SHAREHOLDER LETTER
Dear Shareholder:
This annual report for Franklin Municipal Securities Trust covers the 12-month
period ended May 31, 2000. The reporting period was marked by economic strength,
as the first quarter 2000 U.S. gross domestic product (GDP) rose appreciably,
consumer confidence remained strong, unemployment hit a 30-year low, and
domestic stock markets surged to all-time highs. In the face of such economic
expansion, inflation as measured by the Consumer Price Index was a modest 3.1%
for the year under review.
Bond markets started the period in what looked to be a potentially positive year
due to interest-rate expectations. However, the Federal Reserve Board (the Fed)
proceeded to raise the federal funds target rate on six separate occasions
because of inflation fears. This made 1999 and early 2000 one of the worst
periods that bond markets have ever experienced. In February, the government
announced it would sponsor 30-year Treasury buybacks and reduce future issuance
of long-term Treasuries. This, coupled with several signs that U.S. economic
growth might be slowing, caused a supply/demand imbalance. These circumstances
caused long-term Treasury bond prices to rise sharply, resulting in an inverted
yield curve. That is, rates on long-term bonds declined below those of
short-term bonds. None of the other domestic fixed-income markets, including
municipal bonds, experienced such an inversion.
CONTENTS
Shareholder Letter .................. 1
Fund Reports
Franklin California High
Yield Municipal Fund .............. 4
Franklin Tennessee
Municipal Bond Fund ............... 13
Municipal Bond Ratings .............. 19
Financial Highlights &
Statement of Investments ............ 22
Financial Statements ................ 35
Notes to
Financial Statements ................ 39
Independent
Auditors' Report .................... 44
Tax Designation ..................... 45
[FUND CATEGORY PYRAMID GRAPHIC]
The yield on the 30-year Treasury rose from 5.83% at the beginning of the fund's
fiscal year, to 6.01% on May 31, 2000, reaching a high of 6.75% on January 20,
2000. The yield on the Bond Buyer Municipal Bond Index (Bond Buyer 40), an
indicator of the municipal bond market, rose from 5.37% to 6.13% for the same
period, while its price declined 10.2%.(1) As interest rates and yields
increased, the dollar value of bonds decreased, meaning bond funds in general
declined in value.
Municipal bond supply in 1999 and first quarter 2000 added pressure to the
already volatile municipal bond market. Although less than in 1998, the $225
billion issuance in 1999 was the fourth-highest on record. We anticipate
decreased new issuance for the remainder of 2000. The near-record volume did
have some benefit, as it helped municipal bonds remain cheap relative to
Treasuries. During the year under review, municipal bonds, as measured by the
Bond Buyer 40, yielded as much as 103% of a comparable Treasury bond's yield.
Historically, this ratio is about 90%.(2) Because municipal bonds are
tax-exempt, they generally yield less than Treasuries, which are subject to
federal income tax.(3) When municipals are yielding nearly the same as
Treasuries, investors are able to take advantage of the tax exemption at little
extra cost.
Looking forward, we anticipate that the Fed will monitor inflationary tendencies
closely, possibly raising interest rates again. If, as a result, the economy
slows toward the end of 2000, the bond markets could begin to experience less
volatility.
(1.) Source:The Bond Buyer. The unmanaged Bond Buyer Municipal Bond 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.
(2.) Source:The Bond Buyer, 3/00.
(3.) Treasuries, if held to maturity, offer a fixed rate of return and fixed
principal value; their interest payments and principal are guaranteed.
The last few times municipal bonds lost ground, they enjoyed sharp rebounds in
the following year. For example, in 1994, when the Fed raised interest rates six
times, the average general municipal bond fund lost 6.5% in total return. In the
following year, rates declined, and the average municipal bond fund gained
nearly 17%. Although there is no guarantee that bond markets and municipal bond
funds will repeat past behavior, markets do go through cycles. Predicting these
cycles is very difficult, even for professional economists -- which is why we
recommend investing for the long term. It is important to remember that over
time, the tax-free income received from municipal bond funds will ultimately
drive the funds' total return performance.
Sincerely,
/s/ Charles B. Johnson
Charles B. Johnson
Chairman
Franklin Municipal Securities Trust
/s/ Sheila Amoroso
Sheila Amoroso
/s/ Rafael R. Costas Jr.
Rafael R. Costas Jr.
Senior Vice Presidents & Co-Directors
Franklin Municipal Bond Department
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
The year under review marked California's sixth consecutive year of economic
expansion and fifth straight year in which economic growth and job creation
exceeded the national average. Although the state's low 4.8% unemployment rate
still topped the 3.9% national average in April, this rate dropped faster than
the national average during the reporting period.(2)
The largest employment gains during the reporting period occurred in
construction, which was up 9%, and services, up 4.1% due particularly to the
explosion of Internet-related firms; tourism and entertainment-related jobs also
grew significantly.(2)
(1.) The fund may invest as much as 100% of its assets in bonds whose interest
payments are subject to the federal alternative minimum tax. All or a
significant portion of the income on these obligations may be subject to such
tax. Distributions of capital gains and of ordinary income from accrued market
discount, if any, are taxable. In general, an investor is paid a higher yield to
assume a greater degree of risk.
(2.) Source: Bureau of Labor Statistics, 4/15/00.
All portfolio holdings mentioned in the report are listed by their complete
legal titles in the fund's Statement of Investments (SOI), which is a complete
listing of the fund's portfolio holdings, including dollar value and number of
shares or principal amount. The SOI begins on page 25.
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. Encouraging employment
figures factored into the state's projections for 5.4% personal income growth in
2000, which was conservative compared to most outside forecasters' projections
and followed a 6.6% increase in 1999. Per-capita income stabilized at about 104%
of the national average after a long period of relative decline.(3)
The state's diversified, growing economy demonstrated resilience despite
weakness in Asia, which is one of California's key export markets. Losses on
state exports to the Pacific Rim during 1998 and 1999 were offset by
NAFTA-induced export growth, which had increased substantially. By year-end
1999, exports to Mexico were 12.7% of total state exports, and to Canada,
12.1%.(3) California's economic expansion also translated into a record year for
its housing market, with an estimated 8% increase in the median home price for
1999.(4)
California's economy, as well as its improved fiscal management, contributed to
Moody's and Fitch's decisions to upgrade California's debt to Aa3 and AA,
respectively, during the reporting period.(5) This marked the first time in
eight years that Standard & Poor's(R), Moody's Investors Service and Fitch IBCA
Inc., three independent credit rating agencies, have viewed California's credit
as double-A.(6)
(3.) Source: Moody's Investors Service, 1/15/00.
(4.) Source: California Association of REALTORS, PR Newswire, 10/20/99.
(5.) Sources: Moody's Investors Service, 10/15/99, and Fitch IBCA,State of
California, 2/16/00. This does not indicate Moody's or Fitch's ratings of the
fund.
(6.) Source: Standard & Poor's, Ratings Direct, 2/17/00. This does not indicate
Standard & Poor's rating of the fund.
[CREDIT QUALITY BREAKDOWN* PIE CHART]
Franklin California High Yield Municipal Fund
Based on Total Long-Term Investments
5/31/00
AAA ........................ 10.4%
AA ......................... 3.8%
A ......................... 8.2%
BBB ........................ 40.3%
Below Investment Grade ..... 37.3%
*Quality breakdown may include
internal ratings for bonds not rated by a
national rating agency.
California's total net tax-supported debt was slightly higher than $21.6 billion
in 1999, approximately $729 per capita, or 2.4% of personal income, higher than
the national median of $540 and 2.2%, respectively. California entered fiscal
year 2000 with $9.6 billion in general and special fund surpluses, the largest
amount the state has had in more than two decades.(7) These sizable balances,
which should help cushion the negative impacts of any future recessions, and
projections for further California economic growth, albeit at a slower rate than
that of the past two years, underlie the state's favorable credit outlook.
PORTFOLIO NOTES
Franklin California High Yield Municipal Fund has posted strong results over the
years and consistently has been at the top of its peer group in income
distribution. However, rising interest rates, as well as investor uncertainty
about the Fed's actions, led to higher yields and lower prices for bonds over
the reporting period. In this environment, Franklin California High Yield
Municipal Fund's Class A share price, as measured by net asset value, declined
10% during the period under review. For the 12 months ended May 31, 2000, the
Bond Buyer 40, an indicator of the municipal bond market, had a 10.2% price
decline and the fund's benchmark, the Lehman Brothers Municipal Bond Index, was
off 7.1%.(8)
(7.) Source:The Bond Buyer, 1/3/00.
(8.) Sources: Lehman Brothers;The Bond Buyer. The fund's investment return and
share price fluctuate with market conditions. The indexes are unmanaged and
include reinvested interest. One cannot invest directly in an index.
Also worth noting is the fact that your fund offers a significant tax advantage
over a comparable taxable investment. The Performance Summary on page 11 shows
that at the end of this reporting period, the fund's Class A shares'
distribution rate was 5.67%, based on an annualization of the current 4.7 cent
($0.047) per share dividend and the maximum offering price of $9.94 on May 31,
2000. This tax-free rate is generally higher than the after-tax return on a
comparable taxable investment. An investor in the maximum combined federal and
California state income tax bracket of 45.22% would need to earn 10.35% from a
taxable investment to match the fund's tax-free distribution rate. The
Performance Summary also shows distribution rates and taxable equivalent
distribution rates for Class B and C shares.
During the period, we continued to follow our strategy of investing for high
tax-free income and share-price stability as well as tax efficiency. We sought
to take advantage of the higher interest-rate environment to boost yields,
increase dividends, book tax losses and extend call protection. Tax losses can
be carried forward in the portfolio to help offset taxable capital gains in the
future and potentially lower shareholders' future tax liabilities. By extending
the call protection, we helped maintain the fund's yields.
The fund also used Franklin's presence in California to its advantage. With
Franklin's more than $17 billion in California municipal bond assets, we were
able to use the entire fund group's buying power to find and structure issues to
fit its needs. Most dealers, underwriters and issuers know and trust Franklin
and will come to us to assist them structure and price new issues, giving the
fund the ability to help define the marketplace's characteristics. We also try
to take advantage of strong retail demand in the secondary market, which has
provided liquidity and support to the market, to maintain the fund's stability.
PORTFOLIO BREAKDOWN
Franklin California
High Yield Municipal Fund
5/31/00
% OF TOTAL
LONG-TERM
INVESTMENTS
--------------------------------------
Tax-Supported Debt 43.3%
Transportation 14.9%
Hospital & Health Care 10.9%
Prerefunded 7.8%
Utilities 7.2%
Other Revenue 6.3%
Subject to Government
Appropriation 4.9%
Housing 2.4%
Corporate-Backed 1.2%
Higher Education 0.9%
General Obligation 0.2%
DIVIDEND DISTRIBUTIONS*
Franklin California High Yield Municipal Fund
6/1/99 - 5/31/00
DIVIDEND PER SHARE
----------------------------------------
MONTH CLASS A CLASS B** CLASS C
----------------------------------------------------------------------
June 4.65 cents -- 4.11 cents
July 4.65 cents -- 4.11 cents
August 4.65 cents -- 4.11 cents
September 4.65 cents -- 4.21 cents
October 4.65 cents -- 4.21 cents
November 4.65 cents -- 4.21 cents
December 4.65 cents -- 4.24 cents
January 4.65 cents -- 4.24 cents
February 4.65 cents 2.82 cents 4.24 cents
March 4.70 cents 4.27 cents 4.28 cents
April 4.70 cents 4.27 cents 4.28 cents
May 4.70 cents 4.27 cents 4.28 cents
----------------------------------------------------------------------
TOTAL 55.95 CENTS 15.63 CENTS 50.52 CENTS
*Assumes shares were purchased and held for the entire accrual period. Since
dividends accrue daily, your actual distributions will vary depending on the
date you purchased your shares and any account activity during the month.
**Effective February 1, 2000, the fund began offering Class B shares to
investors. See the prospectus for details.
Looking forward, we believe the new issue supply should be lower for the
remainder of 2000 than in 1999, and this coupled with continued strong
institutional and retail demand should bolster California municipal bond prices.
In our opinion, investors are wise to maintain diversification in their
portfolios with a portion held in fixed-income instruments. Municipal bond
yields currently make them a very attractive investment alternative to equities
for many investors. With the California municipal bond-to-Treasury yield ratio
above 95% at the reporting period's end, we believe the fund is well-positioned
to perform favorably in the future.(9)
(9) Source: The Bond Buyer. Treasuries, if held to maturity, offer a fixed rate
of return and fixed principal value; their interest payments and principal are
guaranteed.
This discussion reflects our views, opinions and portfolio holdings as of May
31, 2000, the end of the reporting period. The information provided is not a
complete analysis of every aspect of any industry, security or the fund. Our
strategies and the fund's portfolio composition will change depending on market
and economic conditions. Although historical performance is no guarantee of
future results, these insights may help you understand our investment and
management philosophy.
FRANKLIN CALIFORNIA HIGH
YIELD MUNICIPAL 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 slightly lower.*
CLASS B: Subject to no initial sales charge, but subject to a contingent
deferred sales charge (CDSC) declining from 4% to 0% over six years. These
shares have higher annual fees and expenses than Class A shares.*
CLASS C: Subject to 1% initial sales charge and 1% CDSC 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.
Without this waiver, the fund's distribution rate and total return would have
been lower, and yield for the period would have been 5.57%, 5.28% and 5.21% for
Classes A, B and C respectively. The fee waiver may be discontinued at any time
upon notice to the fund's Board of Trustees.
ONE-YEAR PERFORMANCE SUMMARY
AS OF 5/31/00
One-year and aggregate total returns do not include sales charges. 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
One-Year Total Return -4.88%
Net Asset Value (NAV) $9.52 (5/31/00) $10.60 (5/31/99)
Change in NAV -$1.08
Distributions(6/1/99-5/31/00) Dividend Income $0.5595
CLASS B
Aggregate Total Return +4.00%
Net Asset Value (NAV) $9.54 (5/31/00) $9.34 (2/1/00)
Change in NAV +$0.20
Distributions(2/1/00-5/31/00) Dividend Income $0.1563
CLASS C
One-Year Total Return -5.39%
Net Asset Value (NAV) $9.55 (5/31/00) $10.63 (5/31/99)
Change in NAV -$1.08
Distributions(6/1/99-5/31/00) Dividend Income $0.5052
Past performance does not guarantee future results.
ADDITIONAL PERFORMANCE
AS OF 6/30/00
INCEPTION
CLASS A 1-YEAR 5-YEAR (5/3/93)
-----------------------------------------------------------------------------
Cumulative Total Return(1) -1.85% +32.40% +47.14%
Average Annual Total Return(2) -6.02% +4.87% +4.90%
INCEPTION
CLASS B (2/1/00)
-----------------------------------------------------------------------------
Cumulative Total Return(1) +5.43%
Aggregate Total Return(2) +1.43%
INCEPTION
CLASS C 1-YEAR 3-YEAR (5/1/96)
-----------------------------------------------------------------------------
Cumulative Total Return(1) -2.37% +10.15% +22.33%
Average Annual Total Return(2) -4.31% +2.94% +4.70%
AS OF 5/31/00
SHARE CLASS A B C
----------------------------------------------------------------------------
Distribution Rate(3) 5.67% 5.31% 5.28%
Taxable Equivalent Distribution Rate(4) 10.35% 9.69% 9.64%
30-Day Standardized Yield(5) 5.79% 5.52% 5.44%
Taxable Equivalent Yield(4) 10.57% 10.08% 9.93%
For updated performance figures, see"Prices and Performance" at
franklintempleton.com, or call Franklin Templeton at 1-800/342-5236.
Past performance does not guarantee future results.
(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. Since Class B shares have
existed for less than one year, aggregate total return for that class represents
total return since inception, including the maximum sales charge.
(3.) Distribution rate is based on an annualization of the respective class's
current monthly dividend and the maximum offering price (net asset value for
Class B) per share on May 31, 2000.
(4.) Taxable equivalent distribution rate and yield assume the published rates
as of March 15, 2000 for the maximum combined federal and California state
personal income tax bracket of 45.22%, 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, 2000.
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.
FRANKLIN CALIFORNIA HIGH
YIELD MUNICIPAL FUND
AVERAGE ANNUAL TOTAL RETURN
5/31/00
CLASS A
---------------------------------
1-Year -8.92%
5-Year +4.36%
Since Inception(5/3/93) +4.75%
AVERAGE ANNUAL TOTAL RETURN
5/31/00
CLASS C
---------------------------------
1-Year -7.25%
3-Year +2.90%
Since Inception(5/1/96) +4.45%
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, which
includes approximately 38,000 municipal securities from across the country,
differs from the fund in composition, does not pay management fees or expenses
and includes reinvested interest. One cannot invest directly in an index. For
the periods shown, performance of the fund's shares exceeded the rate of
inflation as measured by the Consumer Price Index (CPI).
CLASS A (5/31/93-5/31/00)
[LINE GRAPH]
<TABLE>
<CAPTION>
Date Franklin California High Yield Municipal Lehman Brothers Municipal CPI
Fund-Class A Bond Index
---- ---------------------------------------- ------------------------- ---
<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 $9,714 1.67% $10,218 0.14% $10,027
07/31/1993 $9,717 0.13% $10,232 0.00% $10,027
08/31/1993 $9,925 2.08% $10,445 0.28% $10,055
09/30/1993 $10,076 1.14% $10,564 0.21% $10,076
10/31/1993 $10,107 0.19% $10,584 0.41% $10,117
11/30/1993 $10,053 -0.88% $10,491 0.07% $10,124
12/31/1993 $10,241 2.11% $10,712 0.00% $10,124
01/31/1994 $10,365 1.14% $10,834 0.27% $10,152
02/28/1994 $10,193 -2.59% $10,553 0.34% $10,186
03/31/1994 $9,742 -4.07% $10,124 0.34% $10,221
04/30/1994 $9,772 0.85% $10,210 0.14% $10,235
05/31/1994 $9,857 0.87% $10,299 0.07% $10,242
06/30/1994 $9,759 -0.61% $10,236 0.34% $10,277
07/31/1994 $9,943 1.83% $10,423 0.27% $10,305
08/31/1994 $10,020 0.35% $10,460 0.40% $10,346
09/30/1994 $9,922 -1.47% $10,306 0.27% $10,374
10/31/1994 $9,781 -1.78% $10,123 0.07% $10,381
11/30/1994 $9,551 -1.81% $9,939 0.13% $10,395
12/31/1994 $9,616 2.20% $10,158 0.00% $10,395
01/31/1995 $9,904 2.86% $10,448 0.40% $10,436
02/28/1995 $10,191 2.91% $10,753 0.40% $10,478
03/31/1995 $10,413 1.15% $10,876 0.33% $10,513
04/30/1995 $10,466 0.12% $10,889 0.33% $10,547
05/31/1995 $10,752 3.19% $11,237 0.20% $10,568
06/30/1995 $10,648 -0.87% $11,139 0.20% $10,590
07/31/1995 $10,697 0.95% $11,245 0.00% $10,590
08/31/1995 $10,811 1.27% $11,387 0.26% $10,617
09/30/1995 $10,912 0.63% $11,459 0.20% $10,638
10/31/1995 $11,086 1.45% $11,625 0.33% $10,673
11/30/1995 $11,282 1.66% $11,818 -0.07% $10,666
12/31/1995 $11,441 0.96% $11,932 -0.07% $10,658
01/31/1996 $11,505 0.76% $12,023 0.59% $10,721
02/29/1996 $11,420 -0.68% $11,941 0.32% $10,756
03/31/1996 $11,813 -1.28% $11,788 0.52% $10,812
04/30/1996 $11,292 -0.28% $11,755 0.39% $10,854
05/31/1996 $11,347 -0.04% $11,750 0.19% $10,874
06/30/1996 $12,034 1.09% $11,878 0.06% $10,881
07/31/1996 $11,599 0.90% $11,985 0.19% $10,902
08/31/1996 $12,131 -0.02% $11,983 0.19% $10,922
09/30/1996 $11,804 1.40% $12,151 0.32% $10,957
10/31/1996 $11,952 1.13% $12,288 0.32% $10,992
11/30/1996 $12,703 1.83% $12,513 0.19% $11,013
12/31/1996 $12,145 -0.42% $12,460 0.00% $11,013
01/31/1997 $12,150 0.19% $12,484 0.32% $11,048
02/28/1997 $12,271 0.92% $12,599 0.31% $11,083
03/31/1997 $12,155 -1.33% $12,431 0.25% $11,110
04/30/1997 $12,275 0.84% $12,536 0.12% $11,124
05/31/1997 $12,441 1.51% $12,725 -0.06% $11,117
06/30/1997 $12,616 1.07% $12,861 0.12% $11,130
07/31/1997 $12,962 2.77% $13,217 0.12% $11,144
08/31/1997 $12,900 -0.94% $13,093 0.19% $11,165
09/30/1997 $13,140 1.19% $13,249 0.25% $11,193
10/31/1997 $13,247 0.64% $13,334 0.25% $11,221
11/30/1997 $13,359 0.59% $13,412 -0.06% $11,214
12/31/1997 $13,566 1.46% $13,608 -0.12% $11,201
01/31/1998 $13,684 1.03% $13,748 0.19% $11,222
02/28/1998 $13,699 0.03% $13,752 0.19% $11,243
03/31/1998 $13,703 0.09% $13,765 0.19% $11,265
04/30/1998 $13,685 -0.45% $13,703 0.18% $11,285
05/31/1998 $13,904 1.58% $13,919 0.18% $11,305
06/30/1998 $13,979 0.39% $13,974 0.12% $11,319
07/31/1998 $14,038 0.25% $14,009 0.12% $11,332
08/31/1998 $14,250 1.55% $14,226 0.12% $11,346
09/30/1998 $14,456 1.25% $14,403 0.12% $11,360
10/31/1998 $14,446 0.00% $14,403 0.24% $11,387
11/30/1998 $14,540 0.35% $14,454 0.00% $11,387
12/31/1998 $14,560 0.25% $14,490 -0.06% $11,380
01/31/1999 $14,692 1.19% $14,662 0.24% $11,407
02/28/1999 $14,659 -0.44% $14,598 0.12% $11,421
03/31/1999 $14,691 0.14% $14,618 0.30% $11,455
04/30/1999 $14,713 0.25% $14,655 0.73% $11,539
05/31/1999 $14,609 -0.58% $14,570 0.00% $11,539
06/30/1999 $14,361 -1.44% $14,360 0.00% $11,539
07/31/1999 $14,379 0.36% $14,412 0.30% $11,573
08/31/1999 $14,171 -0.80% $14,297 0.24% $11,601
09/30/1999 $14,164 0.04% $14,302 0.48% $11,657
10/31/1999 $13,820 -1.08% $14,148 0.18% $11,678
11/30/1999 $13,948 1.06% $14,298 0.06% $11,685
12/31/1999 $13,590 -0.75% $14,191 0.00% $11,685
01/31/2000 $13,369 -0.44% $14,128 0.24% $11,713
02/29/2000 $13,577 1.16% $14,292 0.59% $11,782
03/31/2000 $14,002 2.18% $14,604 0.82% $11,879
04/30/2000 $13,953 -0.59% $14,517 0.06% $11,886
05/31/2000 $13,896 -0.52% $14,442 0.06% $11,893
</TABLE>
CLASS C (5/1/96-5/31/00)
[LINE GRAPH]
<TABLE>
<CAPTION>
Date Franklin California High Yield Lehman Brothers Municipal Bond CPI
Municipal Fund-Class C Index
---- ------------------------------- ------------------------------ ---
<S> <C> <C> <C> <C> <C>
05/01/1996 $9,899 $10,000 $10,000
05/31/1996 $9,952 -0.04% $9,996 0.19% $10,019
06/28/1996 $10,193 1.09% $10,105 0.06% $10,025
07/31/1996 $10,165 0.90% $10,196 0.19% $10,044
08/30/1996 $10,266 -0.02% $10,194 0.19% $10,063
09/30/1996 $10,326 1.40% $10,337 0.32% $10,095
10/31/1996 $10,450 1.13% $10,453 0.32% $10,128
11/29/1996 $10,735 1.83% $10,645 0.19% $10,147
12/31/1996 $10,617 -0.42% $10,600 0.00% $10,147
01/31/1997 $10,615 0.19% $10,620 0.32% $10,179
02/28/1997 $10,715 0.92% $10,718 0.31% $10,211
03/31/1997 $10,617 -1.33% $10,575 0.25% $10,236
04/30/1997 $10,707 0.84% $10,664 0.12% $10,249
05/31/1997 $10,857 1.51% $10,825 -0.06% $10,243
06/30/1997 $10,994 1.07% $10,941 0.12% $10,255
07/31/1997 $11,302 2.77% $11,244 0.12% $10,267
08/31/1997 $11,243 -0.94% $11,138 0.19% $10,287
09/30/1997 $11,447 1.19% $11,271 0.25% $10,312
10/31/1997 $11,535 0.64% $11,343 0.25% $10,338
11/30/1997 $11,638 0.59% $11,410 -0.06% $10,332
12/31/1997 $11,802 1.46% $11,577 -0.12% $10,320
01/31/1998 $11,913 1.03% $11,696 0.19% $10,339
02/28/1998 $11,911 0.03% $11,699 0.19% $10,359
03/31/1998 $11,911 0.09% $11,710 0.19% $10,379
04/30/1998 $11,890 -0.45% $11,657 0.18% $10,397
05/31/1998 $12,084 1.58% $11,841 0.18% $10,416
06/30/1998 $12,141 0.39% $11,887 0.12% $10,428
07/31/1998 $12,184 0.25% $11,917 0.12% $10,441
08/31/1998 $12,362 1.55% $12,102 0.12% $10,453
09/30/1998 $12,536 1.25% $12,253 0.12% $10,466
10/31/1998 $12,524 0.00% $12,253 0.24% $10,491
11/30/1998 $12,600 0.35% $12,296 0.00% $10,491
12/31/1998 $12,602 0.25% $12,327 -0.06% $10,485
01/31/1999 $12,723 1.19% $12,473 0.24% $10,510
02/28/1999 $12,678 -0.44% $12,419 0.12% $10,523
03/31/1999 $12,698 0.14% $12,436 0.30% $10,554
04/30/1999 $12,722 0.25% $12,467 0.73% $10,631
05/31/1999 $12,626 -0.58% $12,395 0.00% $10,631
06/30/1999 $12,405 -1.44% $12,216 0.00% $10,631
07/31/1999 $12,415 0.36% $12,260 0.30% $10,663
08/31/1999 $12,228 -0.80% $12,162 0.24% $10,689
09/30/1999 $12,216 0.04% $12,167 0.48% $10,740
10/31/1999 $11,904 -1.08% $12,036 0.18% $10,759
11/30/1999 $12,020 1.06% $12,163 0.06% $10,766
12/31/1999 $11,706 -0.75% $12,072 0.00% $10,766
01/31/2000 $11,512 -0.44% $12,019 0.24% $10,792
02/29/2000 $11,673 1.16% $12,158 0.59% $10,855
03/31/2000 $12,033 2.18% $12,423 0.82% $10,944
04/30/2000 $11,986 -0.59% $12,350 0.06% $10,951
05/31/2000 $11,945 -0.52% $12,286 0.06% $10,957
</TABLE>
*Source: Standard and Poor's Micropal.
Past performance does not guarantee 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
During the 12 months ended May 31, 2000, Tennessee's unemployment rate trended
downward, and January's 3.5% rate was the state's lowest unemployment number in
two decades. In the mid-to-late 1990s, job losses in the textile and apparel
manufacturing sectors slowed Tennessee's job growth rate, but since that time,
increased numbers of jobs in the non-manufacturing trade and services sectors
have somewhat filled the gap. The state's recent, low unemployment figures
reflected the fact that all major industries, excluding manufacturing, posted
gains in 1999.(2)
Despite these positive economic trends, growing expenditures and an inflexible
revenue structure led to an unbalanced 2001 budget. Higher contributions to
education and TennCare, the state's health care reform plan, as well as pay
increases for many state employees, resulted in an estimated $342 million gap
between revenues and expenditures. The fiscal 2000 budget, although balanced,
relied on one-time revenues totaling approximately $120 million. As of May 31,
2000, Tennessee's General Assembly was reviewing tax reform, as a means of
addressing the state's projected deficit.(2)
(1.) The fund may invest as much as 100% of its assets in bonds whose interest
payments are subject to the federal alternative minimum tax. All or a
significant portion of the income on these obligations may be subject to such
tax. Distributions of capital gains and of ordinary income from accrued market
discount, if any, are taxable.
(2.) Source: Moody's Investors Service, Municipal Credit Research, 3/14/00.
All portfolio holdings mentioned in the report are listed by their complete
legal titles in the fund's Statement of Investments (SOI), which is a complete
listing of the fund's portfolio holdings, including dollar value and number of
shares or principal amount. The SOI begins on page 31.
[CREDIT QUALITY BREAKDOWN* PIE CHART]
Franklin TENNESSEE Municipal Bond Fund
Based on Total Long-Term Investments
5/31/00
AAA ........................ 53.9%
AA ......................... 36.2%
A ......................... 3.1%
BBB ........................ 6.5%
Below Investment Grade ..... 0.3%
*Quality breakdown may include
internal ratings for bonds not rated by a
national rating agency.
PORTFOLIO BREAKDOWN
Franklin Tennessee
Municipal Bond Fund
5/31/00
% OF TOTAL
LONG-TERM
INVESTMENTS
--------------------------------------
General Obligation 21.5%
Hospital & Health Care 19.5%
Housing 11.4%
Utilities 10.3%
Transportation 9.4%
Higher Education 7.9%
Prerefunded 6.6%
Subject to Government
Appropriation 6.4%
Corporate-Backed 5.4%
Tax-Supported 1.4%
Other Revenue 0.2%
On a positive note, the state has a constitutional balanced budget requirement,
which means the Assembly will be forced to modify fiscal 2001 expenditures if it
does not approve the necessary tax reform to increase revenues. Meanwhile,
Tennessee's low direct-debt burden, compared to the other states, and
strongly-funded pension system should mitigate these budgetary pressures and
help bolster its credit outlook in the months to come. What's more, in a tight
labor market, the state's competitive wage scale and cost environment should
benefit its future business climate.
PORTFOLIO NOTES
Franklin Tennessee Municipal Bond Fund sought to take advantage of rising
interest rates during the 12 months under review. The fund booked tax losses and
reinvested the proceeds at higher yields. As a result, the fund's dividend
increased from $0.044 per share on May 31, 1999, to $0.0465 on May 31, 2000. In
addition to improving current income, the fund enhanced its call protection
structure by selling highly liquid securities with relatively shorter calls.
These included Dickson Electric System Revenue, Hardeman County GO and Knox
County Health, Educational and Housing Board Hospital Facilities Revenue - Mercy
Health Systems bonds.
On the buy side, we focused on securities with at least ten years' call
protection, finding value in Tennessee, Lawrenceburg Electric Revenue;
Memphis-Shelby County Airport Authority Airport Revenue and Johnson City Health
and Educational Facilities Board Hospital Revenue, Refunding - First Mortgage
Mountain States Health bonds. We expect these new purchases to play a pivotal
role in protecting the fund's long-term income-earning potential, and in helping
maintain diversification in a broad range of sectors. Such diversification
should reduce exposure to the risk and volatility that may affect any one
sector. In our opinion, the fund's wide range of bond coupons and maturities
should help meet its goal of protecting principal and providing shareholders
with a steady stream of long-term income.
However, rising interest rates during the reporting period also presented
challenges for the municipal bond market. For the 12 months ended May 31, 2000,
the Bond Buyer 40, a reasonable proxy for the type of securities in the fund's
portfolio, was off 10.2% and the fund's benchmark, the Lehman Brothers Municipal
Bond Index, was off 7.1%(3). By comparison, your fund's share price, as measured
by net asset value, declined 10.22%.
Tennessee's continued economic growth and low debt burden, combined with the
growing need for new infrastructure such as highways, schools and affordable
housing, should sustain the need for new borrowing. Taking these factors into
consideration, we anticipate a positive future for the state's municipal bond
supply.
3. Sources: Lehman Brothers;The Bond Buyer. The fund's investment return and
share price fluctuate with market conditions. Indexes are unmanaged and include
reinvested dividends. One cannot invest directly in an index.
This discussion reflects our views, opinions and portfolio holdings as of May
31, 2000, the end of the reporting period. The information provided is not a
complete analysis of every aspect of any industry, security or the fund. Our
strategies and the fund's portfolio composition will change depending on market
and economic conditions. Although historical performance is no guarantee of
future results, these insights may help you understand our investment and
management philosophy.
DIVIDEND DISTRIBUTIONS*
Franklin Tennessee
Municipal Bond Fund - Class A
6/1/99- 5/31/00
DIVIDEND
MONTH PER SHARE
---------------------------------
June 4.40 cents
July 4.40 cents
August 4.40 cents
September 4.50 cents
October 4.50 cents
November 4.50 cents
December 4.60 cents
January 4.60 cents
February 4.60 cents
March 4.65 cents
April 4.65 cents
May 4.65 cents
---------------------------------
TOTAL 54.45 CENTS
*Assumes shares were purchased and held for the entire accrual period. Since
dividends accrue daily, your actual distributions will vary depending on the
date you purchased your shares and any account activity during the month.
FRANKLIN TENNESSEE
MUNICIPAL BOND FUND
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. Without this
waiver, the fund's distribution rate and total return would have been lower, and
yield for the period would have been 5.04%. The fee waiver may be discontinued
at any time upon notice to the fund's Board of Trustees.
ONE-YEAR PERFORMANCE SUMMARY
AS OF 5/31/00
One-year total return does not include sales charges. 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
One-Year Total Return -5.30%
Net Asset Value (NAV) $10.02 (5/31/00) $11.16 (5/31/99)
Change in NAV -$1.14
Distributions(6/1/99-5/31/00) Dividend Income $0.5445
Past performance does not guarantee future results.
ADDITIONAL PERFORMANCE
AS OF 6/30/00
INCEPTION
CLASS A 1-YEAR 5-YEAR (5/10/94)
--------------------------------------------------------------------
Cumulative Total Return(1) -0.42% +29.42% +41.24%
Average Annual Total Return(2) -4.62% +4.38% +5.05%
AS OF 5/31/00
SHARE CLASS A
---------------------------------------------------------------------
Distribution Rate(3) 5.33%
Taxable Equivalent Distribution Rate(4) 9.39%
30-Day Standardized Yield(5) 5.47%
Taxable Equivalent Yield(4) 9.63%
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the maximum sales charge.
3. Distribution rate is based on an annualization of the current 4.65 cent per
share dividend and the maximum offering price of $10.46 on May 31, 2000.
4. Taxable equivalent distribution rate and yield assume the published rates as
of March 15, 2000, for the maximum combined federal and Tennessee state personal
income tax bracket of 43.22%, 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, 2000.
-------------------------------------------------------------------------------
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.
--------------------------------------------------------------------------------
For updated performance figures, see"Prices and Performance" at
franklintempleton.com, or call Franklin Templeton at 1-800/342-5236.
Past performance does not guarantee future results.
FRANKLIN TENNESSEE MUNICIPAL BOND FUND
AVERAGE ANNUAL TOTAL RETURN
5/31/00
CLASS A
----------------------------------------
1-Year -9.36%
5-Year +3.56%
Since Inception (5/10/94) +4.60%
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 maximum sales charge, fund expenses, account fees and
reinvested distributions. The unmanaged index, which includes approximately
38,000 municipal securities from across the country, differs from the fund in
composition, does not pay management fees or expenses and includes reinvested
interest. One cannot invest directly in an index. For the periods shown,
performance of the fund's shares exceeded the rate of inflation as measured by
the Consumer Price Index (CPI).
CLASS A (5/10/94- 5/31/00)
[AVG RETURN LINE GRAPH]
<TABLE>
<CAPTION>
Date Franklin Tennessee Municipal Lehman Brothers Municipal CPI
Bond Fund-Class A Bond Index
---- ---------------------------- ------------------------- ---
<S> <C> <C> <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 $9,578 -0.61% $9,998 0.34% $10,039
07/31/1994 $9,798 1.83% $10,181 0.27% $10,066
08/31/1994 $9,831 0.35% $10,216 0.40% $10,106
09/30/1994 $9,658 -1.47% $10,066 0.27% $10,133
10/31/1994 $9,396 -1.78% $9,887 0.07% $10,141
11/30/1994 $9,160 -1.81% $9,708 0.13% $10,154
12/31/1994 $9,461 2.20% $9,921 0.00% $10,154
01/31/1995 $9,815 2.86% $10,205 0.40% $10,194
02/28/1995 $10,113 2.91% $10,502 0.40% $10,235
03/31/1995 $10,215 1.15% $10,623 0.33% $10,269
04/30/1995 $10,231 0.12% $10,636 0.33% $10,303
05/31/1995 $10,551 3.19% $10,975 0.20% $10,323
06/30/1995 $10,452 -0.87% $10,879 0.20% $10,344
07/31/1995 $10,502 0.95% $10,983 0.00% $10,344
08/31/1995 $10,652 1.27% $11,122 0.26% $10,371
09/30/1995 $10,721 0.63% $11,192 0.20% $10,392
10/31/1995 $10,877 1.45% $11,355 0.33% $10,426
11/30/1995 $11,080 1.66% $11,543 -0.07% $10,419
12/31/1995 $11,201 0.96% $11,654 -0.07% $10,411
01/31/1996 $11,265 0.76% $11,743 0.59% $10,473
02/29/1996 $11,150 -0.68% $11,663 0.32% $10,506
03/31/1996 $11,516 -1.28% $11,513 0.52% $10,561
04/30/1996 $11,486 -0.28% $11,481 0.39% $10,602
05/31/1996 $11,512 -0.04% $11,477 0.19% $10,622
06/30/1996 $11,658 1.09% $11,602 0.06% $10,629
07/31/1996 $11,768 0.90% $11,706 0.19% $10,649
08/31/1996 $11,781 -0.02% $11,704 0.19% $10,669
09/30/1996 $11,978 1.40% $11,868 0.32% $10,703
10/31/1996 $12,097 1.13% $12,002 0.32% $10,737
11/30/1996 $12,315 1.83% $12,221 0.19% $10,758
12/31/1996 $12,266 -0.42% $12,170 0.00% $10,758
01/31/1997 $11,751 0.19% $12,193 0.32% $10,792
02/28/1997 $11,871 0.92% $12,305 0.31% $10,826
03/31/1997 $11,717 -1.33% $12,142 0.25% $10,853
04/30/1997 $11,825 0.84% $12,244 0.12% $10,866
05/31/1997 $12,007 1.51% $12,429 -0.06% $10,859
06/30/1997 $12,142 1.07% $12,562 0.12% $10,872
07/31/1997 $12,523 2.77% $12,909 0.12% $10,885
08/31/1997 $12,373 -0.94% $12,788 0.19% $10,906
09/30/1997 $12,551 1.19% $12,940 0.25% $10,933
10/31/1997 $12,631 0.64% $13,023 0.25% $10,961
11/30/1997 $12,761 0.59% $13,100 -0.06% $10,954
12/31/1997 $12,990 1.46% $13,291 -0.12% $10,941
01/31/1998 $13,126 1.03% $13,428 0.19% $10,962
02/28/1998 $13,122 0.03% $13,432 0.19% $10,983
03/31/1998 $13,134 0.09% $13,444 0.19% $11,003
04/30/1998 $13,068 -0.45% $13,384 0.18% $11,023
05/31/1998 $13,298 1.58% $13,595 0.18% $11,043
06/30/1998 $13,376 0.39% $13,648 0.12% $11,056
07/31/1998 $13,413 0.25% $13,682 0.12% $11,070
08/31/1998 $13,624 1.55% $13,894 0.12% $11,083
09/30/1998 $13,794 1.25% $14,068 0.12% $11,096
10/31/1998 $13,744 0.00% $14,068 0.24% $11,123
11/30/1998 $13,813 0.35% $14,117 0.00% $11,123
12/31/1998 $13,850 0.25% $14,153 -0.06% $11,116
01/31/1999 $13,992 1.19% $14,321 0.24% $11,143
02/28/1999 $13,912 -0.44% $14,258 0.12% $11,156
03/31/1999 $13,976 0.14% $14,278 0.30% $11,190
04/30/1999 $13,981 0.25% $14,314 0.73% $11,271
05/31/1999 $13,857 -0.58% $14,231 0.00% $11,271
06/30/1999 $13,580 -1.44% $14,026 0.00% $11,271
07/31/1999 $13,581 0.36% $14,076 0.30% $11,305
08/31/1999 $13,342 -0.80% $13,964 0.24% $11,332
09/30/1999 $13,283 0.04% $13,969 0.48% $11,387
10/31/1999 $12,983 -1.08% $13,818 0.18% $11,407
11/30/1999 $13,148 1.06% $13,965 0.06% $11,414
12/31/1999 $12,965 -0.75% $13,860 0.00% $11,414
01/31/2000 $12,845 -0.44% $13,799 0.24% $11,441
02/29/2000 $13,017 1.16% $13,959 0.59% $11,509
03/31/2000 $13,398 2.18% $14,263 0.82% $11,603
04/30/2000 $13,275 -0.59% $14,179 0.06% $11,610
05/31/2000 $13,128 -0.52% $14,106 0.06% $11,617
</TABLE>
*Source: Standard and Poor's Micropal.
Past performance does not guarantee 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: 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 CALIFORNIA HIGH YIELD MUNICIPAL FUND
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------------------------
YEAR ENDED MAY 31,
-------------------------------------------------------------------------
2000 1999 1998 1997 1996
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year $ 10.60 $ 10.65 $ 10.10 $ 9.81 $ 9.93
-------------------------------------------------------------------------
Income from investment operations:
Net investment income(c) .56 .57 .62 .63 .64
Net realized and unrealized gains (losses) (1.08) (.04) .55 .29 (.10)
-------------------------------------------------------------------------
Total from investment operations (.52) .53 1.17 .92 .54
-------------------------------------------------------------------------
Less distributions from:
Net investment income (.56)(d) (.57) (.62) (.63)(b) (.66)
In excess of net investment income -- (.01) -- -- --
-------------------------------------------------------------------------
Total distributions (.56) (.58) (.62) (.63) (.66)
-------------------------------------------------------------------------
Net asset value, end of year $ 9.52 $ 10.60 $ 10.65 $ 10.10 $ 9.81
=========================================================================
Total return(a) (4.88%) 5.07% 11.78% 9.64% 5.55%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $ 464,423 $ 583,752 $ 412,211 $ 213,396 $ 118,313
Ratio to average net assets:
Expenses .49% .44% .35% .34% .35%
Expenses excluding waiver and payments by affiliates .66% .71% .69% .75% .81%
Net investment income 5.70% 5.22% 5.81% 6.24% 6.49%
Portfolio turnover rate 47.45% 14.31% 37.75% 33.79% 28.02%
</TABLE>
(a) Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(b) Includes distributions in excess of net investment income in the amount of
$.001.
(c) Based on average shares outstanding effective year ended May 31, 2000
(d) Includes distributions in excess of net investment income in the amount of
$.002.
FRANKLIN MUNICIPAL SECURITIES TRUST
FINANCIAL HIGHLIGHTS(continued)
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND
CLASS B
---------------
YEAR ENDED
MAY 31, 2000(d)
---------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................. $ 9.34
-------
Income from investment operations:
Net investment income(e) ......................... .17
Net realized and unrealized gains ................ .20
-------
Total from investment operations ................... .37
-------
Less distributions from net investment income ...... (.17)(c)
-------
Net asset value, end of year ....................... $ 9.54
=======
Total return(a) .................................... 4.00%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................... $ 808
Ratio to average net assets:
Expenses ......................................... 1.02%(b)
Expenses excluding waiver and payments by
affiliates ..................................... 1.19%(b)
Net investment income ............................ 5.33%(b)
Portfolio turnover rate ............................ 47.45%
(a) Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(b) Annualized
(c) Includes distributions in excess of net investment income in the amount of
$.0004.
(d) For the period February 1, 2000 (effective date) to May 31, 2000.
(e) Based on average shares outstanding.
FRANKLIN MUNICIPAL SECURITIES TRUST
FINANCIAL HIGHLIGHTS(continued)
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND
<TABLE>
<CAPTION>
CLASS C
-------------------------------------------------------------------------
YEAR ENDED MAY 31,
-------------------------------------------------------------------------
2000 1999 1998 1997 1996(c)
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................. $ 10.63 $ 10.68 $ 10.12 $ 9.82 $ 9.82
-------------------------------------------------------------------------
Income from investment operations:
Net investment income(e) ......................... .51 .51 .56 .57 .05
Net realized and unrealized gains (losses) ....... (1.08) (.04) .56 .30 --
-------------------------------------------------------------------------
Total from investment operations ................... (.57) .47 1.12 .87 .05
-------------------------------------------------------------------------
Less distributions from:
Net investment income ............................ (.51)(f) (.51) (.56) (.57)(d) (.05)
In excess of net investment income ............... -- (.01) -- -- --
-------------------------------------------------------------------------
Total distributions ................................ (.51) (.52) (.56) (.57) (.05)
-------------------------------------------------------------------------
Net asset value, end of year ....................... $ 9.55 $ 10.63 $ 10.68 $ 10.12 $ 9.82
=========================================================================
Total return(a) .................................... (5.39%) 4.48% 11.30% 9.08% .54%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................... $ 64,890 $ 78,338 $ 40,363 $ 10,624 $ 212
Ratio to average net assets:
Expenses ......................................... 1.04% .99% .90% .90% .91%(b)
Expenses excluding waiver and payments by
affiliates ..................................... 1.21% 1.26% 1.24% 1.31% 1.81%(b)
Net investment income ............................ 5.15% 4.66% 5.23% 5.68% 5.73%(b)
Portfolio turnover rate ............................ 47.45% 14.31% 37.75% 33.79% 28.02%
</TABLE>
(a) Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(b) Annualized
(c) For the period May 1, 1996 (effective date) to May 31, 1996.
(d) Includes distributions in excess of net investment income in the amount of
$.001.
(e) Based on average shares outstanding effective year ended May 31, 2000.
(f) Includes distributions in excess of net investment income in the amount of
$.002.
See notes to financial statements.
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, MAY 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND AMOUNT VALUE
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS 97.7%
BONDS 88.5%
ABAG Finance Authority for Nonprofit Corps. COP, 6.15%, 1/01/22 ............................ $ 1,435,000 $ 1,442,505
Adelanto Water Authority Revenue,
Parity Water Systems Acquisition Project, Series A, 7.50%, 9/01/28 ..................... 3,410,000 3,852,448
Water Systems Acquisition Project, sub. lien, Series A, 7.50%, 9/01/28 ................. 2,000,000 2,345,800
Alameda CFD No. 2 Special Tax, 6.125%, 9/01/16 ............................................. 1,240,000 1,192,421
Alameda PFA, Local Agency Revenue, Special Tax, Community Facility No. 1-A,
6.70%, 8/01/12 ......................................................................... 3,400,000 3,467,762
7.00%, 8/01/19 ......................................................................... 4,015,000 4,152,875
American Canyon Joint Powers Financing Authority Lease Revenue, Civic/Recreation Facilities,
6.40%, 6/01/22 ......................................................................... 1,000,000 986,070
Avenal PFA Revenue, Refunding,
7.00%, 9/02/10 ......................................................................... 1,520,000 1,519,772
7.25%, 9/02/27 ......................................................................... 3,665,000 3,664,414
Beaumont Financing Authority Local Agency Revenue, Sewer Enterprise Project, Refunding,
Series A, 6.75%, 9/01/25 ............................................................... 5,000,000 4,869,450
Belmont RDA, Tax Allocation, Los Costanos Community Development, Series A, 6.80%, 8/01/24 .. 1,510,000 1,645,432
Benicia 1915 Act, Fleetside Industrial Park Assessment, Refunding, 7.00%, 9/02/14 .......... 440,000 453,310
Calexico Special Financing Authority Sales Tax Revenue, 7.40%,
1/01/01 ................................................................................ 165,000 165,947
1/01/02 ................................................................................ 175,000 177,046
1/01/03 ................................................................................ 220,000 223,568
1/01/04 ................................................................................ 235,000 239,387
1/01/05 ................................................................................ 285,000 290,486
1/01/06 ................................................................................ 340,000 346,161
1/01/18 ................................................................................ 7,680,000 7,819,162
California City RDA, Tax Allocation Revenue, Refunding, Series A-1, 7.75%, 9/01/34 ......... 9,670,000 9,805,573
California Educational Facilities Authority Revenue,
(b) Keck Graduate Institute, 6.75%, 6/01/30 ............................................ 2,500,000 2,516,300
(b) Pooled College and University, Series B, 6.625%, 6/01/20 ........................... 1,000,000 1,004,500
Pooled College and University Projects, Series B, 6.30%, 4/01/21 ....................... 1,000,000 975,010
California Health Facilities Financing Authority Revenue,
Catholic Healthcare West, Series A, 5.00%, 7/01/18 ..................................... 9,000,000 6,994,710
Cedarknoll Inc., Series B, California Mortgage Insured, Pre-Refunded, 7.50%, 8/01/20 ... 1,800,000 1,844,352
Kaiser Permanente, Series A, 5.40%, 5/01/28 ............................................ 15,000,000 12,917,100
Kaiser Permanente, Series B, 5.25%, 10/01/16 ........................................... 3,250,000 2,871,180
Kaiser Permanente Medical Project, Series A, 5.55%, 8/15/25 ............................ 3,250,000 2,883,953
Thessalonika Family, Series A, MBIA Insured, 6.20%, 12/01/15 ........................... 990,000 1,006,563
California HFAR, Home Mortgage,
Series B, 7.125%, 2/01/26 .............................................................. 280,000 280,028
Series F-1, 7.00%, 8/01/26 ............................................................. 680,000 696,946
Series H, 6.25%, 8/01/27 ............................................................... 2,420,000 2,424,332
California PCFA,
PCR, Southern California Edison Co., Series B, 6.40%, 12/01/24 ......................... 2,000,000 2,037,340
Solid Waste Disposal Revenue, Browning-Ferris Industries Inc., 6.75%, 9/01/19 .......... 7,000,000 6,659,730
Solid Waste Disposal Revenue, Keller Canyon Landfill Co. Project, 6.875%, 11/01/27 ..... 9,100,000 8,674,575
California Special Districts Association Finance Corp. COP, Series V, 7.50%, 5/01/13 ....... 55,000 57,821
California State GO,
FGIC Insured, 6.00%, 8/01/19 ........................................................... 30,000 30,289
Veterans Bonds, Series BD, BE, and BF, 6.40%, 2/01/22 .................................. 1,250,000 1,250,988
</TABLE>
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, MAY 31, 2000 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND AMOUNT VALUE
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
California State HFAR, Home Mortgage, Series L, MBIA Insured, 6.40%, 8/01/27 ............... $ 2,705,000 $ 2,735,485
California Statewide CDA,
COP, International School of Peninsula Project, 7.50%, 11/01/29 ........................ 11,170,000 11,228,307
COP, The Internext Group, 5.375%, 4/01/17 .............................................. 6,000,000 5,086,320
COP, The Internext Group, 5.375%, 4/01/30 .............................................. 8,300,000 6,611,282
COP, Windward School, 6.90%, 9/01/23 ................................................... 2,000,000 2,000,940
Lease Revenue, Special Facilities, United Airlines, Los Angeles, 5.625%, 10/01/34 ...... 5,555,000 4,538,046
Lease Revenue, Special Facilities, United Airlines, Series A, 5.70%, 10/01/33 .......... 6,320,000 5,233,023
California Statewide CDA Revenue, COP, CHFCLP Insured, Families First Inc., 7.25%, 12/01/22 1,800,000 2,002,950
Campbell RDA Tax Allocation, Central Campbell Redevelopment Project, Series A,
6.55%, 10/01/32 ........................................................................ 5,300,000 5,271,168
Capistrano USD, CFD, Special Tax No. 92-1, Pre-Refunded, 7.00%, 9/01/18 .................... 1,000,000 1,082,630
Chula Vista 1915 Act, AD No. 97-2, 6.15%, 9/02/29 .......................................... 8,440,000 7,673,986
Clovis 1915 Act, Special Assessment, AD No. 98-1, 6.375%, 9/02/18 .......................... 1,585,000 1,484,543
Corona-Norco USD, Special Tax, CFD No. 99-1, 7.00%, 9/01/29 ................................ 2,120,000 2,111,838
Duarte RDA, Tax Allocation,
Davis Addition Project Area, Refunding, 6.70%, 9/01/14 ................................. 2,615,000 2,677,891
Davis Addition Project Area, Refunding, 6.90%, 9/01/18 ................................. 4,120,000 4,223,948
Rancho Duarte Phase I Project Area, Pre-Refunded, 6.80%, 9/01/16 ....................... 780,000 873,202
El Dorado County Public Financing Revenue, 6.375%, 2/15/25 ................................. 1,885,000 1,876,649
El Dorado County Special Tax, Community Facilities District No 1992-1,
6.125%, 9/01/16 ........................................................................ 4,985,000 4,764,912
6.25%, 9/01/29 ......................................................................... 2,330,000 2,170,698
Elsinore Valley Municipal Water District Special Tax, CFD No. 99-1, 7.00%, 9/01/29 ......... 3,500,000 3,435,460
Escondido Revenue COP, Refunding, Series A, FGIC Insured, 6.00%, 9/01/31 ................... 3,840,000 3,818,112
Fontana Special Tax,
CFD No. 7, 6.125%, 9/01/28 ............................................................. 1,280,000 1,148,890
CFD No. 12, 6.60%, 9/01/19 ............................................................. 3,295,000 3,210,615
CFD No. 12, 6.625%, 9/01/30 ............................................................ 7,675,000 7,407,373
Foothill/Eastern Corridor Agency Toll Road Revenue, senior lien, Series A, Pre-Refunded,
6.50%, 1/01/32 ......................................................................... 5,500,000 5,976,300
Garden Grove Housing Authority MFHR, Set-Aside Tax Increment, Series C, 6.70%, 7/01/24 ..... 6,375,000 6,359,445
Gateway Improvement Authority Revenue, Marin City CFD, Series A, Pre-Refunded,
7.75%, 9/01/25 ......................................................................... 2,500,000 2,827,000
Granada Sanitation District 1915 Act, Sewage Treatment Facilities, Financing District,
Series A,
7.125%, 9/02/16 ........................................................................ 830,000 835,835
7.25%, 9/02/22 ......................................................................... 865,000 877,326
Half Moon Bay COP, Sea Crest School, 6.75%, 7/01/30 ........................................ 3,945,000 3,860,340
Hawaiian Gardens RDA, Tax Allocation, Project No. 1, Refunding, 6.35%, 12/01/33 ............ 4,000,000 3,829,360
Hesperia PFA Revenue, Series B, 7.375%, 10/01/23 ........................................... 1,930,000 1,967,095
Huntington Beach PFA Revenue, Huntington Beach Redevelopment Projects, Refunding,
7.00%, 8/01/24 ......................................................................... 1,000,000 1,017,110
Imperial County Special Tax, CFD No. 98-1,
6.45%, 9/01/17 ......................................................................... 2,155,000 2,034,794
6.50%, 9/01/31 ......................................................................... 6,205,000 5,790,382
Indio 1915 Act GO, Assessment District No. 99-1, 7.125%, 9/02/20 ........................... 2,500,000 2,425,500
Irvine Meadows Mobile Home Park Revenue, Series A, 5.70%, 3/01/18 .......................... 2,300,000 2,060,892
Irwindale PFA Special Tax, CFD No.1, Refunding, 6.00%, 11/01/20 ............................ 4,450,000 4,117,674
John C. Fremont Hospital District Health Facilities Revenue, 6.75%, 6/01/13 ................ 1,500,000 1,592,160
Lake Elsinore 1915 Act, AD No. 93-1, Series A, 7.90%, 9/02/24 .............................. 1,265,000 1,290,022
Lake Elsinore RDA, Special Tax, CFD No. 90-2, Series A, 6.05%, 10/01/24 .................... 4,500,000 4,142,295
</TABLE>
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, MAY 31, 2000 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND AMOUNT VALUE
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
Lancaster RDA, Tax Allocation,
Library Project, sub. lien, Refunding, 7.00%, 12/01/29 ................................ $ 1,780,000 $ 1,734,557
Residential Redevelopment Project, sub. Lien, Refunding, 6.65%, 9/01/27 ............... 2,500,000 2,465,625
Lemon Grove School District COP, Vista La Mesa Elementary School Construction,
Pre-Refunded, 6.40%, 9/01/26 .......................................................... 2,000,000 2,106,020
Livermore Special Tax, Triad Center Community Facilities District 90-1, 6.50%, 9/01/25 .... 5,095,000 4,741,611
Long Beach Special Tax, CFD No. 2, 7.50%, 9/01/11 ......................................... 140,000 140,076
Los Angeles Harbor Department Revenue, Series B, 6.00%, 8/01/14 ........................... 3,500,000 3,599,575
Los Angeles MFR, Refunding, Series J-2C, 8.50%, 1/01/24 ................................... 1,150,000 1,151,944
Lynwood PFA Revenue, Water System Improvement Project, 6.50%, 6/01/21 ..................... 1,175,000 1,156,506
Lynwood PFA, Tax Allocation, Alameda Project Area, 6.30%, 9/01/24 ......................... 1,000,000 965,010
Lynwood PFA Lease Revenue,
6.25%, 9/01/22 ........................................................................ 1,080,000 1,043,420
6.30%, 9/01/29 ........................................................................ 2,680,000 2,552,807
Millbrae Elementary School District COP, Financing Project, Pre-Refunded, 6.90%, 3/01/22 .. 1,480,000 1,562,199
Modesto PFA, Lease Revenue, John Thurman Field Renovation Project, 6.125%, 11/01/16 ....... 1,645,000 1,657,222
Norco Special Tax CFD GO, No. 97-1, 7.10%, 10/01/30 ....................................... 2,640,000 2,607,238
Northern Mariana Islands Commonwealth Ports Authority Airport Revenue, senior lien,
Series A, 6.25%, 3/15/28 .............................................................. 4,930,000 4,587,069
Northern Mariana Islands Commonwealth Ports Authority Seaport Revenue, Series A,
6.85%, 3/15/28 ........................................................................ 1,945,000 1,865,663
Oakland Revenue, YMCA East Bay Project, Refunding, 7.10%, 6/01/10 ......................... 2,815,000 2,989,080
Orinda 1915 Act, AD No. 94-1, Oak Springs, 8.25%, 9/02/19 ................................. 1,475,000 1,487,464
(c) Palmdale Special Tax CFD, No. 93-1 Ritter Ranch Project, Series A, 8.50%, 9/01/17 ..... 10,000,000 9,500,000
Perris PFA, Local Agency Revenue, Series B, 7.25%, 8/15/23 ................................ 500,000 505,875
Pittsburg 1915 Act, Infrastructure Financing Authority Reassessment Revenue, Sub Series B,
6.00%, 9/02/24 ........................................................................ 2,710,000 2,448,024
Rancho Water District Special Tax Community Facilities 99-1 Area A, Series A,
6.70%, 9/01/30 ........................................................................ 2,250,000 2,181,758
Rancho Water District Special Tax Community Facilities 99-1 Area B, Series A,
6.70%, 9/01/30 ........................................................................ 2,630,000 2,550,232
(b) Richmond 1915 Act, AD No. 99-01, 7.20%, 9/02/30 ....................................... 7,885,000 7,912,834
Richmond Revenue, YMCA East Bay Project, Refunding, 7.25%, 6/01/17 ........................ 2,905,000 3,037,236
Riverside County CFD, Special Tax, senior lien, No. 87-5, Refunding, Series A,
7.00%, 9/01/13 ........................................................................ 7,335,000 7,381,797
Roseville Special Tax,
CFD, No. 1-Highland, 6.30%, 9/01/25 ................................................... 10,000,000 9,422,300
Woodcreek West Community Facilities No. 1, 6.70%, 9/01/25 ............................. 3,000,000 2,914,380
Sacramento County Special Tax, CFD No. 1, Refunding, 6.30%, 9/01/21 ....................... 1,575,000 1,503,968
San Bernardino Associated Communities Financing Authority COP, Granada Hills Health Care,
Refunding and Improvement, Series A, 6.90%, 5/01/27 ................................... 10,000,000 8,380,800
San Diego County Educational Facilities Authority No. 1 Lease Revenue, 6.50%, 8/15/15 ..... 850,000 881,399
San Diego Special Tax, CFD No. 1, Series B, Pre-Refunded, 7.10%, 9/01/20 .................. 3,500,000 3,902,500
San Francisco City and County Airport Commission International Airport Revenue, Issue 8A,
Second Series, FGIC Insured, 6.25%, 5/01/20 ........................................... 1,570,000 1,589,672
San Francisco City and County Revenue, Irwin Memorial Blood Center, Series A, 6.80%,
12/01/21 .............................................................................. 800,000 826,464
San Joaquin Area Flood Control Agency 1915 Act, Flood Protection and Restoration
Assessment, FSA Insured, 6.00%, 9/02/14 ............................................... 800,000 824,736
San Joaquin Hills Transportation Corridor Agency Toll Road Revenue,
Refunding, Series A, 5.50%, 1/15/28 ................................................... 23,200,000 20,239,216
senior lien, 5.00%, 1/01/33 ........................................................... 9,500,000 7,688,445
senior lien, Pre-Refunded, 7.00%, 1/01/30 ............................................. 675,000 723,472
senior lien, Pre-Refunded, 6.75%, 1/01/32 ............................................. 3,450,000 3,677,079
</TABLE>
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, MAY 31, 2000 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND AMOUNT VALUE
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
BONDS (CONT.)
San Jose Financing Authority Revenue, Convention Center Project, Refunding, Series C,
6.40%, 9/01/17 ......................................................................... $ 5,000,000 $ 5,162,600
San Luis Obispo COP, Vista Hospital System Inc., 6.45%, 7/01/29 ............................ 6,660,000 5,527,800
San Marcos Public Facilities Authority Revenue, Tax Increment Project Area-3-A, sub. lien,
6.00%, 8/01/31 ......................................................................... 14,230,000 12,729,304
San Marcos RDA, Tax Allocation, Affordable Housing Project, Series A, 5.65%, 10/01/28 ...... 3,000,000 2,612,640
San Marcos USD Special Tax CFD, No. 4-Zone A, 7.00%, 9/01/30 ............................... 750,000 744,293
San Mateo RDA, Tax Allocation, Merged Area, Series A, 5.50%, 8/01/22 ....................... 4,070,000 3,590,920
San Ramon PFA, Tax Allocation Revenue,
Pre-Refunded, 6.90%, 2/01/24 ........................................................... 700,000 765,387
Refunding, 6.90%, 2/01/24 .............................................................. 800,000 823,680
Sand City RDA, Tax Allocation Revenue, Redevelopment Project, 6.00%, 11/01/26 .............. 3,900,000 3,622,749
Simi Valley 1915 Act, Assessment District No. 98-1, Madera, 7.30%, 9/02/24 ................. 4,000,000 3,985,840
Southern California Public Power Authority Transmission Project Revenue, Southern
Transmission, Refunding, 6.125%, 7/01/18 ............................................... 1,140,000 1,158,981
Stockton CFD No. 1, Special Tax, Mello Roos, Weston Ranch, Series A, 6.00%,
9/01/18 ................................................................................ 1,000,000 944,050
9/01/24 ................................................................................ 1,100,000 1,000,648
Tracy COP, I-205 Corridor Improvement Project, Pre-Refunded, 7.00%, 10/01/27 ............... 1,200,000 1,257,444
Vallejo COP, Marine World Foundation Project, Refunding, 7.40%, 2/01/28 .................... 9,345,000 9,546,945
Vallejo Hiddenbrooke ID No. 1 Revenue, 6.50%, 9/01/31 ...................................... 14,830,000 13,963,483
Virgin Islands PFA Revenue, sub. lien, Fund Loan Notes, Refunding, Series E,
5.75%, 10/01/13 ........................................................................ 1,595,000 1,450,892
5.875%, 10/01/18 ....................................................................... 1,665,000 1,488,843
6.00%, 10/01/22 ........................................................................ 2,650,000 2,369,021
Vista Mobile Home Park Revenue, Estrella De Oro Mobile Home, 5.875%, 2/01/28 ............... 1,685,000 1,474,729
West Sacramento Special Tax Community Facilities District No 10, 6.75%, 9/01/26 ............ 3,235,000 3,160,757
Western Placer Waste Management Authority Revenue, Refunding, 6.75%, 7/01/14 ............... 7,400,000 7,709,024
-----------
TOTAL BONDS (COST $486,547,548) ............................................................ 469,052,407
-----------
ZERO COUPON BONDS 9.2%
California HFAR, Home Mortgage, Series F, FSA Insured, 8/01/31 ............................. 38,500,000 4,808,265
Duarte RDA Tax Allocation, Capital Appreciation, sub. lien, Merged
Redevelopment Project,12/01/28 ......................................................... 30,795,000 4,231,233
Foothill/Eastern Corridor Agency Toll Road Revenue, Capital Appreciation, Refunding,
01/15/26 ............................................................................... 38,720,000 7,231,347
01/15/31 ............................................................................... 85,780,000 11,376,144
San Diego RDA, Capital Appreciation, Tax Allocation, Series B
9/01/10 ................................................................................ 3,770,000 1,902,945
9/01/15 ................................................................................ 6,810,000 2,418,572
9/01/16 ................................................................................ 1,500,000 493,845
9/01/19 ................................................................................ 1,800,000 475,524
9/01/20 ................................................................................ 1,800,000 442,008
9/01/21 ................................................................................ 1,800,000 412,380
9/01/22 ................................................................................ 1,900,000 401,774
9/01/23 ................................................................................ 1,900,000 374,660
9/01/24 ................................................................................ 1,900,000 345,305
9/01/25 ................................................................................ 1,900,000 321,860
9/01/26 ................................................................................ 1,900,000 299,990
9/01/27 ................................................................................ 1,900,000 279,603
9/01/28 ................................................................................ 1,900,000 260,622
</TABLE>
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, MAY 31, 2000 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND AMOUNT VALUE
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
ZERO COUPON BONDS (CONT.)
San Joaquin Hills Transportation Corridor Agency Toll Road Revenue,
junior lien, ETM, 1/01/28 ................................................. $ 19,150,000 $ 3,585,262
Refunding, Series A, 1/15/21 ..................................................... 15,000,000 8,929,200
-------------
TOTAL ZERO COUPON BONDS (COST $46,773,635) ........................................... 48,590,539
-------------
TOTAL LONG TERM INVESTMENTS (COST $533,321,183) ...................................... 517,642,946
-------------
(a) SHORT TERM INVESTMENTS 2.9%
California Health Facilities Financing Authority Revenue, St. Joseph Health System,
Series A, Daily VRDN and Put, 4.15%, 7/01/13 ..................................... 1,000,000 1,000,000
California PCFA, PCR, Southern California Edison Co.,
Series A, Daily VRDN and Put, 3.20%, 2/28/08 ..................................... 1,800,000 1,800,000
Series D, Daily VRDN and Put, 3.00%, 2/28/08 ..................................... 100,000 100,000
Irvine 1915 Act,
AD No. 94-13, Daily VRDN and Put, 4.15%, 9/02/22 ................................. 1,262,000 1,262,000
AD No. 97-17, Daily VRDN and Put, 4.15%, 9/02/23 ................................. 400,000 400,000
Irvine Ranch Water District COP, Capital Improvement Project, Daily VRDN and Put,
4.10%, 8/01/16 ................................................................... 2,300,000 2,300,000
Irvine Ranch Water District Revenue GO, No. 105, 140, 240 and 250, Daily VRDN and Put,
4.10%, 1/01/21 ................................................................... 2,100,000 2,100,000
Irvine Ranch Water District Revenue GO, No. 105, 140, 240 and 250, Daily VRDN and Put,
4.15%, 4/01/33 ................................................................... 6,400,000 6,400,000
Puerto Rico Commonwealth Government Development Bank, Refunding, MBIA Insured, Weekly
VRDN and Put, 3.40%, 12/01/15 .................................................... 100,000 100,000
-------------
TOTAL SHORT TERM INVESTMENTS (COST $15,462,000) ...................................... 15,462,000
-------------
TOTAL INVESTMENTS (COST $548,783,183) 100.6% ......................................... 533,104,946
OTHER ASSETS, LESS LIABILITIES (.6)% ................................................. (2,983,622)
-------------
NET ASSETS 100.0% .................................................................... $ 530,121,324
-------------
</TABLE>
See Glossary of Terms on page 34.
(a) Variable rate demand notes (VRDNs) are tax-exempt obligations which contain
a floating or variable interest rate adjustment formula and an unconditional
right of demand to receive payment of the principal balance plus accrued
interest at 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,
------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------------
<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 $ 11.27 $ 10.71 $ 10.40 $ 10.53
------------------------------------------------------------------------
Income from investment operations:
Net investment income(b) ........................... .56 .55 .57 .58 .56
Net realized and unrealized gains (losses) ......... (1.15) (.08) .56 .33 (.09)
------------------------------------------------------------------------
Total from investment operations ................... (.59) .47 1.13 .91 .47
Less distributions from:
Net investment income .............................. (.55) (.55) (.57) (.60) (.60)
Net realized gains ................................. -- (.03) -- -- --
------------------------------------------------------------------------
Total distributions ................................ (.55) (.58) (.57) (.60) (.60)
------------------------------------------------------------------------
Net asset value, end of year ....................... $ 10.02 $ 11.16 $ 11.27 $ 10.71 $ 10.40
------------------------------------------------------------------------
Total return(a) .................................... (5.30%) 4.19% 10.75% 8.95% 4.50%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................... $ 63,742 $ 77,117 $ 44,526 $ 26,708 $ 13,956
Ratio to average net assets:
Expenses ........................................... .40% .40% .40% .40% .33%
Expenses excluding waiver and payments by affiliates .81% .81% .81% .84% .91%
Net investment income .............................. 5.36% 4.88% 5.12% 5.51% 5.67%
Portfolio turnover rate ............................ 29.94% 13.39% 37.67% 27.60% 27.23%
</TABLE>
(a) Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(b) Based on average shares outstanding effective year ended May 31, 2000.
See notes to financial statements.
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, MAY 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN TENNESSEE MUNICIPAL BOND FUND AMOUNT VALUE
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS 98.3%
(c) Carroll County IDBR, Henry I. Siegel Co. Inc. Project, Refunding, 7.20%, 4/01/05 ...... $ 500,000 $ 175,000
Chattanooga Health Educational and Housing Facility Board Revenue, Catholic Health
Initiatives, Refunding,
Series A, 5.00%, 12/01/18 .......................................................... 1,000,000 832,420
Series A, 5.00%, 12/01/28 .......................................................... 1,000,000 805,500
Cleveland Public Improvement GO, FGIC Insured, 5.25%, 6/01/24 ............................. 3,000,000 2,672,550
Fayetteville and Lincoln IDBR, Hospital Facility Lease, AMBAC Insured, 5.30%, 5/01/28 ..... 3,500,000 3,060,750
Franklin IDB, MFHR, Landings Apartment Project, Refunding, Series A, FSA Insured,
6.00%, 10/01/26 ....................................................................... 1,000,000 972,840
Hamilton County IDB, MFHR, Patten Towers Apartments, 7.125%, 2/01/09 ...................... 500,000 495,020
Hollow Rock-Bruceton Special School District GO, FSA Insured, Pre-Refunded,
5.75%, 4/01/24 ........................................................................ 500,000 521,550
Humphreys County IDB, Solid Waste Disposal Revenue, Dupont Denemours and Co. Project,
6.70%, 5/01/24 ........................................................................ 800,000 846,224
Jackson GO, Refunding and Improvement, MBIA Insured, 5.125%, 3/01/16 ...................... 1,000,000 921,010
Johnson City GO,
Public Improvement, FSA Insured, Pre-Refunded, 5.90%, 6/01/12 ...................... 500,000 518,725
Solid Waste, AMBAC Insured, 5.80%, 5/01/09 ......................................... 100,000 102,450
Johnson City Health and Educational Facilities Board Hospital Revenue, Refunding, First
Mortgage Mountain States Health, Series A, MBIA Insured, 6.00%, 7/01/21 ............... 2,970,000 2,921,054
Johnson City Health and Educational Facilities Board Revenue, Pine Oaks Assisted Project,
Series A, GNMA Secured, 5.90%, 6/20/37 ................................................ 1,390,000 1,279,064
Johnson County Public Improvement GO,
Series B, AMBAC Insured, Pre-Refunded, 6.70%, 5/01/20 100,000 107,643
Knox County First Utility District Water and Sewer Revenue, Refunding and Improvement,
Series A, MBIA Insured, 5.625%, 12/01/19 .............................................. 1,000,000 963,910
Knox County Health, Educational and Housing Board Hospital Facilities Revenue, Fort Sanders
Alliance, Refunding, MBIA Insured, 5.75%, 1/01/14 .................................. 1,250,000 1,259,313
Knox County IDB, MFR, Waterford Apartments, Refunding, Series A, FHA Insured,
5.95%, 3/01/28 ........................................................................ 250,000 241,423
Knox-Chapman Utility District, Knox County Water and Sewer Revenue, Refunding, MBIA
Insured, 6.10%, 1/01/19 ............................................................... 100,000 100,838
Lawrenceburg Electric Revenue, MBIA Insured, 5.50%, 7/01/26 ............................... 1,000,000 925,800
Loudon County IDB, Solid Waste Disposal Revenue, Kimberly-Clark Corp. Project,
6.20%, 2/01/23 ........................................................................ 1,305,000 1,292,342
Macon County GO, FGIC Insured, Pre-Refunded, 5.90%, 9/01/13 ............................... 150,000 157,050
Maury County IDB, PCR, Multi-Modal, Saturn Corp. Project, Refunding, 6.50%, 9/01/24 ....... 620,000 627,831
McKenzie High School District GO, FSA Insured, Pre-Refunded, 5.75%, 4/01/22 ............... 500,000 521,550
Memphis Health, Educational and Housing Facility Board Mortgage Revenue,
Edgewater Terrace, Refunding, GNMA Secured, 7.375%, 1/20/27 ........................ 150,000 158,085
MF River Trace II, Refunding, Series A, FNMA Secured, 6.45%, 4/01/26 ............... 100,000 100,709
Memphis-Shelby County Airport Authority Airport Revenue Series D, AMBAC Insured,
6.00%, 3/01/24 ........................................................................ 4,780,000 4,731,722
Memphis-Shelby County Airport Authority Special Facilities and Project Revenue, Federal
Express Corp., 6.75%, 9/01/12 ......................................................... 100,000 102,571
Metropolitan Government of Nashville and Davidson County Electric Revenue, Series A,
5.20%, 5/15/23 ..................................................................... 1,000,000 882,000
Pre-Refunded, 6.00%, 5/15/17 ....................................................... 200,000 207,478
Metropolitan Government of Nashville and Davidson County GO,
Public Improvements, 5.875%, 5/15/26 ............................................... 1,000,000 973,370
Refunding, 5.125%, 5/15/25 ......................................................... 3,000,000 2,600,310
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 ..... 150,000 163,080
Mortgage, Dandridge Towers, Refunding, Series A, 6.375%, 1/01/11 ................... 500,000 502,795
Multi-Modal Health Facility, Asset Guaranty, 5.50%, 5/01/23 ........................ 955,000 847,467
The Vanderbilt University, Refunding, Series B, 5.00%, 10/01/28 .................... 2,750,000 2,339,480
Metropolitan Government of Nashville and Davidson County Sports Authority Revenue, Stadium
Public Improvement Project, AMBAC Insured, 5.875%, 7/01/21 ............................ 1,775,000 1,742,322
</TABLE>
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, MAY 31, 2000 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN TENNESSEE MUNICIPAL BOND FUND AMOUNT VALUE
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
Metropolitan Government of Nashville and Davidson County Water and Sewer Revenue,
Refunding, 5.50%, 1/01/16 .............................................................. $ 620,000 $ 600,451
Metropolitan Nashville Airport Authority Revenue, Series C, FGIC Insured, 6.60%, 7/01/15 ... 205,000 212,546
Milan Special School District GO, AMBAC Insured, Pre-Refunded, 6.625%, 4/01/11 ............. 180,000 192,506
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 2,181,480
Northern Mariana Islands Commonwealth Ports Authority Seaport Revenue, Series A,
6.85%, 3/15/28 ......................................................................... 290,000 278,171
Pigeon Forge Public Improvement, MBIA Insured, 5.90%, 6/01/09 .............................. 100,000 101,610
Puerto Rico Commonwealth GO,
Pre-Refunded, 6.50%, 7/01/23 ......................................................... 100,000 106,954
Public Improvement, MBIA Insured, 5.75%, 7/01/26 ..................................... 750,000 739,995
Puerto Rico Commonwealth Highway and Transportation Authority Revenue, Series Y,
Pre-Refunded, 6.00%, 7/01/22 ........................................................... 500,000 527,940
Puerto Rico Electric Power Authority Revenue, Series R, Pre-Refunded, 6.25%, 7/01/17 ....... 100,000 104,123
Puerto Rico Industrial Tourist Educational Medical and Environmental Control Facilities
Financing Authority Hospital Revenue, Hospital Auxilio Mutuo Obligation, Series A,
MBIA Insured, 6.25%, 7/01/24 ........................................................... 200,000 203,322
Puerto Rico Port Authority Revenue, Special Facilities, American Airlines, Series A,
6.25%, 6/01/26 ......................................................................... 600,000 566,262
Shelby County GO, Public Improvement and School, Refunding, Series B, 5.00%, 6/01/24 ....... 3,000,000 2,557,950
Shelby County Health Educational and Housing Facilities Board Revenue, Ave Maria Assisted
Living Project, Series A, 5.50%, 12/01/31 .............................................. 2,010,000 1,749,625
Shelby County School GO, Series B, Pre-Refunded, 6.00%, 3/01/16 ............................ 530,000 543,981
South Fulton IDBR, Tyson Foods Inc. Project, 6.40%, 10/01/20 ............................... 300,000 298,953
Sullivan County IDBR, Brandymill, Refunding, Series I-A, 6.35%, 7/20/27 .................... 350,000 352,874
Tennessee HDA,
Homeownership Program, 5.375%, 7/01/23 ............................................... 1,000,000 898,510
Homeownership Program, Issue 4A, 6.375%, 7/01/22 ..................................... 800,000 805,712
Homeownership Project, Series 3C, 6.00%, 1/01/20 ..................................... 2,500,000 2,440,850
Mortgage Finance, Series A, 6.90%, 7/01/25 ........................................... 185,000 191,932
Mortgage Finance, Series B, 6.60%, 7/01/25 ........................................... 100,000 101,639
Mortgage Finance, Series B, MBIA Insured, 6.20%, 7/01/18 ............................. 630,000 637,503
Tennessee State Local Development Authority Revenue,
Community Provider Pooled Loan Program, Pre-Refunded, 6.55%, 10/01/23 ................ 100,000 107,040
State Loan Program, Refunding, Series A, MBIA Insured, 5.125%, 3/01/22 ............... 150,000 131,757
Tennessee State School Board Authority, Higher Educational Facilities,
2nd Program, Series A, 5.00%, 5/01/28 ................................................ 3,000,000 2,516,100
Series A, Pre-Refunded, 6.25%, 5/01/22 ............................................... 100,000 103,697
Virgin Islands PFA Revenue, senior lien, Fund Loan Notes, Refunding, Series A,
5.50%, 10/01/18 ........................................................................ 1,000,000 879,060
West Carroll Special School GO, MBIA Insured, 5.375%, 6/01/29 .............................. 1,055,000 954,575
(b) White House Utility District, Robertson and Summer Counties Water and Sewer Revenue,
FSA Insured, 6.00%, 1/01/26 ............................................................ 1,000,000 996,060
White House Utility District, Robertson and Sumner Counties Waterworks System Revenue,
Refunding, Series B, FGIC Insured, 5.375%, 1/01/19 ..................................... 1,890,000 1,766,432
Wilson County COP,
Educational Facilities, Pre-Refunded, 6.125%, 6/30/10 ................................ 220,000 231,518
FSA Insured, 5.25%, 3/30/18 .......................................................... 1,000,000 915,760
----------
TOTAL LONG TERM INVESTMENTS (COST $67,154,394) ............................................. 62,670,134
----------
</TABLE>
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, MAY 31, 2000 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN TENNESSEE MUNICIPAL BOND FUND AMOUNT VALUE
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(a) SHORT TERM INVESTMENTS 1.6%
Bradley County IDB, Industrial Revenue, Olin Corp. Project, Refunding, Series C, Daily
VRDN and Put, 1.60%, 11/01/17 ........................................................... $ 100,000 $100,000
Puerto Rico Commonwealth Government Development Bank, Refunding, MBIA Insured, Weekly
VRDN and Put, 3.40%, 12/01/15 ........................................................... 900,000 900,000
-----------
TOTAL SHORT TERM INVESTMENTS (COST $1,000,000) ............................................. 1,000,000
-----------
TOTAL INVESTMENTS (COST $68,154,394) 99.9% ................................................. 63,670,134
OTHER ASSETS, LESS LIABILITIES .1% ......................................................... 71,544
-----------
NET ASSETS 100.0% .......................................................................... $63,741,678
===========
</TABLE>
See Glossary of Terms on page 34.
(a) Variable rate demand notes (VRDNs) are tax-exempt obligations which contain
a floating or variable interest rate adjustment formula and an unconditional
right of demand to receive payment of the principal balance plus accrued
interest at specified dates.
(b) Sufficient collateral has been segregated for securities traded on a
when-issued or delayed delivery basis.
(c) See Note 6 regarding defaulted securities.
See notes to financial statements.
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, MAY 31, 2000(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
ETM - Escrow to Maturity
FHA - Federal Housing Authority/Agency
FNMA - Federal National Mortgage Association
FGIC - Financial Guaranty Insurance Corp.
FSA - Financial Security Assistance
GNMA - Government National Mortgage Association
GO - General Obligation
HDA - Housing Development Authority/Agency
HFAR - Housing Finance Authority/Agency Revenue
ID - Improvement District
IDB - Industrial Development Board
IDBR - Industrial Development Board Revenue
MBIA - Municipal Bond Investors Assurance Corp.
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
RDA - Redevelopment Agency
USD - Unified School District
FRANKLIN MUNICIPAL SECURITIES TRUST
Financial Statements
STATEMENTS OF ASSETS AND LIABILITIES
MAY 31, 2000
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN
CALIFORNIA TENNESSEE
HIGH YIELD MUNICIPAL
MUNICIPAL FUND BOND FUND
---------------------------------------
<S> <C> <C>
Assets:
Investments in securities:
Cost ......................................................................... $ 548,783,183 $ 68,154,394
=======================================
Value ........................................................................ 533,104,946 63,670,134
Cash .......................................................................... 15,105 72,534
Receivables:
Investment securities sold ................................................... 3,503,608 --
Capital shares sold .......................................................... 304,192 11,768
Interest ..................................................................... 8,234,500 1,211,216
---------------------------------------
Total assets .............................................................. 545,162,351 64,965,652
---------------------------------------
Liabilities:
Payables:
Investment securities purchased .............................................. 11,360,805 988,880
Capital shares redeemed ...................................................... 1,777,055 7,643
Affiliates ................................................................... 360,913 15,884
Shareholders ................................................................. 499,508 65,111
Distributions to shareholders ................................................. 1,001,248 132,455
Other liabilities ............................................................. 41,498 14,001
---------------------------------------
Total liabilities ......................................................... 15,041,027 1,223,974
---------------------------------------
Net assets, at value ..................................................... $ 530,121,324 $ 63,741,678
=======================================
Net assets consist of:
Undistributed net investment income .......................................... $ -- $ 118,612
Accumulated distributions in excess of net investment income ................. (1,051,949) --
Net unrealized depreciation .................................................. (15,678,237) (4,484,260)
Accumulated net realized loss ................................................ (39,682,663) (2,189,865)
Capital shares ............................................................... 586,534,173 70,297,191
---------------------------------------
Net assets, at value ...................................................... $ 530,121,324 $ 63,741,678
=======================================
</TABLE>
See notes to financial statements.
FRANKLIN MUNICIPAL SECURITIES TRUST
Financial Statements(continued)
STATEMENTS OF ASSETS AND LIABILITIES(CONT.)
MAY 31, 2000
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN
CALIFORNIA TENNESSEE
HIGH YIELD MUNICIPAL
MUNICIPAL FUND BOND FUND
----------------------------------
<S> <C> <C>
CLASS A:
Net assets, at value ............................................................... $464,423,081 $63,741,678
==================================
Shares outstanding ................................................................. 48,769,154 6,361,278
==================================
Net asset value per share* ......................................................... 9.52 $ 10.02
==================================
Maximum offering price per share (net asset value per share / 95.75%) .............. 9.94 $ 10.46
==================================
CLASS B:
Net assets, at value ............................................................... $ 808,210 --
==================================
Shares outstanding ................................................................. 84,745 --
==================================
Net asset value and maximum offering price per share ............................... 9.54 --
==================================
CLASS C:
Net assets, at value ............................................................... $ 64,890,033 --
==================================
Shares outstanding ................................................................. 6,795,247 --
==================================
Net asset value per share* ......................................................... 9.55 --
==================================
Maximum offering price per share (net asset value per share / 99.00%) .............. 9.65 --
==================================
</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, 2000
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN
CALIFORNIA TENNESSEE
HIGH YIELD MUNICIPAL
MUNICIPAL FUND BOND FUND
---------------------------------------
<S> <C> <C>
Investment income:
Interest ................................................................... $ 37,355,234 $ 4,028,292
---------------------------------------
Expenses:
Management fees (Note 3) ................................................... 2,974,310 437,846
Distribution fees (Note 3)
Class A ................................................................... 534,911 70,002
Class B ................................................................... 585 --
Class C ................................................................... 470,988 --
Transfer agent fees (Note 3) ............................................... 193,511 22,564
Custodian fees ............................................................. 7,200 726
Reports to shareholders .................................................... 30,732 4,536
Registration and filing fees ............................................... 68,753 2,286
Professional fees (Note 3) ................................................. 36,896 10,023
Trustees' fees and expenses ................................................ 39,239 3,972
Other ...................................................................... 38,336 12,829
---------------------------------------
Total expenses .......................................................... 4,395,461 564,784
Expenses waived/paid by affiliate (Note 3) .............................. (1,033,002) (284,184)
---------------------------------------
Net expenses ........................................................... 3,362,459 280,600
---------------------------------------
Net investment income ................................................. 33,992,775 3,747,692
---------------------------------------
Realized and unrealized losses:
Net realized loss from investments ......................................... (37,870,917) (2,122,356)
Net unrealized depreciation on investments ................................. (30,918,296) (5,811,528)
---------------------------------------
Net realized and unrealized loss ............................................ (68,789,213) (7,933,884)
---------------------------------------
Net decrease in net assets resulting from operations ........................ $(34,796,438) $(4,186,192)
=======================================
</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, 2000 AND 1999
<TABLE>
<CAPTION>
FRANKLIN CALIFORNIA FRANKLIN TENNESSEE
HIGH YIELD MUNICIPAL FUND MUNICIPAL BOND FUND
-----------------------------------------------------------------------
2000 1999 2000 1999
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income ............................ $ 33,992,775 $ 29,167,118 $ 3,747,692 $ 2,919,711
Net realized gain (loss) from investments ........ (37,870,917) 469,247 (2,122,356) (65,650)
Net unrealized depreciation on investments ....... (30,918,296) (4,500,445) (5,811,528) (845,514)
-----------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations .................... (34,796,438) 25,135,920 (4,186,192) 2,008,547
Distributions to shareholders from:
Net investment income:
Class A ........................................ (30,273,047) (26,332,992) (3,704,225) (2,879,542)
Class B ........................................ (4,475) -- -- --
Class C ........................................ (3,715,253) (2,834,125) -- --
In excess of net investment income:
Class A ........................................ (97,544) (845,334) -- --
Class B ........................................ (11) -- -- --
Class C ........................................ (11,971) (90,980) -- --
Net realized gains:
Class A ........................................ -- -- -- (137,536)
-----------------------------------------------------------------------
Total distributions to shareholders .............. (34,102,301) (30,103,431) (3,704,225) (3,017,078)
Capital share transactions: (Note 2)
Class A ........................................ (58,624,613) 175,775,393 (5,485,282) 33,600,071
Class B ........................................ 812,535 -- -- --
Class C ........................................ (5,257,914) 38,708,484 -- --
-----------------------------------------------------------------------
Total capital share transactions ................. (63,069,992) 214,483,877 (5,485,282) 33,600,071
Net increase (decrease) in net assets ........ (131,968,731) 209,516,366 (13,375,699) 32,591,540
Net assets
Beginning of year ................................ 662,090,055 452,573,689 77,117,377 44,525,837
-----------------------------------------------------------------------
End of year ...................................... $ 530,121,324 $ 662,090,055 $ 63,741,678 $ 77,117,377
=======================================================================
Undistributed net investment income (accumulated
distributions in excess of net investment income)
included in net assets:
End of year .................................... $ (1,051,949) $ (942,423) $ 118,612 $ 74,974
=======================================================================
</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 a non-diversified, open-end investment company
consisting of two series (the Funds). The Funds' investment objectives are to
provide tax-free income.
The following summarizes the Funds' significant accounting policies.
a. SECURITY VALUATION
Tax-free bonds generally trade in the over-the-counter market and are valued
within the range of the latest quoted bid and asked prices. In the absence of a
sale or reported bid and asked prices, information with respect to bond and note
transactions, quotations from bond dealers, market transactions in comparable
securities, and various relationships between securities are used to determine
the value of the security. The Trust may utilize a pricing service, bank or
broker/dealer experienced in such matters to perform any of the pricing
functions under procedures approved by the Board of Trustees. Securities for
which market quotations are not readily available are valued at fair value as
determined by management in accordance with procedures established by the Board
of Trustees.
b. INCOME TAXES
No provision has been made for income taxes because each Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and
distribute 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 February 1, 2000, Franklin California High Yield Municipal Fund began
offering a new class of shares, Class B. Each class of shares differs by its
initial sales load, distribution fees, voting rights on matters affecting a
single class and its exchange privilege.
<TABLE>
<CAPTION>
CLASS A CLASS A, CLASS B & CLASS C
----------------------------------------------------------------------------------------
<S> <C>
Franklin Tennessee Municipal Bond Fund Franklin California High Yield Municipal Fund
</TABLE>
At May 31, 2000, there were an unlimited number of shares authorized ($.01 par
value). Transactions in the Funds' shares were as follows:
<TABLE>
<CAPTION>
FRANKLIN CALIFORNIA FRANKLIN TENNESSEE
HIGH YIELD MUNICIPAL FUND MUNICIPAL BOND FUND
--------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A SHARES:
Year ended May 31, 2000
Shares sold .................................... 20,040,573 $ 200,317,519 1,372,417 $ 14,407,901
Shares issued in reinvestment of distributions . 1,257,061 12,378,477 196,031 2,028,944
Shares redeemed ................................ (27,591,130) (271,320,609) (2,119,063) (21,922,127)
--------------------------------------------------------------------
Net decrease ..................................... (6,293,496) $ (58,624,613) (550,615) $ (5,485,282)
====================================================================
Year ended May 31, 1999
Shares sold .................................... 27,772,926 $ 298,610,959 3,411,015 $ 38,679,224
Shares issued in reinvestment of distributions . 1,020,987 10,979,213 142,474 1,615,863
Shares redeemed ................................ (12,429,134) (133,814,779) (591,080) (6,695,016)
--------------------------------------------------------------------
Net increase ..................................... 16,364,779 $ 175,775,393 2,962,409 $ 33,600,071
====================================================================
CLASS B SHARES:
Year ended May 31, 2000
Shares sold .................................... 100,238 $ 959,709
Shares issued in reinvestment of distributions . 162 1,545
Shares redeemed ................................ (15,655) (148,719)
-------------------------------
Net increase ..................................... 84,745 $ 812,535
===============================
CLASS C SHARES:
Year ended May 31, 2000
Shares sold .................................... 2,200,795 $ 21,956,431
Shares issued in reinvestment of distributions . 192,728 1,897,992
Shares redeemed ................................ (2,968,740) (29,112,337)
-------------------------------
Net decrease ..................................... (575,217) $ (5,257,914)
===============================
CLASS C SHARES:
Year ended May 31, 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
===============================
</TABLE>
FRANKLIN MUNICIPAL SECURITIES TRUST
Notes to Financial Statements (continued)
3. TRANSACTIONS WITH AFFILIATES
Certain officers and trustees of the Funds are also officers or directors of
Franklin/Templeton Distributors, Inc. (Distributors), Franklin Advisers, Inc.
(Advisers), Franklin/Templeton Investor Services, Inc. (Investor Services), and
Franklin Templeton Services, Inc. (FT Services), the Fund's principal
underwriter, investment manager, transfer agent, and administrative manager,
respectively.
The Funds pay an investment management fee to Advisers based on the average
daily net assets of the Funds as follows:
ANNUALIZED
FEE RATE 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, as noted in the Statement
of Operations.
The Franklin Tennessee Municipal Bond Fund reimburses Distributors up to .15%
per year of the Fund's average daily assets, and the Franklin California High
Yield Municipal Fund reimburses Distributors up to .15%, .65% and .65% per year
of the average daily net assets of Class A, Class B, and Class C, respectively,
for costs incurred in marketing the Fund's shares.
Distributors received (paid) net commissions on sales of the Funds shares, and
received contingent deferred sales charges for the year as follows:
FRANKLIN FRANKLIN
CALIFORNIA TENNESSEE
HIGH YIELD MUNICIPAL
MUNICIPAL FUND BOND FUND
-----------------------------
Net commissions received (paid) ....... $(353,717) $ 14,518
Contingent deferred sales charges ..... $ 128,818 $ --
The Funds paid transfer agent fees of $216,075, of which $158,983 were paid to
Investor Services.
Included in professional fees are legal fees of $1,252 that were paid to a law
firm in which a partner is an officer of the Funds.
FRANKLIN MUNICIPAL SECURITIES TRUST
Notes to Financial Statements (continued)
4. INCOME TAXES
At May 31, 2000, the Funds had tax basis capital losses which may be carried
over to offset future capital gains. Such losses expire as follows:
FRANKLIN FRANKLIN
CALIFORNIA TENNESSEE
HIGH YIELD MUNICIPAL
MUNICIPAL FUND BOND FUND
----------------------------
Capital loss carryovers expiring in:
2003 ............................. $ 1,416,838 $ --
2004 ............................. 4,508 --
2005 ............................. 390,400 --
2008 ............................. 8,364,686 543,762
----------------------------
$10,176,432 $ 543,762
============================
At May 31, 2000, the Franklin California High Yield Municipal Bond Fund and the
Franklin Tennessee Municipal Bond Fund have deferred capital losses occurring
subsequent to October 31, 1999 of $29,506,231 and $1,646,103, respectively. For
tax purposes, such losses will be reflected in the year ended May 31, 2001.
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of defaulted securities.
Distributions of income to shareholders may not equal net investment income due
to differing treatments of dividend distributions for book and tax purposes.
At May 31, 2000, the net unrealized depreciation based on the cost of
investments for income tax purposes was as follows:
FRANKLIN FRANKLIN
CALIFORNIA TENNESSEE
HIGH YIELD MUNICIPAL
MUNICIPAL FUND BOND FUND
-------------------------------
Investments at cost ................ $548,783,183 $68,154,394
===============================
Unrealized appreciation ............ $ 9,759,377 $ 432,874
Unrealized depreciation ............ (25,437,614) (4,917,134)
-------------------------------
Net unrealized depreciation ........ $(15,678,237) $(4,484,260)
-------------------------------
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, 2000 were as follows:
FRANKLIN FRANKLIN
CALIFORNIA TENNESSEE
HIGH YIELD MUNICIPAL
MUNICIPAL FUND BOND FUND
------------------------------
Purchases ....................... $279,035,326 $20,435,947
Sales ........................... $346,423,209 $26,103,702
6. CREDIT RISK AND DEFAULTED SECURITIES
The California High Yield Municipal Bond Fund and Franklin Tennessee Municipal
Bond Fund have 37.3% and .8%, respectively, of their 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, 2000, the
Franklin California High Yield Municipal Fund and the Franklin Tennessee
Municipal Bond Fund held defaulted securities with a value aggregating
$9,500,000 and $175,000, representing 1.8% and .3%, respectively, of the funds'
net assets. For information as to specific securities, see the accompanying
Statement of Investments.
For financial reporting purposes, the Funds discontinue accruing income on
defaulted bonds and provide estimates 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 of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of each of the funds constituting the
Franklin Municipal Securities Trust, (hereafter referred to as the "Funds") at
May 31, 2000, 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, 2000 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
San Francisco, California
June 30, 2000
FRANKLIN MUNICIPAL SECURITIES TRUST
Tax Designation
Under Section 852(b)(5)(A) of the Internal Revenue Code, the Funds hereby
designate 100% of the distributions paid from net investment income as
exempt-interest dividends for the fiscal year ended May 31, 2000.
