and Transportation Authority Revenue,
Series T, Pre-Refunded, 6.625%, 7/01/18 ........................................ 315,000 350,305
Series Y, 5.50%, 7/01/26 ....................................................... 800,000 835,688
Puerto Rico Electric Power Authority Revenue,
Series O, 7.125%, 7/01/14 ...................................................... 60,000 62,308
Series O, Pre-Refunded, 7.125%, 7/01/14 ........................................ 55,000 57,130
Series T, Pre-Refunded, 6.375%, 7/01/24 ........................................ 1,000,000 1,139,080
Puerto Rico Industrial, Medical and Environmental Facilities Revenue PCFA, PepsiCo,
Inc. Project, 6.25%, 11/15/13 .................................................. 350,000 385,035
Puerto Rico Industrial Tourist, Medical and Environmental Facilities Revenue,
Guaynabo Warehouse, Series A, 5.15%, 7/01/19 ................................... 850,000 843,574
Puerto Rico PBA, Guaranteed, Public Education and Health Facilities, Refunding,
Series M, 5.75%, 7/01/15 ....................................................... 900,000 949,014
Puerto Rico Telephone Authority Revenue, Refunding, Series L, 6.125%, 1/01/22 ..... 1,230,000 1,306,640
Virgin Islands Public Finance Authority Revenue, Senior Lien, Fund Loan Notes,
Refunding, Series A, 5.625%, 10/01/25 .......................................... 1,900,000 1,953,599
Virgin Islands Water and Power Authority, Electric System Revenue, Refunding,
5.30%, 7/01/18 ................................................................. 500,000 505,155
----------
TOTAL LONG TERM INVESTMENTS (COST $45,129,380) .................................... 48,130,273
----------
</TABLE>
53
<PAGE>
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, NOVEMBER 30, 1998 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN HAWAII MUNICIPAL BOND FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(a)SHORT TERM INVESTMENTS 1.8%
Hawaii State Housing Finance and Development Corp. Revenue, Rental Housing System,
Series A, Weekly VRDN and Put, 3.20%, 7/01/24 ................................. $ 800,000 $ 800,000
Puerto Rico Commonwealth Government Development Bank, Refunding, MBIA Insured,
Weekly VRDN and Put, 2.90%, 12/01/15 .......................................... 100,000 100,000
-----------
TOTAL SHORT TERM INVESTMENTS (COST $900,000) ..................................... 900,000
-----------
TOTAL INVESTMENTS (COST $46,029,380) 99.9% ....................................... 49,030,273
OTHER ASSETS, LESS LIABILITIES .1% ............................................... 51,619
-----------
NET ASSETS 100.0% ................................................................ $49,081,892
===========
</TABLE>
See Glossary of Terms on page 62.
(a)Variable rate demand notes (VRDNs) are tax-exempt obligations which contain a
floating or variable interest rate adjustment formula and an unconditional right
of demand to receive payment of the principal balance plus accrued interest at
specified dates.
(b)Sufficient collateral has been segregated for securities traded on a
when-issued or delayed delivery basis.
54 See notes to financial statements.
<PAGE>
FRANKLIN MUNICIPAL SECURITIES TRUST
Financial Highlights
FRANKLIN TENNESSEE MUNICIPAL BOND FUND
<TABLE>
<CAPTION>
CLASS I
---------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED MAY 31,
NOVEMBER 30, 1998 ----------------------------------------------------------
(UNAUDITED) 1998 1997 1996 1995 1994+
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ........... $ 11.27 $ 10.71 $ 10.40 $ 10.53 $10.11 $10.00
---------------------------------------------------------------------------------
Income from investment operations:
Net investment income ......................... .28 .57 .58 .56 .52 .01
Net realized and unrealized gains (losses) .... .15 .56 .33 (.09) .35 .10
---------------------------------------------------------------------------------
Total from investment operations ............... .43 1.13 .91 .47 .87 .11
---------------------------------------------------------------------------------
Less distributions from net investment income .. (.28) (.57) (.60) (.60) (.45) --
---------------------------------------------------------------------------------
Net asset value, end of period ................. $ 11.42 $ 11.27 $ 10.71 $ 10.40 $10.53 $10.11
=================================================================================
Total return* .................................. 3.87% 10.75% 8.95% 4.50% 8.97% 1.10%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) .............. $58,097 $44,526 $26,708 $13,956 $5,986 $2,224
Ratios to average net assets:
Expenses ...................................... .40%** .40% .40% .33% .10% .03%**
Expenses excluding waiver and payments
by affiliate .................................. .80%** .81% .84% .91% .92% 1.05%**
Net investment income ......................... 4.92%** 5.12% 5.51% 5.67% 6.02% 1.89%**
Portfolio turnover rate ........................ 6.42% 37.67% 27.60% 27.23% 24.71% 22.64%
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
**Annualized
+For the period May 10, 1994 (effective date) to May 31, 1994.
See notes to financial statements. 55
<PAGE>
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, NOVEMBER 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN TENNESSEE MUNICIPAL BOND FUND AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 99.4%
<S> <C> <C>
Carroll County IDBR, Henry I. Siegel Co., Inc. Project, Refunding, 7.20%, 4/01/05 ........ $ 500,000 $ 520,770
Chattanooga Health Educational and Housing Facility Board Revenue, Catholic
Health Initiatives, Refunding, Series A, 5.00%, 12/01/18 .............................. 1,000,000 988,790
Series A, 5.00%, 12/01/28 ............................................................. 1,000,000 974,230
Cleveland Water and Sewer, FGIC Insured, 5.375%, 9/01/28 ................................. 1,000,000 1,027,650
Collierville Water and Sewer Systems, MBIA Insured, 5.625%, 11/01/21 ..................... 500,000 527,535
Dickson Electric System Revenue, MBIA Insured, 5.50%, 9/01/16 ............................ 1,220,000 1,297,019
Eastside Utility District, Hamilton County, Waterworks Revenue, Refunding,
MBIA Insured, 5.25%, 11/01/17 ......................................................... 800,000 824,096
Fayetteville and Lincoln IDBR, Hospital Facility Lease, AMBAC Insured, 5.30%, 5/01/28 .... 1,000,000 1,018,500
Franklin IDB, MFHR, Landings Apartment Project, Refunding, Series A, FSA
Insured, 6.00%, 10/01/26 .............................................................. 1,000,000 1,060,870
Hamilton County IDB, MFHR, Patten Towers Apartments, 7.125%, 2/01/09 ..................... 500,000 524,775
Hardeman County GO, FGIC Insured, 5.625%, 4/01/24 ........................................ 880,000 932,624
Harpeth Valley Utilities District, Davidson and Williamson Counties Revenue,
Utilities Improvement, MBIA Insured, 5.00%, 9/01/28 ................................... 1,430,000 1,401,686
Hollow Rock-Bruceton Special School District GO, FSA Insured, Pre-Refunded, 5.75%, 4/01/24 500,000 562,550
Humphreys County IDB, Solid Waste Disposal Revenue, Du Pont (E.I.) De Nemours
and Co. Project, 6.70%, 5/01/24 ....................................................... 800,000 892,136
Jackson GO, Refunding and Improvement, MBIA Insured, 5.125%, 3/01/16 ..................... 1,000,000 1,017,070
Jackson Water and Sewer Revenue, Series A, AMBAC Insured, 5.00%, 7/01/18 ................. 300,000 299,244
Johnson City Health and Educational Facilities Board,
(b)Medical Center Hospital, Hospital Revenue, Refunding and Improvement,
MBIA Insured, 5.25%, 7/01/28 .......................................................... 2,000,000 2,005,240
Pine Oaks Assisted Project, Mortgage Revenue, Series A, GNMA Secured, 5.90%, 6/20/37 .. 1,400,000 1,461,292
Johnson City Public Improvement, FSA Insured, Pre-Refunded, 5.90%, 6/01/12 ............... 500,000 553,070
Johnson City Solid Waste, AMBAC Insured, 5.80%, 5/01/09 .................................. 100,000 109,368
Johnson County Public Improvement GO, Series B, AMBAC Insured, Pre-Refunded,
6.70%, 5/01/20 ........................................................................ 100,000 117,165
Knox County First Utility District, Water and Sewer Revenue, Refunding and
Improvement, Series A, MBIA Insured, 5.625%, 12/01/19 ................................. 1,000,000 1,070,000
Knox County Health, Educational and Housing Board, Hospital Facilities Revenue,
Fort Sanders Alliance, Refunding, MBIA Insured, 5.75%, 1/01/14 ........................ 1,250,000 1,374,925
Mercy Health Systems, Refunding, Series B, 5.875%, 9/01/15 ............................ 345,000 370,468
Knox County IDB, MFR, Waterford Apartments, Refunding, Series A, FHA
Insured, 5.95%, 3/01/28 ............................................................... 250,000 264,818
Knox-Chapman Utility District, Knox County Water and Sewer Revenue,
FSA Insured, 5.40%, 1/01/23 ........................................................... 660,000 681,325
Refunding, MBIA Insured, 6.10%, 1/01/19 ............................................... 100,000 109,500
(b)Knoxville Electric Revenue, Refunding and Improvement Systems, Series S,
5.10%, 7/01/24 ........................................................................ 2,000,000 2,001,160
Loudon County IDB, Solid Waste Disposal Revenue, Kimberly-Clark Corp. Project,
6.20%, 2/01/23 ........................................................................ 1,305,000 1,393,479
Macon County GO, FGIC Insured, Pre-Refunded, 5.90%, 9/01/13 .............................. 150,000 167,699
Maury County IDB, PCR, Multi-Modal, Saturn Corp. Project, Refunding, 6.50%, 9/01/24 ...... 620,000 687,041
McKenzie High School District GO, FSA Insured, Pre-Refunded, 5.75%, 4/01/22 .............. 500,000 562,550
Memphis GO, Pre-Refunded, 5.75%, 8/01/15 ................................................. 500,000 538,250
Memphis Health, Educational and Housing Facility Board, Mortgage Revenue,
Edgewater Terrace, Refunding, FHA/GNMA Secured, 7.375%, 1/20/27 ....................... 150,000 160,244
MF River Trace II, Refunding, Series A, 6.45%, 4/01/26 ................................ 100,000 106,854
Memphis-Shelby County Airport Authority Revenue, Refunding, MBIA Insured, 5.65%, 9/01/15 . 500,000 528,920
Memphis-Shelby County Airport Authority, Special Facilities and Project
Revenue, Federal Express Corp., 6.75%, 9/01/12 ........................................ 100,000 109,032
Metropolitan Government of Nashville and Davidson County GO, Refunding, 5.125%, 5/15/25 .. 1,000,000 1,008,430
</TABLE>
56
<PAGE>
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, NOVEMBER 30, 1998 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN TENNESSEE MUNICIPAL BOND FUND AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
Metropolitan Government of Nashville and Davidson County,
<S> <C> <C>
Electric Revenue, Refunding, Series A, Pre-Refunded, 6.00%, 5/15/17 .......... $ 200,000 $ 218,290
Electric Revenue, Series A, 5.20%, 5/15/23 ................................... 1,000,000 1,016,370
Health and Educational Facilities Board Revenue, Meharry Medical College
Project, AMBAC Insured, Pre-Refunded, 6.875%, 12/01/24 ..................... 150,000 176,030
Health and Educational Facilities Board Revenue, Mortgage, Dandridge
Towers, Refunding, Series A, 6.375%, 1/01/11 ............................... 500,000 532,745
Health and Educational Facilities Board Revenue, Multi-Modal Health Facility,
Asset Guaranty Insurance Co. Insured, 5.50%, 5/01/23 ....................... 995,000 1,037,954
Health and Educational Facilities Board Revenue, The Vanderbilt University,
Refunding, Series A, 5.375%, 7/01/18 ....................................... 700,000 724,241
Health and Educational Facilities Board Revenue, The Vanderbilt University,
Refunding, Series B, 5.00%, 10/01/28 ....................................... 2,750,000 2,728,743
Public Improvements, 5.875%, 5/15/26 ......................................... 1,000,000 1,082,150
Sports Authority Revenue, Stadium Public Improvement Project, AMBAC Insured,
5.875%, 7/01/21 ............................................................ 1,775,000 1,926,177
Water and Sewer Revenue, Refunding, 5.50%, 1/01/16 ........................... 620,000 620,211
Metropolitan Nashville Airport Authority Revenue, Series C, FGIC Insured,
6.60%, 7/01/15 ............................................................. 205,000 221,941
Milan Special School District GO, AMBAC Insured, Pre-Refunded, 6.625%, 4/01/11 .. 180,000 206,309
Montgomery County Health Educational and Housing Facility Board, Hospital
Revenue, Clarksville Regional Health System, Refunding and Improvement,
5.375%, 1/01/28 .............................................................. 3,000,000 2,962,920
Northern Mariana Islands, Commonwealth Ports Authority, Seaport Revenue,
Series A, 6.40%, 3/15/28 ..................................................... 300,000 297,141
Pigeon Forge Public Improvement, MBIA Insured, 5.90%, 6/01/09 ................... 100,000 106,083
Puerto Rico Commonwealth GO,
Pre-Refunded, 6.50%, 7/01/23 ................................................. 100,000 114,397
Public Improvement, Refunding, 5.75%, 7/01/17 ................................ 750,000 807,075
Puerto Rico Commonwealth Highway and Transportation Authority, Highway Revenue,
Series Y, Pre-Refunded, 6.00%, 7/01/22 ....................................... 500,000 570,355
Puerto Rico Electric Power Authority Revenue,
Refunding, Series X, 5.50%, 7/01/25 .......................................... 500,000 515,260
Series R, Pre-Refunded, 6.25%, 7/01/17 ....................................... 100,000 109,784
Puerto Rico Industrial, Tourist, Educational, Medical and Environmental Control
Facilities Financing Authority, Hospital Revenue, Hospital Auxilio Mutuo
Obligation Group, Series A, MBIA Insured, 6.25%, 7/01/24 ..................... 200,000 222,720
Puerto Rico Ports Authority Revenue, Special Facilities, American Airlines,
Series A, 6.25%, 6/01/26 ..................................................... 600,000 653,112
Shelby County Health, Educational and Housing Facilities Board, Hospital Revenue,
MBIA Insured,
5.30%, 8/01/15 ............................................................... 490,000 508,566
5.00%, 4/01/18 ............................................................... 1,000,000 988,940
Shelby County School GO, Series B, Pre-Refunded, 6.00%, 3/01/16 ................. 530,000 571,616
South Fulton IDBR, Tyson Foods, Inc. Project, 6.40%, 10/01/20 ................... 300,000 330,318
Sullivan County IDBR, Brandymill, Refunding, Series I-A, GNMA Secured,
6.35%, 7/20/27 ............................................................... 350,000 377,703
Tennessee HDA,
Homeownership Program, 5.375%, 7/01/23 ....................................... 1,000,000 1,011,560
Homeownership Program, Issue 4A, 6.375%, 7/01/22 ............................. 800,000 852,760
Homeownership Program, Series 3, 5.85%, 7/01/23 .............................. 320,000 331,734
Mortgage Finance, Series A, 6.90%, 7/01/25 ................................... 200,000 218,154
Mortgage Finance, Series B, 6.60%, 7/01/25 ................................... 190,000 204,525
Mortgage Finance, Series B, MBIA Insured, 6.20%, 7/01/18 ..................... 630,000 669,538
Tennessee State Local Development Authority Revenue,
Community Provider Pooled Loan Program, 6.55%, 10/01/23 ...................... 100,000 109,190
State Loan Program, Refunding, Series A, MBIA Insured, 5.125%, 3/01/22 ....... 150,000 152,138
</TABLE>
57
<PAGE>
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, NOVEMBER 30, 1998 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN TENNESSEE MUNICIPAL BOND FUND AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
Tennessee State School Board Authority, Higher Educational Facilities,
<S> <C> <C>
2nd Program, Series A, 5.00%, 5/01/28 ..................................... $ 1,000,000 $ 972,930
Series A, Pre-Refunded, 6.25%, 5/01/22 .................................... 100,000 109,420
Virgin Islands Public Finance Authority Revenue, Senior Lien, Fund Loan Notes,
Refunding, Series A, 5.50%, 10/01/18 ...................................... 1,000,000 1,015,570
White House Utility District, Robertson and Sumner Counties Waterworks System
Revenue, Refunding, Series B, 5.375%, 1/01/19 ............................. 1,890,000 1,949,213
Wilson County COP,
Educational Facilities, 6.125%, 6/30/10 ................................... 220,000 238,378
FSA Insured, 5.25%, 3/30/18 ............................................... 1,000,000 1,027,450
------------
TOTAL LONG TERM INVESTMENTS (COST $54,913,302) ............................... 57,740,086
------------
(a) SHORT TERM INVESTMENTS 1.5%
Metropolitan Nashville Airport Authority Revenue, Refunding and Improvement,
FGIC Insured, Weekly VRDN and Put, 3.20%, 7/01/19 ......................... 100,000 100,000
Puerto Rico Commonwealth Government Development Bank, Refunding, MBIA Insured,
Weekly VRDN and Put, 2.90%, 12/01/15 ...................................... 100,000 100,000
Puerto Rico Commonwealth Highway and Transportation Authority, Transportation
Revenue, Series A, AMBAC Insured, Weekly VRDN and Put, 2.75%, 7/01/28 ..... 400,000 400,000
Sullivan County IDB, PCR, Mead Corp. Project, Refunding, Daily VRDN and Put,
3.20%, 10/01/16 ........................................................... 300,000 300,000
------------
TOTAL SHORT TERM INVESTMENTS (COST $900,000) ................................. 900,000
------------
TOTAL INVESTMENTS (COST $55,813,302) 100.9% .................................. 58,640,086
OTHER ASSETS, LESS LIABILITIES (.9)% ......................................... (543,454)
------------
NET ASSETS 100.0% ............................................................ $ 58,096,632
============
</TABLE>
See Glossary of Terms on page 62.
(a)Variable rate demand notes (VRDNs) are tax-exempt obligations which contain a
floating or variable interest rate adjustment formula and an unconditional right
of demand to receive payment of the principal balance plus accrued interest at
specified dates.
(b)Sufficient collateral has been segregated for securities traded on a
when-issued or delayed delivery basis.
58 See notes to financial statements.
<PAGE>
FRANKLIN MUNICIPAL SECURITIES TRUST
Financial Highlights
FRANKLIN WASHINGTON MUNICIPAL BOND FUND
<TABLE>
<CAPTION>
CLASS I
---------------------------------------------------------
SIX MONTHS ENDED
NOVEMBER 30, 1998 YEAR ENDED MAY 31,
-----------------------------------------
(UNAUDITED) 1998 1997 1996 1995 1994
PER SHARE OPERATING PERFORMANCE ---------------------------------------------------------
(for a share outstanding throughout the period)
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period .......... $ 10.48 $ 10.09 $ 9.80 $ 9.90 $ 9.55 $ 9.99
---------------------------------------------------------
Income from investment operations:
Net investment income ........................ .28 .57 .58 .56 .56 .51
Net realized and unrealized gains (losses) ... .14 .41 .29 (.08) .36 (.46)
---------------------------------------------------------
Total from investment operations .............. .42 .98 .87 .48 .92 .05
---------------------------------------------------------
Less distributions from:
Net investment income ........................ (.30) (.59) (.58) (.58) (.57) (.47)
Net realized gains ........................... -- -- -- -- -- (.02)
---------------------------------------------------------
Total distributions ........................... (.30) (.59) (.58) (.58) (.57) (.49)
---------------------------------------------------------
Net asset value, end of period ................ $ 10.60 $ 10.48 $10.09 $ 9.80 $ 9.90 $ 9.55
---------------------------------------------------------
Total return* ................................. 4.03% 9.87% 9.04% 4.91% 10.10% 2.88%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $11,761 $10,376 $8,361 $7,718 $5,741 $4,272
Ratios to average net assets:
Expenses ..................................... .10%** .10% .10% .10% .10% .05%
Expenses excluding waiver and payments
by affiliate ................................. .85%** .84% .90% .92% 1.05% .71%
Net investment income ........................ 5.38%** 5.54% 5.81% 5.81% 6.13% 5.59%
Portfolio turnover rate ....................... 2.05% 6.94% 7.73% 19.13% 18.46% 39.52%
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized. Prior to May 1, 1994, dividends from net
investment income were reinvested at the offering price.
**Annualized
See notes to financial statements. 59
<PAGE>
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, NOVEMBER 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN WASHINGTON MUNICIPAL BOND FUND AMOUNT VALUE
<S> <C> <C>
LONG TERM INVESTMENTS 96.2%
Aberdeen GO, Series A, MBIA Insured, 5.80%, 12/01/12 ................................................ $100,000 $107,467
Bellevue Water and Sewer Revenue, Refunding, 5.875%, 7/01/10 ........................................ 100,000 106,611
Bellingham Housing Authority Revenue,
Cascade Meadows Project, Pre-Refunded, 7.10%, 11/01/23 ........................................... 200,000 232,342
Pacific Rim and Cascade Meadows Projects, Refunding, MBIA Insured, 5.20%, 11/01/27 ............... 200,000 201,532
Chelan County PUD No. 1, Chelan Hydroelectric Revenue, Series A, FSA Insured, 5.25%, 7/01/33 ........ 200,000 201,372
Clark County School District No. 114, Evergreen School, Refunding, AMBAC Insured, Pre-Refunded,
5.95%, 12/01/12 .................................................................................. 100,000 111,795
Clark County Sewer Revenue, MBIA Insured, 5.70%, 12/01/16 ........................................... 200,000 213,338
Conservation and Renewable Energy System Revenue, Washington Conservation Project, 6.50%, 10/01/14 400,000 434,492
Douglas County PUD No. 1, Electric Systems Revenue, MBIA Insured, 6.00%, 1/01/15 .................... 100,000 110,152
Federal Way GO, Refunding, 5.85%, 12/01/21 .......................................................... 100,000 105,157
Grant County PUD No. 2,
Priest Rapids Hydroelectric Revenue, Second Series, Series B, MBIA Insured, 5.875%, 1/01/26 ...... 100,000 107,526
(b)Wanapum Hydroelectric Revenue, Refunding, Second Series, Series A, MBIA Insured, 5.20%, 1/01/23 250,000 250,198
Wanapum Hydroelectric Revenue, Second Series, Series A, Pre-Refunded, 6.375%, 1/01/23 ............ 250,000 273,360
King County GO, Sewer District, 5.875%, 1/01/15 ..................................................... 100,000 108,314
King County Housing Authority Revenue, Woodridge Park Project, 6.25%, 5/01/15 ....................... 175,000 185,290
King County School District No. 400, Mercer Island, 5.90%, 12/01/15 ................................. 100,000 108,889
King County School District No. 412, Shoreline, Pre-Refunded, 6.10%, 6/01/13 ........................ 100,000 111,604
King County School District No. 415, Kent, FSA Insured, 5.875%, 6/01/16 ............................. 200,000 215,486
Lewis County PUD No. 1, Cowlitz Falls Hydroelectric Project Revenue, 6.00%, 10/01/24 ................ 200,000 207,546
Pierce County EDC Revenue, Solid Waste, Occidental Petroleum Corp., 5.80%, 9/01/29 .................. 375,000 379,549
Pierce County Sewer Revenue, 5.70%, 2/01/17 ......................................................... 100,000 104,646
Pilchuck Development Public Corp., Special Facilities Airport Revenue, Tramco, Inc. Project, B.F
Goodrich, 6.00%, 8/01/23 ......................................................................... 800,000 831,016
Port of Seattle Revenue, Series B,
6.00%, 11/01/17 .................................................................................. 180,000 186,961
Pre-Refunded, 6.00%, 11/01/17 .................................................................... 20,000 21,509
SeaTac GO, MBIA Insured, 6.50%, 12/01/13 ............................................................ 450,000 503,073
Seattle Housing Authority, Low Income Housing Assistance Revenue, Kin On Project, GNMA Secured,
7.40%, 11/20/36 .................................................................................. 99,000 115,364
Seattle Municipality Metropolitan Sewer Revenue, Refunding, Series V, 6.20%, 1/01/32 ................ 200,000 212,080
Seattle Water Systems Revenue, FGIC Insured, 5.00%, 10/01/23 ........................................ 300,000 298,710
Snohomish County GO, MBIA Insured, 5.90%, 12/01/15 .................................................. 100,000 108,266
Snohomish County Housing Authority Revenue, Pooled, 6.30%, 4/01/16 .................................. 200,000 212,746
Snohomish County PUD No. 1,
Electric and Generation Systems Revenue, Refunding, FGIC Insured, 6.00%, 1/01/18 ................. 200,000 213,850
Water Revenue, 5.85%, 11/01/17 ................................................................... 100,000 100,892
Spokane County GO, Refunding, 6.00%, 12/01/14 ....................................................... 130,000 143,615
Spokane County Water District No. 3 Revenue, Refunding, 5.90%, 1/01/14 .............................. 100,000 101,830
Stevens County Public Corp., PCR, Refunding, Water Power Co. Project, 6.00%, 12/01/23 ............... 300,000 316,980
Sunnyside GO, MBIA Insured, 6.10%, 12/01/14 ......................................................... 100,000 109,478
Tacoma Electric Systems Revenue, Refunding, FGIC Insured, 6.25%, 1/01/15 ............................ 200,000 219,296
Tacoma GO, Series A, MBIA Insured, 5.625%, 12/01/22 ................................................. 300,000 314,112
Tacoma Refuse Utility Revenue, AMBAC Insured, Pre-Refunded, 7.00%, 12/01/19 ......................... 100,000 117,721
Tacoma Water Revenue, FGIC Insured, 5.25%, 12/01/16 ................................................. 100,000 103,809
University of Washington, Alumni Association, Lease Revenue, Medical Center Roosevelt II, FSA
Insured, 6.30%, 8/15/14 .......................................................................... 500,000 557,720
Washington State COP, Office Building Project, Series A, MBIA Insured, 6.00%, 4/01/12 ............... 100,000 105,486
</TABLE>
60
<PAGE>
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, NOVEMBER 30, 1998 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN WASHINGTON MUNICIPAL BOND FUND AMOUNT VALUE
------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONT.)
<S> <C> <C>
Washington State Health Care Facilities Authority Revenue,
Children's Hospital and Regional Medical Center, FSA Insured, 5.00%, 10/01/28 $ 400,000 $ 392,072
Multicare Health Systems, MBIA Insured, 5.00%, 8/15/22 ..................... 250,000 245,890
Multicare Medical Center, FGIC Insured, Pre-Refunded, 5.75%, 8/15/22 ....... 100,000 108,587
Swedish Health Services, AMBAC Insured, 5.50%, 11/15/28 .................... 500,000 518,170
Washington State Higher Education Facilities Authority Revenue,
Pacific Lutheran University Project, Refunding, Connie Lee Insured,
5.70%, 11/01/26 ............................................................ 200,000 214,056
Washington State Housing Finance Commission, SF Program,
Series 1A-1, GNMA/FNMA Secured, 6.25%, 6/01/16 ............................. 100,000 106,939
Series 1A-3, GNMA/FNMA Secured, 6.15%, 12/01/15 ............................ 200,000 212,554
Series 2N, GNMA/FNMA Secured, 6.05%, 12/01/16 .............................. 100,000 105,730
Series 3A, GNMA/FNMA Secured, 5.75%, 12/01/28 .............................. 195,000 200,885
Washington State Housing Finance, SFMR, MBS Program, Series A, 7.05%, 7/01/22 . 60,000 64,757
Washington State Motor Vehicle Fuel Tax GO, Series D, 6.00%, 9/01/20 .......... 240,000 261,451
Whatcom County School District No. 501, Bellingham, 6.05%, 12/01/13 ........... 100,000 109,904
------------
TOTAL LONG TERM INVESTMENTS (COST $10,600,073) ................................ 11,312,175
------------
(a) SHORT TERM INVESTMENTS 4.2%
Puerto Rico Commonwealth Highway and Transportation Authority, Transportation
Revenue, Series A, AMBAC Insured, Weekly VRDN and Put, 3.05%, 7/01/28 ...... 200,000 200,000
Washington State Health Care Facilities Authority Revenue, Sisters Providence,
Series C, Daily VRDN and Put, 3.05%, 10/01/05 .............................. 200,000 200,000
Series D, Daily VRDN and Put, 3.10%, 10/01/05 .............................. 100,000 100,000
------------
TOTAL SHORT TERM INVESTMENTS (COST $500,000) .................................. 500,000
------------
TOTAL INVESTMENTS (COST $11,100,073) 100.4% ................................... 11,812,175
OTHER ASSETS, LESS LIABILITIES (.4)% .......................................... (50,741)
------------
NET ASSETS 100.0% ............................................................. $ 11,761,434
============
</TABLE>
See Glossary of Terms on page 62.
(a) Variable rate demand notes (VRDNs) are tax-exempt obligations which contain
a floating or variable interest rate adjustment formula and an unconditional
right of demand to receive payment of the principal balance plus accrued
interest at specified dates.
(b) Sufficient collateral has been segregated for securities traded on a
when-issued or delayed delivery basis.
See notes to financial statements. 61
<PAGE>
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, NOVEMBER 30, 1998 (UNAUDITED) (CONT.)
GLOSSARY OF TERMS
- --------------------------------------------------------------------------------
1915 ACT - Improvement Bond Act of 1915
ABAG - The Association of Bay Area Governments
AD - Assessment District
AMBAC - American Municipal Bond Assurance Corp.
CDA - Community Development Agency
CFD - Community Facilities District
CHFCLP - California Health Facilities Construction Loan Program
COP - Certificate of Participation
EDC - Economic Development Corp.
ETM - Escrow to Maturity
FGIC - Financial Guaranty Insurance Corp.
FHA - Federal Housing Authority/Agency
FNMA - Fannie Mae
FSA - Financial Security Assistance (Some of the securities shown as FSA
Insured were originally insured by Capital Guaranty Insurance Co.
(CGIC) which was acquired by FSA in 1995 and no longer does business
under this name).
GNMA - Ginnie Mae
GO - General Obligation
HDA - Housing Development Authority/Agency
HFA - Housing Finance Authority/Agency
HMR - Home Mortgage Revenue
IDB - Industrial Development Board
IDBR - Industrial Development Board Revenue
IDR - Industrial Development Revenue
MBIA - Municipal Bond Investors Assurance Corp.
MBS - Mortgage Backed Securities
MFHR - Multi-Family Housing Revenue
MFR - Multi-Family Revenue
PBA - Public Building Authority
PCFA - Pollution Control Financing Authority
PCR - Pollution Control Revenue
PFA - Public Financing Authority
PUD - Public Utility district
RDA - Redevelopment Agency
SF - Single Family
SFM - Single Family Mortgage
SFMR - Single Family Mortgage Revenue
USD - Unified School District
62
<PAGE>
FRANKLIN MUNICIPAL SECURITIES TRUST
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN
ARKANSAS CALIFORNIA HAWAII TENNESSEE WASHINGTON
MUNICIPAL HIGH YIELD MUNICIPAL MUNICIPAL MUNICIPAL
BOND FUND MUNICIPAL FUND BOND FUND BOND FUND BOND FUND
----------------------------------------------------------------------------------------
Assets:
Investments in securities:
<S> <C> <C> <C> <C> <C>
Cost .............................. $ 37,308,691 $ 548,442,079 $ 46,029,380 $ 55,813,302 $ 11,100,073
========================================================================================
Value ............................. 38,639,555 577,254,550 49,030,273 58,640,086 11,812,175
Cash ............................... 356,151 147,572 62,594 239,309 16,607
Receivables:
Investment securities sold ........ 3,080,226 -- -- 2,080,256 5,000
Capital shares sold ............... 63,613 1,099,694 196,724 367,688 --
Interest .......................... 631,991 9,353,675 1,032,006 876,635 199,713
----------------------------------------------------------------------------------------
Total assets .................. 42,771,536 587,855,491 50,321,597 62,203,974 12,033,495
----------------------------------------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased ... 2,987,077 11,420,144 984,637 3,983,453 249,664
Capital shares redeemed ........... -- 1,924,270 123,376 1,188 --
Affiliates ........................ 4,109 277,556 13,924 12,377 2,277
Shareholders ...................... 23,542 429,981 47,844 28,679 2,657
Distributions to shareholders ...... 56,195 795,823 68,612 81,645 17,463
Other liabilities .................. -- 183,659 1,312 -- --
----------------------------------------------------------------------------------------
Total liabilities ............. 3,070,923 15,031,433 1,239,705 4,107,342 272,061
----------------------------------------------------------------------------------------
Net assets, at value ......... $ 39,700,613 $ 572,824,058 $ 49,081,892 $ 58,096,632 $ 11,761,434
========================================================================================
Net assets consist of:
Undistributed net investment income $ 39,301 $ -- $ 92,751 $ 31,708 $ 20,751
Accumulated distributions in excess
of net investment income ........ -- (606,133) -- -- --
Net unrealized appreciation ........ 1,330,864 28,812,471 3,000,893 2,826,784 712,102
Accumulated net realized gain (loss) (18,052) (2,075,444) (543,230) 140,536 (131,560)
Capital shares ..................... 38,348,500 546,693,164 46,531,478 55,097,604 11,160,141
----------------------------------------------------------------------------------------
Net assets, at value ......... $ 39,700,613 $ 572,824,058 $ 49,081,892 $ 58,096,632 $ 11,761,434
========================================================================================
</TABLE>
See notes to financial statements. 63
<PAGE>
FRANKLIN MUNICIPAL SECURITIES TRUST
Financial Statements (continued)
STATEMENT OF ASSETS AND LIABILITIES (CONT.)
NOVEMBER 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN
ARKANSAS CALIFORNIA HAWAII TENNESSEE WASHINGTON
MUNICIPAL HIGH YIELD MUNICIPAL MUNICIPAL MUNICIPAL
BOND FUND MUNICIPAL FUND BOND FUND BOND FUND BOND FUND
CLASS I:
<S> <C> <C> <C> <C> <C>
Net assets, at value ............... $ 39,700,613 $ 511,420,322 $49,081,892 $ 58,096,632 $ 11,761,434
============================================================================================
Shares outstanding ................. 3,591,050 47,209,852 4,346,709 5,087,465 1,109,558
============================================================================================
Net asset value per share* ......... $ 11.06 $ 10.83 $ 11.29 $ 11.42 $ 10.60
============================================================================================
Maximum offering price per share
(net asset value per share divided $ 11.55 $ 11.31 $ 11.79 $ 11.93 $ 11.07
by 95.75% ============================================================================================
CLASS II:
Net assets, at value ............... -- $ 61,403,736 -- -- --
============================================================================================
Shares outstanding ................. -- 5,653,949 -- -- --
============================================================================================
Net asset value per share* ......... -- $ 10.86 -- -- --
============================================================================================
Maximum offering price per share
(net asset value per share divided -- $ 10.97 -- -- --
by 99.00%) ============================================================================================
============================================================================================
</TABLE>
*Redemption price is equal to net asset value less any applicable contingent
deferred sales charge.
64 See notes to financial statements.
<PAGE>
FRANKLIN MUNICIPAL SECURITIES TRUST
Financial Statements (continued)
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED NOVEMBER 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN
ARKANSAS CALIFORNIA HAWAII TENNESSEE WASHINGTON
MUNICIPAL HIGH YIELD MUNICIPAL MUNICIPAL MUNICIPAL
BOND FUND MUNICIPAL FUND BOND FUND BOND FUND BOND FUND
--------------------------------------------------------------------------------
Investment income:
<S> <C> <C> <C> <C> <C>
Interest ................................. $ 872,683 $ 14,876,713 $ 1,314,901 $ 1,371,443 $ 300,676
================================================================================
Expenses:
Management fees (Note 3) ................. 102,935 1,284,764 147,431 161,364 34,377
Distribution fees (Note 3)
Class I ................................. 16,454 231,826 23,591 25,820 5,500
Class II ................................ -- 167,435 -- -- --
Transfer agent fees (Note 3) ............. 4,158 55,507 9,618 6,003 1,860
Custodian fees ........................... 165 2,051 271 208 58
Reports to shareholders .................. 1,933 25,592 4,349 3,205 897
Registration and filing fees ............. 2,875 21,275 876 3,425 1,080
Professional fees ........................ 1,379 9,894 1,616 1,613 953
Trustees' fees and expenses .............. 1,799 9,340 2,820 2,660 700
Other .................................... 1,274 4,048 1,767 1,826 1,366
--------------------------------------------------------------------------------
Total expenses ...................... 132,972 1,811,732 192,339 206,124 46,791
Expenses waived/paid by affiliate
(Note 3) ........................... (116,518) (590,200) (98,028) (103,000) (41,291)
--------------------------------------------------------------------------------
Net expenses ....................... 16,454 1,221,532 94,311 103,124 5,500
--------------------------------------------------------------------------------
Net investment income ............. 856,229 13,655,181 1,220,590 1,268,319 295,176
--------------------------------------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from investments 11,483 205,549 2,579 4,688 (4,874)
Net unrealized appreciation on investments 182,140 9,071,967 555,860 654,002 138,393
--------------------------------------------------------------------------------
Net realized and unrealized gain .......... 193,623 9,277,516 558,439 658,690 133,519
--------------------------------------------------------------------------------
Net increase in net assets resulting
from operations .......................... $ 1,049,852 $ 22,932,697 $ 1,779,029 $ 1,927,009 $ 428,695
================================================================================
</TABLE>
See notes to financial statements. 65
<PAGE>
FRANKLIN MUNICIPAL SECURITIES TRUST
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE SIX MONTHS ENDED NOVEMBER 30, 1998 (UNAUDITED)
AND THE YEAR ENDED MAY 31, 1998
<TABLE>
<CAPTION>
FRANKLIN ARKANSAS FRANKLIN CALIFORNIA HIGH
MUNICIPAL BOND FUND YIELD MUNICIPAL FUND
---------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
NOVEMBER 30, 1998 MAY 31, 1998 NOVEMBER 30, 1998 MAY 31, 1998
---------------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
<S> <C> <C> <C> <C>
Net investment income .................... $ 856,229 $ 1,143,143 $ 13,655,181 $ 18,960,085
Net realized gain (loss) from investments 11,483 5,532 205,549 (116,948)
Net unrealized appreciation on investments 182,140 834,896 9,071,967 15,006,888
---------------------------------------------------------------------
Net increase in net assets resulting
from operations ..................... 1,049,852 1,983,571 22,932,697 33,850,025
Distributions to shareholders from:
Net investment income:
Class I ................................. (860,584) (1,144,675) (12,412,026) (17,741,641)
Class II ................................ -- -- (1,237,045) (1,199,464)
In excess of investment income:
Class I ................................. (551,198) --
Class II ................................ -- -- (54,935) --
---------------------------------------------------------------------
Total distributions to shareholders ....... (860,584) (1,144,675) (14,255,204) (18,941,105)
Capital share transactions (Note 2)
Class I .................................. 9,134,163 16,397,936 91,401,098 184,852,793
Class II ................................. -- -- 20,171,778 28,791,162
---------------------------------------------------------------------
Total capital share transactions .......... 9,134,163 16,397,936 111,572,876 213,643,955
Net increase in net assets ........... 9,323,431 17,236,832 120,250,369 228,552,875
Net assets:
Beginning of period ....................... 30,377,182 13,140,350 452,573,689 224,020,814
---------------------------------------------------------------------
End of period ............................. $ 39,700,613 $ 30,377,182 $ 572,824,058 $ 452,573,689
=====================================================================
Undistributed net investment income
(accumulated distributions in excess of net
investment income) included in net assets:
End of period ............................ $ 39,301 $ 43,656 $ (606,133) $ (6,110)
=====================================================================
</TABLE>
66 See notes to financial statements.
<PAGE>
FRANKLIN MUNICIPAL SECURITIES TRUST
FINANCIAL STATEMENTS (continued)
STATEMENTS OF CHANGES IN NET ASSETS (CONT.)
FOR THE SIX MONTHS ENDED NOVEMBER 30, 1998 (UNAUDITED)
AND THE YEAR ENDED MAY 31, 1998
<TABLE>
<CAPTION>
FRANKLIN HAWAII FRANKLIN TENNESSEE
MUNICIPAL BOND FUND MUNICIPAL BOND FUND
---------------------------------- -----------------------------------
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
NOVEMBER 30, 1998 MAY 31, 1998 NOVEMBER 30, 1998 MAY 31, 1998
----------------- ------------ ----------------- ------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income .................... $ 1,220,590 $ 2,293,946 $ 1,268,319 $ 1,862,477
Net realized gain from investments ....... 2,579 246,873 4,688 201,405
Net unrealized appreciation on investments 555,860 1,170,843 654,002 1,488,290
------------ ------------ ------------ ------------
Net increase in net assets resulting
from operations .................... 1,779,029 3,711,662 1,927,009 3,552,172
Distributions to shareholders from net
investment income ......................... (1,242,189) (2,307,589) (1,270,915) (1,851,295)
Capital share transactions (Note 2) ....... 3,406,911 3,731,394 12,914,701 16,116,499
------------ ------------ ------------ ------------
Net increase in net assets ........... 3,943,751 5,135,467 13,570,795 17,817,376
Net assets:
Beginning of period ....................... 45,138,141 40,002,674 44,525,837 26,708,461
------------ ------------ ------------ ------------
End of period ............................. $ 49,081,892 $ 45,138,141 $ 58,096,632 $ 44,525,837
============ ============ ============ ============
Undistributed net investment income included
in net assets:
End of period ............................ $ 92,751 $ 114,350 $ 31,708 $ 34,3047
------------ ------------ ------------ ------------
</TABLE>
See notes to financial statements.
67
<PAGE>
FRANKLIN MUNICIPAL SECURITIES TRUST
FINANCIAL STATEMENTS (continued)
STATEMENTS OF CHANGES IN NET ASSETS (CONT.)
FOR THE SIX MONTHS ENDED NOVEMBER 30, 1998 (UNAUDITED)
AND THE YEAR ENDED MAY 31, 1998
<TABLE>
<CAPTION>
FRANKLIN WASHINGTON
MUNICIPAL BOND FUND
----------------------------------
SIX MONTHS ENDED YEAR ENDED
NOVEMBER 30, 1998 MAY 31, 1998
----------------- ------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income ................................... $ 295,176 $ 520,263
Net realized gain (loss) from investments ............... (4,874) 2,260
Net unrealized appreciation on investments .............. 138,393 345,821
------------ ------------
Net increase in net assets resulting from operations 428,695 868,344
Distributions to shareholders from net investment income . (308,414) (526,988)
Capital share transactions (Note 2) ...................... 1,264,994 1,674,114
------------ ------------
Net increase in net assets .......................... 1,385,275 2,015,470
Net assets:
Beginning of period ...................................... 10,376,159 8,360,689
------------ ------------
End of period ............................................ $ 11,761,434 $ 10,376,159
------------ ------------
Undistributed net investment income included in net assets:
End of period ............................................ $ 20,751 $ 33,989
------------ ------------
</TABLE>
See notes to financial statements.
68
<PAGE>
FRANKLIN MUNICIPAL SECURITIES TRUST
Notes to Financial Statements (unaudited)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Municipal Securities Trust (the Trust) is registered under the
Investment Company Act of 1940 as an open-end, non-diversified investment
company, consisting of five series (the Funds). The Funds' investment objectives
are to provide tax-free income.
The following summarizes the Funds' significant accounting policies.
a. SECURITY VALUATION
Tax-free bonds generally trade in the over-the-counter market and are valued
within the range of the latest quoted bid and asked prices. In the absence of a
sale or reported bid and asked prices, information with respect to bond and note
transactions, quotations from bond dealers, market transactions in comparable
securities, and various relationships between securities are used to determine
the value of the security. The Trust may utilize a pricing service, bank or
broker/dealer experienced in such matters to perform any of the pricing
functions under procedures approved by the Board of Trustees. Securities for
which market quotations are not readily available are valued at fair value as
determined by management in accordance with procedures established by the Board
of Trustees.
b. INCOME TAXES
No provision has been made for income taxes because each Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and
distribute all of its taxable income.
c. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Interest income and estimated expenses are accrued daily. Bond discount and
premium are amortized on an income tax basis. Dividends from net investment
income are normally declared daily and distributed monthly to shareholders.
Other distributions are recorded on the ex-dividend date.
Common expenses incurred by the Trust are allocated among the Funds based on the
ratio of net assets of each Fund to the combined net assets. Other expenses are
charged to each Fund on a specific identification basis.
Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class.
d. ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the reporting
period. Actual results could differ from those estimates.
69
<PAGE>
FRANKLIN MUNICIPAL SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
2. SHARES OF BENEFICIAL INTEREST
The classes of shares offered within each of the funds are indicated below. The
shares differ by their initial sales load, distribution fees, voting rights on
matters affecting a single class and the exchange privilege of each class.
Class I
Franklin Arkansas Municipal Bond Fund
Franklin Hawaii Municipal Bond Fund
Franklin Tennessee Municipal Bond Fund
Franklin Washington Municipal Bond Fund
Class I & Class II
Franklin California High Yield Municipal Fund
On March 19, 1998, the Board approved name changes for Class I and Class II
shares to Class A and Class C, respectively. The effective date of the name
changes is January 1, 1999.
At November 30, 1998, there were an unlimited number of shares authorized (no
par value). Transactions in the Funds' shares were as follows:
<TABLE>
<CAPTION>
FRANKLIN ARKANSAS FRANKLIN CALIFORNIA
MUNICIPAL BOND FUND HIGH YIELD MUNICIPAL FUND
--------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
<S> <C> <C> <C> <C>
CLASS I SHARES:
Six months ended November 30, 1998
Shares sold ....................................... 1,015,188 $11,194,926 13,177,426 $141,586,768
Shares issued in reinvestment of distributions .... 36,618 404,199 466,590 5,016,338
Shares redeemed ................................... (223,815) (2,464,962) (5,132,035) (55,202,008)
--------- ----------- ---------- ------------
Net increase ...................................... 827,991 $ 9,134,163 8,511,981 $ 91,401,098
========= =========== ========== ============
Year ended May 31, 1998
Shares sold ....................................... 1,545,732 $16,752,477 22,284,623 $234,404,399
Shares issued in reinvestment of distributions .... 57,600 625,362 663,035 6,974,790
Shares redeemed ................................... (90,387) (979,903) (5,372,964) (56,526,396)
--------- ----------- ---------- ------------
Net increase ...................................... 1,512,945 $16,397,936 17,574,694 $184,852,793
========= =========== ========== ============
CLASS II SHARES:
Six months ended November 30, 1998
Shares sold ....................................... 2,157,081 $ 23,225,288
Shares issued in reinvestment of distributions .... 54,290 585,337
Shares redeemed ................................... (337,850) (3,638,847)
--------- ------------
Net increase ...................................... 1,873,521 $ 20,171,778
========= ============
Year ended May 31, 1998
Shares sold ....................................... 2,979,250 $ 31,420,783
Shares issued in reinvestment of distributions .... 51,598 545,089
Shares redeemed ................................... (300,304) (3,174,710)
--------- ------------
Net increase ...................................... 2,730,544 $ 28,791,162
========= ============
</TABLE>
70
<PAGE>
FRANKLIN MUNICIPAL SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
2. SHARES OF BENEFICIAL INTEREST (cont.)
<TABLE>
<CAPTION>
FRANKLIN HAWAII FRANKLIN TENNESSEE
MUNICIPAL BOND FUND MUNICIPAL BOND FUND
------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
<S> <C> <C> <C> <C>
Class I Shares:
Six months ended November 30, 1998
Shares sold ....................................... 463,181 $ 5,208,759 1,334,109 $ 15,139,401
Shares issued in reinvestment of distributions .... 38,803 436,362 62,051 704,900
Shares redeemed ................................... (198,581) (2,238,210) (258,179) (2,929,600)
-------- ------------ --------- ------------
Net increase ...................................... 303,403 $ 3,406,911 1,137,981 $ 12,914,701
======== ============ ========= ============
Year ended May 31, 1998
Shares sold ....................................... 779,362 $ 8,639,651 1,961,959 $ 21,692,685
Shares issued in reinvestment of distributions .... 74,894 830,944 103,474 1,149,741
Shares redeemed ................................... (517,067) (5,739,201) (609,509) (6,725,927)
-------- ------------ --------- ------------
Net increase ...................................... 337,189 $ 3,731,394 1,455,924 $ 16,116,499
======== ============ ========= ============
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN WASHINGTON
MUNICIPAL BOND FUND
-----------------------
SHARES AMOUNT
------ ------
<S> <C> <C>
Class I Shares:
Six months ended November 30, 1998
Shares sold .................................. 162,443 $ 1,712,566
Shares issued in reinvestment of distributions 18,618 196,371
Shares redeemed .............................. (61,278) (643,943)
------- -----------
Net increase ................................. 119,783 $ 1,264,994
======= ===========
Year ended May 31, 1998
Shares sold .................................. 187,538 $ 1,946,679
Shares issued in reinvestment of distributions 35,472 368,307
Shares redeemed .............................. (61,822) (640,872)
------- -----------
Net increase ................................. 161,188 $ 1,674,114
======= ===========
</TABLE>
3. TRANSACTIONS WITH AFFILIATES
Certain officers and trustees of the Funds are also officers or directors of
Franklin/Templeton Distributors, Inc. (Distributors), Franklin Advisers, Inc.
(Advisers), Franklin/Templeton Investor Services, Inc. (Investor Services), and
Franklin Templeton Services, Inc. (FT Services), the Funds' principal
underwriter, investment manager, transfer agent, and administrative manager,
respectively.
The Funds pay an investment management fee to Advisers based on the average net
assets of the Funds as follows:
Annualized
Fee Rate Daily Net Assets
.625% First $100 million
.50% Over $100 million, up to and including $250 million
.45% In excess of $250 million
71
<PAGE>
FRANKLIN MUNICIPAL SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
3. TRANSACTIONS WITH AFFILIATES (cont.)
Under an agreement with Advisers, FT Services provides administrative services
to the Funds. The fee is paid by Advisers based on average daily net assets, and
is not an additional expense of the Funds.
Advisers agreed in advance to waive management fees and assume payment of other
expenses, as noted in the Statements of Operations.
The Franklin Hawaii Municipal Bond Fund reimburses Distributors up to .10% per
year of its average daily net assets, the Franklin Arkansas Municipal Bond,
Franklin Tennessee Municipal Bond and Franklin Washington Municipal Bond Funds
reimburse Distributors up to .15% per year of the Funds' average daily net
assets, and the Franklin California High Yield Municipal Fund reimburses
Distributors up to .15% and .65% per year of the average daily net assets of
Class I and Class II, respectively, for costs incurred in marketing the Funds'
shares.
Distributors received (paid) net commissions from (on) sales of the Funds'
shares, and received contingent deferred sales charges for the period as
follows:
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN
ARKANSAS CALIFORNIA HAWAII TENNESSEE WASHINGTON
MUNICIPAL HIGH YIELD MUNICIPAL MUNICIPAL MUNICIPAL
BOND FUND MUNICIPAL FUND BOND FUND BOND FUND BOND FUND
--------- -------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net commissions received (paid) ..... $ (21,119) $(392,961) $ 5,118 $ (9,105) $ 3,165
Contingent deferred sales charges ... $ -- $ 25,971 $ -- $ -- $ --
</TABLE>
4. INCOME TAXES
At May 31, 1998, the Funds had tax basis capital losses which may be carried
over to offset future capital gains. Such losses expire as follows:
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN
ARKANSAS CALIFORNIA HAWAII WASHINGTON
MUNICIPAL HIGH YIELD MUNICIPAL MUNICIPAL
BOND FUND MUNICIPAL FUND BOND FUND BOND FUND
--------- -------------- --------- ---------
<S> <C> <C> <C> <C>
Capital loss carryovers expiring in: 2003 ......... $29,535 $1,431,250 $474,475 $ 82,647
2004 ......... -- 4,508 64,421 39,744
2005 ......... -- 390,400 -- --
------- ---------- -------- --------
$29,535 $1,826,158 $538,896 $122,391
======= ========== ======== ========
</TABLE>
At May 31, 1998 the Franklin California High Yield Municipal Fund and the
Franklin Washington Municipal Bond Fund had deferred capital losses occurring
subsequent to October 31, 1997 of $454,835 and $4,295, respectively. For tax
purposes, such losses will be reflected in the year ending May 31, 1999.
72
<PAGE>
FRANKLIN MUNICIPAL SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
4. INCOME TAXES (cont.)
At November 30, 1998, the net unrealized appreciation based on the cost of
investments for income tax purposes was as follows:
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN
ARKANSAS CALIFORNIA HAWAII TENNESSEE WASHINGTON
MUNICIPAL HIGH YIELD MUNICIPAL MUNICIPAL MUNICIPAL
BOND FUND MUNICIPAL FUND BOND FUND BOND FUND BOND FUND
--------- -------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Investments at cost ......... $ 37,308,691 $ 548,442,079 $ 46,035,573 $ 55,813,302 $ 11,100,073
============== ============= ============= ============= =============
Unrealized appreciation ..... $ 1,337,334 $ 29,927,876 $ 3,001,126 $ 2,857,898 $ 712,102
Unrealized depreciation ..... (6,470) (1,115,405) (6,426) (31,114) --
-------------- -------------- -------------- -------------- -------------
Net unrealized appreciation.. $ 1,330,864 $ 28,812,471 $ 2,994,700 $ 2,826,784 $ 712,102
-------------- -------------- -------------- -------------- -------------
</TABLE>
Net realized capital gains (losses) differ for financial statement and tax
purposes primarily due to differing treatments of wash sales.
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the
period ended November 30, 1998 were as follows:
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN
ARKANSAS CALIFORNIA HAWAII TENNESSEE WASHINGTON
MUNICIPAL HIGH YIELD MUNICIPAL MUNICIPAL MUNICIPAL
BOND FUND MUNICIPAL FUND BOND FUND BOND FUND BOND FUND
--------- -------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Purchases $ 6,978,542 $139,491,820 $ 4,120,269 $ 16,416,360 $ 1,365,448
Sales ... $ 1,144,774 $ 25,812,901 $ 907,900 $ 3,250,038 $ 216,414
</TABLE>
6. CREDIT RISK
The Funds have investments in excess of 10% of their total net assets in their
respective states. Such concentration may subject the Funds more significantly
to economic changes occurring within those states.
73
