CONTENTS
Shareholder Letter ...................................................... 1
Fund Reports
Franklin Arkansas Municipal Bond Fund ................................. 5
Franklin California High Yield Municipal Fund ......................... 10
Franklin Tennessee Municipal Bond Fund ................................ 19
Franklin Washington Municipal Bond Fund ............................... 25
Municipal Bond Ratings .................................................. 32
Financial Highlights & Statement of Investments ......................... 35
Financial Statements .................................................... 55
Notes to Financial Statements ........................................... 60
Independent Auditors' Report ............................................ 65
Tax Information ......................................................... 66
[FUND CATEGORY PYRAMID]
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SHAREHOLDER LETTER
Dear Shareholder:
It is a pleasure to bring you Franklin Municipal Securities Trust's annual
report for the period ended May 31, 1999.
During the 12 months under review, the municipal bond market was comparatively
stable in what could otherwise be characterized as a challenging year for global
and domestic markets. The economic stresses felt in Asia, Latin America and
Eastern Europe during third and fourth quarters 1998 caused investors to seek
safety in U.S. Treasury bonds, driving yields on the 30-year Treasury bond to an
all-time low of 4.70% on October 5, 1998. These regions had a direct impact on
the U.S. economy as foreign countries purchased fewer American goods, leading to
an overall reduction in U.S. export levels. In light of lowered export levels,
it was expected that the U.S. economy would see some slowing in the fourth
quarter of 1998.
However, it became apparent as 1999 got under way that fourth quarter 1998
growth actually exceeded expectations, and the U.S. gross domestic product
(GDP)grew at a 6% annualized rate. The American consumer boosted the domestic
economy at much higher-than-anticipated levels, which resulted in the Federal
Reserve Board's (the Fed's) moving to a neutral position with respect to
short-term interest rates rather than its previous bias toward lowering rates
that began in 1998. The change in the Fed's position caused 30-year Treasury
yields to rise to a first-quarter peak of 5.69% on March 4, 1999. However, near
the end of the reporting period the Fed announced a tightening bias, which could
bring higher interest rates.
The municipal bond market remained relatively calm throughout the Treasury
market volatility as demand was fundamentally supported by an increased
municipal bond supply. As interest rates declined, municipal bond issuers
increased their refinancing activity of outstanding, higher interest-rate debt.
Additionally, many municipalities were in excellent fiscal condition due to the
strong national economy, which gave them higher confidence to borrow money for
new projects. This environment led to a surge in 1998's new-issue supply with
total volume closely matching 1993's record $293 billion. Although demand from
individual investors was relatively stable, at times the municipal bond market
had difficulty absorbing the large supply of bonds.
These conditions led to attractive municipal bond yields, as municipal bond
prices lagged those of similar Treasury bonds. For example, in October 1998 an
investor could have purchased a 30-year, AAA municipal bond yielding
approximately 105% of the yield on a comparable Treasury bond, versus the
historical average of approximately 85%. Municipal market valuations have not
been this attractive since 1986. With the early 1999 rise in Treasury yields,
and the Bond Buyer 40 index showing an increase in yield to 5.37% for May 1999,
the municipal-to-Treasury yield ratio declined to 92% on May 31, 1999, still
well above the historical average.(*) This relatively high ratio has allowed
municipal investors to earn attractive yields compared with other fixed-income
opportunities.
The prevalence of bond insurance was another trend that affected the municipal
bond market. The increasingly higher percentages of AAA-insured municipal bond
issues coming to market over the past four years seems to have finally peaked at
more than 50% for municipal issuers in 1998. With investors continuing to demand
higher yields in a falling interest-rate environment, municipal bond market
credit spreads, or the additional interest rate paid to investors for BBB-
versus AAA-rated bonds, were extremely narrow.
Looking forward, we anticipate supply pressures to moderate in 1999. Already,
municipal new issuance for the first quarter of the year was down about 19.3%,
compared with the same period last calendar year.(**)
(*)The unmanaged Bond Buyer Municipal 40 Index is composed of the Yield to
Maturity of 40 bonds. The index attempts to track the new-issue market as
closely as possible, so it changes bonds twice a month, adding all new bonds
that meet certain requirements and deleting an equivalent number according to
their secondary market trading activity. As a result, the average par call date,
average maturity date and average coupon rate change over time. The average
maturity generally has been about 29-30 years.
(**)Source: The Bond Buyer, 4/1/99.
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WHAT DOES "TAXABLE EQUIVALENT" MEAN FOR YOU?
For yield and distribution rate, taxable equivalent is the amount a taxable
investment would have to earn to match the income from a tax-free investment
such as a municipal bond. You can find your fund's taxable equivalent
distribution rate and yield in each fund's Performance Summary.
- --------------------------------------------------------------------------------
Municipal bonds continue to be an attractive investment for those investors
seeking tax-free income as well as an opportunity to diversify risk in their
portfolios. Generally, a taxable investment would need to offer a higher yield,
called the taxable equivalent yield, to match the yield on a tax-free
investment. We encourage you to discuss your financial goals with an investment
representative. He or she can address concerns about volatility and help you
diversify your investments and stay focused on the long term. Mutual funds offer
a level of diversification that is almost impossible for individual investors to
achieve on their own. As always, we appreciate your support, welcome your
questions and comments and look forward to serving your investment needs in the
years ahead.
Sincerely,
/s/ Charles B. Johnson
Charles B. Johnson
Chairman
Franklin Municipal Securities Trust
/s/ Thomas J. Kenny
Thomas J. Kenny
Director
Franklin Municipal Bond Department
FRANKLIN ARKANSAS MUNICIPAL BOND FUND
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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)
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STATE UPDATE(2)
Arkansas' economy continues to make slow and steady progress. Consistent,
moderate growth, conservative financial operations and low revenue-supported
debt make the state a stable performer. Arkansas' economic base has diversified
broadly in the last few years, with manufacturing, trade and services making up
the lion's share of new jobs. Unemployment fell to 4.8% at the end of 1998,
substantially lower than in 1997, but still above the national average. The
state ended fiscal 1998 with a surplus of $1.4 billion, and year-to-date 1999
figures show revenues increasing by 5.7% over 1998. Tax-supported debt, at only
0.8% of personal income, is among the nation's lowest.
CREDIT QUALITY BREAKDOWN(*)
Franklin Arkansas Municipal Bond Fund
Based on Total Long-Term Investments
5/31/99
[PIE CHART]
AAA 37.2%
AA 11.0%
A 20.4%
BBB 31.4%
(*)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 taxable.
(2) Standard & Poor's Credit Week Municipal, 4/26/99.
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 36 of
this report.
DIVIDEND DISTRIBUTIONS
Franklin Arkansas
Municipal Bond Fund - Class A
6/1/98-5/31/99
DIVIDEND
MONTH PER SHARE
- ---------------------------------------------------------
June 4.8 cents
July 4.8 cents
August 4.8 cents
September 4.8 cents
October 4.8 cents
November 4.8 cents
December 4.8 cents
January 4.8 cents
February 4.8 cents
March 4.4 cents
April 4.4 cents
May 4.4 cents
- ---------------------------------------------------------
TOTAL 56.4 CENTS
Arkansas does face some challenges, however. The state's median household income
is approximately 78% of the national average. A sub-par transportation network
tends to slow its economic growth. Additionally, education levels remain below
the national average.
Despite these issues, the future looks promising as the state's construction and
housing starts bolster the economy going forward.
PORTFOLIO NOTES
During the reporting period Franklin Arkansas Municipal Bond Fund grew more than
37% in total net assets, from $30.3 million on May 31, 1998, to $41.9 million on
May 31, 1999. Over the reporting period, we saw the yield spread between AAA-
and BBB-rated bonds widen enough to consider portfolio purchases of bonds across
the rating spectrum. Some of these purchases included Little River County -
Georgia Pacific, Pine Bluff Environmental - International Paper, Arkansas State
Development Finance Authority - White River Medical Center, Pulaski County
Public Facilities Board Refunding Series A GNMA Secured and Pulaski County -
Catholic Health Initiatives. The fund continued to focus on keeping fully
invested in bonds with strong income earning potential as the new cash flow came
into the fund.
If you had invested $10,000 in the fund's Class A shares at inception on May 10,
1994, as of May 31, 1999, you would have received monthly tax-free income
dividend checks totaling more than $2,627. If you had reinvested all your
distributions, including capital gains, your account would have been worth
$13,472.(3) In both cases, the fund has provided shareholders attractive
returns. Of course, this was a period of generally declining interest rates and
rising bond prices, and past performance cannot guarantee future results.
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of May 31, 1999, 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.
Franklin Arkansas Municipal Bond Fund was closed to new investors after the
close of business on January 12, 1999, when Franklin Municipal Securities
Trust's board of trustees approved a proposal to merge Franklin Arkansas
Municipal Bond Fund into Franklin Federal Tax-Free Income Fund, subject to
shareholder approval. The board of trustees believes this proposed merger would
benefit shareholders, as discussed in the proxy materials, "Franklin Municipal
Securities Trust Joint Prospectus/Proxy Statement," dated April 22, 1999. The
investment goal of Franklin Federal Tax-Free Income Fund is to provide investors
with as high a level of interest income exempt from federal income taxes as is
consistent with prudent investing, while seeking preservation of shareholders'
capital, by investing in municipal securities throughout the nation.
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PORTFOLIO BREAKDOWN
Franklin Arkansas
Municipal Bond Fund
5/31/99
% OF TOTAL
LONG-TERM
SECTOR INVESTMENTS
- ---------------------------------------------------------
Utilities 20.9%
Hospitals 14.8%
Industrial 14.6%
Housing 12.9%
Other Revenue 11.0%
Transportation 7.3%
General Obligation 5.6%
Education 5.3%
Sales Tax 4.9%
Prerefunded 2.2%
Health Care 0.5%
(3.) Total returns include sales charges and assume reinvestment of dividends
and capital gains at net asset value. Class A: Subject to the maximum 4.25%
initial sales charge. Past expense reductions by the fund's manager increased
the fund's total returns.
FRANKLIN ARKANSAS MUNICIPAL BOND FUND
PERFORMANCE SUMMARY AS OF 5/31/99
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 (6/1/98-5/31/99)
Class A Change 5/31/99 5/31/98
- --------------------------------------------------------------------
Net Asset Value -$0.15 $10.84 $10.99
Distributions
-------------------------------------
Dividend Income $0.5640
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CLASS A:
Subject to the maximum 4.25% initial sales charge. Past expense reductions by
the fund's manager increased the fund's total returns.
- --------------------------------------------------------------------------------
PERFORMANCE
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR 5-YEAR (5/10/94)
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) +3.81% +39.99% +40.83%
Average Annual Total Return(2) -0.62% +6.03% +6.10%
Distribution Rate(3) 4.35%
Taxable Equivalent Distribution Rate(4) 7.74%
30-Day Standardized Yield(5) 4.17%
Taxable Equivalent Yield(4) 7.42%
</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.
(3.) Distribution rate is based on an annualization of the current 4.1 cent per
share monthly dividend and the maximum offering price of $11.32 on May 31, 1999.
(4.) Taxable equivalent distribution rate and yield assume the 1999 maximum
combined federal and Arkansas state personal income tax bracket of 43.8%, based
on the federal income tax rate of 39.6%.
(5.) Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended May 31, 1999.
- --------------------------------------------------------------------------------
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.
TOTAL RETURN INDEX COMPARISON
FOR HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes the applicable, maximum sales charge, fund expenses, account
fees and reinvested distributions. The unmanaged index differs from the fund in
composition, does not pay management fees or expenses and includes reinvested
dividends. One cannot invest directly in an index. Performance of the fund's
shares exceeded the rate of inflation as measured by the Consumer Price Index
(CPI).
[CLASS A LINE GRAPH]
GRAPHIC MATERIAL (4)
The following line graph compares the performance of Franklin Arkansas Municipal
Bond Fund - Class A shares to that of the Lehman Brothers Municipal Bond Index
and the Consumer Price Index based on a $10,000 investment from 5/10/94 -
5/31/99.
<TABLE>
<CAPTION>
Date Franklin Arkansas Municipal Bond Lehman Brothers Municipal CPI
---- Fund-Class A Bond Index ---
-------------------------------- -------------------------
<S> <C> <C> <C> <C> <C>
05/10/1994 $9,579 $10,000 $10,000
05/31/1994 $9,636 0.59% $10,059 0.05% $10,005
06/30/1994 $9,550 -0.61% $9,998 0.34% $10,039
07/31/1994 $9,722 1.83% $10,181 0.27% $10,066
08/31/1994 $9,741 0.35% $10,216 0.40% $10,106
09/30/1994 $9,565 -1.47% $10,066 0.27% $10,133
10/31/1994 $9,271 -1.78% $9,887 0.07% $10,141
11/30/1994 $8,978 -1.81% $9,708 0.13% $10,154
12/31/1994 $9,268 2.20% $9,921 0.00% $10,154
01/31/1995 $9,608 2.86% $10,205 0.40% $10,194
02/28/1995 $9,930 2.91% $10,502 0.40% $10,235
03/31/1995 $10,017 1.15% $10,623 0.33% $10,269
04/30/1995 $10,045 0.12% $10,636 0.33% $10,303
05/31/1995 $10,322 3.19% $10,975 0.20% $10,323
06/30/1995 $10,219 -0.87% $10,879 0.20% $10,344
07/31/1995 $10,268 0.95% $10,983 0.00% $10,344
08/31/1995 $10,388 1.27% $11,122 0.26% $10,371
09/30/1995 $10,487 0.63% $11,192 0.20% $10,392
10/31/1995 $10,648 1.45% $11,355 0.33% $10,426
11/30/1995 $10,830 1.66% $11,543 -0.07% $10,419
12/31/1995 $10,952 0.96% $11,654 -0.07% $10,411
01/31/1996 $11,002 0.76% $11,743 0.59% $10,473
02/29/1996 $10,907 -0.68% $11,663 0.32% $10,506
03/31/1996 $10,781 -1.28% $11,513 0.52% $10,561
04/30/1996 $10,759 -0.28% $11,481 0.39% $10,602
05/31/1996 $10,800 -0.04% $11,477 0.19% $10,622
06/30/1996 $10,947 1.09% $11,602 0.06% $10,629
07/31/1996 $11,042 0.91% $11,707 0.19% $10,649
08/31/1996 $11,030 -0.02% $11,705 0.19% $10,669
09/30/1996 $11,211 1.40% $11,869 0.32% $10,703
10/31/1996 $11,351 1.13% $12,003 0.32% $10,737
11/30/1996 $11,534 1.83% $12,223 0.19% $10,758
12/31/1996 $11,489 -0.42% $12,171 0.00% $10,758
01/31/1997 $11,499 0.19% $12,194 0.32% $10,792
02/28/1997 $11,619 0.92% $12,307 0.31% $10,826
03/31/1997 $11,474 -1.33% $12,143 0.25% $10,853
04/30/1997 $11,584 0.84% $12,245 0.12% $10,866
05/31/1997 $11,761 1.51% $12,430 -0.06% $10,859
06/30/1997 $11,883 1.07% $12,563 0.12% $10,872
07/31/1997 $12,219 2.77% $12,911 0.12% $10,885
08/31/1997 $12,105 -0.94% $12,789 0.19% $10,906
09/30/1997 $12,274 1.19% $12,942 0.25% $10,933
10/31/1997 $12,353 0.64% $13,024 0.25% $10,961
11/30/1997 $12,455 0.59% $13,101 -0.06% $10,954
12/31/1997 $12,649 1.46% $13,293 -0.12% $10,941
01/31/1998 $12,763 1.03% $13,429 0.19% $10,962
02/28/1998 $12,762 0.03% $13,433 0.19% $10,983
03/31/1998 $12,795 0.09% $13,446 0.19% $11,003
04/30/1998 $12,780 -0.45% $13,385 0.18% $11,023
05/31/1998 $12,978 1.58% $13,597 0.18% $11,043
06/30/1998 $13,035 0.39% $13,650 0.12% $11,056
07/31/1998 $13,080 0.25% $13,684 0.12% $11,070
08/31/1998 $13,245 1.55% $13,896 0.12% $11,083
09/30/1998 $13,398 1.25% $14,069 0.12% $11,096
10/31/1998 $13,347 0.00% $14,069 0.24% $11,123
11/30/1998 $13,393 0.35% $14,119 0.00% $11,123
12/31/1998 $13,427 0.25% $14,154 -0.06% $11,116
01/31/1999 $13,559 1.19% $14,322 0.24% $11,143
02/28/1999 $13,508 -0.44% $14,259 0.12% $11,156
03/31/1999 $13,537 0.14% $14,279 0.30% $11,190
04/30/1999 $13,566 0.25% $14,315 0.73% $11,271
05/31/1999 -0.74% $13,489 -0.58% $14,232 0.00% $11,271
Total Return 34.89% 42.32% 12.71%
</TABLE>
(*)Source: Standard and Poor's(R) Micropal.
Past performance is not predictive of future results.
CREDIT QUALITY BREAKDOWN*
Franklin California High Yield Municipal Fund
Based on Total Long-Term Investments
5/31/99
[PIE CHART NOT SHOWN]
AAA - 10.8%
AA - 3.9%
A - 17.7%
BBB - 46.7%
Below Investment
Grade - 20.9%
*Quality breakdown may include internal ratings for bonds not rated by a
national rating agency.
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 by investing primarily in a portfolio of high-yielding, medium-,
lower-, and non-rated California municipal securities.(1)
STATE UPDATE
California's economy prospered during the year under review. According to the
state's annual job report, California added 454,000 nonfarm jobs, more than in
any of the past 15 years. These new jobs reflected a decade-long shift in the
state's key industries, with computers, software and entertainment overtaking
traditional manufacturing sectors such as cars, airplanes and steel in
importance. California home sales, another economic health indicator, reached
their highest level since 1989. Many renters were able to benefit from low
mortgage rates and secure employment to become first-time buyers.
(1). The fund may invest as much as 100% of its assets in bonds that pay
interest subject to federal alternative minimum tax. All or a significant
portion of the income on these obligations may be subject to such tax.
Distributions of capital gains and of ordinary income from accrued market
discount, if any, are taxable. In general, an investor is paid a higher yield to
assume a greater degree of risk.
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.
Despite California's economic ties to Asia, several factors insulated the
state's economy from problems affecting that region during the year under
review. First, export losses to Asia were offset by gains to higher growth
regions or nations, such as Europe, Canada, Mexico and South America. Second,
only two of the state's major industries, aerospace and technology, depended on
Asia for a large percentage of their earnings. Third, many of the state's pre-
mier industries, such as media, transportation and financial services, cater to
a national or regional market. However, continued Asian troubles may bring about
further California export declines with corresponding production cutbacks and
layoffs in the future. Their impact has been limited so far because of the time
it takes for export declines to affect jobs and spending.
Overall, California boasts a rosy fiscal outlook. Taxes generated by the growing
economy should pump an extra $1.3 billion into the state's accounts in the
upcoming months, according to a legislative analyst who attributes the
unanticipated windfall chiefly to capital gains taxes on profits made by stock
market investors.
PORTFOLIO NOTES
The municipal bond market experienced a significant increase in yields over the
last six months of the reporting period as yields on the 30-year Treasury rose
from 4.7% on October 5, 1998, to 5.8% on May 31, 1999. The yield increase can be
mostly attributed to continued strength in our domestic economy combined
with economic recovery abroad. The rise in interest rates adversely affected
municipal bond funds' share prices in general, as the value of their holdings
decreased. Amid the volatility in government rates, though, the municipal bond
market showed remarkable stability over the past year, and Franklin's municipal
bond funds performed well during that time.
PORTFOLIO BREAKDOWN
Franklin California
High Yield Municipal Fund
5/31/99
<TABLE>
<CAPTION>
% OF TOTAL
LONG-TERM
SECTOR INVESTMENTS
- -----------------------------------------
<S> <C>
Tax Allocation 16.8%
Transportation 14.7%
Mello-Roos 13.3%
Hospitals 11.7%
Special Assessment 7.2%
Education 6.3%
Utilities 5.9%
Certificates of Participation 4.9%
Prerefunded 4.6%
Health Care 4.4%
Other Revenue 3.4%
Housing 3.0%
Marks-Roos 1.8%
Industrial 1.0%
General Obligation 1.0%
</TABLE>
Franklin California High Yield Municipal Fund performed particularly well over
the reporting period. Our fiscally responsible buy-and-hold investment
philosophy, which seeks to provide high, tax-free income and share price
stability, proved itself during the latest surge in interest rates. The fund's
Class A share price, as measured by net asset value, decreased only five cents,
from $10.65 on May 31, 1998, to $10.60 on May 31, 1999, while the fund's total
net assets increased from $453 million to $662 million, for the same period.
Furthermore, the fund held a significant percentage of high coupon bonds, which
enabled it to make solid distributions while at the same time reducing share
price volatility. The fund has consistently performed well compared with its
peers, in income distribution and total return, which benefited our
shareholders.
The fund was able to take advantage of Franklin's presence in California to
structure issues to fit the portfolio's needs. By managing over $20 billion in
California municipal assets, Franklin had a distinct advantage over its
competitors in locating value. Consequently, the fund used the entire fund
group's buying power to find and structure new high yield issues.
Furthermore, the fund was able to take advantage of strong retail demand in the
secondary market to maintain stability in the fund's distributions and share
price.
The fund's success and growth led to an increasingly stable and diversified
asset base; however, such tremendous growth combined with the low interest-rate
environment prevalent over the reporting period increased pressure on the
dividend. Additionally, the greater penetration of insurance into the California
municipal bond market led to tighter yield spreads between higher- and
lower-rated credits, resulting in more competition and lower yields as the
supply of nonrated issues diminished. 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 gave us the
first look at new issues coming to market. Much of our strength lies in our
research staff and their ability to locate issues and find value in the market.
Recent fund purchases included Santa Rosa Fountaingrove Parkway District.
Fountaingrove is a 600-unit golf course community in the rapidly growing Santa
Rosa area. The district encompasses 560 acres with 200 housing units under
construction. Due to recent growth restrictions implemented by the city, the
district will likely be the city's last hillside development, which should
provide more value and stability to the project.
If you had invested $10,000 in the fund's Class A shares at inception on May 3,
1993, as of May 31, 1999, you would have received monthly tax-free income
dividend checks totaling more than $3,514. If you had reinvested all your
distributions, including capital gains, your account would have been worth
$14,591.(2) In both cases, the fund has provided shareholders attractive
returns. Of course, this was a period of generally declining interest rates and
rising bond prices, and past performance cannot guarantee future results.
We continue to follow our strategy of investing for income, share price
stability and tax efficiency. The fund should perform well into the next
reporting period, aided by relatively stable interest rates and ample supply of
new bonds.
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of May 31, 1999, 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.
(2). Total returns include sales charges and assume reinvestment of dividends
and capital gains at net asset value. Class A (formerly 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 total returns may be
lower. The fund's manager agreed in advance to waive a portion of its management
fees, which reduces operating expenses and increases total return to
shareholders. Without this waiver, the fund's total return would have been
lower. The fee waiver may be discontinued at any time upon notice to the fund's
Board of Trustees.
DIVIDEND DISTRIBUTIONS
Franklin California High Yield Municipal Fund
6/1/98-5/31/99
DIVIDEND PER SHARE
------------------
MONTH CLASS A CLASS 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
December 4.7 cents 4.35 cents
January 4.7 cents 4.35 cents
February 4.7 cents 4.35 cents
March 4.7 cents 4.13 cents
April 4.7 cents 4.13 cents
May 4.7 cents 4.13 cents
- --------------------------------------------------------------------------------
Total 58.2 cents 52.22 cents
FRANKLIN CALIFORNIA
HIGH YIELD MUNICIPAL FUND
CLASS A (formerly 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 total returns may be lower.(*)
CLASS C (formerly 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 A shares.(*)
(*)The fund's manager agreed in advance to waive a portion of its management
fees, which reduces operating expenses and increases distribution rate 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
4.61% and 4.21% for Class A and C shares respectively. The fee waiver may be
discontinued at any time upon notice to the fund's Board of Trustees.
PERFORMANCE SUMMARY AS OF 5/31/99
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 (6/1/98-5/31/99)
CLASS A CHANGE 5/31/99 5/31/98
----------------------------------------------------------------------------
Net Asset Value -$0.05 $10.60 $10.65
DISTRIBUTIONS
------------------------------------
Dividend Income $0.5820
CLASS C CHANGE 5/31/99 5/31/98
----------------------------------------------------------------------------
Net Asset Value -$0.05 $10.63 $10.68
DISTRIBUTIONS
------------------------------------
Dividend Income $0.5222
Past performance is not predictive of future results.
PERFORMANCE
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR 5-YEAR (5/3/93)
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) +5.07% +48.26% +52.51%
Average Annual Total Return(2) +0.63% +7.26% +6.43%
Distribution Rate(3) 5.04%
Taxable Equivalent Distribution Rate(4) 9.20%
30-Day Standardized Yield(5) 4.83%
Taxable Equivalent Yield(4) 8.82%
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS C 1-YEAR 3-YEAR (5/1/96)
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) +4.48% +26.84% +27.53%
Average Annual Total Return(2) +2.43% +7.88% +7.85%
Distribution Rate(3) 4.59%
Taxable Equivalent Distribution Rate(4) 8.38%
30-Day Standardized Yield(5) 4.45%
Taxable Equivalent Yield(4) 8.12%
</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 May 31,
1999.
(4). Taxable equivalent distribution rate and yield assume the 1999 maximum
combined federal and California state personal income tax bracket of 45.2%,
based on the federal income tax rate of 39.6%.
(5). Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended May 31, 1999.
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.
FRANKLIN CALIFORNIA HIGH
YIELD MUNICIPAL FUND
AVERAGE ANNUAL TOTAL RETURN
5/31/99
CLASS A
----------------------------------
1-Year +0.63%
5-Year +7.26%
SINCE INCEPTION (5/3/93) +6.43%
AVERAGE ANNUAL TOTAL RETURN
5/31/99
CLASS C
---------------------------------
1-Year +2.43%
3-Year +7.88%
SINCE INCEPTION (5/1/96) +7.85%
TOTAL RETURN INDEX COMPARISON
FOR HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes the current, applicable, maximum sales charge(s), fund
expenses, account fees and reinvested distributions. The unmanaged index differs
from the fund in composition, does not pay management fees or expenses and
includes reinvested dividends. One cannot invest directly in an index.
Performance of the fund's shares exceeded the rate of inflation as measured by
the Consumer Price Index (CPI).
[CLASS A LINE GRAPH]
GRAPHIC MATERIAL (9)
The following line graph compares the performance of Franklin California High
Yield Municipal Fund - Class A shares to that of the Lehman Brothers Municipal
Bond Index and the Consumer Price Index based on a $10,000 investment from
5/3/93 - 5/31/99. Source: Standard and Poor's Micropal.
<TABLE>
<CAPTION>
Franklin California High Yield Lehman Brothers
Date Municipal Fund-Class A Municipal Bond Index CPI
- ---- -------------------------------------------- ------------------------------- --------
<S> <C> <C> <C> <C> <C>
05/03/1993 $9,579 $10,000 $10,000
05/31/1993 $9,550 0.51% $10,051 0.13% $10,013
06/30/1993 $9,713 1.67% $10,218 0.14% $10,027
07/31/1993 $9,703 0.13% $10,232 0.00% $10,027
08/31/1993 $9,909 2.08% $10,445 0.28% $10,055
09/30/1993 $10,059 1.14% $10,564 0.21% $10,076
10/31/1993 $10,092 0.19% $10,584 0.41% $10,117
11/30/1993 $10,039 -0.88% $10,491 0.07% $10,124
12/31/1993 $10,223 2.11% $10,712 0.00% $10,124
01/31/1994 $10,346 1.14% $10,834 0.27% $10,152
02/28/1994 $10,183 -2.59% $10,553 0.34% $10,186
03/31/1994 $9,726 -4.07% $10,124 0.34% $10,221
04/30/1994 $9,759 0.85% $10,210 0.14% $10,235
05/31/1994 $9,843 0.87% $10,299 0.07% $10,242
06/30/1994 $9,744 -0.61% $10,236 0.34% $10,277
07/31/1994 $9,931 1.83% $10,423 0.27% $10,305
08/31/1994 $10,006 0.35% $10,460 0.40% $10,346
09/30/1994 $9,906 -1.47% $10,306 0.27% $10,374
10/31/1994 $9,763 -1.78% $10,123 0.07% $10,381
11/30/1994 $9,538 -1.81% $9,939 0.13% $10,395
12/31/1994 $9,604 2.20% $10,158 0.00% $10,395
01/31/1995 $9,892 2.86% $10,448 0.40% $10,436
02/28/1995 $10,181 2.91% $10,753 0.40% $10,478
03/31/1995 $10,397 1.15% $10,876 0.33% $10,513
04/30/1995 $10,453 0.12% $10,889 0.33% $10,547
05/31/1995 $10,736 3.19% $11,237 0.20% $10,568
06/30/1995 $10,631 -0.87% $11,139 0.20% $10,590
07/31/1995 $10,678 0.95% $11,245 0.00% $10,590
08/31/1995 $10,793 1.27% $11,387 0.26% $10,617
09/30/1995 $10,898 0.63% $11,459 0.20% $10,638
10/31/1995 $11,069 1.45% $11,625 0.33% $10,673
11/30/1995 $11,264 1.66% $11,818 -0.07% $10,666
12/31/1995 $11,427 0.96% $11,932 -0.07% $10,658
01/31/1996 $11,489 0.76% $12,023 0.59% $10,721
02/29/1996 $11,403 -0.68% $11,941 0.32% $10,756
03/31/1996 $11,296 -1.28% $11,788 0.52% $10,812
04/30/1996 $11,279 -0.28% $11,755 0.39% $10,854
05/31/1996 $11,330 -0.04% $11,750 0.19% $10,874
06/30/1996 $11,509 1.09% $11,878 0.06% $10,881
07/31/1996 $11,585 0.91% $11,986 0.19% $10,902
08/31/1996 $11,602 -0.02% $11,984 0.19% $10,922
09/30/1996 $11,792 1.40% $12,152 0.32% $10,957
10/31/1996 $11,936 1.13% $12,289 0.32% $10,992
11/30/1996 $12,153 1.83% $12,514 0.19% $11,013
12/31/1996 $12,131 -0.42% $12,461 0.00% $11,013
01/31/1997 $12,134 0.19% $12,485 0.32% $11,048
02/28/1997 $12,257 0.92% $12,600 0.31% $11,083
03/31/1997 $12,137 -1.33% $12,432 0.25% $11,110
04/30/1997 $12,262 0.84% $12,537 0.12% $11,124
05/31/1997 $12,424 1.51% $12,726 -0.06% $11,117
06/30/1997 $12,598 1.07% $12,862 0.12% $11,130
11/30/1993 $10,039 -0.88% $10,491 0.07% $10,124
12/31/1993 $10,223 2.11% $10,712 0.00% $10,124
01/31/1994 $10,346 1.14% $10,834 0.27% $10,152
02/28/1994 $10,183 -2.59% $10,553 0.34% $10,186
03/31/1994 $9,726 -4.07% $10,124 0.34% $10,221
04/30/1994 $9,759 0.85% $10,210 0.14% $10,235
05/31/1994 $9,843 0.87% $10,299 0.07% $10,242
06/30/1994 $9,744 -0.61% $10,236 0.34% $10,277
07/31/1994 $9,931 1.83% $10,423 0.27% $10,305
08/31/1994 $10,006 0.35% $10,460 0.40% $10,346
09/30/1994 $9,906 -1.47% $10,306 0.27% $10,374
10/31/1994 $9,763 -1.78% $10,123 0.07% $10,381
11/30/1994 $9,538 -1.81% $9,939 0.13% $10,395
12/31/1994 $9,604 2.20% $10,158 0.00% $10,395
01/31/1995 $9,892 2.86% $10,448 0.40% $10,436
02/28/1995 $10,181 2.91% $10,753 0.40% $10,478
03/31/1995 $10,397 1.15% $10,876 0.33% $10,513
04/30/1995 $10,453 0.12% $10,889 0.33% $10,547
05/31/1995 $10,736 3.19% $11,237 0.20% $10,568
06/30/1995 $10,631 -0.87% $11,139 0.20% $10,590
07/31/1995 $10,678 0.95% $11,245 0.00% $10,590
08/31/1995 $10,793 1.27% $11,387 0.26% $10,617
09/30/1995 $10,898 0.63% $11,459 0.20% $10,638
10/31/1995 $11,069 1.45% $11,625 0.33% $10,673
11/30/1995 $11,264 1.66% $11,818 -0.07% $10,666
12/31/1995 $11,427 0.96% $11,932 -0.07% $10,658
01/31/1996 $11,489 0.76% $12,023 0.59% $10,721
02/29/1996 $11,403 -0.68% $11,941 0.32% $10,756
03/31/1996 $11,296 -1.28% $11,788 0.52% $10,812
04/30/1996 $11,279 -0.28% $11,755 0.39% $10,854
05/31/1996 $11,330 -0.04% $11,750 0.19% $10,874
06/30/1996 $11,509 1.09% $11,878 0.06% $10,881
07/31/1996 $11,585 0.91% $11,986 0.19% $10,902
08/31/1996 $11,602 -0.02% $11,984 0.19% $10,922
09/30/1996 $11,792 1.40% $12,152 0.32% $10,957
10/31/1996 $11,936 1.13% $12,289 0.32% $10,992
11/30/1996 $12,153 1.83% $12,514 0.19% $11,013
12/31/1996 $12,131 -0.42% $12,461 0.00% $11,013
01/31/1997 $12,134 0.19% $12,485 0.32% $11,048
02/28/1997 $12,257 0.92% $12,600 0.31% $11,083
03/31/1997 $12,137 -1.33% $12,432 0.25% $11,110
04/30/1997 $12,262 0.84% $12,537 0.12% $11,124
05/31/1997 $12,424 1.51% $12,726 -0.06% $11,117
06/30/1997 $12,598 1.07% $12,862 0.12% $11,130
11/30/1993 $10,039 -0.88% $10,491 0.07% $10,124
12/31/1993 $10,223 2.11% $10,712 0.00% $10,124
01/31/1994 $10,346 1.14% $10,834 0.27% $10,152
02/28/1994 $10,183 -2.59% $10,553 0.34% $10,186
03/31/1994 $9,726 -4.07% $10,124 0.34% $10,221
04/30/1994 $9,759 0.85% $10,210 0.14% $10,235
05/31/1994 $9,843 0.87% $10,299 0.07% $10,242
06/30/1994 $9,744 -0.61% $10,236 0.34% $10,277
07/31/1994 $9,931 1.83% $10,423 0.27% $10,305
08/31/1994 $10,006 0.35% $10,460 0.40% $10,346
09/30/1994 $9,906 -1.47% $10,306 0.27% $10,374
10/31/1994 $9,763 -1.78% $10,123 0.07% $10,381
11/30/1994 $9,538 -1.81% $9,939 0.13% $10,395
12/31/1994 $9,604 2.20% $10,158 0.00% $10,395
01/31/1995 $9,892 2.86% $10,448 0.40% $10,436
02/28/1995 $10,181 2.91% $10,753 0.40% $10,478
03/31/1995 $10,397 1.15% $10,876 0.33% $10,513
04/30/1995 $10,453 0.12% $10,889 0.33% $10,547
05/31/1995 $10,736 3.19% $11,237 0.20% $10,568
06/30/1995 $10,631 -0.87% $11,139 0.20% $10,590
07/31/1995 $10,678 0.95% $11,245 0.00% $10,590
08/31/1995 $10,793 1.27% $11,387 0.26% $10,617
09/30/1995 $10,898 0.63% $11,459 0.20% $10,638
10/31/1995 $11,069 1.45% $11,625 0.33% $10,673
11/30/1995 $11,264 1.66% $11,818 -0.07% $10,666
12/31/1995 $11,427 0.96% $11,932 -0.07% $10,658
01/31/1996 $11,489 0.76% $12,023 0.59% $10,721
02/29/1996 $11,403 -0.68% $11,941 0.32% $10,756
03/31/1996 $11,296 -1.28% $11,788 0.52% $10,812
04/30/1996 $11,279 -0.28% $11,755 0.39% $10,854
05/31/1996 $11,330 -0.04% $11,750 0.19% $10,874
06/30/1996 $11,509 1.09% $11,878 0.06% $10,881
07/31/1996 $11,585 0.91% $11,986 0.19% $10,902
08/31/1996 $11,602 -0.02% $11,984 0.19% $10,922
09/30/1996 $11,792 1.40% $12,152 0.32% $10,957
10/31/1996 $11,936 1.13% $12,289 0.32% $10,992
11/30/1996 $12,153 1.83% $12,514 0.19% $11,013
12/31/1996 $12,131 -0.42% $12,461 0.00% $11,013
01/31/1997 $12,134 0.19% $12,485 0.32% $11,048
02/28/1997 $12,257 0.92% $12,600 0.31% $11,083
03/31/1997 $12,137 -1.33% $12,432 0.25% $11,110
04/30/1997 $12,262 0.84% $12,537 0.12% $11,124
05/31/1997 $12,424 1.51% $12,726 -0.06% $11,117
06/30/1997 $12,598 1.07% $12,862 0.12% $11,130
07/31/1997 $12,947 2.77% $13,219 0.12% $11,144
08/31/1997 $12,887 -0.94% $13,094 0.19% $11,165
09/30/1997 $13,127 1.19% $13,250 0.25% $11,193
10/31/1997 $13,231 0.64% $13,335 0.25% $11,221
11/30/1997 $13,347 0.59% $13,414 -0.06% $11,214
12/31/1997 $13,553 1.46% $13,609 -0.12% $11,201
01/31/1998 $13,670 1.03% $13,750 0.19% $11,222
02/28/1998 $13,685 0.03% $13,754 0.19% $11,243
03/31/1998 $13,685 0.09% $13,766 0.19% $11,265
04/30/1998 $13,672 -0.45% $13,704 0.18% $11,285
05/31/1998 $13,892 1.58% $13,921 0.18% $11,305
06/30/1998 $13,971 0.39% $13,975 0.12% $11,319
07/31/1998 $14,023 0.25% $14,010 0.12% $11,332
08/31/1998 $14,234 1.55% $14,227 0.12% $11,346
09/30/1998 $14,446 1.25% $14,405 0.12% $11,360
10/31/1998 $14,433 0.00% $14,405 0.24% $11,387
11/30/1998 $14,526 0.35% $14,455 0.00% $11,387
12/31/1998 $14,549 0.25% $14,491 -0.06% $11,380
01/31/1999 $14,680 1.19% $14,664 0.24% $11,407
02/28/1999 $14,649 -0.44% $14,599 0.12% $11,421
03/31/1999 $14,672 0.14% $14,620 0.30% $11,455
04/30/1999 $14,695 0.25% $14,656 0.73% $11,539
05/31/1999-0.71% $14,608 -0.58% $14,571 0.00% $11,539
Total Return 46.08% 45.71% 15.39%
</TABLE>
[CLASS C LINE GRAPH]
GRAPHIC MATERIAL (11)
The following line graph compares the performance of Franklin California High
Yield Municipal Fund - Class C shares to that of the Lehman Brothers Municipal
Bond Index and the Consumer Price Index based on a $10,000 investment from
5/1/96 - 5/31/99. Source: Standard and Poor's Micropal.
<TABLE>
<CAPTION>
Franklin California High Yield Lehman Brothers Municipal
Date Municipal Fund-Class C Bond Index CPI
- ---- ------------------------------ ------------------------- ---
<S> <C> <C> <C> <C> <C>
05/01/1996 $9,899 $10,000 $10,000
05/31/1996 $9,937 -0.04% $9,996 0.19% $10,019
06/28/1996 $10,080 1.09% $10,105 0.06% $10,025
07/31/1996 $10,152 0.91% $10,197 0.19% $10,044
08/30/1996 $10,153 -0.02% $10,195 0.19% $10,063
09/30/1996 $10,316 1.40% $10,338 0.32% $10,095
10/31/1996 $10,436 1.13% $10,454 0.32% $10,128
11/29/1996 $10,620 1.83% $10,646 0.19% $10,147
12/31/1996 $10,606 -0.42% $10,601 0.00% $10,147
01/31/1997 $10,601 0.19% $10,621 0.32% $10,179
02/28/1997 $10,701 0.92% $10,719 0.31% $10,211
03/31/1997 $10,601 -1.33% $10,576 0.25% $10,236
04/30/1997 $10,694 0.84% $10,665 0.12% $10,249
05/31/1997 $10,841 1.51% $10,826 -0.06% $10,243
06/30/1997 $10,977 1.07% $10,942 0.12% $10,255
07/31/1997 $11,287 2.77% $11,245 0.12% $10,267
08/31/1997 $11,230 -0.94% $11,139 0.19% $10,287
09/30/1997 $11,433 1.19% $11,272 0.25% $10,312
10/31/1997 $11,518 0.64% $11,344 0.25% $10,338
11/30/1997 $11,624 0.59% $11,411 -0.06% $10,332
12/31/1997 $11,786 1.46% $11,578 -0.12% $10,320
01/31/1998 $11,896 1.03% $11,697 0.19% $10,339
02/28/1998 $11,896 0.03% $11,700 0.19% $10,359
03/31/1998 $11,893 0.09% $11,711 0.19% $10,379
04/30/1998 $11,875 -0.45% $11,658 0.18% $10,397
05/31/1998 $12,072 1.58% $11,842 0.18% $10,416
06/30/1998 $12,129 0.39% $11,889 0.12% $10,428
07/31/1998 $12,169 0.25% $11,918 0.12% $10,441
08/31/1998 $12,345 1.55% $12,103 0.12% $10,453
09/30/1998 $12,522 1.25% $12,254 0.12% $10,466
10/31/1998 $12,506 0.00% $12,254 0.24% $10,491
11/30/1998 $12,583 0.35% $12,297 0.00% $10,491
12/31/1998 $12,587 0.25% $12,328 -0.06% $10,485
01/31/1999 $12,708 1.19% $12,475 0.24% $10,510
02/28/1999 $12,665 -0.44% $12,420 0.12% $10,523
03/31/1999 $12,678 0.14% $12,437 0.30% $10,554
04/30/1999 $12,703 0.25% $12,468 0.73% $10,631
05/31/1999-0.76% $12,625 -0.58% $12,396 0.00% $10,631
Total Return 26.25% 23.96% 6.31%
</TABLE>
(*)Source: Standard and Poor's Micropal.
Past performance is not predictive of future results.
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
Tennessee, the home of the 1998 college football national champions, has created
a solid plan for economic growth. The state has received numerous awards and
certificates of excellence for developing comprehensive accounting standards.
Tennessee has only a modest amount of debt. The debt to personal income ratio is
1.0%, or $214 per person, while the national average is 2.0%, or $505 per
person. A state statute requires supporting taxes for general obligation bonds
to be 1.5 times the debt service.(2) Furthermore, Tennessee has consistently
balanced its finances while simultaneously building up reserves.
However, the state needed to improve in a few areas. Economic growth has trailed
the nation in recent years, growing at less than half of the national average.
The increasingly important
(1). The fund may invest as much as 100% of its assets in bonds that pay
interest subject to federal alternative minimum tax. All or a significant
portion of the income on these obligations may be subject to such tax.
Distributions of capital gains and of ordinary income from accrued market
discount, if any, are taxable.
(2). Source: Moody's Investors Service, Municipal Credit Research, 4/9/99.
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 48 of
this report.
CREDIT QUALITY BREAKDOWN(*)
Franklin Tennessee Municipal Bond Fund
Based on Total Long-Term Investments
5/31/99
[PIE CHART]
AAA - 47.4%
AA - 40.2%
A - 3.9%
BBB - 7.8%
Below Investment Grade 0.7%
(*)Quality breakdown may include internal ratings for bonds not rated by a
national rating agency.
DIVIDEND DISTRIBUTIONS
FRANKLIN TENNESSEE
MUNICIPAL BOND FUND - CLASS A
6/1/98-5/31/99
DIVIDEND
MONTH PER SHARE
------------------------------
June 4.70 cents
July 4.70 cents
August 4.70 cents
September 4.60 cents
October 4.60 cents
November 4.60 cents
December 4.60 cents
January 4.60 cents
February 4.60 cents
March 4.45 cents
April 4.45 cents
May 4.45 cents
--------------------------------
TOTAL 55.05 CENTS
WHY DOES A FUND HOLD
PUERTO RICO BONDS?
During a time of limited diversification choices, a fund may purchase Puerto
Rico issues, which enjoy tax-free exemption in a majority of states and are in
general highly liquid and well-received in the marketplace.
service sector's growth slowed to 1.5% in 1998, in sharp contrast to neighboring
states.(2) Tackling these issues, Tennessee enacted various policies to promote
growth. In addition, the state continues to attract significant outside
investment, which was more than $2 billion annually throughout the '90s.(3)
Overall, the future looks promising for the Volunteer State. Tennessee has built
up strong financial measures while also enhancing its economic growth.
PORTFOLIO NOTES
Franklin Tennessee Municipal Bond Fund experienced extraordinary asset growth
during the fiscal year ended May 31, 1999. The fund's total net assets increased
73%, from $44.5 million to $77.1 million. We maintained our disciplined approach
of finding value in municipal securities with good call protection to keep
within the stated objective of providing long-term income when investing new
money. As a result, the fund boasts excellent call protection with a weighted
average life to first call of approximately eight years, at the end of the
fund's fiscal year.
During the reporting period, we sold from our ample supply of Puerto Rico bonds
to buy quality Tennessee bonds as they became available. As a result, we
increased our exposure to general obligation (GO) bonds by 5.8%, education bonds
by 1.7% and utility revenue bonds by 2.6% of total net assets. We found value in
the following credits: Shelby County GOs, Metropolitan Government of Nashville
and Davidson County GOs, Tennessee State School Board Authority Bonds and
Hallsdale-Powell Utility District of Knox County Water and Sewer Revenue Bonds.
These purchases helped maintain excellent sector and credit diversification as
well as superior credit quality, and the fund held 47.4% of total net assets of
AAA quality, on May 31, 1999.
(3). Source: Fitch IBCA, 4/99.
If you had invested $10,000 in the fund's Class A shares at inception on May 10,
1994, as of May 31, 1999, you would have received monthly tax-free income
dividend checks totaling more than $2,640. If you had reinvested all your
distributions, including capital gains, your account would have been worth
$13,844.(4) In both cases, the fund has provided shareholders attractive
returns. Of course, this was a period of generally declining interest rates and
rising bond prices, and past performance cannot guarantee future results.
Tennessee's sound economy has continued to exhibit strength. The state's low
debt burden combined with the growing need for new infrastructure such as
highways, schools and affordable housing should sustain the demand for new
borrowing. In addition, if interest rates remain low, refunding issues resulting
from lower borrowing costs available to issuers could add to new-issue supply.
Hence, our outlook for the state's municipal bond supply remains positive.
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of May 31, 1999, 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.
(4). Total returns include sales charges and assume reinvestment of dividends
and capital gains at net asset value. Class A: 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 total return
to shareholders. Without this waiver, the fund's total return would have been
lower. The fee waiver may be discontinued at any time upon notice to the fund's
Board of Trustees.
PORTFOLIO BREAKDOWN
FRANKLIN TENNESSEE
Municipal Bond Fund
5/31/99
<TABLE>
<CAPTION>
% OF TOTAL
LONG-TERM
SECTOR INVESTMENTS
- -----------------------------------------
<S> <C>
Utilities 25.8%
Hospitals 20.3%
General Obligation 19.0%
Education 8.1%
Housing 7.6%
Prerefunded 6.0%
Industrial 5.6%
Other Revenue 3.8%
Transportation 2.2%
Certificates of Participation 1.6%
</TABLE>
FRANKLIN TENNESSEE
MUNICIPAL BOND FUND
PERFORMANCE SUMMARY AS OF 5/31/99
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.
CLASS A:
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, total return and yield 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 4.11%.
The fee waiver may be discontinued at any time upon notice to the fund's Board
of Trustees.
PRICE AND DISTRIBUTION INFORMATION (6/1/98-5/31/99)
CLASS A CHANGE 5/31/99 5/31/98
---------------------------------------------------------------
Net Asset Value -$0.11 $11.16 $11.27
DISTRIBUTIONS
--------------------------------
Dividend Income $0.5505
Long-Term Capital Gain $0.0030
Short-Term Capital Gain $0.0233
TOTAL $0.5768
Franklin Tennessee Municipal Bond Fund paid distributions derived from long-term
capital gains of 0.3 cents ($0.0030) per share in December 1998. The fund hereby
designates such distributions as capital gain dividends per Internal Revenue
Code Section 852 (b)(3).
22 Past performance is not predictive of future results.
<PAGE>
PERFORMANCE
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR 5-YEAR (5/10/94)
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) +4.19% +43.01% +44.73%
Average Annual Total Return(2) -0.24% +6.49% +6.67%
Distribution Rate(3) 4.53%
Taxable Equivalent Distribution Rate(4) 7.98%
30-Day Standardized Yield(5) 4.51%
Taxable Equivalent Yield(4) 7.94%
</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.
(3). Distribution rate is based on an annualization of the current 4.4 cent
per share monthly dividend and the maximum offering price of $11.66 on May 31,
1999.
(4). Taxable equivalent distribution rate and yield assume the 1999 maximum
combined federal and Tennessee state personal income tax bracket of 43.2%, based
on the federal income tax rate of 39.6%.
(5). Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended May 31, 1999.
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.
FRANKLIN TENNESSEE
MUNICIPAL BOND FUND
AVERAGE ANNUAL TOTAL RETURN
5/31/99
Class A
-----------------------------------
1-Year -0.24%
5-Year +6.49%
Since Inception (5/10/94) +6.67%
TOTAL RETURN INDEX COMPARISON
FOR HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes the applicable, maximum sales charge, fund expenses, account
fees and reinvested distributions. The unmanaged index differs from the fund
in composition, does not pay management fees or expenses and includes reinvested
dividends. One cannot invest directly in an index. Performance of the fund's
shares exceeded the rate of inflation as measured by the Consumer Price Index
(CPI).
[CLASS A LINE GRAPH]
GRAPHIC MATERIAL (16)
The following line graph compares the performance of Franklin Tennessee
Municipal Bond Fund - Class A shares to that of the Lehman Brothers Municipal
Bond Index and the Consumer Price Index based on a $10,000 investment from
5/10/94 - 5/31/99. Source: Standard and Poor's Micropal.
<TABLE>
<CAPTION>
Franklin Tennessee Municipal Lehman Brothers
Date Bond Fund-Class A Municipal Bond Index CPI
---- ---------------------------- -------------------- ---
<S> <C> <C> <C>
05/10/1994 $9,579 $10,000 $10,000
05/31/1994 $9,693 0.59% $10,059 0.05% $10,005
06/30/1994 $9,579 -0.61% $9,998 0.34% $10,039
07/31/1994 $9,799 1.83% $10,181 0.27% $10,066
08/31/1994 $9,818 0.35% $10,216 0.40% $10,106
09/30/1994 $9,644 -1.47% $10,066 0.27% $10,133
10/31/1994 $9,381 -1.78% $9,887 0.07% $10,141
11/30/1994 $9,148 -1.81% $9,708 0.13% $10,154
12/31/1994 $9,448 2.20% $9,921 0.00% $10,154
01/31/1995 $9,799 2.86% $10,205 0.40% $10,194
02/28/1995 $10,103 2.91% $10,502 0.40% $10,235
03/31/1995 $10,201 1.15% $10,623 0.33% $10,269
04/30/1995 $10,219 0.12% $10,636 0.33% $10,303
05/31/1995 $10,537 3.19% $10,975 0.20% $10,323
06/30/1995 $10,436 -0.87% $10,879 0.20% $10,344
07/31/1995 $10,485 0.95% $10,983 0.00% $10,344
08/31/1995 $10,637 1.27% $11,122 0.26% $10,371
09/30/1995 $10,706 0.63% $11,192 0.20% $10,392
10/31/1995 $10,858 1.45% $11,355 0.33% $10,426
11/30/1995 $11,063 1.66% $11,543 -0.07% $10,419
12/31/1995 $11,187 0.96% $11,654 -0.07% $10,411
01/31/1996 $11,250 0.76% $11,743 0.59% $10,473
02/29/1996 $11,135 -0.68% $11,663 0.32% $10,506
03/31/1996 $11,010 -1.28% $11,513 0.52% $10,561
04/30/1996 $10,989 -0.28% $11,481 0.39% $10,602
05/31/1996 $11,010 -0.04% $11,477 0.19% $10,622
06/30/1996 $11,148 1.09% $11,602 0.06% $10,629
07/31/1996 $11,254 0.91% $11,707 0.19% $10,649
08/31/1996 $11,264 -0.02% $11,705 0.19% $10,669
09/30/1996 $11,458 1.40% $11,869 0.32% $10,703
10/31/1996 $11,577 1.13% $12,003 0.32% $10,737
11/30/1996 $11,783 1.83% $12,223 0.19% $10,758
12/31/1996 $11,729 -0.42% $12,171 0.00% $10,758
01/31/1997 $11,740 0.19% $12,194 0.32% $10,792
02/28/1997 $11,860 0.92% $12,307 0.31% $10,826
03/31/1997 $11,705 -1.33% $12,143 0.25% $10,853
04/30/1997 $11,817 0.84% $12,245 0.12% $10,866
05/31/1997 $11,995 1.51% $12,430 -0.06% $10,859
06/30/1997 $12,129 1.07% $12,563 0.12% $10,872
07/31/1997 $12,512 2.77% $12,911 0.12% $10,885
08/31/1997 $12,365 -0.94% $12,789 0.19% $10,906
09/30/1997 $12,543 1.19% $12,942 0.25% $10,933
10/31/1997 $12,620 0.64% $13,024 0.25% $10,961
11/30/1997 $12,754 0.59% $13,101 -0.06% $10,954
12/31/1997 $12,981 1.46% $13,293 -0.12% $10,941
01/31/1998 $13,116 1.03% $13,429 0.19% $10,962
02/28/1998 $13,112 0.03% $13,433 0.19% $10,983
03/31/1998 $13,120 0.09% $13,446 0.19% $11,003
04/30/1998 $13,058 -0.45% $13,385 0.18% $11,023
05/31/1998 $13,289 1.58% $13,597 0.18% $11,043
06/30/1998 $13,368 0.39% $13,650 0.12% $11,056
07/31/1998 $13,400 0.25% $13,684 0.12% $11,070
08/31/1998 $13,611 1.55% $13,896 0.12% $11,083
09/30/1998 $13,786 1.25% $14,069 0.12% $11,096
10/31/1998 $13,733 0.00% $14,069 0.24% $11,123
11/30/1998 $13,800 0.35% $14,119 0.00% $11,123
12/31/1998 $13,839 0.25% $14,154 -0.06% $11,116
01/31/1999 $13,981 1.19% $14,322 0.24% $11,143
02/28/1999 $13,903 -0.44% $14,259 0.12% $11,156
03/31/1999 $13,957 0.14% $14,279 0.30% $11,190
04/30/1999 $13,962 0.25% $14,315 0.73% $11,271
05/31/1999 $13,863-0.89% -0.58% $14,232 0.00% $11,271
Total Return 38.63% 42.32% 12.71%
</TABLE>
*Source: Standard and Poor's Micropal.
Past performance is not predictive of future results.
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(2)
Washington's economic performance during the year under review was brighter than
Seattle's famous rainy conditions. The state's diversified economy and the
government's conservative fiscal practices helped it weather a year that
otherwise could have been dampened by Asia's economic woes.
The economic expansion that began in the early 1980s continued despite the
effects on the commodity export-heavy economy felt from the Asian recession.
Since 1981, the state's service sector growth offset the manufacturing sector
declines, as seen in Boeing Co.'s drop from its high of 10% in 1969 to its
current 3.9% of the total state employment. Employment in those two sectors now
closely mirrors the nation's. Most notable in offsetting the export decline was
the construction industry's growth after nearly six years of stagnation.
CREDIT QUALITY BREAKDOWN(*)
Franklin Washington Municipal Bond Fund
Based on Total Long-Term Investments
5/31/99
[PIE CHART]
AAA - 63.7%
AA - 19.2%
A - 11.0%
BBB - 6.1%
(*)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 taxable.
(2). Source: Moody's Investors Service, Municipal Credit Research, 5/11/99.
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.
DIVIDEND DISTRIBUTIONS
Franklin Washington
Municipal Bond Fund - Class A
6/1/98-5/31/99
DIVIDEND
MONTH PER SHARE
- ---------------------------------
June 4.9 cents
July 4.9 cents
August 4.9 cents
September 4.9 cents
October 4.9 cents
November 4.9 cents
December 4.9 cents
January 4.9 cents
February 4.9 cents
March 4.2 cents
April 4.2 cents
May 4.2 cents
- ---------------------------------
TOTAL 56.7 CENTS
Washington has posted consistent positive financial operating results for more
than a decade now. Audited financial statements for 1998 have net general fund
revenue at $217 million, and $112.1 million of that was transferred to the Rainy
Day Fund, bringing its total to $300.2 million. The Rainy Day Fund's balance is
projected to increase by $133 million in 1999. This makes acceptable the high
$1,241 per capita debt, more than twice the national state median, brought about
by increasing infrastructure needs. Even though it is expected to lag the
nation's growth, economic diversification and sound financial practices give
Washington a positive economic growth outlook over the next few years.
PORTFOLIO NOTES
Washington continues to enjoy a strong rating of aa1/AA+ by Moody's and S&P(R),
national credit rating agencies.(3) Municipal bonds were a very attractive
purchase in 1998 because the difference in yield between a high grade municipal
bond and a Treasury bond was extremely narrow. Historically, the yields of high
grade municipal bonds are approximately 85% of Treasury yields. However, in 1998
the spreads reached 90%-95%, and at times 100%, partly as a result of the
prevalence of municipal bond insurance.
(3). Source: Moody's Investors Service. This does not indicate a rating of the
fund.
As competition among the major municipal insurers increased, the insurance
premiums declined. This created the opportunity for municipalities to insure
their debt at historically low rates. This further allowed bond purchasers
access to some municipalities that typically had to pay higher yields to sell
their issues. As a result, over 50% of the municipal debt brought to market in
1998 was enhanced by insurance, which gives the issue the rating of the company
providing the insurance, in most cases AAA. As a result, many of the purchases
in the fund were AAA-rated due to insurance. Some purchases this year were
Washington State Health Care Facilities, Children's Hospital and Regional
Medical Center - FSA insured, Chelan County Washington Public Utility District
Number 001 Chelan Hydro - FSA insured and Seattle Washington Water System
Revenue - FGIC insured.
PORTFOLIO BREAKDOWN
Franklin Washington
Municipal Bond Fund
5/31/99
% OF TOTAL
LONG-TERM
SECTOR INVESTMENTS
- -------------------------------------
Utilities 28.9%
Prerefunded 13.1%
Housing 12.2%
Hospitals 11.7%
General Obligation 11.1%
Industrial 10.7%
Education 9.7%
Transportation 1.7%
Certificates of Participation 0.9%
If you had invested $10,000 in the fund's Class A shares at inception on May 3,
1993, as of May 31, 1999, you would have received monthly tax-free income
dividend checks totaling more than $3,190. If you had reinvested all your
distributions, including capital gains, your account would have been worth
$13,913.(4) In both cases, the fund has provided shareholders attractive
returns. Of course, this was a period of generally declining interest rates and
rising bond prices, and past performance cannot guarantee future results.
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of May 31, 1999, 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.
4. Total returns include sales charges and assume reinvestment of dividends
and capital gains at net asset value. Class A: 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 total returns may be lower. Past
expense reductions by the fund's manager increased the fund's total returns.
Franklin Washington Municipal Bond Fund was closed to new investors after the
close of business on January 12, 1999, when Franklin Municipal Securities
Trust's board of trustees approved a proposal to merge Franklin Washington
Municipal Bond Fund into Franklin Federal Tax-Free Income Fund, subject to
shareholder approval. If the merger is approved, existing shareholders would
benefit from the lower expenses of the larger Franklin Federal Tax-Free Income
Fund as discussed in the proxy materials, "Franklin Municipal Securities Trust
Joint Prospectus/Proxy Statement," dated April 22, 1999. The investment goal of
Franklin Washington Municipal Bond Fund is to seek a high level of current
income exempt from income taxes by investing in Washington municipal
securities. Although Franklin Federal Tax-Free Income Fund's investment goal is
similar, it seeks income exempt from federal income tax by investing in
municipal securities throughout the nation.
FRANKLIN WASHINGTON
MUNICIPAL BOND FUND
CLASS A:
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 total returns may be lower. Past expense reductions by the fund's
manager increased the fund's total returns.
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 4.0 cent
per share monthly dividend and the maximum offering price of $10.88 on May 31,
1999.
4. Taxable equivalent distribution rate and yield assume the 1999 maximum
federal income tax rate of 39.6%.
5. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended May 31, 1999.
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.
PERFORMANCE SUMMARY AS OF 5/31/99
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 (6/1/98-5/31/99)
CLASS A CHANGE 5/31/99 5/31/98
-----------------------------------------------------------------
Net Asset Value -$0.06 $10.42 $10.48
DISTRIBUTIONS
---------------------------------
Dividend Income $0.5670
PERFORMANCE
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR 5-YEAR (5/3/93)
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) +4.90% +45.15% +45.42%
Average Annual Total Return(2) +0.40% +6.81% +5.60%
Distribution Rate(3) 4.41%
Taxable Equivalent Distribution Rate(4) 7.30%
30-Day Standardized Yield(5) 3.78%
Taxable Equivalent Yield(4) 6.26%
</TABLE>
Past performance is not predictive of future results.
TOTAL RETURN INDEX COMPARISON
FOR HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes the current, applicable, maximum sales charge(s), fund
expenses, account fees and reinvested distributions. The unmanaged index differs
from the fund in composition, does not pay management fees or expenses and
includes reinvested dividends. One cannot invest directly in an index.
Performance of the fund's shares exceeded the rate of inflation as measured by
the Consumer Price Index (CPI).
[CLASS A LINE GRAPH]
GRAPHIC MATERIAL (20)
The following line graph compares the performance of Franklin Washington
Municipal Bond Fund - Class A shares to that of the Lehman Brothers Municipal
Bond Index and the Consumer Price Index based on a $10,000 investment from
5/3/93 - 5/31/99.
<TABLE>
<CAPTION>
Franklin Washington Municipal Lehman Brothers Municipal
Date Bond Fund-Class A Bond Index CPI
- ---- ----------------------------- ------------------------- -------
<S> <C> <C> <C> <C> <C>
05/03/1993 $9,579 $10,000 $10,000
05/31/1993 $9,569 0.51% $10,051 0.13% $10,013
06/30/1993 $9,770 1.67% $10,218 0.14% $10,027
07/31/1993 $9,761 0.13% $10,232 0.00% $10,027
08/31/1993 $9,968 2.08% $10,445 0.28% $10,055
09/30/1993 $10,098 1.14% $10,564 0.21% $10,076
10/31/1993 $10,172 0.19% $10,584 0.41% $10,117
11/30/1993 $9,974 -0.88% $10,491 0.07% $10,124
12/31/1993 $10,237 2.11% $10,712 0.00% $10,124
01/31/1994 $10,361 1.14% $10,834 0.27% $10,152
02/28/1994 $10,061 -2.59% $10,553 0.34% $10,186
03/31/1994 $9,373 -4.07% $10,124 0.34% $10,221
04/30/1994 $9,448 0.85% $10,210 0.14% $10,235
05/31/1994 $9,584 0.87% $10,299 0.07% $10,242
06/30/1994 $9,489 -0.61% $10,236 0.34% $10,277
07/31/1994 $9,748 1.83% $10,423 0.27% $10,305
08/31/1994 $9,764 0.35% $10,460 0.40% $10,346
09/30/1994 $9,527 -1.47% $10,306 0.27% $10,374
10/31/1994 $9,287 -1.78% $10,123 0.07% $10,381
11/30/1994 $9,049 -1.81% $9,939 0.13% $10,395
12/31/1994 $9,304 2.20% $10,158 0.00% $10,395
01/31/1995 $9,666 2.86% $10,448 0.40% $10,436
02/28/1995 $10,008 2.91% $10,753 0.40% $10,478
03/31/1995 $10,132 1.15% $10,876 0.33% $10,513
04/30/1995 $10,129 0.12% $10,889 0.33% $10,547
05/31/1995 $10,552 3.19% $11,237 0.20% $10,568
06/30/1995 $10,400 -0.87% $11,139 0.20% $10,590
07/31/1995 $10,462 0.95% $11,245 0.00% $10,590
08/31/1995 $10,633 1.27% $11,387 0.26% $10,617
09/30/1995 $10,718 0.63% $11,459 0.20% $10,638
10/31/1995 $10,922 1.45% $11,625 0.33% $10,673
11/30/1995 $11,150 1.66% $11,818 -0.07% $10,666
12/31/1995 $11,302 0.96% $11,932 -0.07% $10,658
01/31/1996 $11,344 0.76% $12,023 0.59% $10,721
02/29/1996 $11,253 -0.68% $11,941 0.32% $10,756
03/31/1996 $11,106 -1.28% $11,788 0.52% $10,812
04/30/1996 $11,070 -0.28% $11,755 0.39% $10,854
05/31/1996 $11,067 -0.04% $11,750 0.19% $10,874
06/30/1996 $11,224 1.09% $11,878 0.06% $10,881
07/31/1996 $11,313 0.91% $11,986 0.19% $10,902
08/31/1996 $11,332 -0.02% $11,984 0.19% $10,922
09/30/1996 $11,525 1.40% $12,152 0.32% $10,957
10/31/1996 $11,650 1.13% $12,289 0.32% $10,992
11/30/1996 $11,845 1.83% $12,514 0.19% $11,013
12/31/1996 $11,808 -0.42% $12,461 0.00% $11,013
01/31/1997 $11,805 0.19% $12,485 0.32% $11,048
02/28/1997 $11,920 0.92% $12,600 0.31% $11,083
03/31/1997 $11,776 -1.33% $12,432 0.25% $11,110
04/30/1997 $11,904 0.84% $12,537 0.12% $11,124
05/31/1997 $12,069 1.51% $12,726 -0.06% $11,117
06/30/1997 $12,209 1.07% $12,862 0.12% $11,130
07/31/1997 $12,533 2.77% $13,219 0.12% $11,144
08/31/1997 $12,435 -0.94% $13,094 0.19% $11,165
09/30/1997 $12,579 1.19% $13,250 0.25% $11,193
10/31/1997 $12,652 0.64% $13,335 0.25% $11,221
11/30/1997 $12,749 0.59% $13,414 -0.06% $11,214
12/31/1997 $12,944 1.46% $13,609 -0.12% $11,201
01/31/1998 $13,042 1.03% $13,750 0.19% $11,222
02/28/1998 $13,053 0.03% $13,754 0.19% $11,243
03/31/1998 $13,101 0.09% $13,766 0.19% $11,265
04/30/1998 $13,075 -0.45% $13,704 0.18% $11,285
05/31/1998 $13,263 1.58% $13,921 0.18% $11,305
06/30/1998 $13,350 0.39% $13,975 0.12% $11,319
07/31/1998 $13,374 0.25% $14,010 0.12% $11,332
08/31/1998 $13,565 1.55% $14,227 0.12% $11,346
09/30/1998 $13,730 1.25% $14,405 0.12% $11,360
10/31/1998 $13,716 0.00% $14,405 0.24% $11,387
11/30/1998 $13,793 0.35% $14,455 0.00% $11,387
12/31/1998 $13,831 0.25% $14,491 -0.06% $11,380
01/31/1999 $13,973 1.19% $14,664 0.24% $11,407
02/28/1999 $13,932 -0.44% $14,599 0.12% $11,421
03/31/1999 $13,961 0.14% $14,620 0.30% $11,455
04/30/1999 $13,990 0.25% $14,656 0.73% $11,539
05/31/1999 $13,929-0.58% -0.58% $14,571 0.00% $11,539
Total Return 39.29% 45.71% 15.39%
</TABLE>
*Source: Standard and Poor's Micropal.
Past performance is not predictive of future results.
MUNICIPAL BOND RATINGS
MOODY'S
Aaa: Best quality. They carry the smallest degree of investment risk and
generally are referred to as "gilt-edged." Interest payments are protected by a
large or exceptionally stable margin, and principal is secure. Although the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
Aa: High quality by all standards. Together with the Aaa group, they comprise
what generally are known as high-grade bonds. Aa bonds are rated lower than Aaa
because margins of protection may not be as large, fluctuation of protective
elements may be of greater amplitude, or there may be other elements which make
the long-term risks appear larger.
A: Possess many favorable investment attributes and are considered upper
medium-grade obligations. Factors giving security to principal and interest are
considered adequate, but elements may be present which suggest a susceptibility
to impairment sometime in the future.
Baa: Medium-grade obligations, i.e., they are neither highly protected nor
poorly secured. Interest payments and principal security appear adequate for the
present, but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time.
Ba: Contain speculative elements. Often the protection of interest and principal
payments may be very moderate and, thereby, not well safeguarded during both
good and bad times over the future. Uncertainty of position characterizes bonds
in this class.
B: Generally lack characteristics of the desirable investment. Assurance of
interest and principal payments or of maintenance of other terms of the contract
over any long period of time may be small.
Caa: Poor standing. Such issues may be in default, or elements of danger with
respect to principal or interest may be present.
Ca: Obligations that are highly speculative. Such issues are often in default or
have other marked shortcomings.
C: Lowest-rated class of bonds. Issues rated C can be regarded as having
extremely poor prospects of ever attaining any real investment standing.
S&P(R)
AAA: The highest rating assigned by S&P to a debt obligation and indicates the
ultimate degree of protection as to principal and interest.
AA: Also qualify as high-grade obligations, and, in the majority of instances,
differ from AAA issues only in a small degree.
A: Generally regarded as upper medium-grade. They have considerable investment
strength but are not entirely free from adverse effects of changes in economic
and trade conditions. Interest and principal are regarded as safe.
BBB: Regarded as having an adequate capacity to pay principal and interest.
Whereas they normally exhibit adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a weakened
capacity to pay principal and interest for bonds in this category than for bonds
in the A category.
BB, B, CCC, CC: Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds likely will have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C: Reserved for income bonds on which no interest is being paid.
D: Debt rated "D" is in default and payment of interest and/or repayment of
principal is in arrears.
FRANKLIN MUNICIPAL SECURITIES TRUST
Financial Highlights
FRANKLIN ARKANSAS MUNICIPAL BOND FUND
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------
YEAR ENDED MAY 31,
---------------------------------------------------------
1999 1998 1997 1996 1995
---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value,beginning of year ...................... $ 10.99 $ 10.51 $ 10.21 $10.32 $10.06
---------------------------------------------------------
Income from investment operations:
Net investment income ................................. .54 .56 .58 .55 .51
Net realized and unrealized gains (losses) ............ (.13) .50 .31 (.08) .19
---------------------------------------------------------
Total from investment operations ....................... .41 1.06 .89 .47 .70
---------------------------------------------------------
Less distributions from:
Net investment income ................................. (.55) (.58) (.59) (.58) (.44)
In excess of net investment income .................... (.01) -- -- -- --
---------------------------------------------------------
Total distributions .................................... (.56) (.58) (.59) (.58) (.44)
---------------------------------------------------------
Net asset value,end of year ............................ $ 10.84 $ 10.99 $ 10.51 $10.21 $10.32
=========================================================
Total return(*) ........................................ 3.81% 10.31% 8.90% 4.65% 7.27%
RATIOS/SUPPLEMENTAL DATA
Net assets,end of year (000's) ......................... $41,874 $30,377 $13,140 $8,166 $4,134
Ratio to average net assets:
Expenses .............................................. .45% .10% .10% .10% .10%
Expenses excluding waiver and payments by affiliates .. .84% .83% .87% 1.04% 1.11%
Net investment income ................................. 4.87% 5.30% 5.71% 5.69% 5.64%
Portfolio turnover rate ................................ 13.18% 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 for periods less than one year.
See notes to financial statements.
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, MAY 31, 1999
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN ARKANSAS MUNICIPAL BOND FUND AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENTS 97.8%
Arkansas GO,Waste Disposal and Pollution, Refunding, Series B, 6.25%,
7/01/20 ................................................................ $ 130,000 $ 138,193
Arkansas State Development Finance Authority Drivers License Revenue, State
Police Headquarters, Wireless Data, FGIC Insured, 5.40%, 6/01/18 ......... 950,000 973,532
Arkansas State Development Finance Authority HMR, Series B-1, 5.80%,
1/01/23 .................................................................. 470,000 478,592
Arkansas State Development Finance Authority Revenue, White River Medical
Center Project,
5.55%, 6/01/19 ......................................................... 1,000,000 977,570
5.60%, 6/01/24 ......................................................... 1,200,000 1,170,072
Arkansas State Development Finance Authority SFMR, MBS Program,
Series B, 6.10%, 1/01/29 ............................................... 985,000 1,017,387
Series D, 6.85%, 1/01/27 ............................................... 105,000 111,537
Series D-A, 5.375%, 7/01/30 ............................................ 560,000 555,374
Arkansas State Development Finance Authority Wastewater System Revenue,
Revolving Loan Fund,
Series A, 5.85%, 12/01/19 .............................................. 1,000,000 1,049,480
5.00%, 6/01/22 ......................................................... 750,000 724,163
Arkansas State Student Loan Authority Revenue, Refunding, Sub Series B,
6.25%, 6/01/10 ......................................................... 500,000 528,095
5.60%, 6/01/14 ......................................................... 325,000 327,100
Arkansas State Water Resources Development,
Series A, 5.70%, 7/01/26 ............................................... 560,000 586,466
Series B, 5.75%, 7/01/25 ............................................... 300,000 321,381
Blytheville Solid Waste Recycling and Sewage Treatment Revenue, Nucor Corp.
Project, 6.375%, 1/01/23 ............................................... 100,000 106,328
Camden Environmental Improvement Revenue, International Paper Co. Project,
Series A, 7.625%, 11/01/18 ............................................... 250,000 285,870
Conway Public Facilities Board,Capital Improvement Revenue, Hendrix College
Project, 6.00%, 10/01/26 ................................................. 500,000 515,780
Conway Sales and Use Tax Revenue, Capital Improvement, Series A, FSA
Insured, 5.35%, 12/01/17 ................................................. 1,975,000 2,023,743
Fort Smith Water and Sewer Revenue,Refunding and Construction, MBIA
Insured, 6.00%, 10/01/12 ................................................. 130,000 140,651
Fouke School District No. 15 GO, Refunding and Construction, MBIA Insured,
Pre-Refunded, 6.60%, 4/01/19 ............................................. 130,000 144,095
Greenland School District No. 95, Washington County, Refunding and
Construction, MBIA Insured, 6.50%, 5/01/13 ............................... 115,000 117,844
Guam Airport Authority Revenue, Series B, 6.60%, 10/01/10 .................. 125,000 135,214
Guam Power Authority Revenue, Series A, 5.25%, 10/01/23 .................... 200,000 196,480
Gurdon PCR, International Paper Co. Project, Refunding, Series A, 5.375%,
3/01/20 ................................................................ 2,160,000 2,126,650
Jefferson County PCR,
Arkansas Power and Light Co. Project, Refunding, 6.30%, 6/01/18 ........ 400,000 426,968
Entergy Arkansas Inc. Project, Refunding, 5.60%, 10/01/17 .............. 2,900,000 2,931,378
Jonesboro City Water and Light Plant Public Utilities System Revenue,
MBIA Insured, 5.40%, 11/15/13 .......................................... 100,000 104,978
Refunding, AMBAC Insured, 5.25%, 12/01/13 .............................. 200,000 204,084
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 ............................................ 450,000 484,686
Little River County Revenue, Georgia-Pacific Corp. Project, Refunding,
5.60%, 10/01/26 .......................................................... 3,000,000 2,970,720
Little Rock Capital Improvement Revenue, Infrastructure Improvements,
Series A, AMBAC Insured, 5.00%, 10/01/19 ................................. 1,000,000 989,860
Little Rock GO, Capital Improvement, Refunding, 6.30%, 2/01/09 ............. 140,000 142,559
Little Rock Municipal Airport Revenue, Refunding, MBIA Insured, 6.00%,
11/01/14 ............................................................... 130,000 136,642
Little Rock School District GO, Refunding, 6.25%, 12/01/07 ................. 120,000 121,480
FSA Insured, 5.60%, 1/01/20 ............................................ 100,000 102,312
Little Rock Waste Disposal Revenue, 5.80%, 5/01/16 ......................... 440,000 457,345
North Little Rock Health Facilities Board Health Care Revenue, Baptist
Health Facility, Series A, MBIA Insured, 5.50%, 12/01/21 ................. 800,000 823,504
</TABLE>
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, MAY 31, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN ARKANSAS MUNICIPAL BOND FUND AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENTS (cont.)
Paragould Hospital Revenue, 6.375%, 10/01/17 ................................. $ 400,000 $ 427,040
Pine Bluff Environmental Improvement Revenue, International Paper Co. Project,
Series B, 5.55%, 11/01/22 .................................................. 500,000 496,090
Pope County PCR, Arkansas Power and Light Co. Project, Refunding, 6.30%,
11/01/20 ................................................................... 500,000 518,050
Puerto Rico Commonwealth GO,
AMBAC Insured, 5.40%, 7/01/25 ............................................ 250,000 253,750
Pre-Refunded, 6.50%, 7/01/23 ............................................. 250,000 281,520
Public Improvement,Refunding, 5.75%, 7/01/17 ............................. 250,000 266,733
Puerto Rico Commonwealth Highway and Transportation Authority Revenue,
Series A, 5.00%, 7/01/38 ................................................. 2,500,000 2,353,225
Series Y, 5.50%, 7/01/26 ................................................. 350,000 359,545
Puerto Rico Electric Power Authority Revenue,
Series DD, 5.00%, 7/01/28 ................................................ 1,000,000 954,300
Series R,Pre-Refunded, 6.25%, 7/01/17 .................................... 175,000 189,408
Series T, 5.50%, 7/01/20 ................................................. 400,000 407,956
Series X, 5.50%, 7/01/25 ................................................. 200,000 204,966
Puerto Rico Housing Bank and Financing Authority SFMR, Affordable Housing
Mortgage, First Portfolio, 6.25%, 4/01/29 .................................. 135,000 143,127
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 ................................... 250,000 255,360
Pulaski County Health Facilities Board Revenue,
Catholic Health Initiatives, Series A, 5.00%, 12/01/28 ................... 1,500,000 1,420,410
Nazareth Sisters of Charity, St. Vincent's Infirmary, ETM, Refunding,
MBIA Insured, 6.05%, 11/01/09 ............................................ 125,000 140,406
Pulaski County Public Facilities Board MFR, South Oaks Apartments, Refunding,
Series A, GNMA Secured, 6.50%, 10/20/29 .................................... 600,000 636,732
Pulaski County Public Facilities Board,
College Projects, Refunding, Series A, GNMA Secured, 5.55%, 6/20/27 ...... 1,300,000 1,308,229
Refunding, Series A, GNMA Secured, 5.45%, 12/20/18 ....................... 1,000,000 1,000,680
Saline County Hospital Revenue, Refunding, Connie Lee Insured, 6.00%,
9/01/19 .................................................................... 700,000 749,686
Saline County Retirement Housing and Healthcare Facilities Board
Revenue, Refunding, AMBAC Insured, 5.80%, 6/01/11 .......................... 195,000 209,787
Sebastian County Community Junior College District GO, Refunding and
Improvement, AMBAC Insured, 5.60%, 4/01/17 ................................. 600,000 631,098
Texarkana Public Facilities Board Waterworks Facilities Revenue, Refunding,
FGIC Insured, 5.40%, 9/01/15 ............................................... 200,000 207,248
University of Arkansas Revenues,
Athletic Facilities, Pine Bluff Campus, 5.30%, 12/01/17 .................. 340,000 340,252
Various Facilities, Fayetteville Campus, 5.25%, 11/01/17 ................. 300,000 298,583
University of Central Arkansas Athletic Facilities Revenue, Series C, AMBAC
Insured, 6.125%, 4/01/26 ................................................... 375,000 406,743
University of Puerto Rico Revenues, Series M, MBIA Insured, 5.25%, 6/01/25 ... 285,000 286,475
University of Southern Arkansas Revenues, Student Fees, MBIA Insured,
6.00%, 10/01/13 ............................................................ 125,000 127,915
Virgin Islands PFA Revenue, Fund Loan Notes, Senior Lien, Refunding, Series A,
5.50%, 10/01/18 ............................................................ 1,400,000 1,409,267
-----------
TOTAL INVESTMENTS (COST $40,327,243) 97.8% ................................... 40,932,694
OTHER ASSETS, LESS LIABILITIES 2.2% .......................................... 941,771
-----------
NET ASSETS 100.0% ............................................................ $41,874,465
===========
</TABLE>
See Glossary of Terms on page 54.
See notes to financial statements.
FRANKLIN MUNICIPAL SECURITIES TRUST
Financial Highlights
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------------------
YEAR ENDED MAY 31,
-----------------------------------------------------------------------
1999 1998 1997 1996 1995
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .................. $ 10.65 $ 10.10 $ 9.81 $ 9.93 $ 9.73
-----------------------------------------------------------------------
Income from investment operations:
Net investment income .............................. .57 .62 .63 .64 .66
Net realized and unrealized gains (losses) ......... (.04) .55 .29 (.10) .18
-----------------------------------------------------------------------
Total from investment operations .................... .53 1.17 .92 .54 .84
-----------------------------------------------------------------------
Less distributions from:
Net investment income .............................. (.57) (.62) (.63)++ (.66) (.64)
In excess of net investment income ................. (.01) -- -- -- --
-----------------------------------------------------------------------
Total distributions ................................. (.58) (.62) (.63) (.66) (.64)
-----------------------------------------------------------------------
Net asset value, end of year ........................ $ 10.60 $ 10.65 $ 10.10 $ 9.81 $ 9.93
=======================================================================
Total return* ....................................... 5.07% 11.78% 9.64% 5.55% 9.08%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ..................... $583,752 $412,211 $213,396 $118,313 $51,102
Ratio to average net assets:
Expenses ........................................... .44% .35% .34% .35% .20%
Expenses excluding waiver and payments
by affiliates .71% .69% .75% .81% .88%
Net investment income .............................. 5.22% 5.81% 6.24% 6.49% 6.89%
Portfolio turnover rate ............................. 14.31% 37.75% 33.79% 28.02% 57.06%
</TABLE>
* Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
++ Includes distributions in excess of net investment income in the amount of
$.001.
FRANKLIN MUNICIPAL SECURITIES TRUST
Financial Highlights (continued)
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND (CONT.)
<TABLE>
<CAPTION>
CLASS C
--------------------------------------------------------
YEAR ENDED MAY 31,
--------------------------------------------------------
1999 1998 1997 1996+
--------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .................. $ 10.68 $ 10.12 $ 9.82 $ 9.82
--------------------------------------------------------
Income from investment operations:
Net investment income .............................. .51 .56 .57 .05
Net realized and unrealized gains (losses) ......... (.04) .56 .30 --
--------------------------------------------------------
Total from investment operations .................... .47 1.12 .87 .05
--------------------------------------------------------
Less distributions from:
Net investment income .............................. (.51) (.56) (.57)++ (.05)
In excess of net investment income ................. (.01) -- -- --
--------------------------------------------------------
Total distributions ................................. (.52) (.56) (.57) (.05)
--------------------------------------------------------
Net asset value, end of year ........................ $ 10.63 $ 10.68 $ 10.12 $ 9.82
========================================================
Total return* ....................................... 4.48% 11.30% 9.08% .54%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ..................... $78,338 $40,363 $10,624 $ 212
Ratio to average net assets:
Expenses ........................................... .99% .90% .90% .91%**
Expenses excluding waiver and payments by affiliates 1.26% 1.24% 1.31% 1.81%**
Net investment income .............................. 4.66% 5.23% 5.68% 5.73%**
Portfolio turnover rate ............................. 14.31% 37.75% 33.79% 28.02%
</TABLE>
* Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
** 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.
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, MAY 31, 1999
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS 98.4%
BONDS 95.9%
ABAG Finance Authority for Nonprofit Corps., COP,
California Mortgage Insured, 6.15%, 1/01/22 ............................................................ $1,465,000 $1,586,405
Revenue, Insured, 5.20%, 11/15/23 ...................................................................... 2,380,000 2,300,056
Rhoda Haas Goldman Plaza, California Mortgage Insured, 5.125%, 5/15/23 ................................. 3,000,000 2,897,580
Adelanto Water Authority Revenue,
Parity Water Systems Acquisition Project, Series A, 7.50%, 9/01/28 ..................................... 3,445,000 3,685,082
Sub. Lien, Water Systems Acquisition Project, Series A, 7.50%, 9/01/28 ................................. 2,000,000 2,139,380
Alameda CFD No. 2 Special Tax, 6.125%, 9/01/16 ............................................................ 1,240,000 1,280,027
Alameda PFA, Local Agency Revenue, Special Tax, Community Facility District No. 1-A,
6.70%, 8/01/12 ......................................................................................... 3,400,000 3,597,438
7.00%, 8/01/19 ......................................................................................... 4,015,000 4,354,348
American Canyon Joint Powers Financing Authority Lease Revenue, Civic/Recreation Facilities, 6.40%,
6/01/22 ................................................................................................ 1,000,000 1,049,170
Antioch PFA, Reassessment Revenue,
Refunding, Series B, AMBAC Insured, 5.70%, 9/02/10 ..................................................... 1,375,000 1,355,805
Sub. Lien, Series B, 5.80%, 9/02/11 .................................................................... 1,460,000 1,438,494
Sub. Lien, Series B, 5.90%, 9/02/18 .................................................................... 2,450,000 2,394,679
Avenal PFA Revenue, Refunding,
7.00%, 9/02/10 ......................................................................................... 1,635,000 1,652,609
7.25%, 9/02/27 ......................................................................................... 3,665,000 3,754,866
Beaumont Financing Authority Local Agency Revenue, Sewer Enterprise Project, Refunding, Series A,
6.75%, 9/01/25 ......................................................................................... 5,000,000 5,145,550
Belmont RDA, Tax Allocation, Los Costanos Community Development, Series A, 6.80%, 8/01/24 ................. 1,510,000 1,680,404
Benicia 1915 Act, Fleetside Industrial Park Assessment, Refunding, 7.00%, 9/02/14 ......................... 445,000 458,955
Blythe RDA, Project No.1, Tax Allocation, Refunding, 5.80%, 5/01/28 ....................................... 1,000,000 1,024,270
Brea Olinda CFD No. 97-1, Special Tax, 5.875%, 9/01/28 .................................................... 1,400,000 1,400,798
Brea Olinda USD, CFD No. 95-1, Special Tax,
5.625%, 9/01/18 ........................................................................................ 1,100,000 1,078,990
5.75%, 9/01/28 ......................................................................................... 1,300,000 1,281,761
Brentwood Infrastructure Financing Authority Infrastructure Revenue, CIFP 94-1, Refunding,
5.60%, 9/02/19 ......................................................................................... 3,200,000 3,101,792
5.625%, 9/02/29 ........................................................................................ 6,300,000 6,030,675
Calexico Special Financing Authority Sales Tax Revenue, 7.40%,
1/01/00 ................................................................................................ 125,000 126,389
1/01/01 ................................................................................................ 165,000 168,417
1/01/02 ................................................................................................ 175,000 180,129
1/01/03 ................................................................................................ 220,000 227,984
1/01/04 ................................................................................................ 235,000 244,181
1/01/05 ................................................................................................ 285,000 295,474
1/01/06 ................................................................................................ 340,000 352,468
1/01/18 ................................................................................................ 7,680,000 7,920,538
California Educational Facilities Authority Revenue,
Claremont University Center, Refunding, Series A, 5.00%, 3/01/17 ....................................... 3,430,000 3,339,242
Claremont University Center, Series B, 5.00%, 3/01/24 .................................................. 2,980,000 2,881,213
Heald College, 5.45%, 2/15/22 .......................................................................... 2,485,000 2,456,075
Heald College, 5.40%, 2/15/29 .......................................................................... 5,740,000 5,574,229
Los Angeles College of Chiropractic, Refunding, 5.60%, 11/01/17 ........................................ 1,500,000 1,525,965
Pooled College and University Projects, Series B, 6.30%, 4/01/21 ....................................... 1,000,000 1,071,000
</TABLE>
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, MAY 31, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
California Educational Facilities Authority Revenue, (cont.)
Pooled College and University Projects, Series B, 5.25%, 4/01/24 .................................... $ 2,455,000 $ 2,359,378
Student Loan Program, Series A, MBIA Insured, 6.00%, 3/01/16 ........................................ 4,000,000 4,210,600
California Health Facilities Financing Authority Revenue,
Catholic Healthcare West, Series A, 5.00%, 7/01/18 .................................................. 10,000,000 9,619,000
Cedarknoll Inc., Series B, California Mortgage Insured, Pre-Refunded, 7.50%, 8/01/20 ................ 1,800,000 1,916,748
Clinicas de Salud Pueblo, Series A, California Mortgage Insured, 5.25%, 6/01/23 ..................... 2,435,000 2,392,607
Kaiser Permanente Medical Project, Series A, 5.55%, 8/15/25 ......................................... 3,750,000 3,752,738
(b)Kaiser Permanente, Series A, 5.40%, 5/01/28 ......................................................... 15,000,000 14,804,700
Kaiser Permanente, Series B, 5.25%, 10/01/16 ........................................................ 3,250,000 3,202,518
Marshall Hospital, Refunding, Series A, 5.25%, 11/01/18 ............................................. 3,215,000 3,187,801
Sacramento Medical Health Facility, Series A, California Mortgage Insured, 5.25%, 5/01/21 ........... 2,320,000 2,272,579
Thessalonika Family, Series A, MBIA Insured, 6.20%, 12/01/15 ........................................ 990,000 1,076,467
California HFA Revenue, Home Mortgage
MFHR, Series B, AMBAC Insured, 6.15%, 8/01/22 ....................................................... 5,000,000 5,268,150
Series B, 7.125%, 2/01/26 ........................................................................... 660,000 675,682
Series F-1, 7.00%, 8/01/26 .......................................................................... 1,565,000 1,645,128
Series H, 6.25%, 8/01/27 ............................................................................ 2,475,000 2,596,077
Series R, MBIA Insured, 6.15%, 8/01/27 .............................................................. 3,285,000 3,423,266
California PCFA Revenue,
PCR, Pacific Gas and Electric Co., Series B, 5.85%, 12/01/23 ........................................ 5,000,000 5,174,400
PCR, Southern California Edison Co., Series B, 6.40%, 12/01/24 ...................................... 2,000,000 2,168,720
Solid Waste Disposal Revenue, Browning-Ferris Industries Inc., 6.75%, 9/01/19 ....................... 1,000,000 1,054,740
California Special Districts Association Finance Corp. COP, Series V, 7.50%, 5/01/13 ................... 55,000 59,025
California State GO,
FGIC Insured, 6.00%, 8/01/19 ........................................................................ 30,000 32,541
FGIC Insured, Pre-Refunded, 6.00%, 8/01/19 .......................................................... 1,470,000 1,629,745
Veterans Bonds, Series BD, BE, and BF, 6.40%, 2/01/22 ............................................... 1,250,000 1,267,025
Veterans Bonds, Series BH, 5.50%, 12/01/18 .......................................................... 5,000,000 5,112,150
California State HFAR, Home Mortgage, Series L, MBIA Insured, 6.40%, 8/01/27 ........................... 2,970,000 3,129,489
California Statewide CDA Revenue COP, CHFCLP Insured, Families First Inc., 7.25%, 12/01/22 ............. 1,800,000 2,058,264
California Statewide CDA,
COP, Auxiliary Organization, California State University Foundation, MBIA Insured, 5.20%, 6/01/24 ... 7,165,000 7,125,306
COP, The Internext Group, 5.375%, 4/01/30 ........................................................... 12,000,000 11,587,680
Lease Revenue, Special Facilities, United Airlines, Los Angeles, 5.625%, 10/01/34 ................... 26,955,000 27,131,016
California Statewide Communities Development Authority COP, The Internext Group., 5.375%, 4/01/17 ...... 6,000,000 5,881,620
Capistrano USD, CFD, Special Tax No. 92-1, 7.00%, 9/01/18 .............................................. 1,000,000 1,135,820
Carlsbad 1915 Act, Escrow, AD No. 96-1,
5.50%, 9/02/28 ...................................................................................... 4,775,000 4,599,949
5.55%, 9/02/28 ...................................................................................... 1,745,000 1,688,514
Chaffey Community College District COP, 5.20%, 9/01/23 ................................................. 3,060,000 3,005,960
Clovis 1915 Act, Special Assessment, AD No. 98-1, 6.375%, 9/02/18 ...................................... 1,620,000 1,595,295
Compton Sewer Revenue, Refunding,
5.125%, 9/01/13 ..................................................................................... 1,565,000 1,557,832
5.375%, 9/01/23 ..................................................................................... 2,000,000 1,977,120
Duarte COP,
Refunding, Series A, 5.25%, 4/01/24 ................................................................. 5,000,000 4,824,850
Series A, 5.25%, 4/01/31 ............................................................................ 10,000,000 9,539,000
</TABLE>
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, MAY 31, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND AMOUNT VALUE
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
Duarte RDA, Tax Allocation,
Davis Addition Project Area, Refunding, 6.70%, 9/01/14 .............................................. $2,615,000 $2,790,414
Davis Addition Project Area, Refunding, 6.90%, 9/01/18 .............................................. 4,120,000 4,413,262
Rancho Duarte Phase I Project Area, Pre-Refunded, 6.80%, 9/01/16 .................................... 805,000 948,556
El Cajon RDA, Tax Allocation, Redevelopment Project, Refunding, AMBAC Insured, 5.35%, 10/01/22 ......... 1,000,000 1,010,200
El Monte PFA,
Housing Set Aside Revenue, 5.75%, 6/01/28 ........................................................... 2,570,000 2,552,061
Tax Allocation Revenue, Multiple Redevelopment District No. 86-1, Series R, 5.75%, 6/01/28 .......... 6,215,000 6,171,619
Escondido GO, 1915 Act, AD No. 86-1, Refunding, Series R, 5.625%, 9/02/18 .............................. 1,150,000 1,160,017
Folsom Special Tax, CFD No. 11,
5.65%, 9/01/18 ...................................................................................... 2,000,000 1,933,800
5.75%, 9/01/23 ...................................................................................... 1,750,000 1,685,653
Fontana RDA, Tax Allocation, Jurupa Hills Redevelopment Project, Refunding, Series A, 5.50%, 10/01/19 .. 5,000,000 5,023,050
Fontana Special Tax,
CFD No. 2-B, Refunding, 5.70%, 9/01/12 .............................................................. 1,960,000 1,978,032
CFD No. 7, 6.125%, 9/01/28 .......................................................................... 1,280,000 1,301,786
Foothill/Eastern Corridor Agency Toll Road Revenue, Senior Lien, Series A,
6.50%, 1/01/32 ...................................................................................... 5,500,000 6,099,830
6.00%, 1/01/34 ...................................................................................... 8,235,000 8,898,576
Galt Capital Improvements Authority Revenue, Wastewater, Refunding, 5.25%, 9/01/16 ..................... 2,690,000 2,563,624
Garden Grove Housing Authority MFHR, Set-Aside Tax Increment, Series C, 6.70%, 7/01/24 ................. 6,375,000 6,688,459
Gateway Improvement Authority Revenue, Marin City CFD, Series A, Pre-Refunded, 7.75%, 9/01/25 .......... 2,500,000 3,016,775
Gateway Refinancing Authority Revenue, Refunding, Series A, 5.55%, 9/01/25 ............................. 5,500,000 5,417,280
Granada Sanitation District 1915 Act, Sewage Treatment Facilities, Financing District, Series A,
7.125%, 9/02/16 ..................................................................................... 920,000 948,603
7.25%, 9/02/22 ...................................................................................... 940,000 969,337
Hawaiian Gardens RDA, Tax Allocation, Project No. 1, Refunding, 6.35%, 12/01/33 ........................ 4,000,000 4,211,160
Hesperia PFA Revenue, Series B, 7.375%, 10/01/23 ....................................................... 1,930,000 2,026,133
Hi Desert Memorial Health Care District Revenue, Refunding, 5.50%,
10/01/15 ............................................................................................ 1,000,000 970,580
10/01/19 ............................................................................................ 2,000,000 1,921,820
Huntington Beach PFA Revenue, Huntington Beach Redevelopment Projects, Refunding, 7.00%, 8/01/24 ....... 1,000,000 1,049,310
Indio RDAR, Housing Set Aside, Refunding, 5.375%, 8/15/22 .............................................. 3,000,000 2,935,530
Irvine 1915 Act, AD No. 95-12, Group Three, 5.50%, 9/02/21 ............................................. 3,000,000 2,961,810
Irvine Meadows Mobile Home Park Revenue, Series A, 5.70%,
3/01/18 ............................................................................................. 2,300,000 2,334,868
3/01/28 ............................................................................................. 5,000,000 4,978,500
Irwindale PFA Special Tax, CFD No.1, Refunding, 6.00%, 11/01/20 ........................................ 4,450,000 4,449,733
John C. Fremont Hospital District Health Facilities Revenue, 6.75%, 6/01/13 ............................ 1,500,000 1,664,925
La Mirada RDA, Special Tax, CFD No. 89-1, Refunding, 5.70%, 10/01/20 ................................... 3,025,000 3,036,646
Lake Elsinore 1915 Act, AD No. 93-1, Series A, 7.90%, 9/02/24 .......................................... 1,265,000 1,331,855
(b)Lake Elsinore RDA, Special Tax, CFD No. 90-2, Series A, 6.05%, 10/01/24 ................................ 5,000,000 4,993,050
Lake Elsinore School Financing Authority Revenue, Refunding, 6.125%, 9/01/19 ........................... 1,000,000 1,052,860
Lancaster RDA, Tax Allocation, Residential Redevelopment Project, Sub. Lien, Refunding, 6.65%,
9/01/27 ............................................................................................. 2,500,000 2,619,075
Lemon Grove School District COP, Vista La Mesa Elementary School Construction, Pre-Refunded, 6.40%,
9/01/26 ............................................................................................. 2,000,000 2,189,360
Livermore Special Tax, Triad Center Community Facilities District 90-1, 6.50%, 9/01/25 ................. 5,215,000 5,105,120
</TABLE>
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, MAY 31, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
Long Beach IDR, California State University Foundation, Refunding, Series A, 5.25%,
2/01/13 ............................................................................................... $ 1,000,000 $1,006,420
2/01/23 ............................................................................................... 1,000,000 977,410
Long Beach Special Tax, CFD No. 2, 7.50%, 9/01/11 ........................................................ 140,000 140,314
Los Angeles Harbor Department Revenue, Series B,
6.00%, 8/01/14 ........................................................................................ 3,500,000 3,805,480
5.375%, 11/01/23 ...................................................................................... 2,465,000 2,469,388
Los Angeles MFR, Refunding, Series J-2C, 8.50%, 1/01/24 .................................................. 1,150,000 1,175,519
Lynwood PFA Revenue, Water System Improvement Project, 6.50%, 6/01/21 .................................... 1,175,000 1,287,283
Millbrae Elementary School District COP, Financing Project, Pre-Refunded, 6.90%, 3/01/22 ................. 1,480,000 1,625,084
Modesto PFA, Lease Revenue, John Thurman Field Renovation Project, 6.125%, 11/01/16 ...................... 1,700,000 1,798,906
Monrovia USD,
COP, Financing Project, MBIA Insured, 5.30%, 4/01/26 .................................................. 1,100,000 1,108,294
Special Tax, CFD No. 89-1, 5.65%, 9/01/23 ............................................................. 2,200,000 2,213,574
Monterey Park PFA Tax Allocation Revenue, Merged Redevelopment Project Area,
5.25%, 3/01/18 ........................................................................................ 1,900,000 1,823,259
5.30%, 3/01/28 ........................................................................................ 3,000,000 2,847,270
National City Community Development Commission MFHR, Park Villas Apartments,
Series A, GNMA Secured, 5.85%, 7/20/19 ................................................................... 1,545,000 1,601,037
Newman RDA, Tax Allocation, Redevelopment and Housing Project No.1, 5.375%, 8/01/27 ...................... 1,285,000 1,228,409
Northern Mariana Islands Commonwealth Ports Authority Airport Revenue, Senior Lien,
Series A, 6.25%, 3/15/28 .............................................................................. 4,980,000 5,188,114
Northern Mariana Islands Commonwealth Ports Authority Seaport Revenue, Series A, 6.85%, 3/15/28 .......... 1,985,000 2,117,935
Oakland Revenue, YMCA East Bay Project, Refunding, 7.10%, 6/01/10 ........................................ 2,815,000 3,093,150
Orange County CFD, No. 86-2 Special Tax, Rancho Santa Margarita, Refunding, Series A, 5.55%, 8/15/17 ..... 1,000,000 1,002,230
Orinda 1915 Act, AD No. 94-1, Oak Springs, 8.25%, 9/02/19 ................................................ 1,515,000 1,560,177
Oroville Hospital Revenue, Oroville Hospital, Series A, CHFCLP Insured, 5.40%, 12/01/17 .................. 1,140,000 1,147,718
Palm Desert Financing Authority Tax Allocation Housing Set-Aside Revenue, MBIA Insured, 5.10%, 10/01/27 .. 1,875,000 1,833,638
(c) Palmdale Special Tax CFD, No. 93-1 Ritter Ranch Project, Series A, 8.50%, 9/01/17 .................... 10,000,000 8,000,000
Perris PFA, Local Agency Revenue, Series B, 7.25%, 8/15/23 ............................................... 500,000 524,365
Pittsburg 1915 Act, Infrastructure Financing Authority Reassessment Revenue, Series A, 5.60%, 9/02/24 ..... 1,000,000 1,003,220
Sub Series B, 6.00%, 9/02/24 .......................................................................... 2,710,000 2,732,114
Pomona RDA, Tax Allocation, Series Y,
5.50%, 5/01/32 ........................................................................................ 4,380,000 4,275,668
Refunding-West Holt Avenue Redevelopment, 5.45%, 5/01/22 .............................................. 2,360,000 2,308,528
Port of Redwood City Revenue,
5.40%, 6/01/19 ........................................................................................ 800,000 775,288
5.125%, 6/01/30 ....................................................................................... 3,200,000 2,977,568
Richmond Revenue, YMCA East Bay Project, Refunding, 7.25%, 6/01/17 ....................................... 2,905,000 3,157,067
Riverside County CFD, Special Tax, Senior Lien, No. 87-5, Refunding, Series A, 7.00%, 9/01/13 ............ 7,335,000 7,834,807
Riverside County PFA, Tax Allocation Revenue, Redevelopment Projects, Series A, 5.50%, 10/01/22 .......... 2,710,000 2,660,868
Roseville Special Tax, North Central CFD No. 1, 5.75%, 9/01/23 ........................................... 5,000,000 4,999,500
Sacramento County Special Tax, CFD No.1, Refunding,
5.60%, 12/01/12 ....................................................................................... 1,515,000 1,523,348
5.70%, 12/01/20 ....................................................................................... 2,410,000 2,432,726
6.30%, 9/01/21 ........................................................................................ 1,575,000 1,635,008
Salinas COP, Capital Improvement Projects, Series A, 5.70%, 10/01/28 ..................................... 2,665,000 2,714,756
</TABLE>
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, MAY 31, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
Salinas Valley Solid Waste Authority Revenue,
5.75%, 8/01/18 ....................................................................................... $ 500,000 $ 510,455
5.80%, 8/01/27 ....................................................................................... 1,100,000 1,118,018
San Bernardino Associated Communities Financing Authority COP, Granada Hills Health Care, Refunding and
Improvement, Series A, 6.90%, 5/01/27 ................................................................... 10,000,000 10,421,600
San Bernardino Joint Powers Financing Authority Lease Revenue, Department of Transportation Lease,
Series A, 5.50%, 12/01/20 ............................................................................ 4,000,000 4,089,800
San Diego County Educational Facilities Authority No. 1 Lease Revenue, 6.50%, 8/15/15 ................... 850,000 924,494
San Diego Special Tax, CFD No. 1, Series B, Pre-Refunded, 7.10%, 9/01/20 ................................ 3,500,000 4,099,795
San Francisco City and County Airport Commission International Airport Revenue,
Issue 8A, Second Series, FGIC Insured, 6.25%, 5/01/20 ................................................ 1,570,000 1,706,731
Issue 16A, Second Series, FSA Insured, 5.125%, 5/01/23 ............................................... 2,000,000 1,952,760
San Francisco City and County Redevelopment Financing Authority Tax Allocation Revenue, Redevelopment
Projects, Refunding, Series C, 5.30%, 8/01/25 ........................................................ 1,635,000 1,640,919
Series A, 5.50%, 8/01/22 ............................................................................. 1,180,000 1,209,252
San Francisco City and County Revenue, Irwin Memorial Blood Center, Series A, 6.80%, 12/01/21 ........... 800,000 858,656
San Joaquin Area Flood Control Agency 1915 Act, Flood Protection and Restoration Assessment, FSA Insured,
6.00%, 9/02/14 ....................................................................................... 970,000 1,003,417
San Joaquin Hills Transportation Corridor Agency Toll Road Revenue,
Refunding, Series A, 5.50%, 1/15/28 .................................................................. 20,710,000 20,986,479
Senior Lien, 5.00%, 1/01/33 .......................................................................... 2,000,000 1,879,460
Senior Lien, Pre-Refunded, 7.00%, 1/01/30 ............................................................ 675,000 756,459
Senior Lien, Pre-Refunded, 6.75%, 1/01/32 ............................................................ 3,450,000 3,837,815
San Jose Financing Authority Revenue, Convention Center Project, Refunding, Series C, 6.40%, 9/01/17 .... 5,000,000 5,318,400
San Jose RDA, Tax Allocation, Merged Area Redevelopment Project, 5.25%, 8/01/29 ......................... 6,750,000 6,698,970
San Luis Obispo COP, Vista Hospital System Inc., 8.375%, 7/01/29 ........................................ 6,660,000 6,793,200
San Marcos Public Facilities Authority Revenue, Refunding, 5.80%, 9/01/27 ............................... 3,000,000 3,016,920
San Marcos RDA, Tax Allocation, Affordable Housing Project, Series A, 5.65%, 10/01/28 ................... 3,000,000 3,002,070
San Mateo RDA, Tax Allocation, Merged Area, Series A, 5.50%,
8/01/17 .............................................................................................. 1,330,000 1,355,829
8/01/22 .............................................................................................. 4,820,000 4,864,440
San Ramon PFA, Tax Allocation Revenue,
Pre-Refunded, 6.90%, 2/01/24 ......................................................................... 700,000 803,411
Refunding, 6.90%, 2/01/24 ............................................................................ 800,000 886,512
Sand City RDA, Tax Allocation Revenue, Redevelopment Project, 6.00%, 11/01/26 ........................... 3,900,000 4,081,116
Santa Ana Financing Authority Revenue, Mainplace Project, Refunding, Series D,
5.50%, 9/01/15 ....................................................................................... 1,250,000 1,239,288
5.60%, 9/01/19 ....................................................................................... 2,000,000 1,978,320
Santa Rosa 1915 Act, Fountaingrove Parkway, Series A, Refunding, 5.70%, 9/02/19 ......................... 2,430,000 2,375,568
Scotts Valley RDA, Tax Allocation, Scotts Valley Redevelopment Project, Refunding, Series A, 5.30%,
8/01/29 .............................................................................................. 1,880,000 1,811,418
Southern California Public Power Authority Transmission Project Revenue, Southern Transmission,
Refunding, 6.125%, 7/01/18 ........................................................................... 1,140,000 1,220,359
Stockton CFD No. 1, Special Tax, Mello Roos, Weston Ranch, Series A,
5.45%, 9/01/08 ....................................................................................... 1,775,000 1,792,803
5.80%, 9/01/14 ....................................................................................... 4,000,000 4,050,960
6.00%, 9/01/18 ....................................................................................... 1,000,000 1,019,780
6.00%, 9/01/24 ....................................................................................... 1,100,000 1,113,882
Stockton Health Facilities Revenue, Dameron Hospital Association, Refunding, Series A, 5.70%, 12/01/14 .. 2,300,000 2,351,014
</TABLE>
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, MAY 31, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
Suisun City PFA, Tax Allocation Revenue, Redevelopment Project,
Escrow Term, Series A, 5.20%, 10/01/28 .............................................................. $ 3,000,000 $ 2,916,240
Series A, 5.20%, 10/01/23 ........................................................................... 275,000 268,672
Taft PFA, Lease Revenue, Community Correctional Facility Project, Series A, 6.05%, 1/01/17 ............. 3,235,000 3,448,089
Torrance RDA, Tax Allocation,
Downtown Redevelopment, Refunding, Series A, 5.55%, 9/01/18 ......................................... 1,695,000 1,688,881
Downtown Redevelopment, Refunding, Series A, 5.60%, 9/01/28 ......................................... 1,500,000 1,497,705
Sub. Lien, Refunding, Series B, 5.625%, 9/01/28 ..................................................... 1,500,000 1,481,820
Tracy COP, I-205 Corridor Improvement Project, Pre-Refunded, 7.00%, 10/01/27 ........................... 1,200,000 1,308,372
Turlock PFA Revenue,
5.25%, 9/01/15 ...................................................................................... 600,000 583,344
5.45%, 9/01/24 ...................................................................................... 1,055,000 1,018,455
Union City Special Tax, CFD No. 1997-1,
5.70%, 9/01/18 ...................................................................................... 1,000,000 999,900
5.80%, 9/01/28 ...................................................................................... 2,180,000 2,196,895
University of California Revenues, Multi-Purpose Projects, Refunding, Series E, MBIA Insured,
5.125%, 9/01/20 ..................................................................................... 625,000 618,963
Upland COP, Refunding, California Mortgage Insured, 5.50%, 6/01/21 ..................................... 2,000,000 2,031,180
Vallejo COP, Marine World Foundation Project, Refunding, 7.40%, 2/01/28 ................................ 9,345,000 10,275,108
Vallejo Hiddenbrooke ID No. 1 Revenue, 6.50%, 9/01/31 .................................................. 12,830,000 12,742,628
Victor Valley UHSD, COP, Instructional Academy Project, MBIA Insured, 5.80%, 11/15/21 .................. 1,000,000 1,083,100
Virgin Islands PFA Revenue, Sub. Lien, Fund Loan Notes, Refunding, Series E,
5.75%, 10/01/13 ..................................................................................... 1,595,000 1,629,500
5.875%, 10/01/18 .................................................................................... 1,665,000 1,707,091
6.00%, 10/01/22 ..................................................................................... 2,650,000 2,744,526
Vista Mobile Home Park Revenue, Estrella De Oro Mobile Home, 5.875%, 2/01/28 ........................... 1,685,000 1,704,142
West Contra Costa USD, GO, Series B, 5.25%, 8/01/23 .................................................... 1,940,000 1,880,481
West Sacramento Financing Authority Lease Revenue, City
Administration Facilities Project, MBIA Insured, 5.30%, 9/01/30 ........................................ 1,020,000 1,027,936
Western Placer Waste Management Authority Revenue, Refunding, 6.75%, 7/01/14 ........................... 7,400,000 8,005,986
Westminster COP, Public Improvements Project, Pre-Refunded 6.00%, 6/01/22 .............................. 2,060,000 2,268,781
Whittier School District COP, School Facilities Project,
5.375%, 9/01/22 ..................................................................................... 1,055,000 1,029,606
5.40%, 9/01/29 ...................................................................................... 1,725,000 1,672,388
Winton Water and Sanitation District COP, Wastewater System Improvement Project, Refunding,
MBIA Insured, 5.25%, 3/01/28 ........................................................................ 1,500,000 1,505,550
------------
TOTAL BONDS (COST $621,204,290) ........................................................................ 634,906,356
------------
ZERO COUPON BONDS 2.5%
Paramount RDA, Tax Allocation, Redevelopment Project Area No. 1, Refunding, MBIA Insured, 8/01/26 ...... 14,050,000 3,269,997
San Diego RDA, Capital Appreciation, Tax Allocation,
Series B, 09/01/10 .................................................................................. 3,770,000 1,964,885
Series B, 09/01/15 .................................................................................. 6,810,000 2,537,678
Series B, 09/01/16 .................................................................................. 1,500,000 519,015
Series B, 09/01/19 .................................................................................. 1,800,000 501,821
Series B, 09/01/20 .................................................................................. 1,800,000 468,233
Series B, 09/01/21 .................................................................................. 1,800,000 437,580
Series B, 09/01/22 .................................................................................. 1,900,000 431,490
Series B, 09/01/23 .................................................................................. 1,900,000 401,051
</TABLE>
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, MAY 31, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND AMOUNT VALUE
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
ZERO COUPON BONDS (CONT.)
San Diego RDA, Capital Appreciation, Tax Allocation, (cont.)
Series B, 09/01/24 ............................................................................... $ 1,900,000 $ 376,123
Series B, 09/01/25 ............................................................................... 1,900,000 353,646
Series B, 09/01/26 ............................................................................... 1,900,000 330,827
Series B, 09/01/27 ............................................................................... 1,900,000 310,250
Series B, 09/01/28 ............................................................................... 1,900,000 290,984
San Joaquin Hills Transportation Corridor Agency Toll Road Revenue, Junior Lien, ETM, 1/01/28 ....... 19,150,000 4,271,024
------------
TOTAL ZERO COUPON BONDS (COST $14,926,611) .......................................................... 16,464,604
------------
TOTAL LONG TERM INVESTMENTS (COST $636,130,901) ..................................................... 651,370,960
------------
(a)SHORT TERM INVESTMENTS 3.5%
California Health Facilities Financing Authority Revenue, Sutter Health,
Series A, Daily VRDN and Put, 2.55%, 3/01/20 ..................................................... 400,000 400,000
Series C, Daily VRDN and Put, 2.95%, 7/01/22 ..................................................... 700,000 700,000
California PCFA, PCR,
Pacific Gas and Electric, Refunding, Series E, Daily VRDN and Put, 2.85%, 11/01/26 ............... 9,100,000 9,100,000
Shell Oil Co. Project, Refunding, Series B, Daily VRDN and Put, 3.25%, 10/01/11 .................. 1,600,000 1,600,000
California State Economic Development Financing Authority Revenue, California Independent System
Project, Series B, Daily VRDN and Put, 2.90%, 4/01/08 ............................................ 2,700,000 2,700,000
Irvine 1915 Act,
AD No. 94-13, Daily VRDN and Put, 3.00%, 9/02/22 ................................................. 2,500,000 2,500,000
AD No. 97-13, Daily VRDN and Put, 3.00%, 9/02/23 ................................................. 2,300,000 2,300,000
Irvine Ranch Water District COP, Capital Improvement Project, Daily VRDN and Put, 2.70%, 8/01/16 .... 1,700,000 1,700,000
Orange County Sanitation District COP,
Nos 1-3, 5-7, 11, 13 and 14, Daily VRDN and Put, 2.55%, 8/01/15 .................................. 1,300,000 1,300,000
Nos 1-3, 5-7 and 11, Refunding, AMBAC Insured, Daily VRDN and Put, 3.20%, 8/01/16 ................ 1,200,000 1,200,000
------------
TOTAL SHORT TERM INVESTMENTS (COST $23,500,000) ..................................................... 23,500,000
------------
TOTAL INVESTMENTS (COST $659,630,901) 101.9% ........................................................ 674,870,960
OTHER ASSETS, LESS LIABILITIES (1.9)% ............................................................... (12,780,905)
------------
NET ASSETS 100.0% ................................................................................... $662,090,055
============
</TABLE>
See Glossary of Terms on page 54.
(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 principal balance
plus accrued interest at specific dates.
(b) Sufficient collateral has been segregated for securities traded on a
when-issued or delayed delivery basis.
(c) See Note 6 regarding defaulted securities.
See notes to financial statements.
FRANKLIN MUNICIPAL SECURITIES TRUST
Financial Highlights
FRANKLIN TENNESSEE MUNICIPAL BOND FUND
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------
YEAR ENDED MAY 31,
----------------------------------------------------------------
1999 1998 1997 1996 1995
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .................. $ 11.27 $ 10.71 $ 10.40 $ 10.53 $ 10.11
----------------------------------------------------------------
Income from investment operations:
Net investment income .............................. .55 .57 .58 .56 .52
Net realized and unrealized gains (losses) ......... (.08) .56 .33 (.09) .35
----------------------------------------------------------------
Total from investment operations .................... .47 1.13 .91 .47 .87
----------------------------------------------------------------
Less distributions from:
Net investment income .............................. (.55) (.57) (.60) (.60) (.45)
Net realized gains ................................. (.03) -- -- -- --
----------------------------------------------------------------
Net asset value, end of year ........................ $ 11.16 $ 11.27 $ 10.71 $ 10.40 $ 10.53
================================================================
Total return* ....................................... 4.19% 10.75% 8.95% 4.50% 8.97%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ..................... $ 77,117 $ 44,526 $ 26,708 $ 13,956 $ 5,986
Ratio to average net assets:
Expenses ........................................... .40% .40% .40% .33% .10%
Expenses excluding waiver and payments by affiliates .81% .81% .84% .91% .92%
Net investment income .............................. 4.88% 5.12% 5.51% 5.67% 6.02%
Portfolio turnover rate ............................. 13.39% 37.67% 27.60% 27.23% 24.71%
</TABLE>
* Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
See notes to financial statements.
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, MAY 31, 1999
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN TENNESSEE MUNICIPAL BOND FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS 98.9%
Carroll County IDBR, Henry I. Siegel Co. Inc. Project, Refunding, 7.20%, 4/01/05 $ 500,000 $ 516,575
Chattanooga Health Educational and Housing Facility Board Revenue, Catholic Health Initiatives,
Refunding, Series A, 5.00%, 12/01/18 1,000,000 966,170
Series A, 5.00%, 12/01/28 1,000,000 944,120
Cleveland Water and Sewer, FGIC Insured, 5.375%, 9/01/28 1,000,000 1,009,520
Collierville Water and Sewer Systems, MBIA Insured, 5.625%, 11/01/21 500,000 516,940
Dickson Electric System Revenue, MBIA Insured, 5.50%, 9/01/16 1,220,000 1,267,617
Eastside Utility District, Hamilton County, Waterworks Revenue, Refunding, MBIA Insured, 5.25%, 11/01/17 800,000 806,992
Fayetteville and Lincoln IDBR, Hospital Facility Lease, AMBAC Insured, 5.30%, 5/01/28 1,000,000 997,010
Franklin IDB, MFHR, Landings Apartment Project,
Refunding, Series A, FSA Insured, 6.00%, 10/01/26 1,000,000 1,044,990
Hallsdale-Powell Utility District of Knox County Water and Sewer Revenue, Refunding, AMBAC Insured,
5.00%, 4/01/19 3,000,000 2,918,850
Hamilton County IDB, MFHR, Patten Towers Apartments, 7.125%, 2/01/09 500,000 518,530
Hardeman County GO, FGIC Insured, 5.625%, 4/01/24 880,000 927,124
Harpeth Valley Utilities District Davidson and Williamson Counties Revenue, Utilities Improvement,
MBIA Insured, 5.00%, 9/01/28 1,430,000 1,376,747
Series A, MBIA Insured, 5.00%, 9/01/28 3,540,000 3,382,718
Hollow Rock-Bruceton Special School District GO, FSA Insured, Pre-Refunded, 5.75%, 4/01/24 500,000 549,010
Humphreys County IDB, Solid Waste Disposal Revenue, Dupont Denemours and Co. Project, 6.70%, 5/01/24 800,000 888,472
Jackson GO, Refunding and Improvement, MBIA Insured, 5.125%, 3/01/16 1,000,000 1,000,870
Jackson Water and Sewer Revenue, Series A, AMBAC Insured, 5.00%, 7/01/18 300,000 292,782
Johnson City GO,
Public Improvement, FSA Insured, Pre-Refunded, 5.90%, 6/01/12 500,000 544,355
Solid Waste, AMBAC Insured, 5.80%, 5/01/09 100,000 106,954
Johnson City Health and Educational Facilities Board Revenue, Pine Oaks
Assisted Project, Series A, GNMA Secured, 5.90%, 6/20/37 1,390,000 1,423,805
Johnson City Health and Educational Revenue, Medical Center Hospital, Refunding
and Improvement, MBIA Insured, 5.25%, 7/01/28 2,000,000 1,950,420
Johnson County Public Improvement GO, Series B, AMBAC Insured, Pre-Refunded, 6.70%, 5/01/20 100,000 114,021
Knox-Chapman Utility District, Knox County Water and Sewer Revenue,
FSA Insured, 5.40%, 1/01/23 660,000 668,560
Refunding, MBIA Insured, 6.10%, 1/01/19 100,000 108,223
Knox County First Utility District Water and Sewer Revenue, Refunding and Improvement, Series A,
MBIA Insured, 5.625%, 12/01/19 1,000,000 1,046,570
Knox County Health, Educational and Housing Board Hospital Facilities Revenue,
Fort Sanders Alliance, Refunding, MBIA Insured, 5.75%, 1/01/14 1,250,000 1,352,925
Mercy Health Systems, Refunding, Series B, 5.875%, 9/01/15 345,000 366,621
Knox County IDB, MFR, Waterford Apartments, Refunding, Series A, FHA Insured, 5.95%, 3/01/28 250,000 261,073
Knoxville Electric Revenue, Refunding and Improvement Systems, Series S, 5.10%, 7/01/24 2,000,000 1,931,320
Loudon County IDB, Solid Waste Disposal Revenue, Kimberly-Clark Corp. Project, 6.20%, 2/01/23 1,305,000 1,406,255
Macon County GO, FGIC Insured, Pre-Refunded, 5.90%, 9/01/13 150,000 165,039
Maury County IDB, PCR, Multi-Modal, Saturn Corp. Project, Refunding, 6.50%, 9/01/24 620,000 679,483
McKenzie High School District GO, Pre-Refunded, FSA Insured, 5.75%, 4/01/22 500,000 549,010
Memphis GO, Pre-Refunded, 5.75%, 8/01/15 500,000 531,655
Memphis Health, Educational and Housing Facility Board Mortgage Revenue,
Edgewater Terrace, Refunding, GNMA Secured, 7.375%, 1/20/27 150,000 163,901
MF River Trace II, Refunding, Series A, 6.45%, 4/01/26 100,000 105,416
Memphis-Shelby County Airport Authority Revenue, Refunding, MBIA Insured, 5.65%, 9/01/15 500,000 521,015
</TABLE>
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, MAY 31, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN TENNESSEE MUNICIPAL BOND FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
Memphis-Shelby County Airport Authority Special Facilities and Project Revenue, Federal Express Corp.,
6.75%, 9/01/12 ........................................................................................ $ 100,000 $ 107,625
Metropolitan Government of Nashville and Davidson County Electric Revenue, Series A,
5.20%, 5/15/23 ........................................................................................ 1,000,000 991,850
Pre-Refunded, 6.00%, 5/15/17 .......................................................................... 200,000 215,162
Metropolitan Government of Nashville and Davidson County GO,
Public Improvements, 5.875%, 5/15/26 .................................................................. 1,000,000 1,088,600
(b)Refunding, 5.125%, 5/15/25 ............................................................................ 5,500,000 5,387,745
Metropolitan Government of Nashville and Davidson County Health and Educational Facilities Board Revenue,
Meharry Medical College Project, AMBAC Insured, Pre-Refunded, 6.875%, 12/01/24 ........................ 150,000 172,692
Mortgage, Dandridge Towers, Refunding, Series A, 6.375%, 1/01/11 ...................................... 500,000 525,770
Multi-Modal Health Facility, Asset Guaranty, 5.50%, 5/01/23 ........................................... 965,000 981,280
The Vanderbilt University, Refunding, Series A, 5.375%, 7/01/18 ....................................... 700,000 713,888
The Vanderbilt University, Refunding, Series B, 5.00%, 10/01/28 ....................................... 2,750,000 2,639,560
Metropolitan Government of Nashville and Davidson County Sports Authority Revenue, Stadium Public
Improvement Project, AMBAC Insured, 5.875%, 7/01/21 ..................................................... 1,775,000 1,873,637
Metropolitan Government of Nashville and Davidson County Water and Sewer Revenue, Refunding, 5.50%,
1/01/16 ............................................................................................... 620,000 620,099
Metropolitan Nashville Airport Authority Revenue, Series C, FGIC Insured, 6.60%, 7/01/15 ................. 205,000 219,762
Milan Special School District GO, AMBAC Insured, Pre-Refunded, 6.625%, 4/01/11 ........................... 180,000 202,671
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 2,822,910
Northern Mariana Islands Commonwealth Ports Authority Seaport Revenue, Series A, 6.85%, 3/15/28 .......... 295,000 314,756
Pigeon Forge Public Improvement, MBIA Insured, 5.90%, 6/01/09 ............................................ 100,000 104,531
Puerto Rico Commonwealth GO,
Pre-Refunded, 6.50%, 7/01/23 .......................................................................... 100,000 112,608
Public Improvement, Refunding, 5.75%, 7/01/17 ......................................................... 750,000 800,198
Puerto Rico Commonwealth Highway and Transportation Authority Revenue, Series Y, Pre-Refunded, 6.00%,
7/01/22 ............................................................................................... 500,000 555,955
Puerto Rico Electric Power Authority Revenue,
Series X, 5.50%, 7/01/25 .............................................................................. 500,000 512,415
Series R, Pre-Refunded, 6.25%, 7/01/17 ................................................................ 100,000 108,233
Puerto Rico Industrial Tourist Educational Medical and Environmental Control Facilities Financing
Authority Hospital Revenue, Hospital Auxilio Mutuo Obligation, Series A, 6.25%, 7/01/24 ................. 200,000 219,584
Puerto Rico Port Authority Revenue, Special Facilities, American Airlines, Series A, 6.25%, 6/01/26 ...... 600,000 637,716
Shelby County GO, Public Improvement and School,
Refunding, Series B, 5.00%, 6/01/24 ................................................................... 3,000,000 2,896,260
Series A, 4.75%, 5/01/21 .............................................................................. 2,330,000 2,179,272
Shelby County Health Educational and Housing Facilities Board Hospital Revenue, MBIA Insured,
5.30%, 8/01/15 ........................................................................................ 490,000 499,217
5.00%, 4/01/18 ........................................................................................ 1,000,000 970,260
Shelby County Health Educational and Housing Facilities Board Revenue, Ave Maria Assisted Living Project,
Series A, 5.50%, 12/01/31 ............................................................................. 2,010,000 1,983,026
Shelby County School GO, Series B, Pre-Refunded, 6.00%, 3/01/16 .......................................... 530,000 563,432
South Fulton IDBR, Tyson Foods Inc. Project, 6.40%, 10/01/20 ............................................. 300,000 325,203
Sullivan County IDBR, Brandymill, Refunding, Series I-A, GNMA Secured, 6.35%, 7/20/27 .................... 350,000 372,929
Tennessee HDA,
Homeownership Program, 5.375%, 7/01/23 ................................................................ 1,000,000 993,940
Homeownership Program, Issue 4A, 6.375%, 7/01/22 ...................................................... 800,000 837,232
Homeownership Program, Series 3, 5.85%, 7/01/23 ....................................................... 320,000 327,069
</TABLE>
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, MAY 31, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN TENNESSEE MUNICIPAL BOND FUND AMOUNT VALUE
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
Tennessee HDA, (cont.)
Mortgage Finance, Series A, 6.90%, 7/01/25 ...................................................... $ 200,000 $ 215,580
Mortgage Finance, Series B, 6.60%, 7/01/25 ...................................................... 190,000 202,295
Mortgage Finance, Series B, MBIA Insured, 6.20%, 7/01/18 ........................................ 630,000 658,004
Tennessee State Local Development Authority Revenue,
Community Provider Pooled Loan Program, 6.55%, 10/01/23 ......................................... 100,000 111,791
State Loan Program, Refunding, Series A, MBIA Insured, 5.125%, 3/01/22 .......................... 150,000 147,320
Tennessee State School Board Authority, Higher Educational Facilities,
2nd Program, Series A, 5.00%, 5/01/28 ........................................................... 3,000,000 2,846,250
Series A, Pre-Refunded, 6.25%, 5/01/22 .......................................................... 100,000 107,743
Virgin Islands PFA Revenue, Senior Lien, Fund Loan Notes, Refunding, Series A, 5.50%, 10/01/18 ..... 1,000,000 1,006,620
White House Utility District, Robertson and Sumner Counties Waterworks System Revenue, Refunding,
Series B, FGIC Insured, 5.375%, 1/01/19 ........................................................... 1,890,000 1,911,583
Wilson County COP,
Educational Facilities, 6.125%, 6/30/10 ......................................................... 220,000 243,262
FSA Insured, 5.25%, 3/30/18 ..................................................................... 1,000,000 1,006,490
-----------
TOTAL LONG TERM INVESTMENTS (COST $74,928,415) ..................................................... 76,255,683
-----------
(a)SHORT TERM INVESTMENTS 1.9%
Metropolitan Nashville Airport Authority Special Facilities Revenue, American Airlines Project,
Refunding, Series B, Daily VRDN and Put, 3.25%, 10/01/12 .......................................... 100,000 100,000
Puerto Rico Commonwealth Government Development Bank, Refunding, MBIA Insured, Weekly VRDN and Put,
3.00%, 12/01/15 ................................................................................. 500,000 500,000
Puerto Rico Commonwealth Highway and Transportation Authority Revenue, Series A, AMBAC Insured,
Weekly VRDN and Put, 3.00%, 7/01/28 ................................................................ 800,000 800,000
Sullivan County IDB, PCR, Mead Corp., Project, Refunding, Daily VRDN and Put, 3.20%, 10/01/16 ...... 100,000 100,000
-----------
TOTAL SHORT TERM INVESTMENTS (COST $1,500,000) ..................................................... 1,500,000
-----------
TOTAL INVESTMENTS (COST $76,428,415) 100.8% ........................................................ 77,755,683
OTHER ASSETS, LESS LIABILITIES (.8)% ............................................................... (638,306)
-----------
NET ASSETS 100.0% .................................................................................. $77,117,377
===========
</TABLE>
See Glossary of Terms on page 54.
(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 principal balance
plus accrued interest at specific dates.
(b) Sufficient collateral has been segregated for securities traded on a
when-issued or delayed delivery basis.
See notes to financial statements.
FRANKLIN MUNICIPAL SECURITIES TRUST
Financial Highlights
FRANKLIN WASHINGTON MUNICIPAL BOND FUND
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------
YEAR ENDED MAY 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .................. $ 10.48 $ 10.09 $ 9.80 $ 9.90 $ 9.55
------------------------------------------------------------
Income from investment operations:
Net investment income .............................. .53 .57 .58 .56 .56
Net realized and unrealized gains (losses) ......... (.02) .41 .29 (.08) .36
------------------------------------------------------------
Total from investment operations .................... .51 .98 .87 .48 .92
------------------------------------------------------------
Less distributions from:
Net investment income .............................. (.56) (.59) (.58) (.58) (.57)
In excess of net investment income ................. (.01) -- -- -- --
------------------------------------------------------------
Total distributions ................................. (.57) (.59) (.58) (.58) (.57)
------------------------------------------------------------
Net asset value, end of year ........................ $ 10.42 $ 10.48 $ 10.09 $ 9.80 $ 9.90
============================================================
Total return* ....................................... 4.90% 9.87% 9.04% 4.91% 10.10%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ..................... $ 11,200 $ 10,376 $ 8,361 $ 7,718 $ 5,741
Ratio to average net assets:
Expenses ........................................... .46% .10% .10% .10% .10%
Expenses excluding waiver and payments by affiliates .94% .84% .90% .92% 1.05%
Net investment income .............................. 5.00% 5.54% 5.81% 5.81% 6.13%
Portfolio turnover rate ............................. 5.50% 6.94% 7.73% 19.13% 18.46%
</TABLE>
* Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
See notes to financial statements.
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, MAY 31, 1999
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN WASHINGTON MUNICIPAL BOND FUND AMOUNT VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENTS 97.7%
Aberdeen GO, Series A, MBIA Insured, 5.80%, 12/01/12 ..... $100,000 $105,361
Bellevue Water and Sewer Revenue, Refunding, 5.875%,
7/01/10 ................................................ 100,000 104,697
Bellingham Housing Authority Revenue,
Cascade Meadows Project, Pre-Refunded, 7.10%,
11/01/23 ........................................... 200,000 228,322
Pacific Rim and Cascade Meadows Project,
Refunding, MBIA Insured, 5.20%, 11/01/27 ........... 200,000 196,494
Chelan County PUD No. 1, Consolidated Revenue, Chelan
Hydroelectric Division I Project, Series A, FSA
Insured, 5.25%, 7/01/33 ............................... 200,000 194,126
Clark County School District No. 114, Evergreen
School, AMBAC Insured, Pre-Refunded, 5.95%,
12/01/12 ............................................... 100,000 109,678
Clark County Sewer Revenue, MBIA Insured, 5.70%,
12/01/16 ............................................... 200,000 209,806
Conservation and Renewable Energy System Revenue,
Washington Conservation Project, 6.50%, 10/01/14 ....... 400,000 429,784
Douglas County PUD No.1 Electric Systems Revenue,
MBIA Insured, 6.00%, 1/01/15 ........................... 100,000 108,728
Federal Way GO, Refunding, 5.85%, 12/01/21 ............... 100,000 106,610
Grant County PUD No. 2,
Priest Rapids Hydroelectric Revenue, Second
Series, Series B, MBIA Insured, 5.875%, 1/01/26 .... 100,000 105,539
Wanapum Hydroelectric Revenue, Refunding, Second
Series, Series A, MBIA Insured, 5.20%, 1/01/23 ..... 250,000 245,985
King County GO, Sewer District, 5.875%, 1/01/15 .......... 100,000 108,341
King County Housing Authority Revenue, Woodridge
Park Project, 6.25%, 5/01/15 ........................... 175,000 183,160
King County School District No. 400, Mercer Island,
5.90%, 12/01/15 ........................................ 100,000 108,321
King County School District No. 412, Shoreline,
Pre-Refunded, 6.10%, 6/01/13 ........................... 100,000 109,533
King County School District No. 415, Kent, FSA Insured,
5.875%, 6/01/16 ........................................ 200,000 214,732
Lewis County PUD No.1, Cowlitz Falls Hydroelectric
Project Revenue, 6.00%, 10/01/24 ....................... 200,000 205,256
Pierce County EDC, Solid Waste Revenue, Occidental
Petroleum Corp., 5.80%, 9/01/29 ........................ 375,000 375,154
Pierce County Sewer Revenue, 5.70%, 2/01/17 .............. 100,000 103,231
Pilchuck Development Public Corp. Special Facilities
Airport Revenue, Tramco Project, B.F. Goodrich,
6.00%, 8/01/23 ......................................... 800,000 820,176
Port of Seattle Revenue, Series B,
6.00%, 11/01/17 ...................................... 180,000 188,267
Pre-Refunded, 6.00%, 11/01/17 ........................ 20,000 21,263
Seatac GO, MBIA Insured, Pre-Refunded, 6.50%, 12/01/13 ... 450,000 503,789
Seattle Housing Authority Low Income Housing Assistance
Revenue, Kin On Project, GNMA Secured, 7.40%, 11/20/36 . 99,000 113,597
Seattle Municipality Metropolitan Sewer Revenue,
Refunding, Series V, 6.20%, 1/01/32 .................... 200,000 209,298
Seattle Water System Revenue, FGIC Insured, 5.00%,
10/01/23 ............................................... 300,000 286,569
Snohomish County GO, MBIA Insured, 5.90%, 12/01/15 ....... 100,000 106,949
Snohomish County Housing Authority Revenue, Pooled,
6.30%, 4/01/16 ......................................... 200,000 210,158
Snohomish County PUD No.1 Electric Revenue, Generation
System, Refunding, FGIC Insured, 6.00%, 1/01/18 ........ 200,000 211,306
Snohomish County PUD No.1 Water Revenue, 5.85%,
11/01/17 ............................................... 100,000 100,801
Spokane County GO, Refunding, 6.00%, 12/01/14 ............ 130,000 142,289
Spokane County Water District No. 3 Water Revenue,
Refunding, 5.90%, 1/01/14 .............................. 100,000 101,118
Stevens County Public Corp. PCR, Water Power Co. Project,
Refunding, 6.00%, 12/01/23 ............................. 300,000 312,582
Sunnyside GO, MBIA Insured, 6.10%, 12/01/14 .............. 100,000 107,813
Tacoma Electric System Revenue, Refunding, FGIC
Insured, 6.25%, 1/01/15 ................................ 200,000 216,550
Tacoma GO, Series A, MBIA Insured, 5.625%, 12/01/22 ...... 300,000 312,426
Tacoma Refuse Utility Revenue, AMBAC Insured,
Pre-Refunded, 7.00%, 12/01/19 .......................... 100,000 115,738
Tacoma Water Revenue, FGIC Insured, 5.25%, 12/01/16 ...... 100,000 100,722
University of Washington Alumni Association Lease
Revenue, Medical Center Roosevelt II, FSA Insured,
6.30%, 8/15/14 ......................................... 500,000 550,615
Washington State COP, Office Building Project,
Series A, MBIA Insured, 6.00%, 4/01/12 ................. 100,000 104,260
</TABLE>
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, MAY 31, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN WASHINGTON MUNICIPAL BOND FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENTS (CONT.)
Washington State Health Care Facilities Authority Revenue,
Children's Hospital and Regional Medical Center, FSA
Insured, 5.00%, 10/01/28 ........................... $600,000 $ 563,988
Multicare Health Systems, MBIA Insured, 5.00%, 8/15/22 250,000 237,793
Swedish Health Services, Refunding, AMBAC Insured, 5.50%,
11/15/28 ............................................... 500,000 506,345
Washington State Higher Education Facilities Authority
Revenue, Pacific Lutheran University Project, Refunding,
Connie Lee Insured, 5.70%, 11/01/26 .................... 200,000 208,568
Washington State Housing Finance Commission SF Program,
Series 1A-1, GNMA/FNMA Secured, 6.25%, 6/01/16 ....... 100,000 104,976
Series 1A-3, GNMA/FNMA Secured, 6.15%, 12/01/15 ...... 200,000 208,838
Series 2N, GNMA/FNMA Secured, 6.05%, 12/01/16 ........ 100,000 104,342
Series 3A, GNMA/FNMA Secured, 5.75%, 12/01/28 ........ 195,000 197,812
Washington State Housing Finance Commission SFMR, MBS
Program, Series A, GNMA Secured, FNMA Insured, 7.05%,
7/01/22 ................................................ 50,000 53,102
Washington State Motor Vehicle Fuel Tax GO, Series D,
6.00%, 9/01/20 ......................................... 240,000 260,613
Whatcom County School District No.501 GO, Bellingham,
Pre-Refunded, 6.05%, 12/01/13 ........................... 100,000 109,944
-----------
TOTAL INVESTMENTS (COST $10,433,687) 97.7% ............... 10,945,465
OTHER ASSETS, LESS LIABILITIES 2.3% ...................... 254,457
-----------
NET ASSETS 100.0% ........................................ $11,199,922
===========
</TABLE>
See Glossary of Terms on page 54.
See notes to financial statements.
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, MAY 31, 1999 (CONT.)
GLOSSARY OF TERMS
- --------------------------------------------------------------------------------
1915 Act - Improvement Bond Act of 1915
ABAG - The Association of Bay Area Governments
AD - Assessment District
AMBAC - American Municipal Bond Assurance Corp.
CDA - Community Development Authority/Agency
CFD - Community Facilities District
CHFCLP - California Health Facilities Construction Loan Program
COP - Certificate of Participation
EDC - Economic Development Corp.
ETM - Escrow to Maturity
FGIC - Financial Guaranty Insurance Corp.
FHA - Federal Housing Authority/Agency
FNMA - Federal National Mortgage Association
FSA - Financial Security Assistance (Some of the securities shown as FSA
Insured were originally insured by Capital Guaranty Insurance Co.
(CGIC) which was acquired by FSA in 1995 and no longer does business
under this name.)
GNMA - Government National Mortgage Association
GO - General Obligation
HDA - Housing Development Authority/Agency
HFA - Housing Finance Authority/Agency
HMR - Home Mortgage Revenue
IDB - Industrial Development Board
IDBR - Industrial Development Board Revenue
IDR - Industrial Development Revenue
MBIA - Municipal Bond Investors Assurance Corp.
MBS - Mortgage-Backed Securities
MF - Multi-Family
MFHR - Multi-Family Housing Revenue
MFR - Multi-Family Revenue
PCFA - Pollution Control Financing Authority
PCR - Pollution Control Revenue
PFA - Public Financing Authority
PUD - Public Utilities District
RDA - Redevelopment Agency
SF - Single Family
SFMR - Single Family Mortgage Revenue
USD - Unified School District
FRANKLIN MUNICIPAL SECURITIES TRUST
Financial Statements
STATEMENTS OF ASSETS AND LIABILITIES
MAY 31, 1999
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN
ARKANSAS CALIFORNIA TENNESSEE WASHINGTON
MUNICIPAL HIGH YIELD MUNICIPAL MUNICIPAL
BOND FUND MUNICIPAL FUND BOND FUND BOND FUND
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Investments in securities:
Cost ............................... $ 40,327,243 $ 659,630,901 $ 76,428,415 $ 10,433,687
=============================================================
Value .............................. 40,932,694 674,870,960 77,755,683 10,945,465
Cash ................................. 58,060 36,075 59,956 134,278
Receivables:
Investment securities sold ......... 481,057 105,000 -- --
Capital shares sold ................ 10,043 1,338,474 354,832 --
Interest ........................... 715,905 10,461,844 1,137,287 198,135
-------------------------------------------------------------
Total assets ..................... 42,197,759 686,812,353 79,307,758 11,277,878
-------------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased .... -- 22,440,270 1,969,276 --
Capital shares redeemed ............ 131,389 544,549 66,177 42,286
Affiliates ......................... 40,653 556,241 26,610 12,132
Shareholders ....................... 94,149 283,749 18,638 5,247
Distributions to shareholders ........ 52,716 854,761 100,812 13,440
Other liabilities .................... 4,387 42,728 8,868 4,851
-------------------------------------------------------------
Total liabilities ................ 323,294 24,722,298 2,190,381 77,956
-------------------------------------------------------------
Net assets,at value ............ $ 41,874,465 $ 662,090,055 $ 77,117,377 $ 11,199,922
=============================================================
Net assets consist of:
Undistributed net investment income... $ -- $ -- $ 74,974 $ --
Accumulated distributions in excess
of net investment income ........... (40,355) (942,423) -- (5,811)
Net unrealized appreciation .......... 605,451 15,240,059 1,327,268 511,778
Accumulated net realized loss ........ (37,555) (1,811,746) (67,338) (109,193)
Capital shares ....................... 41,346,924 649,604,165 75,782,473 10,803,148
-------------------------------------------------------------
Net assets, at value ........... $ 41,874,465 $ 662,090,055 $ 77,117,377 $ 11,199,922
=============================================================
</TABLE>
See notes to financial statements.
FRANKLIN MUNICIPAL SECURITIES TRUST
Financial Statements (continued)
STATEMENTS OF ASSETS AND LIABILITIES (CONT.)
MAY 31,1999
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN
ARKANSAS CALIFORNIA TENNESSEE WASHINGTON
MUNICIPAL HIGH YIELD MUNICIPAL MUNICIPAL
BOND FUND MUNICIPAL FUND BOND FUND BOND FUND
-------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A:
Net assets,at value ............................... $ 41,874,465 $ 583,752,099 $ 77,117,377 $ 11,199,922
=============================================================
Shares outstanding ................................ 3,862,181 55,062,650 6,911,893 1,075,033
=============================================================
Net asset value per share* ........................ $ 10.84 $ 10.60 $ 11.16 $ 10.42
=============================================================
Maximum offering price per share
(net asset value per share divided by 95.75%) ... $ 11.32 $ 11.07 $ 11.66 $ 10.88
=============================================================
CLASS C:
Net assets,at value ............................... $ -- $ 78,337,956 -- --
=============================================================
Shares outstanding ................................ $ -- 7,370,464 -- --
=============================================================
Net asset value per share* ........................ $ -- $ 10.63 -- --
=============================================================
Maximum offering price per share
(net asset value per share divided by 99.00%) ... $ -- $ 10.74 -- --
=============================================================
</TABLE>
* Redemption price is equal to net asset value less any applicable contingent
deferred sales charge.
See notes to financial statements.
FRANKLIN MUNICIPAL SECURITIES TRUST
Financial Statements (continued)
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED MAY 31, 1999
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN
ARKANSAS CALIFORNIA TENNESSEE WASHINGTON
MUNICIPAL HIGH YIELD MUNICIPAL MUNICIPAL
BOND FUND MUNICIPAL FUND BOND FUND BOND FUND
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment income:
Interest .............................................. $ 2,001,226 $ 31,944,137 $ 3,158,661 $ 626,774
------------------------------------------------------------
Expenses:
Management fees (Note 3) .............................. 235,345 3,022,340 373,934 71,672
Distribution fees (Note 3)
Class A .............................................. 37,573 500,083 59,830 11,495
Class C .............................................. -- 392,529 -- --
Transfer agent fees (Note 3) .......................... 11,883 159,921 17,695 4,624
Custodian fees ........................................ 381 5,509 569 115
Reports to shareholders ............................... 5,622 64,500 7,290 1,842
Registration and filing fees .......................... 8,522 75,907 5,654 4,679
Professional fees ..................................... 2,999 20,950 3,665 1,914
Trustees' fees and expenses ........................... 2,134 31,770 3,314 669
Pricing service fees .................................. 11,358 35,684 14,491 10,029
Other ................................................. 1,583 4,296 795 687
------------------------------------------------------------
Total expenses ...................................... 317,400 4,313,489 487,237 107,726
Expenses waived/paid by affiliate (Note 3) .......... (148,374) (1,536,470) (248,287) (54,686)
------------------------------------------------------------
Net expenses ....................................... 169,026 2,777,019 238,950 53,040
------------------------------------------------------------
Net investment income ............................. 1,832,200 29,167,118 2,919,711 573,734
------------------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from investments ............. (8,020) 469,247 (65,650) 17,493
Net unrealized depreciation on investments ............ (543,273) (4,500,445) (845,514) (61,931)
------------------------------------------------------------
Net realized and unrealized loss ....................... (551,293) (4,031,198) (911,164) (44,438)
------------------------------------------------------------
Net increase in net assets resulting from operations ... $ 1,280,907 $ 25,135,920 $ 2,008,547 $ 529,296
============================================================
</TABLE>
See notes to financial statements.
FRANKLIN MUNICIPAL SECURITIES TRUST
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED MAY 31, 1999 AND 1998
<TABLE>
<CAPTION>
FRANKLIN ARKANSAS FRANKLIN CALIFORNIA
MUNICIPAL BOND FUND HIGH YIELD MUNICIPAL FUND
----------------------------------------------------------------
1999 1998 1999 1998
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 1,832,200 $ 1,143,143 $ 29,167,118 $ 18,960,085
Net realized gain (loss) from investments (8,020) 5,532 469,247 (116,948)
Net unrealized appreciation (depreciation)
on investments (543,273) 834,896 (4,500,445) 15,006,888
----------------------------------------------------------------
Net increase in net assets resulting
from operations 1,280,907 1,983,571 25,135,920 33,850,025
Distributions to shareholders from:
Net investment income:
Class A (1,876,706) (1,144,675) (26,332,992) (17,741,641)
Class C -- -- (2,834,125) (1,199,464)
In excess of net investment income:
Class A (40,355) -- (845,334) --
Class C -- -- (90,980) --
----------------------------------------------------------------
Total distributions to shareholders (1,917,061) (1,144,675) (30,103,431) (18,941,105)
Capital share transactions: (Note 2)
Class A 12,133,437 16,397,936 175,775,393 184,852,793
Class C -- -- 38,708,484 28,791,162
----------------------------------------------------------------
Total capital share transactions 12,133,437 16,397,936 214,483,877 213,643,955
Net increase in net assets 11,497,283 17,236,832 209,516,366 228,552,875
Net assets:
Beginning of year 30,377,182 13,140,350 452,573,689 224,020,814
----------------------------------------------------------------
End of year $ 41,874,465 $ 30,377,182 $ 662,090,055 $ 452,573,689
================================================================
Undistributed net investment income
(accumulated distributions in excess of net
investment income) included in net assets:
End of year $ (40,355) $ 43,656 $ (942,423) $ (6,110)
================================================================
</TABLE>
See notes to financial statements.
FRANKLIN MUNICIPAL SECURITIES TRUST
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS (CONT.)
FOR THE YEARS ENDED MAY 31, 1999 AND 1998
<TABLE>
<CAPTION>
FRANKLIN TENNESSEE FRANKLIN WASHINGTON
MUNICIPAL BOND FUND MUNICIPAL BOND FUND
------------------------------------------------------------
1999 1998 1999 1998
------------------------------------------------------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 2,919,711 $ 1,862,477 $ 573,734 $ 520,263
Net realized gain (loss) from investments (65,650) 201,405 17,493 2,260
Net unrealized appreciation (depreciation)
on investments (845,514) 1,488,290 (61,931) 345,821
------------------------------------------------------------
Net increase in net assets resulting
from operations 2,008,547 3,552,172 529,296 868,344
Distributions to shareholders from:
Net investment income (2,879,542) (1,851,295) (608,226) (526,988)
In excess of net investment income -- -- (5,811) --
Net realized gains (137,536) -- -- --
------------------------------------------------------------
Total distributions to shareholders (3,017,078) (1,851,295) (614,037) (526,988)
Capital share transactions (Note 2) 33,600,071 16,116,499 908,504 1,674,114
------------------------------------------------------------
Net increase in net assets 32,591,540 17,817,376 823,763 2,015,470
Net assets:
Beginning of year 44,525,837 26,708,461 10,376,159 8,360,689
------------------------------------------------------------
End of year $ 77,117,377 $ 44,525,837 $ 11,199,922 $ 10,376,159
============================================================
Undistributed net investment income
(accumulated distributions in excess of net
investment income) included in net assets:
End of year $ 74,974 $ 34,304 $ (5,811) $ 33,989
============================================================
</TABLE>
See notes to financial statements.
FRANKLIN MUNICIPAL SECURITIES TRUST
Notes to Financial Statements
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Municipal Securities Trust (the Trust) is registered under the
Investment Company Act of 1940 as an open-end, non-diversified investment
company consisting of five series (the Funds). The Funds' investment objectives
are to provide tax-free income.
On June 23, 1999, a proposal to merge the Franklin Arkansas Municipal Bond Fund
and the Franklin Washington Municipal Bond Fund into the Franklin Federal
Tax-Free Income Fund was approved by the shareholders. The scheduled date of the
merger is August 26, 1999.
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 substantially 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.
FRANKLIN MUNICIPAL SECURITIES TRUST
Notes to Financial Statements (continued)
2. SHARES OF BENEFICIAL INTEREST
The classes of shares offered within each of the funds are indicated below.
Effective January 1, 1999, Class I and Class II were renamed Class A and Class
C, respectively. 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.
<TABLE>
<CAPTION>
CLASS A CLASS A & CLASS C
- -----------------------------------------------------------------------------------------
<S> <C>
Franklin Arkansas Municipal Bond Fund Franklin California High Yield Municipal Fund
Franklin Tennessee Municipal Bond Fund
Franklin Washington Municipal Bond Fund
</TABLE>
At May 31, 1999, there were an unlimited number of shares authorized ($.01 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 A SHARES:
1999
Shares sold ........................................ 1,504,758 $16,592,898 27,772,926 $ 298,610,959
Shares issued in reinvestment of distributions ..... 74,378 819,058 1,020,987 10,979,213
Shares redeemed .................................... (480,014) (5,278,519) (12,429,134) (133,814,779)
----------------------------------------------------------
Net increase ........................................ 1,099,122 $12,133,437 16,364,779 $ 175,775,393
==========================================================
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 C SHARES:
1999
Shares sold ........................................ 4,445,199 $ 47,926,169
Shares issued in reinvestment of distributions ..... 126,216 1,360,771
Shares redeemed .................................... (981,379) (10,578,456)
----------------------------
Net increase ........................................ 3,590,036 $ 38,708,484
============================
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>
FRANKLIN MUNICIPAL SECURITIES TRUST
Notes to Financial Statements (continued)
2. SHARES OF BENEFICIAL INTEREST (CONT.)
<TABLE>
<CAPTION>
FRANKLIN TENNESSEE FRANKLIN WASHINGTON
MUNICIPAL BOND FUND MUNICIPAL BOND FUND
-------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A SHARES:
1999
Shares sold ...................................... 3,411,015 $38,679,224 250,699 $ 2,646,406
Shares issued in reinvestment of distributions ... 142,474 1,615,863 31,215 329,287
Shares redeemed .................................. (591,080) (6,695,016) (196,656) (2,067,189)
-------------------------------------------------------
Net increase ...................................... 2,962,409 $33,600,071 85,258 $ 908,504
=======================================================
1998
Shares sold ...................................... 1,961,959 $21,692,685 187,538 $ 1,946,679
Shares issued in reinvestment of distributions ... 103,474 1,149,741 35,472 368,307
Shares redeemed .................................. (609,509) (6,725,927) (61,822) (640,872)
-------------------------------------------------------
Net increase ...................................... 1,455,924 $16,116,499 161,188 $ 1,674,114
=======================================================
</TABLE>
3. TRANSACTIONS WITH AFFILIATES
Certain officers and trustees of the Funds are also officers and/or directors of
Franklin/Templeton Distributors, Inc. (Distributors), Franklin Advisers, Inc.
(Advisers), Franklin/Templeton Investor Services, Inc. (Investor Services), and
Franklin Templeton Services, Inc. (FT Services), the Fund's principal
underwriter, investment manager, transfer agent, and administrative manager,
respectively.
The Funds pay an investment management fee to Advisers based on the 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
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 through February 28, 1999
for the Franklin Arkansas and Washington Municipal Bond Funds and through May
31, 1999 for the Franklin California High Yield and Tennessee Municipal Bond
Funds, as noted in the Statement of Operations.
The Franklin Arkansas, Tennessee, and Washington Municipal Bond Funds reimburse
Distributors up to .15% per year of the Funds' average daily 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 A and Class C,
respectively, for costs incurred in marketing the Funds' shares.
FRANKLIN MUNICIPAL SECURITIES TRUST
Notes to Financial Statements (continued)
3. TRANSACTIONS WITH AFFILIATES (CONT.)
Distributors received (paid) net commissions on sales of the Funds shares, and
received contingent deferred sales charges for the year as follows:
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN
ARKANSAS CALIFORNIA TENNESSEE WASHINGTON
MUNICIPAL HIGH YIELD MUNICIPAL MUNICIPAL
BOND FUND MUNICIPAL FUND BOND FUND BOND FUND
------------------------------------------------
<S> <C> <C> <C> <C>
Net commissions received (paid) ............. $(10,534) $(833,168) $(49,136) $ 4,973
Contingent deferred sales charges ........... $ 2,000 $ 59,344 $ 2,120 $ --
</TABLE>
The Funds paid transfer agent fees of $194,123 of which $170,374 was paid to
Investor Services.
4. INCOME TAXES
At May 31, 1999, 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
ARKANSAS CALIFORNIA WASHINGTON
MUNICIPAL HIGH YIELD MUNICIPAL
BOND FUND MUNICIPAL FUND BOND FUND
-------------------------------------
<S> <C> <C> <C>
Capital loss carryovers expiring in: 2003 ............ $ 18,053 $1,416,838 $ 69,449
2004 ............ -- 4,508 39,744
2005 ............ -- 390,400 --
-------------------------------------
$ 18,053 $1,811,746 $ 109,193
=====================================
</TABLE>
At May 31, 1999, the Franklin Arkansas Municipal Bond Fund and the Franklin
Tennessee Municipal Bond Fund had deferred capital losses occurring subsequent
to October 31, 1998 of $19,502 and $67,509, respectively. For tax purposes, such
losses will be reflected in the year ending August 26, 1999 for the Franklin
Arkansas Municipal Bond Fund and the year ending May 31, 2000 for the Franklin
Tennessee Municipal Bond Fund.
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of defaulted securities.
At May 31, 1999, the net unrealized appreciation based on the cost of
investments for income tax purposes was as follows:
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN
ARKANSAS CALIFORNIA TENNESSEE WASHINGTON
MUNICIPAL HIGH YIELD MUNICIPAL MUNICIPAL
BOND FUND MUNICIPAL FUND BOND FUND BOND FUND
------------------------------------------------------
<S> <C> <C> <C> <C>
Investments at cost .......................... $40,327,243 $659,630,901 $76,428,415 $10,433,687
======================================================
Unrealized appreciation ...................... $ 938,192 $ 20,592,624 $ 2,060,653 $ 545,812
Unrealized depreciation ...................... (332,741) (5,352,565) (733,385) (34,034)
------------------------------------------------------
Net unrealized appreciation .................. $ 605,451 $ 15,240,059 $ 1,327,268 $ 511,778
=======================================================
</TABLE>
FRANKLIN MUNICIPAL SECURITIES TRUST
Notes to Financial Statements (continued)
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the
period ended May 31, 1999 were as follows:
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN FRANKLIN
ARKANSAS CALIFORNIA TENNESSEE WASHINGTON
MUNICIPAL HIGH YIELD MUNICIPAL MUNICIPAL
BOND FUND MUNICIPAL FUND BOND FUND BOND FUND
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Purchases .............. $ 16,376,190 $ 288,957,081 $ 41,077,447 $ 1,561,334
Sales .................. $ 4,804,330 $ 78,896,744 $ 7,832,628 $ 601,900
</TABLE>
6. CREDIT RISK AND DEFAULTED SECURITIES
The California High Yield Municipal Bond Fund has 20.9% of its portfolio
invested in lower rated and comparable quality unrated high yield securities,
which tend to be more sensitive to economic conditions than higher rated
securities. The risk of loss due to default by the issuer may be significantly
greater for the holders of high yielding securities because such securities are
generally unsecured and are often subordinated to other creditors of the issuer.
At May 31, 1999, the Fund held defaulted securities with a value aggregating
$8,000,000 representing 1.2% of the Fund's net assets. For more information as
to specific securities, see the accompanying Statement of Investments.
For financial reporting purposes, the Fund discontinues accruing income on
defaulted bonds and provides an estimate for losses on interest receivable.
The Funds have investments in excess of 10% of their total net assets in their
respective states or U.S. territories and possessions. Such concentration may
subject the Funds more significantly to economic changes occurring within those
states.
FRANKLIN MUNICIPAL SECURITIES TRUST
Independent Auditors' Report
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS
OF FRANKLIN MUNICIPAL SECURITIES TRUST
In our opinion, the accompanying statements of assets and liabilities, including
the statements of investments, and the related statements of operations and
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of each of the funds included in this
report constituting part of the Franklin Municipal Securities Trust, (hereafter
referred to as the Funds) at May 31, 1999, the results of each of their
operations for the year then ended, the changes in each of their net assets for
each of the two years in the period then ended and the financial highlights for
each of the periods presented, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Funds'
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at May 31, 1999 by correspondence with the custodian
and brokers, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Francisco, California
July 1, 1999
FRANKLIN MUNICIPAL SECURITIES TRUST
Tax Information
Under Section 852(b)(3)(C) of the Internal Revenue Code, the Franklin Tennessee
Municipal Bond Fund hereby designates $1,858 as a capital gain dividend for the
fiscal year ended May 31, 1999.
Under Section 852(b)(5)(C) of the Internal Revenue Code, the Trust hereby
designates 100% of the distributions paid from net investment income as
exempt-interest dividends for the fiscal year ended May 31, 1999.
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This page intentionally left blank.
FRANKLIN MUNICIPAL SECURITIES TRUST
FINANCIAL HIGHLIGHTS
FRANKLIN HAWAII MUNICIPAL BOND FUND
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
---------------------------------------------
1999 1998 1997 1996 1995
---------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year $ 11.16 $ 10.79 $ 10.54 $ 10.67 $010.36
---------------------------------------------
Income from investment operations:
Net investment income .56 .58 .60 .60 .60
Net realized and unrealized gains (losses) (.06) .38 .25 (.13) .31
---------------------------------------------
Total from investment operations .50 .96 .85 .47 .91
Less distributions from net investment income (.58) (.59) (.60) (.60) (.60)
---------------------------------------------
Net asset value, end of year $ 11.08 $ 11.16 $ 10.79 $ 10.54 $ 10.67
=============================================
Total return* 4.57% 9.10% 8.23% 4.49% 9.26%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $ 42,198 $ 45,138 $ 40,003 $ 38,8053$,36,827
Ratio to average net assets:
Expenses .57% .40% .39% .35% .20%
Expenses excluding waiver and payments by affiliate.84% .81% .83% .84% .87%
Net investment income 5.04% 5.32% 5.59% 5.63% 6.02%
Portfolio turnover rate 11.19% 23.18% 13.40% 16.01% 22.88%
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
See notes to financial statements
<TABLE>
<CAPTION>
FRANKLIN MUNICIPAL SECURITIES TRUST
Statement of Investments, May 31, 1999
<S> <C> <C>
Franklin Hawaii Municipal Bond Fund PRINCIPAL AMOUNT VALUE
Bonds 98.4%
Guam Airport Authority Revenue, Series B,
6.60%, 10/01/10 $ 200,000 $ 216,342
6.70%, 10/01/23 1,000,000 1,085,970
Guam Government Limited Obligation Highway Revenue, Refunding, Series A, FSA Insured, 6.30%, 280,000 300,264
5/01/12
Hawaii State Airports System Revenue,
Refunding, Third Series 1994, AMBAC Insured, 5.75%, 7/01/09 300,000 321,627
Second Series 1990, FGIC Insured, 7.50%, 7/01/20 60,000 63,216
Second Series 1991, 7.00%, 7/01/18 1,520,000 1,616,277
Second Series 1991, MBIA Insured, 6.75%, 7/01/21 200,000 213,210
Second Series 1992, MBIA Insured, 6.90%, 7/01/12 400,000 471,028
Hawaii State COP, Kapolei State Office Building, Series A, AMBAC Insured, 5.00%, 5/01/18 1,000,000 980,780
Hawaii State Department of Budget and Finance Special Purpose Mortgage Revenue,
Hawaiian Electric Co. and Subsidiaries, MBIA Insured, 6.55%, 12/01/22 3,425,000 3,723,420
Hawaiian Electric Co., Series A, MBIA Insured, 6.60%, 1/01/25 1,950,000 2,142,875
Hawaiian Electric Light Co. Project, 7.20%, 12/01/14 100,000 103,773
Kaiser Permanente, Refunding, Series A, 6.25%, 3/01/21 100,000 104,231
Kapiolani Health Care System, Refunding, 6.40%, 7/01/13 600,000 640,884
Kapiolani Health Care System, Refunding, 6.00%, 7/01/19 125,000 131,010
St. Francis Medical Centers, Refunding, FSA Insured, 6.50%, 7/01/22 1,100,000 1,187,659
Hawaii State Department of Budget and Finance Special Purpose Revenue,
Hawaiian Electric Co. Project, Series B, MBIA Insured, 5.875%, 12/01/26 500,000 536,265
Kaiser Permanente, Series A, 5.15%, 3/01/15 1,000,000 972,590
Kapiolani Health Obligation, 6.25%, 7/01/21 1,100,000 1,176,934
Queens Health System, Refunding, Series A, 6.05%, 7/01/16 1,000,000 1,077,860
Queens Health System, Refunding, Series A, 6.00%, 7/01/20 120,000 127,944
Queens Health System, Refunding, Series A, 5.75%, 7/01/26 1,500,000 1,550,250
Queens Health System, Series B, MBIA Insured, 5.25%, 7/01/23 500,000 498,620
Wilcox Memorial Hospital Projects, 5.25%, 7/01/13 600,000 582,546
Wilcox Memorial Hospital Projects, 5.35%, 7/01/18 2,040,000 1,937,041
Wilcox Memorial Hospital Projects, 5.50%, 7/01/28 2,410,000 2,295,887
Hawaii State Department of Transportation Special Facilities Revenue, Matson Terminals Inc., 75,000 76,944
Refunding, 5.75%, 3/01/13
Hawaii State GO,
Series BW, 6.375%, 3/01/11 100,000 113,812
Series CA, 6.00%, 1/01/09 100,000 110,661
Hawaii State Harbor Capital Improvement Revenue,
Refunding, Series 1994, FGIC Insured, 6.25%, 7/01/15 1,000,000 1,084,100
Refunding, Series 1994, FGIC Insured, 6.375%, 7/01/24 500,000 544,370
Series 1990, MBIA Insured, 7.25%, 7/01/10 70,000 73,578
Series 1990, MBIA Insured, 7.00%, 7/01/17 80,000 83,880
Series 1992, FGIC Insured, 6.50%, 7/01/19 200,000 215,456
Hawaii State Housing Finance and Development Corp. Revenue, Affordable Rental Housing
Program, Series A,
6.00%, 7/01/15 1,000,000 1,044,800
6.05%, 7/01/22 750,000 782,085
6.10%, 7/01/30 235,000 245,032
Statement of Investments, May 31, 1999 (cont.)
Franklin Hawaii Municipal Bond Fund PRINCIPAL AMOUNT VALUE
Bonds (cont.)
Hawaii State Housing Finance and Development Corp. SFM Purchase Revenue, Series A,
7.10%, 7/01/24 $ 465,000 $ 489,296
6.00%, 7/01/26 255,000 261,477
Honolulu City and County GO,
Refunding, Series 1992, 6.00%, 12/01/14 150,000 166,730
Series B, FGIC Insured, 5.00%, 11/01/17 320,000 312,832
Honolulu City and County MFHR, Waipahu Towers Project, Series A, 6.90%, 6/20/35 1,205,000 1,288,868
Honolulu City and County Water Supply Board Water System Revenue, 5.80%, 7/01/21 1,785,000 1,885,031
Kauai County GO, Refunding, Series C, AMBAC Insured, 5.95%, 8/01/10 220,000 243,052
Maui County GO,
6.05%, 9/01/07 30,000 31,101
6.10%, 9/01/08 170,000 176,234
Series C, FGIC Insured, 5.20%, 3/01/17 575,000 575,420
Northern Mariana Islands Commonwealth Ports Authority Seaport Revenue, Series A, 6.85%, 1,000,000 1,066,970
3/15/28
Puerto Rico Commonwealth Highway and Transportation Authority Revenue, Series Y, 5.50%, 800,000 821,816
7/01/26
Puerto Rico Electric Power Authority Revenue, Series O, Pre-Refunded, 7.125%, 7/01/14 115,000 117,067
Puerto Rico Industrial Medical and Environmental PCFA Revenue, PepsiCo Inc. Project, 6.25%, 350,000 380,016
11/15/13
Puerto Rico Industrial Tourist Educational Medical and Environmental Control Facilities 850,000 832,269
Financing Authority Industrial Revenue, Guaynabo Warehouse, Series A, 5.15%, 7/01/19
Puerto Rico PBA, Public Education and Health Facilities, Refunding, Series M, 5.75%, 7/01/15 900,000 940,707
Puerto Rico Telephone Authority Revenue, Series L, 6.125%, 1/01/22 1,000,000 1,065,619
Virgin Islands PFA Revenue, senior lien, Fund Loan Notes, Refunding, Series A, 5.625%, 1,900,000 1,926,067
10/01/25
Virgin Islands Water and Power Authority Electric System Revenue, Refunding, 5.30%, 7/01/18 500,000 489,409
-----------
Total Investments (Cost $39,807,346) 98.4% 41,503,202
Other Assets, less Liabilities 1.6% 694,677
-----------
Net Assets 100.0% $ 42,197,879
===========
</TABLE>
See notes to financial statements.
FRANKLIN MUNICIPAL SECURITIES TRUST
Statement of Investments, May 31, 1999 (cont.)
Franklin Hawaii Municipal Bond Fund
Glossary of Terms
- ---------------------------------------------------------------
AMBAC - American Municipal Bond Assurance Corp.
COP - Certificate of Participation
FGIC - Financial Guaranty Insurance Co.
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).
GO - General Obligation
MBIA - Municipal Bond Investors Assurance Corp.
MFHR - Multi-Family Housing Revenue
PBA - Public Building Authority
PCFA - Pollution Control Financing Authority
PFA - Public Financing Authority
SFM - Single Family Mortgage
FRANKLIN MUNICIPAL SECURITIES TRUST
FRANKLIN HAWAII MUNICIPAL BOND FUND
Financial Statements
Statement of Assets and Liabilities
May 31, 1999
Assets:
Investments in securities, at value (cost $39,807,346) $ 41,503,202
Cash 119,559
Interest receivable 919,872
-------------
Total assets 42,542,633
-------------
Liabilities:
Payables:
Capital shares redeemed 91,604
Affiliates 32,590
Shareholders 158,520
Distributions to shareholders 53,727
Other liabilities 8,313
-------------
Total liabilities 344,754
-------------
Net assets, at value $ 42,197,879
=============
Net assets consist of:
Undistributed net investment income $ 39,103
Net unrealized appreciation 1,695,856
Accumulated net realized loss (67,166)
Capital shares 40,530,086
-------------
Net assets, at value $ 42,197,879
=============
Net asset value per share ($42,197,879 -:- 3,809,302
shares outstanding $11.08
=============
Maximum offering price per share ($11.08 -:- 95.75%) $11.57
=============
* Redemption price is equal to net asset value less any applicable contingent
deferred sales charge
See notes to financial statements.
FRANKLIN MUNICIPAL SECURITIES TRUST
FRANKLIN HAWAII MUNICIPAL BOND FUND
Financial Statements (continued)
Statement of Operations
for the year ended May 31, 1999
Investment income:
Interest $ 2,620,539
-------------
Expenses:
Management fees (Note 3) 292,001
Distribution fees (Note 3) 46,952
Transfer agent fees (Note 3) 22,811
Custodian fees 470
Reports to shareholders 7,686
Registration and filing fees 1,211
Professional fees 3,204
Trustees' fees and expenses 2,778
Other 15,280
-------------
Total expenses 392,393
Expenses waived by affiliate (Note 3) (126,308)
-------------
Net expenses 266,085
-------------
Net investment income 2,354,454
-------------
Realized and unrealized gains (losses):
Net realized gain from investments 478,643
Net unrealized depreciation on investments (749,177)
-------------
Net realized and unrealized loss (270,534)
-------------
Net increase in net assets resulting from operations $ 2,083,920
=============
See notes to financial statements.
FRANKLIN MUNICIPAL SECURITIES TRUST
FRANKLIN HAWAII MUNICIPAL BOND FUND
Financial Statements (continued)
Statements of Changes in Net Assets
for the years ended May 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
-------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 2,354,454 $ 2,293,946
Net realized gain from investments 478,643 246,873
Net unrealized appreciation (depreciation) on investments (749,177) 1,170,843
-------------------------------
Net increase in net assets resulting from operations 2,083,920 3,711,662
Distributions to shareholders from net investment income (2,431,359) (2,307,589)
Capital share transactions (Note 2) (2,592,823) 3,731,394
-------------------------------
Net increase (decrease) in net assets (2,940,262) 5,135,467
Net assets :
Beginning of year 45,138,141 40,002,674
-------------------------------
End of year $ 42,197,879 $ 45,138,141
===============================
Undistributed net investment income included in net assets:
End of year $ 39,103 $ 114,350
===============================
</TABLE>
FRANKLIN MUNICIPAL SECURITIES TRUST
FRANKLIN HAWAII MUNICIPAL BOND FUND
Notes to Financial Statements
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Municipal Securities Trust (the Trust) is registered under the
Investment Company Act of 1940 as an open-end, non-diversified investment
company, consisting of five separate series (the Funds). This report pertains
only to the Franklin Hawaii Municipal Bond Fund (the Fund). The Fund seeks to
provide tax-free income.
On June 24, 1999, the Fund merged into the Franklin Federal Tax-Free Income
Fund.
The following summarizes the Fund's significant accounting policies.
A. SECURITY VALUATION
Tax-free bonds generally trade in the over-the-counter market and are valued
within the range of the latest quoted bid and asked prices. In the absence of a
sale or reported bid and asked prices, information with respect to bond and note
transactions, quotations from bond dearlers, market transactions in comparable
securities, and various relationships between securities are used to determine
the value of the security. The Fund may utilize a pricing service, bank or
broker/dealer experienced in such matters to perform any of the pricing
functions under procedures approved by the Board of 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 the Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and
distribute substantially 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.
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.
D. ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the reporting
period. Actual results could differ from those estimates.
2. SHARES OF BENEFICIAL INTEREST
At May 31, 1999, there were an unlimited number of shares authorized ($0.01par
value). Transactions in the Fund's shares were as follows:
FRANKLIN MUNICIPAL SECURITIES TRUST
FRANKLIN HAWAII MUNICIPAL BOND FUND
Notes to Financial Statements (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONT.)
<TABLE>
<CAPTION>
Year ended May 31,
----------------------------------------------------
1999 1998
----------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
----------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 622,742 $ 7,002,053 779,362 $ 8,639,651
Shares issued in reinvestment
of distributions 77,911 874,401 74,894 830,944
Shares redeemed (934,657) (10,469,277) (517,067) (5,739,201)
----------------------------------------------------
Net increase (decrease) (234,004) $ (2,592,823) 337,189 $ 3,731,394
====================================================
</TABLE>
3. TRANSACTIONS WITH AFFILIATES
Certain officers and trustees of the Fund are also officers and/or directors of
Franklin/Templeton Distributors, Inc. (Distributors), Franklin Advisers, Inc.
(Advisers), Franklin/Templeton Investor Services, Inc. (Investor Services), and
Franklin Templeton Services, Inc. (FT Services), the Fund's principal
underwriter, investment manager, transfer agent, and administrative manager,
respectively.
The Fund pays an investment management fee to Advisers based on the net assets
of the Fund 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
Under an agreement with Advisers, FT Services provides administrative services
to the Fund. The fee is paid by Advisers based on average daily net assets, and
is not an additional expense of the Fund.
Advisers agreed in advance to waive management fees through February 28, 1999,
as noted in the Statement of Operations.
The Fund reimburses Distributors up to .10% per year of its average daily net
assets for costs in marketing the Fund's shares.
Distributors received net commissions on sales of the Fund shares, and received
contingent deferred sales charges for the year of $5,637 and $1,487,
respectively.
The Fund paid transfer agent fees of $22,811, of which $20,662 was paid to
Investor Services.
4. INCOME TAXES
At May 31, 1999, the Fund had tax basis capital losses of $60,253 which may be
carried over to offset future capital gains. Such losses expire in 2004.
At May 31, 1999, the net unrealized appreciation based on the cost of
investments for income tax purposes of $39,814,259 was as follows:
Unrealized appreciation $1,943,072
Unrealized depreciation (254,129)
--------------
Net unrealized appreciation $1,688,943
--------------
Net realized capital losses differ for financial statement and tax purposes
primarily due to differing treatment of wash sales.
FRANKLIN MUNICIPAL SECURITIES TRUST
FRANKLIN HAWAII MUNICIPAL BOND FUND
Notes to Financial Statements (CONTINUED)
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the year
ended May 31, 1999 aggrregated $5,120,269 and $7,702,338, respectively.
6. CREDIT RISK
The Fund has investments in excess of 10% of its total net assets in the State
of Hawaii and U.S. territories and possessions. Such concentration may subject
the Fund more significantly to economic changes occurring within those regions.
See notes to financial statements.
Franklin Municipal Securities Trust
Franklin Hawaii Municipal Bond Fund
Independent Auditors' Report
To the Board of Trustees
and Shareholders of
Franklin Municipal Securities Trust
In our opinion, the accompanying statement of assets and liabilities,
including the statement of investments, and the related statements of
operations and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of Franklin Hawaii
Municipal Bond Fund (the "Fund") (one of the funds constituting Franklin
Municipal Securities Trust) at May 31, 1999, the results of its operations
for the year then ended, the changes in its net assets for each of the two
years in the period then ended and the financial highlights for each of the
periods presented, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. We believe that our audits,
which included confirmation of securities at May 31, 1999 by correspondence
with the custodian and brokers, provide a reasonable basis for the opinion
expressed above.
PricewaterhouseCoopers LLP
San Francisco, California
July 1, 1999
Franklin Municipal Securities Trust
Franklin Hawaii Municipal Bond Fund
Tax Information
Under Section 852(b)(5)(A) of the Internal Revenue code, the Trust hereby
designates 100% of the distributions paid from net investment income as
exempt-interest dividends for the fiscal year ended May 31, 1999.
