SHAREHOLDER LETTER
Dear Shareholder:
This semiannual report for Franklin Municipal Securities Trust covers the period
ended November 30, 1999.
During the six months under review, U.S. bond markets continued to experience
challenging times. The yield on the benchmark 30-year Treasury bond steadily
increased, from 5.83% on May 31, 1999, to 6.29% on November 30, 1999 -- reaching
a high of 6.38% on October 26, 1999. Concerned about domestic inflationary
tendencies, the Federal Open Market Committee raised the federal funds target
rate from 4.75% to 5.50% in three incremental steps during the reporting period.
The economy's direction and its effect on inflationary pressures will contribute
to the level of volatility that impacts bond markets in the near future. During
the period under review, many investors reacted swiftly to new releases of
economic data or Federal Reserve Board announcements, and in many instances the
market overcorrected. Investors with short-term investment horizons may view
such instability as unfavorable. However, we prefer to take a long-term approach
toward investing, and we find that recent market fluctuations afforded us
opportunities not only to increase the funds' income-earning potential, but also
to enhance the portfolios' overall structure.
CONTENTS
<TABLE>
<S> <C>
Shareholder Letter ..... 1
Special Feature:
Uncovering Tax-Free
Opportunities .......... 4
Fund Reports
Franklin California High
Yield Municipal Fund ... 9
Franklin Tennessee
Municipal Bond Fund .... 16
Municipal Bond Ratings . 20
Financial Highlights &
Statement of Investments 23
Financial Statements ... 36
Notes to
Financial Statements ... 40
</TABLE>
[PYRAMID GRAPH]
<PAGE>
WHAT DOES "TAXABLE EQUIVALENT" MEAN FOR YOU?
For yield and distribution rate, the taxable equivalent is the amount a taxable
investment would have to earn to match a tax-free investment such as municipal
bonds(2). You can find your fund's taxable equivalent distribution rate and
yield in the Performance Summary that follows your fund's report.
If the interest-rate outlook stabilizes and inflationary concerns diminish, we
expect the bond markets to become less volatile and municipal bonds to perform
well. The yield ratio for the Bond Buyer Municipal Bond Index versus the 30-year
Treasury bond was approximately 97% at the end of the reporting period,
considerably higher than the historical average of 89%, which means municipal
bonds are relatively inexpensive.(1)
Municipal bond funds continue to be an attractive investment for those investors
seeking tax-free income as well as providing an opportunity to diversify risk in
their portfolios. Generally, a taxable investment would need to offer a higher
yield than the taxable equivalent yield of a tax-free investment. We encourage
you to discuss your financial goals with an investment representative. Mutual
funds offer a level of diversification that is difficult for individual
investors to achieve on their own. As always, we appreciate your support,
welcome your questions and look forward to serving your investment needs in the
years ahead.
(1) 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) For investors subject to the federal alternative minimum tax, a portion of
this income may be subject to such tax. Distributions of capital gains and of
ordinary income from accrued market discount, if any, are generally taxable.
Sincerely,
/s/ CB 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
UNCOVERING TAX-FREE OPPORTUNITIES
[circle with writing Special Feature]
[PICTURE OF RAFAEL COSTAS]
Rafael Costas, Senior Vice President and Co-Director of Franklin's Municipal
Bond Department, discusses how research is an integral part of Franklin's
tax-free income funds' success.
Q: Could you provide an overview of Franklin's research department?
RAFAEL COSTAS: We have one of the industry's largest municipal research staffs,
allowing us to routinely analyze more than 2,000 debt issuers a year. The
research department analysts work closely with our portfolio managers, who rely
on these analysts when making buy and sell decisions. With a focus on in-depth
research and the discipline to buy when others are selling, we often are able to
find exciting opportunities at temporarily depressed prices. Generally, we
concentrate on investment-grade issues. Of course, for our high yield funds, we
also look for below investment-grade bonds that we feel offer appropriate
rewards for the increased risk.
Q: What are some advantages of Franklin's size and reputation?
RAFAEL: Today, Franklin is one of the nation's leading tax-free fund managers.
Our size, with approximately $50 billion of tax-free investments, often enables
us to purchase investments at advantageous prices, which in turn, can help keep
investment costs low. We pass on these savings to shareholders in the form of
higher tax-free yields. (1) In addition, our size often makes us a favorite of
new issuers, as many prefer to work with a minimum number of investors.
This page is not part of the shareholder report.
Q: What type of tax-free bonds do you favor?
RAFAEL: We typically look for investment-grade bonds, as we try to provide our
shareholders high, current income with a relatively low level of risk. Most of
our investment-grade tax-free bond funds are composed of a high percentage of
securities rated AAA or AA, the highest ratings bonds can receive from
independent credit rating agencies. (2) In addition, many of our purchases are
insured because of the prevalence of insurance in the municipal bond marketplace
in the past few years. Insured securities normally are rated AAA, further
improving the quality of our funds. For our high yield funds, we look for bonds
which may be out of favor but, in our view, still have solid fundamentals and
the potential to be upgraded. In fact, we devote much of our research efforts to
finding such bonds in the low investment-grade, high yield sectors.
Q: How do you research a bond?
RAFAEL: We emphasize detailed, high-quality research, which often enables us to
uncover attractive investments that others may have overlooked. When presented
with an opportunity, our analysts carefully consider such factors as the bond's
purpose, who will repay the bond, if the projections are reasonable, the payment
schedule and the issuer's credit history. We incorporate all of the numerical
findings in our internal, proprietary databases and spreadsheets created by our
analysts. With the processed information and analysis, we meet with our
portfolio managers to discuss the merits of each individual issue. The portfolio
manager's decision to buy a security will depend largely on our analysis of the
bond's credit quality and price. We continue to monitor our investments closely
after the purchase, looking for signs of potential problems as well as
additional opportunities.
(1.) For investors subject to the federal or state alternative minimum tax, a
portion of this income may be subject to such tax. Distributions of capital
gains and of ordinary income from accrued market discount, if any, are generally
taxable.
(2.) Ratings can change.
This page is not part of the shareholder report.
Q: Do you feel it is important to personally meet management and municipal
officials?
RAFAEL: Very much so. Each year Franklin's analysts and portfolio managers visit
hundreds of sites to garner an understanding that can be obtained only through
personal inspection. They meet face-to-face with the project's management and
municipal officials to discuss firsthand any potential problems. Our analysts
also can use these meetings to discover new opportunities, often before they are
widely known.
Q: Do issuers and investment bankers ever come to Franklin?
RAFAEL: Our sizable presence in the municipal bond market frequently means that
issuers and their bankers come to us with new issues. In a typical day, we may
receive between 50 and 100 calls from brokers offering new and secondary issues.
Approximately three times a week, investment bankers visit our offices, usually
as part of an issue's road show. We view these as excellent opportunities not
only to buy issues at favorable prices, but also to propose changes to the
issue, enhancing its quality and appeal to our distinct standards.
Municipal research analyst Molly Butler discusses a
bond issue with portfolio manager Stella Wong.
[Picture of Molly Butler & Stella Wong]
This page is not part of the shareholder report.
Q: How can Franklin's research influence the portfolio managers' investment
decisions?
RAFAEL: Our extensive research allows us to use a contrarian approach
to investing, because we firmly believe that near-term volatility can create
opportunities for greater long-term yields. For example, when Moody's, Standard
& Poor's or Fitch, three independent credit rating agencies, downgrade a bond,
many investors sell the issue, sometimes reducing prices to what we believe are
attractive levels. As we evaluate our investments based on our internal
assessments, we can use these valuable opportunities to purchase what we believe
are high-quality issues at temporarily depressed prices.
External events can also lead to situations where bonds become undervalued. Over
the past few years, for example, Medicare reform negatively affected the
hospital bond sector, even for those hospitals in strong financial shape. As
many hospitals' credit profiles weakened, we were able to find value selectively
through our analysts' expertise. Seeking to take advantage of this, we
recommended such bonds to our portfolio managers who purchased them at a time
when the market seemed to be shunning these issues.
This page is not part of the shareholder report. 7
Q: Could you provide an example of a successful outcome of your research?
RAFAEL: Sure. A perfect example is Tucson Electric Power (TEP). It issued $579
million in tax-exempt debt in 1997-98. However, the utility had a long, troubled
history and its debt was rated below investment grade. So, Molly Butler, our
electric utility analyst, and I flew to Tucson and spent an entire day with
TEP's top executives and division heads. We discussed their history, current
position and future plans as well as challenged and questioned many of their
projections and assumptions. At the end of the day, we were satisfied that their
management team had a clear vision and a realistic plan for the future.
Q: How is TEP doing today?
RAFAEL: Since then, the rating agencies have raised TEP's credit rating and the
bonds have seen a significant increase in value. Of course, the ratings can
change again in the future. However, the bonds are still offering above-market
yields for our shareholders, because we were able to purchase the securities
when they were unpopular. We have an excellent relationship with management and
they often call Ms. Butler to discuss the latest releases of information.
THANK YOU, RAFAEL.
This page is not part of the shareholder report.
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 six-month review period marked California's sixth consecutive year of
economic expansion and fifth straight year in which the state's economic growth
and job creation exceeded the national average. The state realized this growth
despite the Asian recession's negative effect on exports over the last two
years, as services, construction and tourism sector growth made up for
Asia-related declines in high technology employment.(2)
California's prominent Internet, multimedia and biotechnology industries
highlight the trend toward a knowledge-based services economy, where the state
is home to one in five computer software jobs in the nation. The motion picture
and related video, cable and satellite programming industries, as well as the
travel and tourism industries, also contributed to the service sector's
strength.(3)
CREDIT QUALITY BREAKDOWN*
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND BASED ON TOTAL LONG-TERM
INVESTMENTS 11/30/99
[2D pie chart]
<TABLE>
<S> <C>
AAA- 9.7%
AA- 4.6%
A- 11.4%
BBB- 47.9%
Below Investment Grade- 26.4%
</TABLE>
*Quality breakdown may include internal ratings for bonds not rated by an
independent rating agency.
(1.) The fund may invest as much as 100% of its assets in bonds that pay
interest subject to the federal alternative minimum tax. All or a significant
portion of the income on these obligations may be subject to such tax.
Distributions of capital gains and of ordinary income from accrued market
discount, if any, are generally taxable. In general, an investor is paid a
higher yield to assume a greater degree of risk.
(2.) Source: Moody's Investors Service, 10/15/99.
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 25 of
this report.
PORTFOLIO BREAKDOWN
Franklin California
High Yield Municipal Fund
11/30/99
<TABLE>
<CAPTION>
% OF TOTAL
LONG-TERM
SECTOR INVESTMENTS
- ---------------------------------
<S> <C>
Tax-Supported 41.7%
Transportation 15.1%
Hospital &
Health Care 13.2%
Prerefunded 6.8%
Utilities 6.1%
Subject to Government
Appropriation 5.9%
Other Revenue 3.4%
Corporate-Backed 2.8%
Housing 2.4%
Higher Education 2.2%
General Obligation 0.4%
</TABLE>
The state's diversified and growing economy, as well as its improved fiscal
management, contributed to Moody's decision to upgrade the state's debt to Aa3
on October 15.(4) This marked the first time in eight years that Standard &
Poor's, Moody's Investors Service and Fitch IBCA Inc., three independent credit
rating agencies, have viewed California's credit as double-A. California ended
fiscal 1999 with $9.6 billion in available resources, due to general and special
fund surpluses, the largest amount the state has had in over two decades. These
sizable balances, which should cushion the negative impacts of any future
recessions, and projections for further California economic growth, albeit at a
slower rate than that of the last two years, underlie the state's rosy credit
outlook.(2)
PORTFOLIO NOTES
Generally rising interest rates during the six-month period under review
presented challenges for the municipal bond market, as bond prices fall when
interest rates rise. For the six months ended November 30, 1999, the 30-year
Treasury bond price fell 7.4%, and the Bond Buyer 40, a reasonable proxy for the
type of securities in the fund's portfolio, was off 10.1%. By comparison, your
fund's Class A share price, as measured by net asset value, declined only
7.17%.(5)
3. Source: California Trade and Commerce Agency, California Economic Review,
6/99.
4. This does not indicate Moody's rating of the fund.
5. Sources: Lehman Brothers; 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. The fund's investment return and share price
fluctuate with market conditions. Index is unmanaged and includes reinvested
dividends. One cannot invest directly in an index.
The portfolio's conservative buy-and-hold, income-oriented investment philosophy
contributed to its superior performance, relative to the entire fixed-income
market. The fund continued to hold a significant percentage of higher coupon
bonds from previous higher interest-rate periods. Over time, this strategy can
lower share price volatility and provide greater current income. Our
shareholders can thus benefit from this practice, not only for income and lower
volatility, but for tax efficiency and after-tax total return.
Franklin California High Yield Municipal Fund took advantage of the rising
interest-rate environment to improve its portfolio structure. Higher interest
rates enabled the fund to capture greater yields, improve call protection and
book tax losses. These losses can then be carried forward to help offset any
current or future taxable capital gains, possibly lowering shareholders' tax
liabilities.
With close to $17 billion in California municipal assets, Franklin Templeton's
significant presence in the state proved beneficial in finding and structuring
municipal bond issues to fit the portfolio's needs, as explained in the special
feature on page 4. Furthermore, the fund was able to take advantage of strong
retail demand in the resale market to help maintain fund stability.
The Roseville Highland Reserve Community Facilities District was one recent
purchase. Highland Reserve is a mixed-use development project with 1,770 single
and multi-family residential units alongside a 168-acre retail and commercial
site near Sacramento.
DIVIDEND DISTRIBUTIONS*
Franklin California High Yield Municipal Fund
6/1/99 - 11/30/99
<TABLE>
<CAPTION>
DIVIDEND PER SHARE
-------------------------
MONTH CLASS A CLASS C
- ----------------------------------------------------
<S> <C> <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
- ----------------------------------------------------
TOTAL 27.90 CENTS 24.96 CENTS
</TABLE>
*Assumes shares were purchased and held for the entire accrual period. Since
dividends accrue daily, your actual distributions will vary depending on the
date you purchased your shares and any account activity during the month. Income
distributions include all accrued income earned by the fund during the
reporting period.
The project benefits from a superior location along Highway 65 and across the
freeway from the new Galleria Mall. The retail demand expected from the Galleria
Mall, as well as a need for available residential lots in the growing Roseville
market, should bode well for this project.
The reporting period comes near the close of two years with very large municipal
issuance. In 1998, new supply nationally reached a near-record $286 billion,
while 1999 issuance followed at a solid pace, possibly reaching $230 billion by
year-end. Supply should stabilize looking forward, as the higher interest-rate
environment significantly reduces refunding opportunities. Diminishing
expectations for primary and secondary bond issuance should result in continued
solid demand for institutional and retail California municipal bonds. With the
California municipal bond-to-Treasury yield ratio above 92% at the reporting
period's end, we believe the fund is well-positioned to perform favorably in the
future.
This discussion reflects our views, opinions and portfolio holdings as of
November 30, 1999, the end of the reporting period. 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 (formerly Class I): Subject to the current, maximum 4.25% initial sales
charge. Prior to July 1, 1994, fund shares were offered at a lower initial sales
charge; thus actual total returns may differ.*
CLASS C (formerly Class II): Subject to 1% initial sales charge and 1%
contingent deferred sales charge for shares redeemed within 18 months of
investment. These shares have higher annual fees and expenses than Class A
shares.*
*The fund's manager agreed in advance to waive a portion of its management fees,
which reduces operating expenses and increases distribution rate, total return
and yield to shareholders (see Additional Performance). Without this waiver, the
fund's distribution rate and total return would have been lower, and yield for
the period would have been 5.34% and 4.97% for Classes A and C respectively. The
fee waiver may be discontinued at any time upon notice to the fund's Board of
Trustees.
SIX-MONTH PERFORMANCE SUMMARY
AS OF 11/30/99
Six-month 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.
<TABLE>
<S> <C> <C>
CLASS A
Six-Month Total Return -4.53%
Net Asset Value (NAV) (11/30/99) $9.84 (5/31/99) $10.60
Change in NAV -$0.76
Distributions (6/1/99-11/30/99) Dividend Income $0.2790
CLASS C
Six-Month Total Return -4.80%
Net Asset Value (NAV) (11/30/99) $9.87 (5/31/99) $10.63
Change in NAV -$0.76
Distributions (6/1/99-11/30/99) Dividend Income $0.2496
</TABLE>
Past performance does not guarantee future results.
ADDITIONAL PERFORMANCE
AS OF QUARTER ENDED 12/31/99
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR 5-YEAR (5/3/93)
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) -6.68% +41.33% +41.87%
Average Annual Total Return(2) -10.65% +6.23% +4.70%
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS C 1-YEAR 3-YEAR (5/1/96)
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) -7.10% +10.25% +18.26%
Average Annual Total Return(2) -8.91% +2.97% +4.39%
</TABLE>
AS OF 11/30/99
<TABLE>
<CAPTION>
SHARE CLASS A C
- --------------------------------------------------------------------
<S> <C> <C>
Distribution Rate(3) 5.43% 5.10%
Taxable Equivalent Distribution Rate(4) 9.91% 9.31%
30-Day Standardized Yield(5) 5.49% 5.12%
Taxable Equivalent Yield(4) 10.02% 9.35%
</TABLE>
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the current, applicable,
maximum sales charge(s) for that class.
3. Distribution rate is based on an annualization of the respective class's
current monthly dividend and the maximum offering price per share on November
30, 1999.
4. Taxable equivalent distribution rate and yield assume the 1999 maximum
combined federal and California state personal income tax bracket of 45.2%,
based on the federal income tax rate of 39.6%.
5. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended November 30, 1999.
Bond prices, and thus the fund's share price, generally move in the opposite
direction from interest rates. Since markets can go down as well as up,
investment return and principal value will fluctuate with market conditions, and
you may have a gain or loss when you sell your shares.
For updated performance figures, see "Prices and Performance" on the Internet at
www.franklintempleton.com, or call Franklin Templeton at 1-800/342-5236.
Past performance does not guarantee future results.
FRANKLIN TENNESSEE
MUNICIPAL BOND FUND
CREDIT QUALITY BREAKDOWN*
Franklin Tennessee Municipal Bond Fund
Based on Total Long-Term Investments
11/30/99
[2d pie chart]
<TABLE>
<S> <C>
AAA - 48.4%
AA - 39.4%
A - 4.5%
BBB - 7.0%
Below Investment Grade - 0.7%
</TABLE>
*Quality breakdown may include internal ratings for bonds not rated by an
independent rating agency.
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(2)
Tennessee's economy registered steady, though moderate, growth during the
six-month reporting period. The state's slower growth rate, compared to the
national average, resulted in part from cutbacks in the apparel and textile
industries, as well as a dramatic slowdown in service industry employment
growth. Although cyclical, the automobile industry has come to play a greater
role in the state's manufacturing employment, with companies such as Peterbilt,
Nissan and Saturn building plants in Tennessee.
On a positive note, the state's solid fiscal management places it well below the
national average for debt levels. The state's limited borrowing and
pay-as-you-go financing contributed to a debt-to-income ratio under the median
for the 50 states. However, Tennessee's constitutional balanced budget
requirement will necessitate tax reform in the near future. One-time revenues
closed the gap to balance the fiscal 2000 budget, while the state projects a
$382 million deficit for the fiscal 2001 budget. To address this issue, the
state legislature held a November session on tax reform.
(1) The fund may invest as much as 100% of its assets in bonds that pay
interest subject to the federal alternative minimum tax. All or a significant
portion of the income on these obligations may be subject to such tax.
Distributions of capital gains and of ordinary income from accrued market
discount, if any, are generally taxable.
(2) Source: Moody's Investors Service, 10/25/99.
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 32 of
this report.
Low business costs, affordable housing and further industrial diversification
should bolster Tennessee's economy going forward. Meanwhile, the state's
balanced budget requirement and possible tax reform should address the projected
fiscal 2001 budgetary deficit, allowing the state to maintain its excellent
credit status.
PORTFOLIO NOTES
Generally rising interest rates during the six-month period under review
presented challenges for the municipal bond market, as bond prices fall when
interest rates rise. For the six months ended November 30, 1999, the 30-year
Treasury bond price fell 7.4%, and the Bond Buyer 40, a reasonable proxy for the
type of securities in the fund's portfolio, was off 10.1%. By comparison, your
fund's share price, as measured by net asset value, declined 7.53%.(3)
Franklin Tennessee Municipal Bond Fund took advantage of rising interest rates
to book tax losses and reinvest the proceeds at higher yields. These losses can
be carried forward and used to help offset current or future capital gains and
reduce our shareholders' tax liabilities. In this process, we sold Shelby County
Public Improvement and School General Obligation, Harpeth Valley Utilities
District Davidson and Williamson Counties Revenue, and Hallsdale-Powell Utility
District of Knox County Water and Sewer Revenue bonds during the reporting
period.
PORTFOLIO BREAKDOWN
Franklin Tennessee
Municipal Bond Fund
11/30/99
<TABLE>
<CAPTION>
% OF TOTAL
LONG-TERM
SECTOR INVESTMENTS
- -------------------------------------
<S> <C>
General Obligation 24.3%
Utilities 16.7%
Hospital & Health Care 14.5%
Housing 10.8%
Higher Education 8.2%
Subject to Government
Appropriation 6.6%
Prerefunded 6.1%
Transportation 5.9%
Corporate-Backed 5.4%
Tax-Supported 1.3%
Other Revenue 0.2%
</TABLE>
(3) Sources: Lehman Brothers; 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. The fund's investment return and share price
fluctuate with market conditions. Index is unmanaged and includes reinvested
dividends. One cannot invest directly in an index.
DIVIDEND DISTRIBUTIONS*
Franklin Tennessee
Municipal Bond Fund - Class A
6/1/99 - 11/30/99
<TABLE>
<CAPTION>
DIVIDEND
MONTH PER SHARE
- ------------------------
<S> <C>
June 4.4 cents
July 4.4 cents
August 4.4 cents
September 4.5 cents
October 4.5 cents
November 4.5 cents
- ------------------------
TOTAL 26.7 CENTS
</TABLE>
*Assumes shares were purchased and held for the entire accrual period. Since
dividends accrue daily, your actual distributions will vary depending on the
date you purchased your shares and any account activity during the month. Income
distributions include all accrued income earned by the fund during the reporting
period.
In addition to promoting tax efficiency, the reporting period's rising interest
rates resulted in increased opportunities for the fund to enhance its structure
and current, tax-free income. As a result, we were able to increase its monthly
dividend from 4.4 to 4.5 cents in September. In our effort to provide
shareholders with a steady stream of long-term income, we sought bonds with good
call protection. Portfolio additions during the reporting period included
Cleveland Public Improvement General Obligation, West Carroll Special School
District, Memphis-Shelby County Airport Authority Airport Revenue and Tennessee
Housing Development Agency bonds, all of which have at least ten years' call
protection.
These portfolio additions should play a pivotal role in protecting the fund's
long-term income-earning potential. At the same time, they maintained broad
sector diversification, helping reduce the fund's exposure to risk and
volatility that may affect any one sector.
Tennessee's steady economic growth and low debt burden, combined with the
growing need for new infrastructure such as highways, schools and affordable
housing, should sustain the demand for new borrowing. Taking these factors into
consideration, we anticipate a positive future for the state's municipal bond
supply.
This discussion reflects our views, opinions and portfolio holdings as of
November 30, 1999, the end of the reporting period. 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.
SIX-MONTH PERFORMANCE SUMMARY
AS OF 11/30/99
Six-month 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.
<TABLE>
<CAPTION>
CLASS A
<S> <C> <C>
Six-Month Total Return -5.12%
Net Asset Value (NAV) (11/30/99) $10.32 (5/31/99) $11.16
Change in NAV -$0.84
Distributions (6/1/99-11/30/99) Dividend Income $0.267
</TABLE>
ADDITIONAL PERFORMANCE
AS OF QUARTER ENDED 12/31/99
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR 5-YEAR (5/10/94)
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) -6.40% +37.07% +35.41%
Average Annual Total Return(2) -10.41% +5.59% +4.72%
</TABLE>
AS OF 11/30/99
<TABLE>
<CAPTION>
SHARE CLASS A
- -------------------------------------------------------
<S> <C>
Distribution Rate(3) 5.12%
Taxable Equivalent Distribution Rate(4) 9.02%
30-Day Standardized Yield(5) 5.27%
Taxable Equivalent Yield(4) 9.28%
</TABLE>
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" on the Internet at
www.franklintempleton.com, or call Franklin Templeton at 1-800/342-5236.
Franklin Tennessee Municipal Bond Fund
CLASS A (formerly Class I): Subject to the maximum 4.25% initial sales charge.
The fund's manager agreed in advance to waive a portion of its management fees,
which reduces operating expenses and increases distribution rate, total return
and yield to shareholders (see Additional Performance). Without this waiver, the
fund's distribution rate and total return would have been lower, and yield for
the period would have been 4.88%. The fee waiver may be discontinued at any time
upon notice to the fund's Board of Trustees.
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the applicable, maximum
sales charge.
3. Distribution rate is based on an annualization of the current 4.6 cent per
share monthly dividend and the maximum offering price of $10.78 on November 30,
1999.
4. Taxable equivalent distribution rate and yield assume the 1999 maximum
combined federal and Tennessee state personal income tax bracket of 43.2%, based
on the federal income tax rate of 39.6%.
5. Yield, calculated as required by the SEC, is based on the earnings of the
fund's portfolio for the 30 days ended November 30, 1999.
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: Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds likely will have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C: Reserved for income bonds on which no interest is being paid.
D: Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
FRANKLIN MUNICIPAL SECURITIES TRUST
Financial Highlights
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED MAY 31,
NOVEMBER 30, 1999 ------------------------------------------------------
(UNAUDITED)(3) 1999 1998 1997 1996 1995
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .......... $ 10.60 $ 10.65 $ 10.10 $ 9.81 $ 9.93 $ 9.73
--------------------------------------------------------------------------
Income from investment operations:
Net investment income ........................ .28 .57 .62 .63 .64 .66
Net realized and unrealized gains (losses) ... (.76) (.04) .55 .29 (.10) .18
--------------------------------------------------------------------------
Total from investment operations .............. (.48) .53 1.17 .92 .54 .84
--------------------------------------------------------------------------
Less distributions from:
Net investment income ........................ (.28)(5) (.57) (.62) (.63)(4) (.66) (.64)
In excess of net investment income ........... -- (.01) -- -- -- --
--------------------------------------------------------------------------
Total distributions ........................... (.28) (.58) (.62) (.63) (.66) (.64)
--------------------------------------------------------------------------
Net asset value, end of period ................ $ 9.84 $ 10.60 $ 10.65 $ 10.10 $ 9.81 $ 9.93
==========================================================================
Total return(1) ............................... (4.53%) 5.07% 11.78% 9.64% 5.55% 9.08%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ............. $545,161 $583,752 $412,211 $213,396 $118,313 $51,102
Ratio to average net assets:
Expenses ..................................... .48%(2) .44% .35% .34% .35% .20%
Expenses excluding waiver and payments
by affiliates ............................... .66%(2) .71% .69% .75% .81% .88%
Net investment income ........................ 5.48%(2) 5.22% 5.81% 6.24% 6.49% 6.89%
Portfolio turnover rate ....................... 23.83% 14.31% 37.75% 33.79% 28.02% 57.06%
</TABLE>
(1) Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(2) Annualized.
(3) Based on average shares outstanding.
(4) Includes distributions in excess of net investment income in the amount of
$.001.
(5) Includes distributions in excess of net investment income in the amount of
$.004.
FRANKLIN MUNICIPAL SECURITIES TRUST
Financial Highlights (continued)
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND (CONT.)
<TABLE>
<CAPTION>
CLASS C
-----------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED NOVEMBER 31,
NOVEMBER 30, 1999 ----------------------------------------
(UNAUDITED)(3) 1999 1998 1997 1996(6)
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ................ $ 10.63 $ 10.68 $ 10.12 $ 9.82 $ 9.82
----------------------------------------------------------
Income from investment operations:
Net investment income .............................. .25 .51 .56 .57 .05
Net realized and unrealized gains (losses) ......... (.77) (.04) .56 .30 --
----------------------------------------------------------
Total from investment operations .................... (.52) .47 1.12 .87 .05
----------------------------------------------------------
Less distributions from:
Net investment income .............................. (.25)(5) (.51) (.56) (.57)(4) (.05)
In excess on net investment income ................. -- (.01) -- --
----------------------------------------------------------
Total distributions ................................. (.25) (.52) (.56) (.57) (.05)
----------------------------------------------------------
Net asset value, end of period ...................... $ 9.86 $ 10.63 $ 10.68 $ 10.12 $ 9.82
==========================================================
Total return(1) ..................................... (4.80%) 4.48% 11.30% 9.08% .54%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ................... $74,236 $78,338 $40,363 $10,624 $ 212
Ratio to average net assets:
Expenses ........................................... 1.04%(2) .99% .90% .90% .91%(2)
Expenses excluding waiver and payments by affiliates 1.20%(2) 1.26% 1.24% 1.31% 1.81%(2)
Net investment income .............................. 4.94%(2) 4.66% 5.23% 5.68% 5.73%(2)
Portfolio turnover rate ............................. 23.83% 14.31% 37.75% 33.79% 28.02%
</TABLE>
(1) Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(2) Annualized
(3) Based on average shares outstanding.
(4) Includes distributions in excess of net investment income in the amount of
$.001.
(5) Includes distributions in excess of net investment income in the amount of
$.004.
(6) For the period May 1, 1996 (effective date) to May 31, 1996.
See notes to financial statements.
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, NOVEMBER 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENTS 102.1%
BONDS 94.4%
ABAG Finance Authority for Nonprofit Corps. COP, 6.15%, 1/01/22 .............. $ 1,465,000 $ 1,476,046
Adelanto Water Authority Revenue,
Parity Water Systems Acquisition Project, Series A, 7.50%, 9/01/28 ......... 3,410,000 3,573,475
Water Systems Acquisition Project, Sub. Lien, Series A, 7.50%, 9/01/28 ..... 2,000,000 2,095,880
Alameda CFD No. 2 Special Tax, 6.125%, 9/01/16 ............................... 1,240,000 1,206,359
Alameda PFA, Local Agency Revenue, Special Tax, Community Facility No. 1-A,
6.70%, 8/01/12 ............................................................. 3,400,000 3,473,406
7.00%, 8/01/19 ............................................................. 4,015,000 4,208,122
American Canyon Joint Powers Financing Authority Lease Revenue,
Civic/Recreation Facilities, 6.40%, 6/01/22 ................................ 1,000,000 1,006,960
Antioch PFA, Reassessment Revenue, sub. lien, Series B, 5.90%, 9/02/18 ....... 2,435,000 2,331,026
Avenal PFA Revenue, Refunding,
7.00%, 9/02/10 ............................................................. 1,520,000 1,539,030
7.25%, 9/02/27 ............................................................. 3,665,000 3,710,336
Beaumont Financing Authority Local Agency Revenue, Sewer Enterprise Project,
Refunding, Series A,
6.75%, 9/01/25 ............................................................. 5,000,000 4,975,100
Belmont RDA, Tax Allocation, Los Costanos Community Development, Series A,
6.80%, 8/01/24 ............................................................. 1,510,000 1,609,841
Benicia 1915 Act, Fleetside Industrial Park Assessment, Refunding, 7.00%,
9/02/14 .................................................................... 440,000 453,517
Blythe RDA, Project No.1, Tax Allocation, Refunding, 5.80%, 5/01/28 .......... 1,000,000 939,210
Brentwood Infrastructure Financing Authority Infrastructure Revenue, CIFP
94-1, Refunding, 5.625%, 9/02/29 ............................................ 6,265,000 5,480,183
Calexico Special Financing Authority Sales Tax Revenue, 7.40%,
1/01/00 .................................................................... 125,000 125,256
1/01/01 .................................................................... 165,000 166,817
1/01/02 .................................................................... 175,000 178,274
1/01/03 .................................................................... 220,000 225,304
1/01/04 .................................................................... 235,000 241,439
1/01/05 .................................................................... 285,000 293,199
1/01/06 .................................................................... 340,000 349,653
1/01/18 .................................................................... 7,680,000 7,898,035
California Educational Facilities Authority Revenue,
Heald College, 5.45%, 2/15/22 .............................................. 2,485,000 2,234,065
Heald College, 5.40%, 2/15/29 .............................................. 5,740,000 4,985,018
Pooled College and University Projects, Series B, 6.30%, 4/01/21 ........... 1,000,000 999,890
Student Loan Program, Series A, MBIA Insured, 6.00%, 3/01/16 ............... 4,000,000 4,044,800
California Health Facilities Financing Authority Revenue,
Catholic Healthcare West, Series A, 5.00%, 7/01/18 ......................... 10,000,000 8,062,500
Cedarknoll Inc., Series B, California Mortgage Insured, Pre-Refunded, 7.50%,
8/01/20 ................................................................... 1,800,000 1,878,174
Kaiser Permanente, Series A, 5.40%, 5/01/28 ................................ 15,000,000 13,152,600
Kaiser Permanente, Series B, 5.25%, 10/01/16 ............................... 3,250,000 2,980,803
Kaiser Permanente Medical Project, Series A, 5.55%, 8/15/25 ................ 3,750,000 3,376,313
Thessalonika Family, Series A, MBIA Insured, 6.20%, 12/01/15 ............... 990,000 1,023,997
California HFAR, Home Mortgage
MFHR, Home Mortgage, Series B, AMBAC Insured, 6.15%, 8/01/22 ............... 5,000,000 5,066,750
Series B, 7.125%, 2/01/26 .................................................. 660,000 663,023
Series F-1, 7.00%, 8/01/26 ................................................. 1,075,000 1,099,704
Series H, 6.25%, 8/01/27 ................................................... 2,430,000 2,449,124
California PCFA,
PCR, Pacific Gas and Electric Co., Series B, 5.85%, 12/01/23 ............... 5,000,000 4,930,250
PCR, Southern California Edison Co., Series B, 6.40%, 12/01/24 ............. 2,000,000 2,061,860
</TABLE>
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, NOVEMBER 30, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENTS (CONT.)
BONDS (CONT.)
California PCFA, (cont.)
Solid Waste Disposal Revenue, Browning-Ferris Industries Inc., 6.75%, 9/01/19 ..................... $ 7,000,000 $ 6,849,850
(a)Solid Waste Disposal Revenue, Keller Canyon Landfill Co. Project, 6.875%, 11/01/27 ................ 9,100,000 8,927,737
California Special Districts Association Finance Corp. COP, Series V, 7.50%, 5/01/13 ................ 55,000 58,178
California State GO,
FGIC Insured, 6.00%, 8/01/19 ...................................................................... 30,000 30,374
FGIC Insured, Pre-Refunded, 6.00%, 8/01/19 ........................................................ 1,470,000 1,593,995
Veterans Bonds, Series BD, BE, and BF, 6.40%, 2/01/22 ............................................. 1,250,000 1,252,213
California State HFAR, Home Mortgage, Series L, MBIA Insured, 6.40%, 8/01/27 ........................ 2,790,000 2,841,615
California Statewide CDA,
COP, The Internext Group, 5.375%, 4/01/17 ......................................................... 6,000,000 5,281,080
COP, The Internext Group, 5.375%, 4/01/30 ......................................................... 16,800,000 14,020,272
Lease Revenue, Special Facilities, United Airlines, Los Angeles, 5.625%, 10/01/34 ................. 21,555,000 19,124,889
Lease Revenue, Special Facilities, United Airlines, Series A, 5.70%, 10/01/33 ..................... 1,320,000 1,185,954
California Statewide CDA Revenue, COP, CHFCLP Insured, Families First Inc., 7.25%, 12/01/22 ......... 1,800,000 1,964,214
Campbell RDA Tax Allocation, Central Campbell Redevelopment Project, Series A, 6.55%, 10/01/32 ...... 5,300,000 5,360,261
Capistrano USD, CFD, Special Tax No. 92-1, Pre-Refunded, 7.00%, 9/01/18 ............................. 1,000,000 1,108,330
Chula Vista 1915 Act, AD No. 97-2, 6.15%, 9/02/29 ................................................... 8,440,000 8,062,985
Clovis 1915 Act, Special Assessment, AD No. 98-1, 6.375%, 9/02/18 ................................... 1,585,000 1,510,790
Duarte COP, Series A, 5.25%, 4/01/31 ................................................................ 10,000,000 8,153,800
Duarte RDA, Tax Allocation,
Davis Addition Project Area, Refunding, 6.70%, 9/01/14 ............................................ 2,615,000 2,689,972
Davis Addition Project Area, Refunding, 6.90%, 9/01/18 ............................................ 4,120,000 4,237,049
Rancho Duarte Phase I Project Area, Pre-Refunded, 6.80%, 9/01/16 .................................. 780,000 892,281
El Dorado County Special Tax, Community Facilities District No 1992-1,
6.125%, 9/01/16 ................................................................................... 5,000,000 4,879,400
6.25%, 9/01/29 .................................................................................... 2,350,000 2,275,811
El Monte PFA,
Housing Set Aside Revenue, 5.75%, 6/01/28 ......................................................... 2,570,000 2,339,857
Tax Allocation Revenue, Multiple Redevelopment District No. 86-1, Series R, 5.75%, 6/01/28 ........ 6,215,000 5,658,447
Folsom Special Tax, CFD No. 11,
5.65%, 9/01/18 .................................................................................... 1,000,000 924,840
5.75%, 9/01/23 .................................................................................... 1,250,000 1,145,663
Fontana RDA, Tax Allocation, Jurupa Hills Redevelopment Project, Refunding, Series A, 5.60%, 10/01/27 1,600,000 1,434,496
Fontana Special Tax, CFD No. 12,
6.60%, 9/01/19 .................................................................................... 3,295,000 3,273,022
6.625%, 9/01/30 ................................................................................... 7,675,000 7,579,677
Fontana Special Tax,
CFD No. 2-B, Refunding, 5.70%, 9/01/12 ............................................................ 1,960,000 1,896,084
CFD No. 7, 6.125%, 9/01/28 ........................................................................ 1,280,000 1,217,741
Foothill/Eastern Corridor Agency Toll Road Revenue,
senior lien, Series A, Pre-Refunded, 6.50%, 1/01/32 ............................................... 5,500,000 6,100,435
senior lien, Series A, Pre-Refunded, 6.00%, 1/01/34 ............................................... 8,235,000 8,888,283
Garden Grove Housing Authority MFHR, Set-Aside Tax Increment, Series C, 6.70%, 7/01/24 .............. 6,375,000 6,449,460
Gateway Improvement Authority Revenue, Marin City CFD, Series A, Pre-Refunded, 7.75%, 9/01/25 ....... 2,500,000 2,900,175
Gateway Refinancing Authority Revenue, Refunding, Series A, 5.55%, 9/01/25 .......................... 4,000,000 3,564,040
</TABLE>
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, NOVEMBER 30, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENTS (CONT.)
BONDS (CONT.)
Granada Sanitation District 1915 Act, Sewage Treatment Facilities,
Financing District, Series A,
7.125%, 9/02/16 .......................................................................... $ 910,000 $ 932,741
7.25%, 9/02/22 ........................................................................... 935,000 962,994
Half Moon Bay COP, Sea Crest School, 6.75%, 7/01/30 ........................................ 3,945,000 3,869,729
Hawaiian Gardens RDA, Tax Allocation, Project No. 1, Refunding, 6.35%, 12/01/33 ............ 4,000,000 4,007,400
Hesperia PFA Revenue, Series B, 7.375%, 10/01/23 ........................................... 1,930,000 1,980,334
Hi Desert Memorial Health Care District Revenue, Refunding, 5.50%,
10/01/15 ................................................................................. 1,000,000 886,580
10/01/19 ................................................................................. 2,000,000 1,734,620
Huntington Beach PFA Revenue, Huntington Beach Redevelopment Projects,
Refunding, 7.00%, 8/01/24 ................................................................. 1,000,000 1,029,000
Imperial County Special Tax, CFD No. 98-1,
6.45%, 9/01/17 ........................................................................... 2,155,000 2,071,214
6.50%, 9/01/31 ........................................................................... 6,205,000 5,901,451
Indio RDAR, Housing Set Aside, Refunding, 5.375%, 8/15/22 .................................. 3,000,000 2,690,250
Irvine 1915 Act, AD No. 94-13, Group Two, 6.00%, 9/02/22 ................................... 1,000,000 953,440
Irvine Meadows Mobile Home Park Revenue, Series A, 5.70%,
3/01/18 .................................................................................. 2,300,000 2,175,156
3/01/28 .................................................................................. 3,000,000 2,648,970
Irwindale PFA Special Tax, CFD No. 1, Refunding, 6.00%, 11/01/20 ........................... 4,450,000 4,197,240
John C. Fremont Hospital District Health Facilities Revenue, 6.75%, 6/01/13 ................ 1,500,000 1,609,065
Lake Elsinore 1915 Act, AD No. 93-1, Series A, 7.90%, 9/02/24 .............................. 1,265,000 1,305,796
Lake Elsinore RDA, Special Tax, CFD No. 90-2, Series A, 6.05%, 10/01/24 .................... 5,000,000 4,586,300
Lake Elsinore School Financing Authority Revenue, Refunding, 6.125%, 9/01/19 ............... 1,000,000 986,930
Lancaster RDA, Tax Allocation, Residential Redevelopment Project, Sub. Lien,
Refunding, 6.65%, 9/01/27 ................................................................. 2,500,000 2,510,150
Lancaster RDA, Tax Allocation, Library Project, Sub. Lien, Refunding, 7.00%, 12/01/29 ...... 1,780,000 1,773,343
Lemon Grove School District COP, Vista La Mesa Elementary School Construction,
Pre-Refunded, 6.40%, 9/01/26 .............................................................. 2,000,000 2,145,220
Livermore Special Tax, Triad Center Community Facilities District 90-1, 6.50%, 9/01/25 ..... 5,215,000 4,952,686
Long Beach IDR, California State University Foundation, Refunding, Series A, 5.25%,
2/01/13 .................................................................................. 1,000,000 960,440
2/01/23 .................................................................................. 1,000,000 882,820
Long Beach Special Tax, CFD No. 2, 7.50%, 9/01/11 .......................................... 140,000 140,141
Los Angeles Harbor Department Revenue, Series B, 6.00%, 8/01/14 ............................ 3,500,000 3,630,480
Los Angeles MFR, Refunding, Series J-2C, 8.50%, 1/01/24 .................................... 1,150,000 1,151,300
Lynwood PFA Revenue, Water System Improvement Project, 6.50%, 6/01/21 ...................... 1,175,000 1,218,640
Lynwood PFA, Tax Allocation, Alameda Project Area, 6.30%, 9/01/24 .......................... 1,000,000 997,390
Lynwood PFA Lease Revenue,
6.25%, 9/01/22 ........................................................................... 1,080,000 1,073,390
6.30%, 9/01/29 ........................................................................... 2,680,000 2,654,781
Millbrae Elementary School District COP, Financing Project, Pre-Refunded, 6.90%, 3/01/22 ... 1,480,000 1,591,252
Modesto PFA Lease Revenue, John Thurman Field Renovation Project, 6.125%, 11/01/16 ......... 1,645,000 1,663,440
Monterey Park PFA Tax Allocation Revenue, Merged Redevelopment Project Area, 5.30%, 3/01/28 2,500,000 2,116,800
M-S-R Public Power Agency San Juan Project Revenue, Refunding, Series H, 5.90%, 7/01/20 .... 3,915,000 3,859,759
National City Community Development Commission MFHR, Park Villas Apartments,
Series A, GNMA Secured, 5.85%, 7/20/19 .................................................... 1,545,000 1,520,095
Newman RDA, Tax Allocation, Redevelopment and Housing Project No.1, 5.375%, 8/01/27 ........ 1,285,000 1,110,664
Northern Mariana Islands Commonwealth Ports Authority Airport Revenue, senior lien,
Series A, 6.25%, 3/15/28 .................................................................. 4,980,000 4,806,746
Northern Mariana Islands Commonwealth Ports Authority Seaport Revenue,
Series A, 6.85%, 3/15/28 .................................................................. 1,985,000 1,972,435
</TABLE>
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, NOVEMBER 30, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENTS (CONT.)
BONDS (CONT.)
Oakland Revenue, YMCA East Bay Project, Refunding, 7.10%, 6/01/10 ........................... $ 2,815,000 $ 3,003,295
Orinda 1915 Act, AD No. 94-1, Oak Springs, 8.25%, 9/02/19 ................................... 1,475,000 1,496,299
(b)Palmdale Special Tax CFD, No. 93-1 Ritter Ranch Project, Series A, 8.50%, 9/01/17 ........... 10,000,000 8,000,000
Perris PFA, Local Agency Revenue, Series B, 7.25%, 8/15/23 .................................. 500,000 511,070
Pittsburg 1915 Act, Infrastructure Financing Authority Reassessment Revenue,
Series A, 5.60%, 9/02/24 .................................................................. 500,000 444,930
Sub Series B, 6.00%, 9/02/24 .............................................................. 2,710,000 2,569,514
Pomona COP, General Fund Lease Finance, Series AB, 5.80%, 8/01/24 ........................... 2,275,000 2,109,244
Pomona RDA, Tax Allocation, Series Y,
5.50%, 5/01/32 ............................................................................ 4,380,000 3,892,550
Refunding-West Holt Avenue Redevelopment, 5.45%, 5/01/22 .................................. 2,360,000 2,123,339
Port of Redwood City Revenue,
5.40%, 6/01/19 ............................................................................ 800,000 715,696
5.125%, 6/01/30 ........................................................................... 3,200,000 2,663,264
Rancho Water District Special Tax Community Facilities 99-1 Area A, Series A, 6.70%, 9/01/30 2,250,000 2,243,880
Rancho Water District Special Tax Community Facilities 99-1 Area B, Series A, 6.70%, 9/01/30 2,630,000 2,609,302
Richmond Revenue, YMCA East Bay Project, Refunding, 7.25%, 6/01/17 .......................... 2,905,000 3,047,432
Riverside County CFD, Special Tax, senior lien, No. 87-5, Refunding, Series A, 7.00%, 9/01/13 7,335,000 7,483,680
Roseville Special Tax, CFD No. 1-Highland, 6.30%, 9/01/25 ................................... 10,000,000 9,811,600
Roseville Special Tax,
North Central CFD No. 1, 5.75%, 9/01/23 ................................................... 6,000,000 5,431,800
(a)Woodcreek West Community Facilities No. 1, 6.70%, 9/01/25 ................................ 3,000,000 2,977,770
Sacramento County Special Tax, CFD No. 1,
Laguna, 6.375%, 10/01/24 .................................................................. 2,370,000 2,255,197
Laguna, 6.40%, 10/01/25 ................................................................... 2,820,000 2,689,857
Refunding, 5.60%, 12/01/12 ................................................................ 1,515,000 1,445,083
Refunding, 5.70%, 12/01/20 ................................................................ 2,410,000 2,245,518
Refunding, 6.30%, 9/01/21 ................................................................. 1,575,000 1,558,274
Salinas COP, Capital Improvement Projects, Series A, 5.70%, 10/01/28 ........................ 2,665,000 2,443,485
Salinas Valley Solid Waste Authority Revenue,
5.75%, 8/01/18 ............................................................................ 500,000 471,585
5.80%, 8/01/27 ............................................................................ 1,100,000 1,005,554
San Bernardino Associated Communities Financing Authority COP, Granada Hills Health
Care, Refunding and Improvement, Series A, 6.90%, 5/01/27 .................................. 10,000,000 9,665,500
San Bernardino Joint Powers Financing Authority Lease Revenue, Department of
Transportation Lease, Series A, 5.50%, 12/01/20 ........................................... 4,000,000 3,808,800
San Clemente 1915 Act, AD No. 98-1, Refunding, 6.05%, 9/02/28 ............................... 3,250,000 3,105,050
San Diego County Educational Facilities Authority No. 1 Lease Revenue, 6.50%, 8/15/15 ....... 850,000 890,715
San Diego Special Tax, CFD No. 1, Series B, Pre-Refunded, 7.10%, 9/01/20 .................... 3,500,000 3,996,615
San Francisco City and County Airport Commission International Airport Revenue,
Issue 8A, Second Series, FGIC Insured, 6.25%, 5/01/20 ...................................... 1,570,000 1,613,301
San Francisco City and County Revenue, Irwin Memorial Blood Center, Series A, 6.80%, 12/01/21 800,000 837,152
San Joaquin Area Flood Control Agency 1915 Act, Flood Protection and
Restoration Assessment, FSA Insured, 6.00%, 9/02/14 ........................................ 800,000 825,496
San Joaquin Hills Transportation Corridor Agency Toll Road Revenue,
Refunding, Series A, 5.50%, 1/15/28 ....................................................... 23,200,000 21,454,432
senior lien, 5.00%, 1/01/33 ............................................................... 9,500,000 7,962,615
</TABLE>
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, NOVEMBER 30, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENTS (CONT.)
BONDS (CONT.)
San Joaquin Hills Transportation Corridor Agency Toll Road Revenue, (cont.)
senior lien, Pre-Refunded, 7.00%, 1/01/30 .............................................. $ 675,000 $ 739,240
senior lien, Pre-Refunded, 6.75%, 1/01/32 .............................................. 3,450,000 3,753,704
San Jose Financing Authority Revenue, Convention Center Project,
Refunding, Series C, 6.40%, 9/01/17 ..................................................... 5,000,000 5,211,100
San Luis Obispo COP, Vista Hospital System Inc., 6.45%, 7/01/29 .......................... 6,660,000 6,327,000
San Marcos Public Facilities Authority Revenue,
Refunding, 5.80%, 9/01/27 .............................................................. 3,000,000 2,749,290
Tax Increment Project Area-3-A, sub. lien, 6.00%, 8/01/31 .............................. 14,230,000 13,135,713
San Marcos RDA, Tax Allocation, Affordable Housing Project, Series A, 5.65%, 10/01/28 .... 3,000,000 2,712,600
San Mateo RDA, Tax Allocation, Merged Area, Series A, 5.50%,
8/01/17 ................................................................................ 1,330,000 1,259,444
8/01/22 ................................................................................ 4,820,000 4,422,736
San Pablo RDA, Tax Allocation, Sub. Lien, 10th Township, Series A, 5.65%, 12/01/23 ....... 1,330,000 1,233,030
San Ramon PFA, Tax Allocation Revenue,
Pre-Refunded, 6.90%, 2/01/24 ........................................................... 700,000 783,769
Refunding, 6.90%, 2/01/24 .............................................................. 800,000 849,688
Sand City RDA, Tax Allocation Revenue, Redevelopment Project, 6.00%, 11/01/26 ............ 3,900,000 3,715,101
Southern California Public Power Authority Transmission Project Revenue,
Southern Transmission, Refunding, 6.125%, 7/01/18 ....................................... 1,140,000 1,165,194
Stockton CFD No. 1, Special Tax, Mello Roos, Weston Ranch, Series A,
5.80%, 9/01/14 ......................................................................... 4,000,000 3,838,920
6.00%, 9/01/18 ......................................................................... 1,000,000 965,020
6.00%, 9/01/24 ......................................................................... 1,100,000 1,041,678
Stockton Health Facilities Revenue, Dameron Hospital Association,
Refunding, Series A, 5.70%, 12/01/14 .................................................... 2,300,000 2,182,309
Taft PFA, Lease Revenue, Community Correctional Facility Project, Series A, 6.05%, 1/01/17 3,235,000 3,237,038
Tracy COP, I-205 Corridor Improvement Project, Pre-Refunded, 7.00%, 10/01/27 ............. 1,200,000 1,282,656
Upland COP, Refunding, California Mortgage Insured, 5.50%, 6/01/21 ....................... 2,000,000 1,861,860
Vallejo COP, Marine World Foundation Project, Refunding, 7.40%, 2/01/28 .................. 9,345,000 9,937,473
Vallejo Hiddenbrooke ID No. 1 Revenue, 6.50%, 9/01/31 .................................... 14,830,000 14,289,297
Victor Valley UHSD, COP, Instructional Academy Project, MBIA Insured, 5.80%, 11/15/21 .... 1,000,000 996,270
Virgin Islands PFA Revenue, sub. lien, Fund Loan Notes, Refunding, Series E,
5.75%, 10/01/13 ........................................................................ 1,595,000 1,551,902
5.875%, 10/01/18 ....................................................................... 1,665,000 1,571,692
6.00%, 10/01/22 ........................................................................ 2,650,000 2,496,193
Vista Mobile Home Park Revenue, Estrella De Oro Mobile Home, 5.875%, 2/01/28 ............. 1,685,000 1,574,210
(a)West Sacramento Special Tax Community Facilities District No 10, 6.75%, 9/01/26 .......... 3,235,000 3,190,809
Western Placer Waste Management Authority Revenue, Refunding, 6.75%, 7/01/14 ............. 7,400,000 7,730,187
-----------
TOTAL BONDS (COST $604,454,933) .......................................................... 584,713,808
-----------
</TABLE>
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, NOVEMBER 30, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ZERO COUPON BONDS (7.7%)
(a)Duarte RDA Tax Allocation, Capital Appreciation, sub. lien,
Merged Redevelopment Project, 12/01/28 ...................................................... $30,795,000 $ 4,356,569
Foothill/Eastern Corridor Agency Toll Road Revenue,
Capital Appreciation, Refunding,
01/15/25 .................................................................................. 57,000,000 11,266,620
01/15/30 .................................................................................. 67,500,000 9,522,225
MBIA Insured, 01/15/40 .................................................................... 10,000,000 9,280,700
San Diego RDA, Capital Appreciation, Tax Allocation, Series B
09/01/15 .................................................................................. 6,810,000 2,390,855
09/01/16 .................................................................................. 1,500,000 486,405
09/01/19 .................................................................................. 1,800,000 462,690
09/01/20 .................................................................................. 1,800,000 429,336
09/01/21 .................................................................................. 1,800,000 399,006
09/01/22 .................................................................................. 1,900,000 391,248
09/01/23 .................................................................................. 1,900,000 361,665
09/01/24 .................................................................................. 1,900,000 337,250
09/01/25 .................................................................................. 1,900,000 315,286
09/01/26 .................................................................................. 1,900,000 293,265
09/01/27 .................................................................................. 1,900,000 273,486
09/01/10 .................................................................................. 3,770,000 1,902,003
09/01/28 .................................................................................. 1,900,000 255,018
San Joaquin Hills Transportation Corridor Agency Toll Road Revenue, junior lien, ETM, 1/01/28 19,150,000 3,602,115
Santa Monica-Malibu USD, GO, Capital Appreciation, FGIC Insured,8/01/23 ..................... 6,340,000 1,533,266
-------------
TOTAL ZERO COUPON BONDS (COST $51,828,684) .................................................. 47,859,008
-------------
TOTAL INVESTMENTS (COST $656,283,617) 102.1% ................................................ 632,572,816
OTHER ASSETS, LESS LIABILITIES (2.1%) ....................................................... (13,175,757)
-------------
NET ASSETS 100.0% ........................................................................... $ 619,397,059
-------------
</TABLE>
See Glossary of Terms on page 35.
(a) Sufficient collateral has been segregated for securities traded on a
when-issued or delayed delivery basis.
(b) See Note 6 regarding defaulted securities
See notes to financial statements.
FRANKLIN MUNICIPAL SECURITIES TRUST
Financial Highlights
FRANKLIN TENNESSEE MUNICIPAL BOND FUND
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED MAY 31,
NOVEMBER 30, 1999 ---------------------------------------------------
(UNAUDITED)(3) 1999 1998 1997 1996 1995
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ................ $ 11.16 $ 11.27 $ 10.71 $ 10.40 $ 10.53 $10.11
-----------------------------------------------------------------------
Income from investment operations:
Net investment income .............................. .28 .55 .57 .58 .56 .52
Net realized and unrealized gains (losses) ......... (.85) (.08) .56 .33 (.09) .35
-----------------------------------------------------------------------
Total from investment operations .................... (.57) .47 1.13 .91 .47 .87
-----------------------------------------------------------------------
Less distributions from:
Net investment income .............................. (.27) (.55) (.57) (.60) (.60) (.45)
Net realized gains ................................. -- (.03) -- -- -- --
-----------------------------------------------------------------------
Net asset value, end of period ...................... $ 10.32 $ 11.16 $ 11.27 $ 10.71 $ 10.40 $10.53
=======================================================================
Total return(1) ..................................... (5.12%) 4.19% 10.75% 8.95% 4.50% 8.97%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ................... $70,888 $77,117 $44,526 $26,708 $13,956 $5,986
Ratio to average net assets:
Expenses ........................................... 0.40%(2) .40% .40% .40% .33% .10%
Expenses excluding waiver and payments by affiliates 0.80%(2) .81% .81% .84% .91% .92%
Net investment income .............................. 5.22%(2) 4.88% 5.12% 5.51% 5.67% 6.02%
Portfolio turnover rate ............................. 16.48% 13.39% 37.67% 27.60% 27.23% 24.71%
</TABLE>
(1) Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
(2) Annualized
(3) Based on average shares outstanding.
See notes to financial statements.
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, NOVEMBER 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN TENNESSEE MUNICIPAL BOND FUND AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS 96.6%
Carroll County IDBR, Henry I. Siegel Co. Inc. Project, Refunding, 7.20%, 4/01/05 .................. $ 500,000 $ 504,325
Chattanooga Health Educational and Housing Facility Board Revenue, Catholic Health Initiatives,
Refunding, Series A, 5.00%, 12/01/18 ............................................................ 1,000,000 861,140
Series A, 5.00%, 12/01/28 ....................................................................... 1,000,000 819,840
Cleveland Public Improvement, GO, FGIC Insured, 5.25%, 6/01/24 .................................. 3,000,000 2,723,820
Cleveland Water and Sewer, GO, FGIC Insured, 5.375%, 9/01/28 ...................................... 1,000,000 916,050
Fayetteville and Lincoln IDBR, Hospital Facility Lease, AMBAC Insured, 5.30%, 5/01/28 ............. 4,000,000 3,645,400
Franklin IDB, MFHR, Landings Apartment Project, Refunding, Series A, FSA Insured, 6.00%,
10/01/26 ......................................................................................... 1,000,000 991,990
Hamilton County IDB, MFHR, Patten Towers Apartments, 7.125%, 2/01/09 .............................. 500,000 502,415
Hardeman County GO, FGIC Insured, 5.625%, 4/01/24 ................................................. 880,000 841,218
Harpeth Valley Utilities District Davidson and Williamson Counties Revenue, Utilities
Improvement, Series A, MBIA Insured, 5.00%, 9/01/28 .............................................. 3,540,000 3,061,852
Hollow Rock-Bruceton Special School District GO, FSA Insured, Pre-Refunded, 5.75%, 4/01/24 ........ 500,000 532,460
Humphreys County IDB, Solid Waste Disposal Revenue, Dupont Denemours and Co. Project,
6.70%, 5/01/24 ................................................................................... 800,000 858,488
Jackson GO, Refunding and Improvement, MBIA Insured, 5.125%, 3/01/16 .............................. 1,000,000 925,540
Johnson City GO,
Public Improvement, FSA Insured, Pre-Refunded, 5.90%, 6/01/12 ................................... 500,000 529,780
Solid Waste, AMBAC Insured, 5.80%, 5/01/09 ...................................................... 100,000 103,560
Johnson City Health and Educational Facilities Board Revenue, Pine Oaks Assisted Project, Series A,
GNMA Secured, 5.90%, 6/20/37 ..................................................................... 1,390,000 1,323,669
Johnson County Public Improvement GO, Series B, AMBAC Insured, Pre-Refunded, 6.70%, 5/01/20 ....... 100,000 110,258
Knox-Chapman Utility District, Knox County Water and Sewer Revenue, Refunding, MBIA Insured, 6.10%,
1/01/19 .......................................................................................... 100,000 103,059
Knox County First Utility District Water and Sewer Revenue, Refunding and Improvement, Series A,
MBIA Insured, 5.625%, 12/01/19 ................................................................... 1,000,000 978,290
Knox County Health, Educational and Housing Board Hospital Facilities Revenue,
Fort Sanders Alliance, Refunding, MBIA Insured, 5.75%, 1/01/14 .................................. 1,250,000 1,274,138
Mercy Health Systems, Refunding, Series B, AMBAC Insured, 5.875%, 9/01/15 ....................... 345,000 351,776
Knox County IDB, MFR, Waterford Apartments, Refunding, Series A, FHA Insured, 5.95%, 3/01/28 ...... 250,000 251,528
Knoxville Electric Revenue, Refunding and Improvement Systems, Series S, 5.10%, 7/01/24 ........... 1,500,000 1,329,300
Loudon County IDB, Solid Waste Disposal Revenue, Kimberly-Clark Corp. Project, 6.20%, 2/01/23 ..... 1,305,000 1,326,715
Macon County GO, FGIC Insured, Pre-Refunded, 5.90%, 9/01/13 ....................................... 150,000 160,500
Maury County IDB, PCR, Multi-Modal, Saturn Corp. Project, Refunding, 6.50%, 9/01/24 ............... 620,000 637,608
McKenzie High School District GO, FSA Insured, Pre-Refunded, 5.75%, 4/01/22 ....................... 500,000 532,460
Memphis Health, Educational and Housing Facility Board Mortgage Revenue,
Edgewater Terrace, Refunding, GNMA Secured, 7.375%, 1/20/27 ..................................... 150,000 160,577
MF River Trace II, Refunding, Series A, FNMA Secured, 6.45%, 4/01/26 ............................ 100,000 101,926
Memphis-Shelby County Airport Authority Airport Revenue, Series D, AMBAC Insured, 6.00%, 3/01/24 .. 2,500,000 2,474,525
Memphis-Shelby County Airport Authority Revenue, Refunding, MBIA Insured, 5.65%, 9/01/15 .......... 500,000 499,950
Memphis-Shelby County Airport Authority Special Facilities and Project Revenue, Federal
Express Corp., 6.75%, 9/01/12 .................................................................... 100,000 104,987
Metropolitan Government of Nashville and Davidson County Electric Revenue, Series A,
5.20%, 5/15/23 .................................................................................. 1,000,000 902,290
Pre-Refunded, 6.00%, 5/15/17 .................................................................... 200,000 210,658
Metropolitan Government of Nashville and Davidson County GO,
Public Improvements, 5.875%, 5/15/26 ............................................................ 1,000,000 996,630
Refunding, 5.125%, 5/15/25 ...................................................................... 5,500,000 4,902,095
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 .................. 150,000 167,320
Mortgage, Dandridge Towers, Refunding, Series A, 6.375%, 1/01/11 ................................ 500,000 507,715
</TABLE>
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, NOVEMBER 30, 1999 (UNAUDITED) (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 Health and Educational
Facilities Board Revenue, (cont.)
Multi-Modal Health Facility, Asset Guaranty, 5.50%, 5/01/23 ........................ $ 965,000 $ 884,297
The Vanderbilt University, Refunding, Series A, 5.375%, 7/01/18 .................... 700,000 661,087
The Vanderbilt University, Refunding, Series B, 5.00%, 10/01/28 .................... 2,750,000 2,371,463
Metropolitan Government of Nashville and Davidson County Sports Authority
Revenue, Stadium Public Improvement Project, AMBAC Insured, 5.875%, 7/01/21 ......... 1,775,000 1,769,515
Metropolitan Government of Nashville and Davidson County Water and Sewer Revenue,
Refunding, 5.50%, 1/01/16 ........................................................... 620,000 603,210
Metropolitan Nashville Airport Authority Revenue, Series C, FGIC Insured, 6.60%,
7/01/15 ............................................................................. 205,000 214,432
Milan Special School District GO, AMBAC Insured, Pre-Refunded, 6.625%, 4/01/11 ....... 180,000 196,950
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 2,460,900
Northern Mariana Islands Commonwealth Ports Authority Seaport Revenue, Series A,
6.85%, 3/15/28 ...................................................................... 295,000 293,133
Pigeon Forge Public Improvement, MBIA Insured, 5.90%, 6/01/09 ........................ 100,000 102,724
Puerto Rico Commonwealth GO,
Pre-Refunded, 6.50%, 7/01/23 ....................................................... 100,000 109,977
Public Improvement, Refunding, 5.75%, 7/01/17 ...................................... 750,000 752,153
Puerto Rico Commonwealth Highway and Transportation Authority Revenue, Series Y,
Pre-Refunded, 6.00%, 7/01/22 ........................................................ 500,000 542,805
Puerto Rico Electric Power Authority Revenue,
Series R, Pre-Refunded, 6.25%, 7/01/17 ............................................. 100,000 106,151
Series X, 5.50%, 7/01/25 ........................................................... 500,000 474,365
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 .................................. 200,000 210,120
Puerto Rico Port Authority Revenue, Special Facilities, American Airlines,
Series A, 6.25%, 6/01/26 ............................................................ 600,000 590,838
Shelby County GO, Public Improvement and School, Refunding, Series B, 5.00%, 6/01/24 . 3,000,000 2,631,420
Shelby County Health Educational and Housing Facilities Board Revenue, Ave Maria
Assisted Living Project, Series A, 5.50%, 12/01/31 .................................. 2,010,000 1,794,870
Shelby County School GO, Series B, Pre-Refunded, 6.00%, 3/01/16 ...................... 530,000 552,006
South Fulton IDBR, Tyson Foods Inc. Project, 6.40%, 10/01/20 ......................... 300,000 307,188
Sullivan County IDBR, Brandymill, Refunding, Series I-A, GNMA Secured, 6.35%,
7/20/27 ............................................................................. 350,000 359,709
Tennessee HDA,
Homeownership Program, 5.375%, 7/01/23 ............................................. 1,000,000 914,570
Homeownership Program, Issue 4A, 6.375%, 7/01/22 ................................... 800,000 810,216
Homeownership Program, Series 3, 5.85%, 7/01/23 .................................... 320,000 308,886
Homeownership Program, Series 3C, 6.00%, 1/01/20 ................................... 2,500,000 2,462,600
Mortgage Finance, Series A, 6.90%, 7/01/25 ......................................... 200,000 209,342
Mortgage Finance, Series B, 6.60%, 7/01/25 ......................................... 145,000 149,433
Mortgage Finance, Series B, MBIA Insured, 6.20%, 7/01/18 ........................... 630,000 639,456
Tennessee State Local Development Authority Revenue,
Community Provider Pooled Loan Program, Pre-Refunded, 6.55%, 10/01/23 .............. 100,000 108,187
State Loan Program, Refunding, Series A, MBIA Insured, 5.125%, 3/01/22 ............. 150,000 134,492
Tennessee State School Board Authority, Higher Educational Facilities,
2nd Program, Series A, 5.00%, 5/01/28 .............................................. 3,000,000 2,593,050
Series A, Pre-Refunded, 6.25%, 5/01/22 ............................................. 100,000 105,393
Virgin Islands PFA Revenue, senior lien, Fund Loan Notes, Refunding, Series A,
5.50%, 10/01/18 ..................................................................... 1,000,000 903,240
West Carroll Special School District, MBIA Insured, 5.375%, 6/01/29 .................. 1,055,000 965,673
White House Utility District, Robertson and Sumner Counties Waterworks System Revenue,
Refunding, Series B, FGIC Insured, 5.375%, 1/01/19 .................................. 1,890,000 1,795,859
</TABLE>
FRANKLIN MUNICIPAL SECURITIES TRUST
STATEMENT OF INVESTMENTS, NOVEMBER 30, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN TENNESSEE MUNICIPAL BOND FUND AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
Wilson County COP,
Educational Facilities, Pre-Refunded, 6.125%, 6/30/10 ............................. $ 220,000 $ 236,601
FSA Insured, 5.25%, 3/30/18 ....................................................... 1,000,000 925,590
-----------
TOTAL LONG TERM INVESTMENTS (COST $72,304,461) ...................................... 68,477,753
-----------
SHORT TERM INVESTMENTS .4%
(c)Bradley County IDB Industrial Revenue, Refunding, Olin Corporate Project, Series C,
Daily VRDN and Put, 3.85%, 11/01/17 (COST $300,000) .............................. 300,000 300,000
-----------
TOTAL INVESTMENTS (COST $72,604,461) 97.0% .......................................... 68,777,753
OTHER ASSETS, LESS LIABILITIES 3.0% ................................................. 2,110,257
-----------
NET ASSETS 100.0% ................................................................... $70,888,010
===========
</TABLE>
See Glossary of Terms on page 35.
(c) Variable rate demand notes (VRDNs) are tax-exempt obligations which contain
a floating or variable interest adjustment formula and an unconditional
right of demand to receive payment of principal balance plus accrued
interest at specific dates.
See notes to financial statements.
Franklin Municipal Securities Trust
STATEMENT OF INVESTMENTS, NOVEMBER 30, 1999 (UNAUDITED) (CONT.)
GLOSSARY OF TERMS
- --------------------------------------------------------------------------------
1915 ACT - Improvement Bond Act of 1915
ABAG - The Association of Bay Area Governments
AD - Assessment District
AMBAC - American Municipal Bond Assurance Corp.
CDA - Community Development Authority/Agency
CFD - Community Facilities District
CHFCLP - California Health Facilities Construction Loan Program
COP - Certificate of Participation
ETM - Escrow to Maturity
FGIC - Financial Guaranty Insurance Corp.
FHA - Federal Housing Authority/Agency
FNMA - Federal National Mortgage Association
FSA - Financial Security Assistance (Some of the securities shown as FSA
Insured were originally insured by Capital Guaranty Insurance Co.
(CGIC) which was acquired by FSA in 1995 and no longer does business
under this name.)
GNMA - Government National Mortgage Association
GO - General Obligation
HDA - Housing Development Authority/Agency
HFAR - Housing Finance Authority/Agency Revenue
ID - Improvement District
IDB - Industrial Development Board
IDBR - Industrial Development Board Revenue
IDR - Industrial Development Revenue
MBIA - Municipal Bond Investors Assurance Corp.
MF - Multi-Family
MFHR - Multi-Family Housing Revenue
PCFA - Pollution Control Financing Authority
PCR - Pollution Control Revenue
PFA - Public Financing Authority
RDA - Redevelopment Agency
UHSD - Unified High School District
USD - Unified School District
FRANKLIN MUNICIPAL SECURITIES TRUST
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
FRANKLIN CALIFORNIA FRANKLIN TENNESSEE
HIGH YIELD MUNICIPAL
MUNICIPAL FUND BOND FUND
----------------------------------------
<S> <C> <C>
Assets:
Investments in securities:
Cost ...................................................... $ 656,283,617 $ 72,604,461
==================================
Value ..................................................... 632,572,816 68,777,753
Cash ....................................................... -- 92,565
Receivables:
Investment securities sold ................................ 5,595,117 1,195,656
Capital shares sold ....................................... 1,651,008 162,966
Interest .................................................. 10,428,717 1,144,136
----------------------------------
Total assets ............................................ 650,247,658 71,373,076
----------------------------------
Liabilities:
Payables:
Investment securities purchased ........................... 14,657,190 --
Capital shares redeemed ................................... 12,756,942 301,550
Affiliates ................................................ 302,458 24,386
Shareholders .............................................. 100,773 10,132
Distributions to shareholders .............................. 1,145,085 136,178
Funds advanced by custodian ................................ 1,865,405 --
Other liabilities .......................................... 22,746 12,820
----------------------------------
Total liabilities ....................................... 30,850,599 485,066
----------------------------------
Net assets, at value .................................. $ 619,397,059 $ 70,888,010
==================================
Net assets consist of:
Undistributed net investment income ........................ $ -- $ 113,617
Accumulated distributions in excess of net investment
income ................................................... (1,211,741) --
Net unrealized depreciation ................................ (23,710,801) (3,826,708)
Accumulated net realized loss .............................. (11,929,476) (820,328)
Capital shares ............................................. 656,249,077 75,421,429
----------------------------------
Net assets, at value .................................. $ 619,397,059 $ 70,888,010
==================================
</TABLE>
See notes to financial statements.
FRANKLIN MUNICIPAL SECURITIES TRUST
Financial Statements (continued)
STATEMENT OF ASSETS AND LIABILITIES (CONT.)
NOVEMBER 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
FRANKLIN CALIFORNIA FRANKLIN TENNESSEE
HIGH YIELD MUNICIPAL
MUNICIPAL FUND BOND FUND
----------------------------------------
<S> <C> <C>
CLASS A:
Net assets, at value ................................................ $545,160,816 $70,888,010
=================================
Shares outstanding .................................................. 55,422,557 6,870,367
=================================
Net asset value per share* .......................................... $ 9.84 $ 10.32
=================================
Maximum offering price per share (net asset value per share / 95.75%) $ 10.28 $ 10.78
=================================
CLASS C:
Net assets, at value ................................................ $ 74,236,243 --
=================================
Shares outstanding .................................................. 7,525,958 --
=================================
Net asset value per share* .......................................... $ 9.86 --
=================================
Maximum offering price per share (net asset value per share / 99.00%) $ 9.96 --
=================================
</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 SIX MONTHS ENDED NOVEMBER 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
FRANKLIN CALIFORNIA FRANKLIN TENNESSEE
HIGH YIELD MUNICIPAL
MUNICIPAL FUND BOND FUND
----------------------------------------
<S> <C> <C>
Investment income:
Interest .......................................... $ 19,521,022 $ 2,082,260
---------------------------------
Expenses:
Management fees (Note 3) .......................... 1,600,472 231,859
Distribution fees (Note 3)
Class A .......................................... 289,115 37,120
Class C .......................................... 252,586 --
Transfer agent fees (Note 3) ...................... 93,679 9,823
Custodian fees .................................... 3,143 358
Reports to shareholders ........................... 27,120 2,693
Registration and filing fees ...................... 38,634 4,179
Professional fees ................................. 14,344 2,135
Trustees' fees and expenses ....................... 14,616 1,573
Other ............................................. 12,893 6,481
---------------------------------
Total expenses ................................. 2,346,602 296,221
Expenses waived/paid by affiliate (Note 3) ..... (558,330) (147,726)
---------------------------------
Net expenses ................................. 1,788,272 148,495
---------------------------------
Net investment income ....................... 17,732,750 1,933,765
---------------------------------
Realized and unrealized losses:
Net realized loss from investments ................ (10,117,730) (752,990)
Net unrealized depreciation on investments ........ (38,950,860) (5,153,976)
---------------------------------
Net realized and unrealized loss ................... (49,068,590) (5,906,966)
---------------------------------
Net decrease in net assets resulting from operations $(31,335,840) $(3,973,201)
=================================
</TABLE>
See notes to financial statements.
FRANKLIN MUNICIPAL SECURITIES TRUST
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE SIX MONTHS ENDED NOVEMBER 30, 1999 (UNAUDITED)
AND THE YEAR ENDED MAY 31, 1999
<TABLE>
<CAPTION>
FRANKLIN CALIFORNIA FRANKLIN TENNESSEE
HIGH YIELD MUNICIPAL FUND MUNICIPAL BOND FUND
--------------------------------------------------------------------
SIX MONTHS YEAR SIX MONTHS YEAR
ENDED ENDED ENDED ENDED
NOVEMBER 30, 1999 MAY 31, 1999 NOVEMBER 30, 1999 MAY 31, 1999
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income .................................. $ 17,732,750 $ 29,167,118 $ 1,933,765 $ 2,919,711
Net realized gain (loss) from investments .............. (10,117,730) 469,247 (752,990) 65,650)
Net unrealized depreciation on investments ............. (38,950,860) (4,500,445) (5,153,976) (845,514)
-------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations ...................................... (31,335,840) 25,135,920 (3,973,201) 2,008,547
Distributions to shareholders from:
Net investment income:
Class A ............................................... (15,832,551) (26,332,992) (1,895,122) (2,879,542)
Class C ............................................... (1,900,199) (2,834,125) -- --
In excess of net investment income:
Class A ............................................... (240,447) (845,334) -- --
Class C ............................................... (28,871) (90,980) -- --
Net realized gains ..................................... -- -- -- (137,536)
-------------------------------------------------------------------
Total distributions to shareholders ..................... (18,002,068) (30,103,431) (1,895,122) (3,017,078)
Capital share transactions: (Note 2)
Class A ................................................ 4,966,850 175,775,393 (361,044) 33,600,071
Class C ................................................ 1,678,062 38,708,484 -- --
-------------------------------------------------------------------
Total capital share transactions ........................ 6,644,912 214,483,877 (361,044) 33,600,071
Net increase (decrease) in net assets ................. (42,692,996) 209,516,366 (6,229,367) 32,591,540
Net assets
Beginning of period ..................................... 662,090,055 452,573,689 77,117,377 44,525,837
-------------------------------------------------------------------
End of period ........................................... $ 619,397,059 $ 662,090,055 $ 70,888,010 $ 77,117,377
===================================================================
Undistributed net investment income (accumulated
distributions in excess of net investment income)
included in net assets:
End of period ............................................ $ (1,211,741) $ (942,423) $ 113,617 $ 74,974
===================================================================
</TABLE>
See notes to financial statements.
FRANKLIN MUNICIPAL SECURITIES TRUST
Notes to Financial Statements (unaudited)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Municipal Securities Trust (the Trust) is registered under the
Investment Company Act of 1940 as an open-end, non-diversified investment
company consisting of two series (the Funds). The Funds' investment objectives
are to provide tax-free income.
The Trust previously consisted of four series. On August 26, 1999, pursuant to a
plan of reorganization approved by the funds' shareholders, the Franklin
Arkansas Municipal Bond Fund and the Franklin Washington Municipal Bond Fund
were merged into the Franklin Federal Tax-Free Income Fund.
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.
For the Franklin California High Yield Municipal Fund, 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 (unaudited) (continued)
2. SHARES OF BENEFICIAL INTEREST
The classes of shares offered within each of the funds are indicated below.
Effective January 1, 1999, Class I and Class II were renamed Class A and Class
C, respectively. 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 C
- ---------------------------------------------------------------------------------------
<S> <C>
Franklin Tennessee Municipal Bond Fund Franklin California High Yield Municipal Fund
</TABLE>
At November 30, 1999, 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:
Six months ended November 30, 1999
Shares sold .................................. 13,429,419 $ 137,052,153 826,862 $ 8,850,386
Shares issued in reinvestment of distributions 662,002 6,705,949 97,213 1,030,324
Shares redeemed .............................. (13,731,514) (138,791,252) (965,601) (10,241,754)
----------------------------------------------------------
Net increase (decrease) ....................... 359,907 $ 4,966,850 (41,526) $ (361,044)
==========================================================
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 C SHARES:
Six months ended November 30, 1999
Shares sold .................................. 1,273,885 $ 13,029,093
Shares issued in reinvestment of distributions 94,404 958,176
Shares redeemed .............................. (1,212,795) (12,309,207)
-----------------------------
Net increase (decrease) ....................... 155,494 $ 1,678,062
=============================
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>
3. TRANSACTIONS WITH AFFILIATES
Certain officers and trustees of the Funds are also officers or directors of
Franklin/Templeton Distributors, Inc. (Distributors), Franklin Advisers, Inc.
(Advisers), Franklin/Templeton Investor Services, Inc. (Investor Services), and
Franklin Templeton Services, Inc. (FT Services), the Funds' principal
underwriter, investment manager, transfer agent, and administrative manager,
respectively.
FRANKLIN MUNICIPAL SECURITIES TRUST
Notes to Financial Statements (unaudited) (continued)
3. TRANSACTIONS WITH AFFILIATES (CONT.)
The Funds pay an investment management fee to Advisers based on the net assets
of the Funds as follows:
<TABLE>
<CAPTION>
ANNUALIZED FEE RATE MONTH-END NET ASSETS
-------------------------------------------------------------------------
<S> <C>
.625% First $100 million
.50% Over $100 million, up to and including $250 million
.45% In excess of $250 million
</TABLE>
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% and .65% per year of the
average daily net assets of Class A and Class C, respectively, for costs
incurred in marketing the Funds' shares.
Distributors received (paid) net commissions on sales of the Funds' shares, and
received contingent deferred sales charges for the period as follows:
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN
CALIFORNIA TENNESSEE
HIGH YIELD MUNICIPAL
MUNICIPAL FUND BOND FUND
--------------------------
<S> <C> <C>
Net commissions received (paid) ..... $(250,841) $7,802
Contingent deferred sales charges ... $ 58,860 $2,120
</TABLE>
The Funds paid transfer agent fees of $103,502, of which $85,210 was paid to
Investor Services.
4. INCOME TAXES
At May 31, 1999, the Franklin California High Yield Municipal Fund had tax basis
capital losses which may be carried over to offset future capital gains.
Such losses expire as follows:
<TABLE>
<S> <C>
Capital loss carryovers expiring in: 2003 ...... $1,416,838
2004 ...... 4,508
2005 ...... 390,400
----------
$1,811,746
==========
</TABLE>
FRANKLIN MUNICIPAL SECURITIES TRUST
Notes to Financial Statements (unaudited) (continued)
4. INCOME TAXES (CONT.)
At May 31, 1999, the Franklin Tennessee Municipal Bond Fund had deferred capital
losses occurring subsequent to October 31, 1998 of $67,509. For tax purposes,
such losses will be reflected in the year ending May 31, 2000.
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 November 30, 1999, the net unrealized depreciation based on the cost of
investments for income tax purposes was as follows:
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN
CALIFORNIA TENNESSEE
HIGH YIELD MUNICIPAL
MUNICIPAL FUND BOND FUND
-----------------------------
<S> <C> <C>
Investments at cost ....... $ 656,283,617 $ 72,604,461
=============================
Unrealized appreciation ... $ 9,569,391 $ 609,070
Unrealized depreciation ... (33,280,192) (4,435,778)
-----------------------------
Net unrealized appreciation $ (23,710,801) $ (3,826,708)
=============================
</TABLE>
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the
period ended November 30, 1999 were as follows:
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN
CALIFORNIA TENNESSEE
HIGH YIELD MUNICIPAL
MUNICIPAL FUND BOND FUND
----------------------------
<S> <C> <C>
Purchases $182,057,432 $11,892,207
Sales ... $152,730,508 $13,772,270
</TABLE>
6. CREDIT RISK AND DEFAULTED SECURITIES
The California High Yield Municipal Bond Fund has 26.4% of its portfolio
invested in lower rated and comparable quality unrated high yield securities,
which tend to be more sensitive to economic conditions than higher rated
securities. The risk of loss due to default by the issuer may be significantly
greater for the holders of high yielding securities because such securities are
generally unsecured and are often subordinated to other creditors of the issuer.
At November 30, 1999, the Fund held defaulted securities with a value
aggregating $8,000,000 representing 1.3% of the Fund's net assets. For more
information as to specific securities, see the accompanying Statement of
Investments.
For financial reporting purposes, the Fund discontinues accruing income on
defaulted bonds and provides an estimate for losses on interest receivable.
The Funds have investments in excess of 10% of their total net assets in their
respective states or U.S. territories and possessions. Such concentration may
subject the Funds more significantly to economic changes occurring within those
states.
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