-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BqPErknANRubt3GwlGRJvafCudru2zKF5QRQsF0SjfWbbagkDJbQ4MbIOXOqF0LK VLywRgTiDjquEWOXPVNyjQ== 0000820206-95-000001.txt : 19951119 0000820206-95-000001.hdr.sgml : 19951119 ACCESSION NUMBER: 0000820206-95-000001 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951114 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRANKLIN REAL ESTATE INCOME FUND CENTRAL INDEX KEY: 0000820206 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 770185558 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-12700 FILM NUMBER: 95591862 BUSINESS ADDRESS: STREET 1: 1800 GATEWAY DR STREET 2: 3RD FLOOR CITY: SAN MATEO STATE: CA ZIP: 94404 BUSINESS PHONE: 4153123000 MAIL ADDRESS: STREET 1: P O BOX 7777 CITY: SAN MATEO STATE: CA ZIP: 94403-7777 FORMER COMPANY: FORMER CONFORMED NAME: PROPERTY RESOURCES EQUITY TRUST II DATE OF NAME CHANGE: 19880515 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) (x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended SEPTEMBER 30, 1995 -------------------------------------------------- OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE CHANGE ACT OF 1934 For the transition period from TO ---------------------- -------------------------- Commission file number 1-12700 ----------------------------------------------------------- FRANKLIN REAL ESTATE INCOME FUND - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) CALIFORNIA 77-0185558 - -------------------------------------------------------------------------------- (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) P. O. BOX 7777, SAN MATEO, CALIFORNIA 94403-7777 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (415) 312-2000 N/A - -------------------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Common Stock Shares Outstanding as of September 30, 1995, Series A: 3,999,515 Common Stock Shares Outstanding as of September 30, 1995, Series B: 319,308 PART I - FINANCIAL INFORMATION Item 1. Financial Statements FRANKLIN REAL ESTATE INCOME FUND BALANCE SHEETS SEPTEMBER 30, 1995 AND DECEMBER 31, 1994 (Dollars in 000's except per share amounts)
(Unaudited) (Audited) 1995 1994 ASSETS Rental property: Land $10,326 $10,326 Buildings and improvements 29,567 29,606 Equipment - 63 39,893 39,995 Less: accumulated depreciation 5,266 4,535 34,627 35,460 Cash and cash equivalents 1,498 973 Mortgage-backed securities, available for sale 537 532 Deferred rent receivable 769 686 Other assets 614 579 Total assets $38,045 $38,230 LIABILITIES AND STOCKHOLDERS' EQUITY Note payable $1,948 $1,981 Tenants' deposits and other liabilities 323 247 Dividends payable 500 500 Total liabilities 2,771 2,728 Stockholders' equity: Common stock, Series A, without par value. Stated value $10 per share; 10,000,000 shares authorized; 3,999,515 and 3,999,653 shares issued and outstanding in 1995 and 1994 35,702 35,703 Common stock, Series B, without par value. Stated value $10 per share; 500,000 shares authorized; 319,308 shares issued and outstanding in 1995 and 1994 3,193 3,193 Unrealized gain (loss) on mortgage-backed securities 1 (40) Accumulated dividends in excess of net income (3,622) (3,354) Total stockholders' equity 35,274 35,502 Total liabilities and stockholders' equity $38,045 $38,230 See notes to financial statements.
Item 1. Financial Statements (continued) FRANKLIN REAL ESTATE INCOME FUND STATEMENTS OF OPERATIONS FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1994 (Unaudited) (Dollars in 000's except per share amounts) 1995 1994 Revenue: Rent $1,207 $1,111 Interest 21 15 Dividends 2 1 Other 2 6 Total revenue 1,232 1,133 Expenses: Interest 50 51 Depreciation and amortization 287 284 Operating 402 302 Related party 56 55 Consolidation expense 62 - General and administrative 39 35 Total expenses 896 727 Net income $ 336 $ 406 Net income per share, based on shares outstanding of Series A common stock of 3,999,515 and 4,000,000 in 1995 and 1994 $ .08 $ .10 Dividends per share, based on shares outstanding of Series A common stock of 3,999,515 and 4,000,000 in 1995 and 1994 $ .13 $ .13 See notes to financial statements. Item 1. Financial Statements (continued) FRANKLIN REAL ESTATE INCOME FUND STATEMENTS OF OPERATIONS FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1994 (Unaudited) (Dollars in 000's except per share amounts) 1995 1994 Revenue: Rent $3,468 $3,239 Interest 55 44 Dividends 4 5 Other 10 20 Total revenue 3,537 3,308 Expenses: Interest 154 124 Depreciation and amortization 862 833 Operating 937 772 Related party 164 154 Consolidation expense 62 - General and administrative 126 183 Loss on sale of mortgage-backed securities - 68 Total expenses 2,305 2,134 Net income $1,232 $1,174 Net income per share, based on shares outstanding of Series A common stock of 3,999,515 and 4,000,000 in 1995 and 1994 $ .31 $ .29 Dividends per share, based on shares outstanding of Series A common stock of 3,999,515 and 4,000,000 in 1995 and 1994 $ .38 $ .38 See notes to financial statements. Item 1. Financial Statements (continued) FRANKLIN REAL ESTATE INCOME FUND STATEMENT OF STOCKHOLDERS' EQUITY FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1995 (Unaudited) (Dollars in 000's)
Common Stock Series A Series B Accumulated Unrealized Dividends Gain/Loss in Excess on of Net Shares Amount Shares Amount Securities Income Total Balance, beginning of period 3,999,653 $35,703 319,308 $3,193 $(40) $(3,354) $35,502 Redemption of Series A common stock (138) (1) - - - - (1) Unrealized gain on mortgage-backed securities - - - - 41 - 41 Net income - - - - - 1,232 1,232 Dividends declared - - - - - (1,500) (1,500) Balance,end of period 3,999,515 $35,702 319,308 $3,193 $1 $(3,622) $35,274
See notes to financial statements. Item 1. Financial Statements (continued) FRANKLIN REAL ESTATE INCOME FUND STATEMENTS OF CASH FLOWS FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1994 (Unaudited) (Dollars in 000's)
1995 1994 Cash flows from operating activities: Net income $1,232 $1,174 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 862 833 Increase in deferred rent receivable (83) (142) Decrease in Due from Advisor - 258 Increase in other assets (113) (23) Increase in tenants' deposits and other liabilities 76 140 Loss on disposition of rental property 100 - 842 1,066 Net cash provided by operating activities 2,074 2,240 Cash flows from investing activities: Acquisition of rental property - (6,700) Improvements to rental property (51) (147) Decrease in investment in mortgage-backed securities 36 3,823 Net cash used in investing activities (15) (3,024) Cash flows from financing activities: Dividends paid (1,500) (1,500) Borrowings under loan payable - 2,000 Principal payments on note payable (33) (7) Redemption of Series A common stock (1) - Net cash provided by (used in) financing activities (1,534) 493 Net increase (decrease) in cash and cash equivalents 525 (291) Cash and cash equivalents, beginning of period 973 1,470 Cash and cash equivalents, end of period $1,498 $1,179 See notes to financial statements.
FRANKLIN REAL ESTATE INCOME FUND NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1995 NOTE 1 - ORGANIZATION Franklin Real Estate Income Fund (the "Company") is a California corporation formed on August 7, 1987 for the purpose of investing in income-producing real property. The Company is a real estate investment trust ("REIT") having elected to qualify as a REIT under the applicable provisions of the Internal Revenue Code since 1988. Under the Internal Revenue Code and applicable state income tax law, a qualified REIT is not subject to income tax if at least 95% of its taxable income is currently distributed to its stockholders and other REIT tests are met. The Company has distributed at least 95% of its taxable income and intends to distribute substantially all of its taxable income in the future. Accordingly, no provision is made for income taxes in these financial statements. As of September 30, 1995, the Company's real estate portfolio consisted of the Mira Loma Shopping Center located in Reno, Nevada; a 40% undivided interest in the Shores Office Complex located in Redwood City, California; three separate R&D buildings in the Northport Business Park located in Fremont, California; and the Glen Cove Center located in Vallejo, California. The Company has also purchased two small parcels of land located adjacent to the Mira Loma Shopping Center. The Company has completed its property acquisition phase and no additional property acquisitions are currently anticipated. NOTE 2 - BASIS OF PRESENTATION The accompanying unaudited financial statements contain all adjustments (consisting of normal recurring accruals) which are necessary, in the opinion of management, for a fair presentation. The statements, which do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements, should be read in conjunction with the Company's financial statements for the year ended December 31, 1994. RECLASSIFICATION Certain amounts in the 1994 financial statements have been reclassified to correspond to the 1995 presentation. These reclassifications did not affect previously reported net income. NOTE 3 - RELATED PARTY TRANSACTIONS The Company has an agreement with Franklin Properties, Inc. (the "Advisor"), to administer the day-to-day operations of the Company. Under the terms of the agreement, which is renewable annually, the Advisor will receive quarterly, an annualized fee equal to 1% of invested assets and .4% of mortgage investments. The fee is subordinate to declared dividends to Series A common stock shareholders totaling at least an 8% per annum non-cumulative non-compounded return on their adjusted price per share, as defined. Accordingly, no advisory fee was paid to the Advisor. At September 30, 1995, cash equivalents included $313,000, which was invested in Franklin Money Fund, an investment company managed by an affiliate of the Advisor. Dividends earned from Franklin Money Fund totaled $4,000 for the nine month period ended September 30, 1995. FRANKLIN REAL ESTATE INCOME FUND NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1995 NOTE 3 - RELATED PARTY TRANSACTIONS (Continued) The agreements between the Company and the Advisor, or affiliates, provide for certain types of compensation and payments including but not limited to the following, for those services rendered for the nine month period ended September 30, 1995: Reimbursement for data processing, accounting and certain other expenses, charged to related party expense $36,000 Property management fee, charged to related party expense $128,000 Leasing commission, capitalized and amortized over the term of the related lease $105,000 Construction supervision fee, capitalized and amortized over the life of the related investment or the term of the related lease $1,000 NOTE 4 - COMMON STOCK, WARRANTS AND INCOME PER SHARE Series A and Series B common stock have the same voting rights. Dividends from sources other than cash from the sale or refinancing of the Company's property are to be paid in the following order of priority: first to the Series A stockholders until they receive an 8% per annum non-cumulative non-compounded return on their adjusted price per share, as defined; then to the Series A and Series B stockholders in proportion of their respective number of shares. All dividends are declared at the discretion of the Directors of the Company. To date, the Board of Directors has not declared any dividends to be payable to any shares of outstanding Series B common stock. Since Series A common stock has not received an 8% per annum non-cumulative non-compounded return on its adjusted purchase price, and since Series B common stock does not participate in earnings until such 8% return is received by the Series A common stock, net income per share is not applicable to Series B common stock. Warrants were issued with each share of Series A common stock purchased during the offering period, without additional cost to the stockholders. The number of warrants issued with each share varied depending upon the number of shares outstanding at the time the warrants were issued. Warrants covering the exercise of 2,861,420 additional shares of Series A common stock are outstanding as of September 30, 1995. Each warrant is exercisable at a price of $10.00 per share for a 12-month period which commenced on February 1, 1995. NOTE 5 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW AND NONCASH INFORMATION For the nine month period ended September 30, 1995, the Company paid interest on the note payable of $156,000. FRANKLIN REAL ESTATE INCOME FUND NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1995 NOTE 6 - SUBSEQUENT EVENT On November 2, 1995 the Board of Directors of the Company and of two other real estate investment trusts that Franklin Properties, Inc. advises, Franklin Advantage Real Estate Income Fund ("Advantage") and Franklin Select Real Estate Income Fund ("Select"), authorized the execution of a Merger Agreement and the filing of a Joint Proxy Statement/Registration Statement with the Securities and Exchange Commission. The Registration Statement was filed on November 13, 1995. In the proposed merger, the Company and/or Advantage would be merged into Select, which would be renamed Franklin Select Realty Trust. The shares of Select will be offered to shareholders of the Company and Advantage in exchange for their shares on the basis described in the Joint Proxy Statement/Registration Statement. The merger is subject to certain conditions including approval by a majority of the shareholders of Select, the Company, and/or Advantage. A special meeting of the shareholders of each REIT will be held to vote on the proposed merger upon the effectiveness of the Registration Statement and the close of the solicitation period. PART I - FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition AND RESULTS OF OPERATIONS INTRODUCTION Management's discussion and analysis of financial condition and results of operations should be read in conjunction with the Financial Statements and Notes thereto. FUNDS FROM OPERATIONS FOR NINE MONTHS ENDED SEPTEMBER 30, (Dollars in 000's) 1995 1994 Funds Provided By: Constant Properties (a) $1,842 $1,884 Acquired Property (b) 571 485 Interest and Dividend Income 59 49 Interest Expense (154) (124) Loss on Sale of Securities - (68) Company Expenses (224) (219) Funds from Operations (c) $2,094 $2,007 Reconciliation to Net Income: Depreciation & Amortization: Buildings and Improvements (612) (601) Tenant Improvements (172) (162) Leasing Commission Amortization (76) (69) Other Amortization (2) (1) Net Income: $1,232 $1,174 Dividends Declared $1,500 $1,500 - --------------- (a) Represents properties which were owned throughout the entire period January 1, 1994 to September 30 1995, for comparative purposes. Amounts are net of property management fees. (b) Represents the operations, net of property management fees, of the Glen Cove Center, which was purchased on January 31, 1994. (c) As defined by the National Association of Real Estate Investment Trusts. The Company believes that funds from operations is an appropriate supplemental measure of operating performance. However, funds from operations should not be considered as a substitute for net income as an indicator of the Company's operating performance, or for cash flows as a measure of liquidity. PART I - FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS COMPARISON OF THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1994 Net income for the nine month period ended September 30, 1995 increased $58,000, or 5%, as compared to the same period in 1994 due to the following factors: an increase in rental revenue of $229,000; an increase in interest and dividends of $10,000; a decrease in other income of $10,000; an increase in interest expense of $30,000; an increase in depreciation and amortization of $29,000; an increase in operating expenses of $165,000; an increase in related party expenses of $10,000; an increase in consolidation expense of $62,000; a decrease in general and administrative expense of $57,000, and a decrease in loss on the sale of mortgage-backed securities of $68,000. Explanations of the material changes are as follows: Rental revenue for the nine month period ended September 30, 1995 increased $229,000, or 7%, primarily due to the recognition of rental income from the Glen Cove Shopping Center acquired in January 1994 and improved occupancy and rental rates at the Shores Office Complex. The average occupancy rate of net rentable square feet for the nine month periods ended September 30, 1995 and 1994 at the Shores Office Complex was 98% and 91%; at the Northport Buildings 98% and 97%; at the Mira Loma Shopping Center 81% and 81%; and at the Glen Cove Center 97% and 95%, respectively. Total expenses increased for the nine month period ended September 30, 1995 by $171,000, or 8%, from $2,134,000 in 1994 to $2,305,000. The increase in total expenses is attributable to the following factors: an increase in interest expense of $30,000; an increase in depreciation and amortization of $29,000, or 3%; an increase in operating expenses of $165,000, or 21%; an increase in related party expense of $10,000, or 6%; an increase in consolidation expense of $62,000 or 100%; a decrease in general and administrative expense of $57,000, or 31%, and a decrease in loss on sale of mortgage-backed securities of $68,000 or 100%. Interest expense increased $30,000 reflecting the issuance of an unsecured loan payable in January, 1994, related to the acquisition of the Glen Cove Center. This loan was converted into a secured mortgage note in June, 1994. Depreciation and amortization increased $29,000 reflecting tenant improvment costs at the Shores Office Complex related to new leases commencing in late 1994 and the acquisition of rental property in January, 1994. Related party expense increased $10,000 as a result of an increase in property management fees due to the increases in rental revenue at the Company's properties. Consolidation expense of $62,000 relates to the proposed consolidation. General and administrative expense decreased $57,000 due to a decrease in non-recurring consulting fees and legal expenses. Loss on sale of mortgage-backed securities decreased $68,000 due to the sale of mortgage-backed securities in January, 1994. The proceeds were used to invest in rental property. Operating expenses increased $165,000 due to an increase in utility and insurance expense at the Company's properties and to a $100,000 writeoff of building and equipment related to ceasing operations at the Mira Loma Car Wash in August, 1995. The land will be paved and used as additional parking space at the Mira Loma Shopping Center. PART I - FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES The Company's principal source of capital for the acquisition of properties was the proceeds from the initial public offering of its stock. The Company completed its property acquisition phase in 1994 and no further acquisitions are anticipated. The Company's funds from operations have been its principal source of capital for property improvements, leasing costs and the payments of quarterly dividends. At September 30, 1995, the Company's cash reserves, including mortgage backed securities, aggregated $2,035,000. As of September 30, 1995, one of the Company's properties was subject to secured financing with an outstanding balance of approximately $1,948,000. Otherwise, the Company's properties are owned free of any indebtedness. Interest on the note accrues at a variable rate of 1.5% in excess of the Union Bank Reference Rate. Monthly installments of principal and interest commenced August 1, 1994, and continue until maturity of the note on May 1, 1999. Principal installments are payable in the amount of $3,700 per month. The note may be prepaid in whole or in part at any time without penalty. For the foreseeable future, management believes that the Company's current sources of capital will continue to be adequate to meet both its operating requirements and the payment of dividends. IMPACT OF INFLATION The Company's management believes that inflation may have a positive effect on the Company's property portfolio, but this effect generally will not be fully realized until such properties are sold or exchanged. On some leases, the Company collects overage rents based on increased sales and increased base rentals as a result of cost of living adjustments. The Company's policy of negotiating leases which incorporate operating expense "pass-through" provisions is intended to protect the Company against increased operating costs resulting from inflation. DIVIDENDS Dividends are declared quarterly at the discretion of the Board of Directors. The Company's present dividend policy is to at least annually evaluate the current dividend rate in light of anticipated tenant turnover over the next two or three years, the estimated level of associated improvements and leasing commissions, planned capital expenditures, any debt service requirements and the Company's other working capital requirements. After balancing these considerations, and considering the Company's earnings and cash flow, the level of its liquid reserves and other relevant factors, the Company seeks to establish a dividend rate which: i) provides a stable dividend which is sustainable despite short term fluctuations in property cash flows; ii) maximizes the amount of funds from operations paid out as dividends consistent with the above listed objective; and iii)complies with the Internal Revenue Code requirement that a REIT annually pay out as dividends not less than 95% of its taxable income. For the nine-month period ended September 30, 1995, the Company declared dividends totaling $1,500,000. PART I - FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition AND RESULTS OF OPERATIONS On November 2, 1995 the Board of Directors of the Company and of two other real estate investment trusts that Franklin Properties, Inc. advises, Franklin Advantage Real Estate Income Fund ("Advantage") and Franklin Select Real Estate Income Fund ("Select"), authorized the execution of a Merger Agreement and the filing of a Joint Proxy Statement/Registration Statement with the Securities and Exchange Commission. The Registration Statement was filed on November 13, 1995. In the proposed merger, the Company and/or Advantage would be merged into Select, which would be renamed Franklin Select Realty Trust. The shares of Select will be offered to shareholders of the Company and Advantage in exchange for their shares on the basis described in the Joint Proxy Statement/Registration Statement. The merger is subject to certain conditions including approval by a majority of the shareholders of Select, the Company, and/or Advantage. A special meeting of the shareholders of each REIT will be held to vote on the proposed merger upon the effectiveness of the Registration Statement and the close of the solicitation period. PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Not applicable (b) Reports on Form 8-K No reports on Form 8-K were filed by the Registrant during the quarter ended September 30, 1995. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FRANKLIN REAL ESTATE INCOME FUND By: /S/ DAVID P. GOSS David P. Goss Chief Executive Officer Date: NOVEMBER 10, 1995 EX-27 2
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM REGISTRANT'S FINANCIAL STATEMENTS FOR THE QUARTER ENDED SEPTEMBER 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1995 SEP-30-1995 1,498 537 537 0 0 0 39,893 5,266 38,045 0 0 38,895 0 0 0 38,045 0 1,232 0 846 0 0 50 0 0 0 0 0 0 336 0 0
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