-----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, VXceBYmxNTa/EAELejbBVVslbWV8fG/a+5J/0D35V1/qeOP8hzXSMFNlJKvc5Jy9 dIlQxhLmthH6l92tnW/gug== 0000820206-96-000005.txt : 19960402 0000820206-96-000005.hdr.sgml : 19960402 ACCESSION NUMBER: 0000820206-96-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960401 SROS: AMEX 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-12700 FILM NUMBER: 96542193 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-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1995. Commission File No. 0-12700 FRANKLIN REAL ESTATE INCOME FUND (Exact Name of Registrant as Specified in its Charter) California 77-0185558 - -------------------------------------------------------------------------- (State or other jurisdiction or (I.R.S. Employer Identification incorporation or organization) number) P.O. Box 7777, San Mateo, CA (415) 312-2000 94403-7777 - -------------------------------------------------------------------------- (Address of principal and executive Company's telephone number, Office) including Area Code Securities registered pursuant to Section 12(b) of Act: Title of each class Name of each exchange on which registered Common Stock Series A American Stock Exchange - -------------------------------------------------------------------------- Securities registered pursuant to Section 12(g) of the Act: Warrants to purchase Common Stock, Series A Indicate by check mark whether the Company (1) has filed all reports required to be filed by Section 12 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No At February 1, 1996, 3,992,515 shares of the Company's Series A common stock were held by non-affiliates of the Company. The aggregate market value of the voting stock held by non-affiliates of the Company, based upon the closing price of $5.625 as of February 1, 1996, is $22,457,897. Indicate the number of shares outstanding of each of the Company's classes of common stock at December 31, 1995, 3,999,515 shares of Series A common stock and 319,308 shares of Series B common stock and 2,861,420 warrants for Series A common stock. PART 1 Item 1. Business Franklin Real Estate Income Fund (the "Company") is a California corporation formed on August 7, 1987 for the purpose of acquiring, managing and holding for investment income-producing real estate assets. The Company is a real estate investment trust ("REIT"). The Company's investment program includes providing shareholders with a professionally managed diversified portfolio of income-producing equity real estate investments in strategic markets which represent the potential for current cash flow and for capital appreciation. Early in 1994, the Company completed its property acquisition phase with the purchase of the Glen Cove Center in Vallejo, California. On November 2, 1995, the Boards of Directors of the Company and of two other real estate investments 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/Prospectus with the Securities and Exchange Commission. The Prospectus was filed on November 13, 1995, and became effective on March 14, 1996. 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/Prospectus. 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 on May 7, 1996, to vote on the proposed merger upon the close of the solicitation period. The Company's day-to-day operations are managed by Franklin Properties, Inc. (the "Advisor") under the terms of an advisory agreement which is renewable annually. The Advisor manages the Company subject to the overall approval of the Board of Directors, a majority of whom are independent of the Advisor. The Company does not have any employees. The Company's properties are managed by Continental Property Management Co. ("CPMC"), an affiliate of the Advisor, which performs the leasing, re-leasing and management-related services for the properties. The Advisor is a wholly-owned subsidiary of Franklin Resources, Inc., ("Franklin") whose primary business is the $139 billion Franklin Templeton Group of Funds. The Company is subject to the risks generally associated with the ownership of real property, including the possibility that operating expenses, debt service payments and fixed costs may exceed property revenues; economic conditions may adversely change in California and the national market; the real estate investment climate may change; local market conditions may change adversely due to general or local economic conditions and neighborhood characteristics; interest rates may fluctuate and the availability, costs and terms of mortgage financing may change; unanticipated maintenance and renovations may arise; changes in real estate tax rates and other operating expenses may arise; governmental rules and fiscal policies may change; natural disasters, including earthquakes, floods or tornadoes may result in losses beyond the coverage of the Company's insurance policies; the financial condition of the tenants of properties may deteriorate; and other factors which are beyond the control of the Company may occur. The real estate business is competitive, and the Company is in competition with many other entities engaged in real estate investment activities, many of which have greater assets than the Company. The Company's real estate investments in rental properties are subject to the risk of the Company's inability to attract or retain tenants and a consequent decline in rental income. Furthermore, real estate investments tend to be long-term, and under the REIT provisions of the Internal Revenue Code, might be subject to minimum holding periods to avoid adverse tax consequences; consequently, the Company will have only minimal ability to vary its property portfolio in response to changing economic, financial and investment conditions. To the extent that the Company's rental income is based on a percentage of the gross receipts of retail tenants, its cash flow is dependent on the retail success achieved by such tenants. Item 1. Business (Continued) The opportunities for sale, and the profitability of any sale, of any particular property by the Company will be subject to the risk of adverse changes in real estate market conditions, which may vary depending upon the size, location and type of each property. Under various federal, state and local laws, ordinances and regulations, an owner or operator of real property may become liable for the costs of removal or remediation of certain hazardous substances released on or in its property. Such laws often impose such liability without regard to whether the owner or operator knew of, or was responsible for, the release of such hazardous substances, the presence of such substances, or the failure to properly remediate such substances, when released. As part of the investigation of properties prior to acquisition, the Company has obtained inspection reports concerning the condition of the property, including specialized environmental inspection reports concerning the presence of hazardous substances on the property. Such inspection reports, however, do not necessarily reveal all hazardous substances or sources thereof, and substances not considered hazardous when a property is acquired may subsequently be classified as such by amendments to local, state, and federal laws, ordinances, and regulations. If it is ever determined that hazardous substances on or in a Company property must be removed or the release of such substances remediated, the Company could be required to pay all costs of any necessary cleanup work, although under certain circumstances, claims against other responsible parties could be made by the Company. The Company could also experience lost revenues during any such cleanup, or lower lease rates, decreased occupancy or difficulty selling or borrowing against the affected property either prior to or following any such cleanup. The Company is not aware of any hazardous substances on or in its properties and it has not been notified by any governmental authority of any noncompliance, liability or other claim in connection with the environmental condition of any of its properties. The Americans with Disabilities Act ("ADA"), which generally requires that buildings be made accessible to people with disabilities, and has separate compliance requirements for "public accommodations" and "commercial facilities". If certain uses by tenants of a building constitute a "public accommodation", the ADA imposes liability for non-compliance on both the tenant and the owner/operator of the building. The Company has conducted inspections of its properties to determine whether the exterior and common area of such properties are in compliance with the ADA and it believes that its properties are in compliance. If, however, it were ever determined that one or more of the Company's properties were not in compliance, the Company may be subjected to unanticipated expenditures incurred to remove access barriers, or to pay fines or damages related to such non-compliance. The Company's only business consists of the real estate investment activity described above. Therefore, information about industry segments is not applicable. The business is not seasonal. Item 2. Properties As of December 31, 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 Shopping Center located in Vallejo, California. The Company has also purchased two small parcels of land located adjacent to the Mira Loma Shopping Center. An affiliated real estate investment trust, Franklin Select Real Estate Income Fund, owns the remaining 60% interest in the Shores. Item 2. Properties (Continued) With the exception of the Glen Cove Center, the Company's properties are not generally subject to any mortgage, lien or other encumbrance. The Glen Cove Center is owned subject to a loan with an outstanding balance of approximately $1,937,000. The Company currently carries earthquake insurance coverage for its properties and intends to continue to carry earthquake coverage to the extent that it is available at economically reasonable rates. However, the Company's earthquake insurance coverage is subject to substantial deductibles. PORTFOLIO SUMMARY At December 31, 1995, the Company's properties contained a total of 55 leases. The Company's portfolio represents in the aggregate, 360,012 rentable square feet. The following schedule lists the portfolio's lease expiration dates and the related annual base rental income as of December 31, 1995. LEASE EXPIRATIONS - ---------------------------------------------- No. of Current % of Leases Total Annual Current Year Expiring Sq. Ft.1 Base Rent1 Annual Rent - ---------------------------------------------- 1996 13 104,303 $947,000 24.3% 1997 5 4,249 78,000 2.0% 1998 11 16,919 257,000 6.6% 1999 8 22,887 420,000 10.8% 2000 7 18,504 368,000 9.5% 2001 2 3,153 51,000 1.3% 2002 3 35,752 426,000 10.9% 2003 1 29,120 231,000 5.9% 2005 1 36,000 329,000 8.5% 2010 1 50,360 552,000 14.2% 2012 2 2,400 123,000 3.2% 2013 1 15,025 109,000 2.8% - ---------------------------------------------- - --------------- 1 Total Square Feet and Annual Base Rent reflect the Company's 40% interest in the Shores. ITEM 2. Properties (CONTINUED) At December 31, 1995, the Company's properties were 94% leased, which compares to 93% leased at the end of 1994. The following tables indicate the occupancy rates for each of the Company's properties and the average rental rates at December 31 of each of the last five years: OCCUPANCY RATES - ---------------------------------------------------- Mira The Northport Glen Year Loma Shores Buildings Cove Overall - ---------------------------------------------------- 94,026 55,4182 144,568 66,000 360,012 Sq. Ft. Sq. Ft. Sq. Ft. Sq. Ft. Sq. Ft. - ---------------------------------------------------- 1991 90% 95% 100% N/A 96% 1992 88% 84% 61% N/A 74% 1993 95%1 90% 97% N/A 95% 1994 82%1 99% 97% 97% 93% 1995 82%1 100% 100% 94% 94% - ---------------------------------------------------- - --------------- 1 Includes 16%, which is leased by a drug store tenant, who has vacated their space but remains current under the terms of the lease. 2 Reflects the Company's 40% interest in the Shores. AVERAGE ANNUAL RENTAL RATES/SQ. FT.1 - -------------------------------------------- Mira The Northport Glen Year YeaLoma2 Shores Buildings Cove - -------------------------------------------- 1991 $8.79 $24.77 $8.00 N/A 1992 $8.40 $21.29 $8.09 N/A 1993 $8.77 $21.94 $8.18 N/A 1994 $9.20 $21.52 $7.99 $11.553 1995 $9.59 $21.82 $7.98 $12.21 - -------------------------------------------- - --------------- 1 The average annual rental rates represent effective base rental income, as recorded on a GAAP basis for each year, excluding the amortization of lease buy-out payments, if any, divided by the average monthly occupied square feet. 2 Average rental rate per square foot excludes income from a land lease and a kiosk containing an automatic teller machine. 3 The 1994 average rental rate for Glen Cove represents eleven months of income. ITEM 2. Properties (CONTINUED) SIGNIFICANT TENANTS The grocery store anchor at Glen Cove Center, Save Mart, is the only tenant that provides 10% or more of the Company's total revenues. The tenant leases 50,360 square feet, and makes base rental payments totaling approximately $552,000 annually, or about 12% of the Company's 1995 revenues. In addition, the tenant is responsible for all allocable expenses of operating the property including their pro rata share of real estate taxes, common area expenses and insurance. The lease expires on January 31, 2010, and provides for four consecutive five-year renewal options. - -------------------------------------------------------------------------------- MIRA LOMA SHOPPING CENTER RETAIL 94,026 SQ. FT. RENO, NEVADA - -------------------------------------------------------------------------------- In 1988, the Company purchased a fee interest in the Mira Loma Shopping Center ("Mira Loma"), a neighborhood shopping center located on the southeast corner of Mira Loma Drive and McCarran Boulevard in Reno, Nevada. Located in the southeast quadrant of Reno, Mira Loma is surrounded by single family homes as well as residential apartment complexes and city recreational facilities which includes a golf course. The number of households within two miles of Mira Loma grew by approximately 18% during the period from 1990 to 1995 according to information reported by Information Decision Systems. The Advisor believes that Mira Loma is in a strong competitive position in a neighborhood which has a higher than average household income compared to other parts of Reno. As the area continues to grow, Mira Loma is expected to benefit. Mira Loma is the only neighborhood shopping center in the immediate market area and, under present zoning laws, no other shopping centers may be built in Mira Loma's immediate market area. Reno is Nevada's second largest city with a population of approximately 150,000. Its geographic proximity to California and generally favorable business climate enable Reno to attract companies wishing to benefit from Nevada's lack of corporate income, personal income and payroll taxes as well as other lower costs, while taking advantage of major California markets, including Sacramento and the San Francisco Bay Area. According to information reported by CB Commercial Real Estate Group the competitive retail market in Reno is approximately 93% occupied. At 82%, Mira Loma's occupancy rate at December 31, 1995, is below the market average; however, the Company believes that the occupancy will improve once a replacement tenant is found for the drug store described below. The Company believes that the average effective rents payable under existing leases at Mira Loma are at current market rates for comparable space in the Reno area. In 1993, the drug store tenant at the Mira Loma Shopping Center vacated the premises. This tenant leases approximately 16% of the rentable space at Mira Loma under a lease that expires in May 2013. To date, the tenant has remained current on its rental obligations and management has no reason to believe that the tenant intends to discontinue payments. Therefore, the Company does not expect that the store closing will have any material short-term impact on the operations of the property. The Company and the tenant are actively marketing the space to locate a replacement tenant. ITEM 2. Properties (CONTINUED) - -------------------------------------------------------------------------------- THE SHORES OFFICE COMPLEX OFFICE 138,546 SQ. FT. REDWOOD SHORES, CA. - -------------------------------------------------------------------------------- In 1989, the Company purchased a 40% undivided fee interest in the Shores Office Complex (the "Shores"). An affiliated real estate investment trust, Franklin Select Real Estate Income Fund ("Select"), acquired the remaining 60% fee interest as co-owner. This office complex consists of three buildings located at 100 Marine World Parkway, 1 Twin Dolphin Drive and 3 Twin Dolphin Drive, Redwood City, San Mateo County, California. The Company and Select acquired the Shores as tenants in common and have entered into a Co-Ownership Agreement. The Co-Ownership Agreement provides that the management and operation of the Shores is vested equally in the Company and Select. The Company is entitled to 40% and Select to 60% of the net cash flow from operations of the Shores. Operating costs in excess of net cash flow from operations, capital expenditures and insurance costs are paid 40% by the Company and 60% by Select. Neither co-owner may transfer its interest in the Shores without the consent of the other, and each co-owner has a right of first refusal with respect to a third-party buyer. Located in the Redwood Shores community of Redwood City, California and near the midpoint of the San Francisco Peninsula approximately 25 miles south of San Francisco, the Shores is part of a 1,465 acre master-planned, mixed-use development. Approximately 250 acres are devoted to commercial development including office buildings, shopping centers, medical buildings, and hotels. The remainder of Redwood Shores comprises residential properties, a 250 acre lagoon, and 200 acres of reserved open space. The area contains other existing and planned buildings which can be considered competitive with the Shores. The Company believes that the average effective rents provided by existing leases at the Shores are at current market rates for comparable space in the Redwood Shores area. During 1992 and continuing into 1993, the Redwood Shores office market experienced a decline in rental rates, resulting from over-building and the economic recession. These factors had a substantial impact on the Shores' cash flow. The property's operating income declined as leases and renewals were signed at lower rental rates, and while the Company incurred additional costs associated with replacing tenants. Late in 1993 the market stabilized, and by the end of 1994 the area's vacancy rate had declined to less than 2% where it remained throughout 1995 according to CB Commercial Real Estate Group. As a result, effective market rental rates increased about 9% during 1994 and rent concessions substantially ended. Rental rates continued to increase during 1995. The Company believes that the long-term outlook for the Redwood Shores office market remains favorable. The area continues to be attractive to potential tenants. - -------------------------------------------------------------------------------- NORTHPORT BUSINESS PARK INDUSTRIAL 144,568 SQ. FT. FREMONT, CA. - -------------------------------------------------------------------------------- In 1991, the Company purchased three research and development ("R&D") buildings in the Northport Business Park, located at 45875 and 45635 Northport Loop East and 4545 Cushing Parkway in Fremont, California (the "Northport Buildings"). The Northport Business Park is located in the Bayside/Northport area of Fremont, California, on the southeastern side of the San Francisco Bay in southern Alameda County. Fremont is located in the northeastern part of Silicon Valley and its lower development costs, good transportation access and affordable housing have attracted a significant portion of the recent research and development growth in Silicon Valley. The area is improved with a wide variety of industrial facilities, many of which are competitive with the light industrial nature of the Northport Buildings. The Advisor believes that the average effective rents provided from the existing leases at the Northport Buildings are at market rates for comparable space in the Fremont area. Item 2. Properties (Continued) The vacancy rate in the Fremont R&D market is currently 6% compared to 11% at January 1, 1995, and 18% on January 1, 1994, according to information from Colliers Parrish International, Inc. Market rental rates increased approximately 20% during 1995 after declining in the two previous years. The Advisor believes that rental rates will continue to increase in 1996. The Northport Buildings are subject to local improvement assessments in the following outstanding current principal amounts as of December 31, 1995: Building 12 $112,636 Building 13 93,031 Building 17 124,597 Assessments are payable concurrently with property tax payments. The assessments are scheduled to be fully paid in 2004. - -------------------------------------------------------------------------------- GLEN COVE CENTER RETAIL 66,000 SQ. FT. VALLEJO, CA. - -------------------------------------------------------------------------------- In January, 1994, the Company purchased the Glen Cove Center ("Glen Cove"), located at 100-170 Robles Drive, Vallejo, California. Vallejo has a population of approximately 116,000, and is located about 30 miles northeast of San Francisco, and twenty miles north of Oakland. Glen Cove is strategically located at the only entrance and exit to the Glen Cove neighborhood which contains over 2,500 dwelling units. Within a one mile radius surrounding the property, there are no competing neighborhood shopping centers, giving Glen Cove Center a competitive advantage in serving the neighborhood. As of December 31, 1995, the Glen Cove Center was 94% occupied, while the competitive retail market in the vicinity was approximately 85% occupied according to internal research reports. At the time of acquisition, in January, 1994, the property was 90% occupied. Over the past twelve months, rental rates have remained stable. The Company believes that the average effective rents payable under existing leases at Glen Cove are substantially at current market rates for comparable space in the Vallejo area. Item 3. Legal Proceedings There are no material legal proceedings pending to which the Company is a party or to which any of its properties is the subject, required to be reported hereunder. From time to time, the Company may be a party to ordinary routine litigation incidental to its business. Item 4. Submission Of Matters To A Vote Of Security Holders There were no matters submitted to a vote of security holders during the fourth quarter of the fiscal year . PART II Item 5. Market For Company's Common Stock And Related Stockholder Matters The Company has one class of common stock in two series, designated Series A and Series B (the "Common Stock"). As of December 31, 1995, the Company had 3,999,515 Series A common shares outstanding and 319,308 Series B common shares outstanding, and there were approximately 1,658 Series A stockholders of record. The Common Stock votes together as one class with each share being entitled to one vote. The Series B shares are owned by Franklin Properties, Inc., the Advisor. In connection with the Company's initial offering of Series A common stock, shareholders also received warrants in varying amounts depending on when they subscribed during the offering. Warrants covering the exercise of 2,861,420 additional shares of Series A common stock are currently outstanding. Each warrant was exercisable at a price of $10.00 per share, for a 12-month period that expired on January 31, 1996. No warrants were exercised. The Common Stock of the Company has been listed on the American Stock Exchange since January 14, 1994. The following tables set forth the distributions paid per share on Company Common Stock for the periods indicated below and the reported high and low sales prices on the American Stock Exchange composite tape for the applicable periods. DISTRIBUTIONS CALENDAR PERIODS HIGH LOW PAID 1994: First Quarter $6 3/8 $4 1/2 $ .125 Second Quarter 5 3/8 4 3/4 .125 Third Quarter 5 3/4 4 1/2 .125 Fourth Quarter 5 4 1/8 .125 1995: First Quarter 5 3/8 4 1/8 .125 Second Quarter 5 7/8 4 1/4 .125 Third Quarter 5 13/16 5 .125 Fourth Quarter 5 7/8 4 7/8 .125 Distributions to shareholders are currently paid quarterly on approximately the 15th day of January, April, July and October. Shareholders may elect to direct their distributions into any or one of the eligible funds in the Franklin Templeton Group of Funds, which are managed by an affiliate of the Advisor, or participate in the Company's Dividend Reinvestment Plan. For information on how to participate in the Dividend Reinvestment Plan, please contact the Company's transfer agent at (800) 851-4217. There are no restrictions on sales or purchases of the Company's Series A common stock other than those that may be imposed by any applicable federal or state securities laws or by the Company's Articles of Incorporation or Bylaws with respect to maintaining the Company's status as a qualified real estate investment trust under applicable tax rules and regulations. Item 5. Market For Company's Common Stock And Related Stockholder Matters (Continued) The Company is a real estate investment trust ("REIT") and elected REIT status commencing with the 1988 tax year pursuant to the provisions of the Internal Revenue Code (the "Code") and applicable state income tax law. Under those provisions, the Company will not be subject to income tax on that portion of its taxable income which is distributed annually to stockholders if at least 95% of its taxable income (which term excludes capital gains) is distributed and if certain other conditions are met. During such time as the Company qualifies as a REIT, the Company intends to make quarterly cash distributions to the stockholders aggregating on an annual basis at least 95% of its taxable income. The Company has a policy, subject to the discretion of the Board of Directors, of making quarterly cash distributions to shareholders aggregating on an annual basis at least 95% of its taxable income. For the years ended December 31, 1995, and the Company declared distributions of approximately $2,000,000 ($.50 per share) each year. Because depreciation is a non-cash expense, cash flow will typically be greater than earnings from operations and net earnings. Therefore, quarterly distributions will consistently be higher than quarterly earnings which causes a portion of the distributions to be considered a return of capital. For the years ended December 31, 1995 and 1994, the portion of distributions that represented a return of capital under generally accepted accounting principles were $401,000 and $434,000, respectively. For return of capital information on a tax basis see "Item 6. Selected Financial Data". Among other requirements, the Company must, in order to continue its status as a REIT under the Code, not have more than 50% in value of its outstanding shares owned by five or fewer individuals during the last half of a taxable year (the "5/50 Provision"). In order to meet these requirements, the Company has the power to redeem a sufficient number of shares in order to maintain or to bring the ownership of the shares into conformity with these requirements, and to prohibit the transfer of shares to persons whose acquisition would result in a violation of these requirements. These restrictions may include shares issuable upon the exercise of warrants. The price to be paid in the event of the redemption of shares will be the last reported sale price of the Series A common stock on the last business day prior to the redemption date of the principal national securities exchange on which the Series A common stock is listed or admitted to trading, or otherwise as determined in good faith by the Directors of the Company. In order to assure compliance with the 5/50 Provision of the Code, described above, the Company's Bylaws permit the Directors of the Company to impose a lower percentage limit on the remaining shareholders, in the event certain shareholders (including Franklin and its affiliates) acquire in excess of 9.8% of the outstanding shares of Common Stock during the offering period. The Directors of the Company have exercised this authority under the Bylaws to lower the percentage limitation such that shareholders may not acquire additional shares if such shareholder then holds, or would then hold, in excess of 8% of the total outstanding voting shares of the Company. Any shares acquired in excess of the foregoing limitation will be deemed to be held in trust for the Company, and will not be entitled to receive distributions or to vote. The Directors of the Company may impose, or seek judicial or other imposition of additional restrictions if deemed necessary or advisable, including but not limited to further reductions in the foregoing percentage limitation, with or without notice, or redemption of shares, in order to protect the Company's status as a qualified REIT. The Company has established a Dividend Reinvestment Plan (the "Plan") which is designed to enable Company Series A Shareholders to choose to have distributions automatically invested in additional shares of Company common stock at market value, without the payment of any brokerage commission, service charge or other expense. In order to participate in the Plan, investors must designate that they would like their distributions reinvested. Company Series A shareholders may elect to participate in the Plan at any time. The Plan does not accept cash contributions from Company shareholders to purchase additional shares of existing Company common stock. Only distributions on existing Company common stock may be reinvested. Item 6. Selected Financial Data
- ------------------------------------------------------------------------------------ (Dollars in 000's except 1995 1994 1993 1992 1991 per share amounts) - ------------------------------------------------------------------------------------ Total revenue $ 4,708 $ 4,480 $ 4,138 $ 3,903 $ 4,245 Depreciation and 1,141 1,122 1,069 959 965 amortization Property operations 1,225 1,114 909 892 940 expense Related party expenses 222 213 226 222 187 General and administrative expenses 173 218 219 133 118 Consolidation expense, net 143 2 284 423 - Net income 1,599 1,566 1,431 1,274 2,035 Total assets 37,855 38,230 36,676 37,230 38,175 Note payable 1,937 1,981 0 0 0 Per share1: Net income .40 .39 .36 .32 .51 Distributions declared .50 .50 .50 .55 .76 Tax status of distributions paid Ordinary income .49 .41 .14 .47 .55 Return of capital .01 .09 .24 .08 .21 Weighted average number of shares of Series A common stock outstanding 3,999,518 3,999,958 4,000,000 4,000,000 4,000,000
1Per weighted average number of shares of Series A common stock outstanding. Item 7. 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. RESULTS OF OPERATIONS COMPARISON OF THE YEAR ENDED DECEMBER 31, 1995, TO YEAR ENDED DECEMBER 31, 1994 Net income for 1995 increased $33,000, or 2%, as compared to 1994 due to the following factors: an increase in rental revenue of $224,000; an increase in interest and dividends of $18,000; a decrease in other income of $14,000; an increase in interest expense of $28,000; an increase in depreciation and amortization of $19,000; an increase in operating expenses of $111,000; an increase in related party expenses of $9,000; an increase in consolidation expense of $141,000; a decrease in general and administrative expense of $45,000, 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 1995 increased $224,000, or 5%, primarily due to an additional month of rental income from the Glen Cove Shopping Center acquired on January 31, 1994, and improved occupancy and rental rates at the Shores Office Complex. The average occupancy rate of net rentable square feet during the years 1995 and 1994 at the Shores Office Complex was 99% and 92%; at the Northport Buildings 99% and 97%; at the Mira Loma Shopping Center 82% and 81%; and at the Glen Cove Center 96% and 96%, respectively. Total expenses increased in 1995 by $195,000, or 7% from $2,914,000 in 1994 to $3,109,000. The increase in total expenses is attributable to the following factors: an increase in interest expense of $28,000; an increase in depreciation and amortization of $19,000, or 2%; an increase in operating expenses of $111,000, or 9%; an increase in related party expense of $9,000, or 4%; an increase in consolidation expense of $141,000; a decrease in general and administrative expense of $45,000, or 21%, and a decrease in loss on sale of mortgage-backed securities of $68,000 or 100%. Interest expense increased $28,000 as a result of the issuance of a note payable on January 31, 1994, and to an increase in the interest rate charged on the outstanding principal balance of the loan. Interest rates on the note ranged from 10% to 10.5% in 1995 compared with 8% to 11% in 1994. Depreciation and amortization increased $19,000 reflecting tenant improvement costs at the Shores Office Complex related to new leases commencing in late 1994 and the acquisition of Glen Cove Center on January 31, 1994. Related party expense increased $9,000 as a result of an increase in property management fees due to the increases in rental revenue at the Company's properties. Consolidation expense increased $141,000 as a result of the proposed consolidation. General and administrative expense decreased $45,000 due to a decrease in nonrecurring costs associated with listing the Company's stock on the American Stock Exchange in January, 1994, of $55,000. The decrease in nonrecurring costs were partially offset by an increase in director's fees related to the proposed consolidation of $10,000. 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. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Operating expenses increased $111,000 due to an increase in utility and insurance expense at the Company's properties and to a $100,000 write-off of building and equipment related to ceasing operations at the Mira Loma Car Wash in August, 1995. The land was paved and used as additional parking space at the Mira Loma Shopping Center. COMPARISON OF YEAR ENDED DECEMBER 31, 1994, TO YEAR ENDED DECEMBER 31, 1993 Net income for 1994 increased $135,000, or 9%, as compared to 1993 primarily due to the acquisition of the Glen Cove Center in January, 1994, and due to improved occupancy rates at two of the Company's properties. Rental revenue for 1994 increased $1,045,000, or 31%, primarily due to the recognition of approximately $913,000 of rental income from the Glen Cove Center, and due to improved occupancy at the Shores Office Complex and Northport Business Park properties. The average occupancy rate of net rentable square feet during the years 1994 and 1993 at the Shores Office Complex was 93% and 83%; at the Northport Buildings 97% and 87%; and at the Mira Loma Shopping Center 81% and 92%, respectively. Average occupancy during 1994 at the Glen Cove Center was 95%. Interest and distribution income decreased $246,000, or 79%, primarily due to the sale of mortgage-backed securities and the investment of the proceeds in the Glen Cove Center. A loss of $68,000 was recorded in 1994 on the sale of the securities. In 1993, the Company sold its GNMA mortgage-backed securities in order to realize the gain on those investments in the amount of $447,000. Total expenses increased in 1994 by $207,000, or 8%, from $2,707,000 in 1993 to $2,914,000, mostly due to the acquisition of the Glen Cove Center. Interest expense increased $177,000 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 $53,000 and operating expense increased $205,000 reflecting the acquisition of the Glen Cove Center. Consolidation expense decreased $282,000 on a net basis in 1994, due to the termination of the proposed merger in the fourth quarter of 1993. 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 cash flow has been its principal source of capital for property improvements, leasing costs and the payment of quarterly distributions. At December 31, 1995, the Company's cash reserves, including mortgage-backed securities, aggregated $2,098,000. The Company's investment in mortgage-backed securities consists of GNMA, adjustable rate pass-through certificates in which payments of principal and interest are guaranteed by GNMA. However, changes in market interest rates may cause the security's market value to fluctuate, which could result in a gain or loss to the Company if the securities are sold before maturity. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) For the periods presented, the Company's investing and financing activities primarily consisted of the acquisition of the Glen Cove Center. During 1994, the Company borrowed $2 million in order to purchase the Glen Cove Center. 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 are due beginning August 1, 1994, and continuing 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 distributions. Net cash flow provided by operating activities for the years ended December 31, 1995, 1994 and 1993 was $2,746,000, $2,670,000 and $2,023,000, respectively. The trend generally reflects the Company's improving profitability, which is also indicated by trends in net income and Funds from Operations. Net cash flow provided by operating activities was impacted in 1993 by consolidation expenses and greater free rent and leasing commissions. Also see "Results of Operations" above. Funds from Operations for the years ended December 31, 1995, 1994 and 1993 were $2,740,000, $2,688,000 and $2,500,000, respectively. The primary differences between the periods relate to the changes in net income as discussed under "Results of Operations". The Company believes that Funds from Operations is helpful in understanding a property portfolio in that such calculation reflects income from operating activities and the properties' ability to support general operating expenses and interest expense before the impact of certain activities, such as gains and losses from property sales and changes in the accounts receivable and accounts payable. However, it does not measure whether income is sufficient to fund all of the Company's cash needs including principal amortization, capital improvements and distributions to shareholders. Funds from Operations should not be considered an alternative to net income, or any other GAAP measurement of performance, as an indicator of the Company's operating performance or as an alternative to cash flows from operating, investing or financing activities as a measure of liquidity. As defined by the National Association of Real Estate Investment Trusts, Funds from Operations is net income (computed in accordance with GAAP), excluding gains or losses from debt restructuring and sales of property, plus depreciation and amortization, and after adjustment for unconsolidated joint ventures. The Company reports Funds from Operations in accordance with the NAREIT definition. For the periods presented, Funds from Operations represents net income plus depreciation and amortization. The measure of Funds from Operations as reported by the Company may not be comparable to similarly titled measures of other companies that follow different definitions. 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. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) DISTRIBUTIONS Distributions are declared quarterly at the discretion of the Board of Directors. The Company's present distribution policy is to at least annually evaluate the current distribution 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 distribution rate which: i) provides a stable distribution which is sustainable despite short term fluctuations in property cash flows; ii) maximizes the amount of cash flow paid out as distributions consistent with the above listed objective; and iii) complies with the Internal Revenue Code requirement that a REIT annually pay out as distributions not less than 95% of its taxable income. During the years ended December 31, 1995, and 1994, the Company declared distributions totaling $2,000,000, or $.50 per share each year. Because depreciation is a non-cash expense, cash flow will typically be greater than earnings from operations and net earnings. Therefore, quarterly distributions will consistently be higher than quarterly earnings. Item 8. Financial Statements And Supplementary Data Index to Financial Statements and Schedules Page Report of Independent Accountants 17 Balance Sheets as of December 31, 1995, and 1994 18 Statements of Operations for the years ended December 31, 1995, 1994 and 1993 19 Statements of Stockholders' Equity for the years ended December 31, 1995, 1994 and 1993 20 Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993 21 Notes to Financial Statements 22-27 Schedule III - Real Estate and Accumulated Depreciation 28-29 All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. R E P O R T O F I N D E P E N D E N T A C C O U N T A N T S Board of Directors and Stockolders Franklin Real Estate Income Fund We have audited the accompanying balance sheets of Franklin Real Estate Income Fund as of December 31, 1995 and 1994, the related statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1995, and the financial statement schedule of Real Estate and Accumulated Depreciation. These financial statements and the financial statement schedule are the responsibility of Franklin Real Estate Income Fund's management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Franklin Real Estate Income Fund as of December 31, 1995 and 1994, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the above financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND L.L.P. San Francisco, California January 20, 1996 B A L A N C E S H E E T S Franklin Real Estate Income Fund - -------------------------------------------------------------------- as of December 31, 1995 and 1994 (dollars in 1995 1994 000's except per share amounts) - -------------------------------------------------------------------- ASSETS Rental property Land $10,326 $10,326 Buildings and improvements 29,666 29,606 Equipment - 63 ------------------ 39,992 39,995 Less accumulated depreciation 5,521 4,535 ------------------ 34,471 35,460 Cash and cash equivalents 1,586 973 Mortgage-backed securities, available for sale 512 532 Deferred rent receivable 745 686 Deferred costs and other assets 541 579 ------------------ Total assets $37,855 $38,230 ================== - -------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Note payable $1,937 $1,981 Tenants' deposits and other liabilities 276 247 Distributions payable 500 500 ------------------ Total liabilities 2,713 2,728 ------------------ Stockholders' equity: Common stock, Series A, without par value; stated value $10 per share; 10,000,000 shares authorized; 35,702 35,703 3,999,515 and 3,999,653 shares issued and outstanding for 1995 and 1994, respectively Common stock, Series B, without par value; stated value $10 per share; 500,000 shares 3,193 3,193 authorized; 319,308 shares issued and outstanding Unrealized gain (loss) on mortgage-backed 2 (40) securities Accumulated distributions in excess of net (3,755) (3,354) income ------------------ Total stockholders' equity 35,142 35,502 ------------------ Total liabilities and stockholders' equity $37,855 $38,230 ================== - -------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements. S T A T E M E N T S O F O P E R A T I O N S Franklin Real Estate Income Fund - ----------------------------------------------------------------- for the years ended December 31, 1995, 1994 and 1993 1995 1994 1993 (Dollars in 000's except per share amounts) - ----------------------------------------------------------------- Revenue: Rent $4,613 $4,389 $3,344 Interest and dividends 85 67 313 Other 10 24 34 Gain on sale of mortgage-backed securities - - 447 ---------------------------- Total revenue 4,708 4,480 4,138 ---------------------------- Expenses: Interest 205 177 - Depreciation and amortization 1,141 1,122 1,069 Property operations 1,225 1,114 909 Related party 222 213 226 Consolidation expense, net 143 2 284 General and administrative 173 218 219 Loss on sale of mortgage-backed securities - 68 - ---------------------------- Total expenses 3,109 2,914 2,707 ---------------------------- Net income $1,599 $1,566 $1,431 ============================ Net income per share, based on the weighted average shares outstanding of Series A common stock of 3,999,518,3,999,958 and 4,000,000 for the years ended December 31, 1995, 1994 and 1993,respectively $ .40 $ .39 $ .36 ============================ Distributions per share, based on the weighted average shares outstanding of Series A common stock of 3,999,518,3,999,958 and 4,000,000 for the years ended December 31, 1995, 1994 and 1993, respectively $ .50 $ .50 $ .50 ============================ - ----------------------------------------------------------------- The accompanying notes are an integral part of these financial statements. S T A T E M E N T S O F S T O C K H O L D E R S' EQUITY Franklin Real Estate Income Fund for the years ended December 31, 1995, 1994 and 1993 (Dollars in 000's)
Common Stock Series A Series B Unrealized (Loss)/Gain Accumulated on Mortgage- Distributions Backed in Excess of Shares Amount Shares Amount Securities Net Income Total - --------------------------------------------------------------------------------------------- Balance, December 31, 1992 4,000,000 $35,704 319,308 $3,193 - $(2,351) $36,546 Net income - - - - - 1,431 1,431 Distributions declared - - - - - (2,000) (2,000) - --------------------------------------------------------------------------------------------- Balance, December 31, 1993 4,000,000 35,704 319,308 3,193 - (2,920) 35,977 Redemption of Series A common stock (347) (1) - - - - (1) Unrealized loss on mortgage- backed securities - - - - (40) - (40) Net income - - - - - 1,566 1,566 Distributions declared - - - - - (2,000) (2,000) - --------------------------------------------------------------------------------------------- Balance, December 31, 1994 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 - - - - 42 - 42 Net Income - - - - - 1,599 1,599 Distributions declared - - - - - (2,000) (2,000) - --------------------------------------------------------------------------------------------- Balance, December 31, 1995 3,999,515 $35,702 319,308 $3,193 $2 $(3,755) $35,142 =============================================================================================
The accompanying notes are an integral part of these financial statements. S T A T E M E N T S O F C A S H F L O W S
Franklin Real Estate Income Fund - ------------------------------------------------------------------------- for the years ended December 31, 1995, 1994 1995 1994 1993 and 1993 (Dollars in 000's) - ------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $1,599 $1,566 $1,431 ---------------------------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,141 1,122 1,069 Increase in deferred rent receivable (59) (147) (273) (Increase) decrease in other assets (64) 81 (219) Increase in tenants' deposits and other 29 48 15 liabilities Loss on disposition of rental property 100 - - ---------------------------- 1,147 1,104 592 ---------------------------- Net cash provided by operating activities 2,746 2,670 2,023 ---------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of rental property - (6,700) - Improvements to rental property (150) (279) (503) Investment in mortgage-backed securities - (588) - Disposition of mortgage-backed securities 62 4,420 1,133 ---------------------------- Net cash provided by (used in) investing activities (88) (3,147) 630 ---------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Distributions paid (2,000) (2,000) (2,000) Borrowings under note payable - 2,000 - Principal payments on note payable (44) (19) - Redemption of Series A common stock (1) (1) - ---------------------------- Net cash used in financing activities (2,045) (20) (2,000) ---------------------------- Net increase (decrease) in cash and cash equivalents 613 (497) 653 Cash and cash equivalents, beginning of year 973 1,470 817 ---------------------------- Cash and cash equivalents, end of year $1,586 $973 $1,470 ============================ - -------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements. N O T E S T O F I N A N C I A L S T A T E M E N T S NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND BUSINESS ACTIVITY 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. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. As of December 31, 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. RENTAL PROPERTY Rental property is stated at cost and depreciated using the straight-line method over an estimated useful life of 35 years for buildings and improvements, and 5 years for equipment. Significant improvements and betterments are capitalized. Maintenance, repairs and minor renewals are charged to expense when incurred. The Shores is reflected in these financial statements in accordance with the Company's ownership interest. Pursuant to the Company's investment objectives, property purchased is generally held for extended periods. During the holding period, management periodically, but at least annually, evaluates whether rental property has suffered an impairment in value. Management's analysis includes consideration of estimated undiscounted future cash flows during the expected holding period in comparison with carrying values, prevailing market conditions and other economic matters. If the current carrying value of an individual property exceeds estimated future undiscounted cash flows, the Company would reduce the carrying value of the asset to fair value; however, to date, such adjustments have not been required. CASH AND CASH EQUIVALENTS The Company classifies highly liquid investments with original maturities of three months or less from the date acquired as cash equivalents. N O T E S T O F I N A N C I A L S T A T E M E N T S MORTGAGE-BACKED SECURITIES VALUATION Mortgage-backed securities held by the Company are classified as available for sale and are carried at market value. The resulting unrealized gains and losses are reported as a separate component of stockholders' equity until realized. Realized gains and losses are recognized on the specific identification method and are included in earnings. For the year 1993, prior to the adoption of Statement of Financial Accounting Standards No. 115, the Company valued mortgage-backed securities at amortized cost. The impact of this change on stockholders' equity on January 1, 1994, was immaterial. DEFERRED COSTS Lease commissions are deferred and amortized using the straight-line method over the term of the related lease. RENTAL REVENUES Rental revenues are recorded on the straight-line method to reflect scheduled rent increases over the related lease term. As a result, a deferred rent receivable is created when rental receivables are less than the amount earned using the straight-line method or when rental income is recognized during free rent periods of a lease. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of mortgage-backed securities. The Company places excess cash in short-term deposits with Franklin Money Fund, an investment company managed by an affiliate of the Advisor, and in money market securities of companies with strong credit ratings and, by policy, limits credit exposure to any one issuer. The Company performs ongoing credit evaluations of its tenants and generally does not require collateral for commercial tenants. The Company reserves for potential credit losses, as appropriate. The following tenants provided 10% or more of the Company's total straight-line rental revenues for the years 1995, 1994 and 1993. Percent of Straight-Line Rental Revenue Primary Lease Expirations 1995 1994 1993 Business - ----------------------------------------------------------------- Grocery Store 01/31/2010 14.7% 14.7% 0% Grocery Store 04/25/2005 7.0% 7.6% 10.2% RECLASSIFICATION Certain reclassifications were made in the 1994 and 1993 financial statements to conform to the presentation in the 1995 financial statements. Such reclassifications had no effect on previously reported results. NOTE 2 - 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 distributions 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. The agreement also provides for the Advisor to receive fees in connection with obtaining financing and the sale of the Company's properties. N O T E S T O F I N A N C I A L S T A T E M E N T S The agreements between the Company and the Advisor, or affiliates of the Advisor, provide for certain types of compensation and payments including but not limited to the following, for those services rendered for the years ended December 31, 1995, 1994 and 1993: 1995 1994 1993 -------------------------------- Property management fee, charged to $175,000 $157,000 $168,000 related party expense Reimbursement for data processing, accounting and certain other expenses, charged to related party 47,000 56,000 58,000 expense Acquisition fee, capitalized and amortized over the life of the related investment - 250,000 - Leasing commission, capitalized and amortized over the term of the 124,000 25,000 - related lease Construction supervision fee, capitalized and amortized over the life of the related investment or the term of the related lease 12,000 10,000 - At December 31, 1995 and 1994, cash equivalents included $330,000 and $31,000, respectively, which was invested in Franklin Money Fund, an investment company managed by an affiliate of the Advisor. Dividends earned from Franklin Money Fund totaled $7,000, $6,000 and $5,000 for the years ended December 31, 1995, 1994 and 1993, respectively. NOTE 3 - MORTGAGE-BACKED SECURITIES, AVAILABLE FOR SALE Mortgage-backed securities, available for sale at December 31, 1995, consisted of a Government National Mortgage Association certificate with a 7% coupon rate, maturing in 2023. Amortized cost was $509,000 and market value was $511,000, resulting in a gross unrealized gain of $2,000. Mortgage-backed securities at December 31, 1994, had an aggregate market value of $532,000 and an amortized cost of $572,000, resulting in a gross unrealized loss of $40,000. N O T E S T O F I N A N C I A L S T A T E M E N T S NOTE 4 - COMMON STOCK, WARRANTS AND INCOME PER SHARE Series A and Series B common stock have the same voting rights. Distributions 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 distributions are declared at the discretion of the Directors of the Company. To date, the Board of Directors has not declared any distributions 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 December 31, 1995. Each warrant is exercisable at a price of $10.00 per share for a 12-month period which expires on January 31, 1996. NOTE 5 - DISTRIBUTIONS The allocation of cash distributions per share for individual shareholders' income tax purposes, as reported on Internal Revenue Service Form 1099-DIV, for the years ended December 31, 1995, 1994 and 1993 was as follows: Ordinary Return of Capital Total Year Paid Income Capital Gain Paid - ------------------------------------------------------- 1995 $.49 $.01 $ - $.50 1994 $.41 $.09 $ $.50 1993 $.14 $.24 $.12 $.50 In December, 1994, the Company implemented a new Dividend Reinvestment and Share Purchase Plan (the "Plan"), under which a stockholder's cash distributions may be reinvested in shares of Series A common stock of the Company, subject to the terms and conditions of the Plan. Under the Plan, the Company's Dividend Reinvestment Agent makes open market purchases of the Company's Series A common stock, administers the Plan and performs other duties related to the Plan. No new shares are issued in connection with the Plan. N O T E S T O F I N A N C I A L S T A T E M E N T S NOTE 6 - NOTE PAYABLE The mortgage note payable is collateralized by a deed of trust on the Glen Cove Center. The note bears interest, payable monthly, at a variable rate equal to the Union Bank Reference Rate plus 1.5%. Principal is payable in monthly installments of $3,700 until maturity on May 1, 1999. For the years ended December 31, 1995, 1994, and 1993, the Company paid interest of $204,000, $178,000 and $0, respectively. Aggregate principal payments required in future years are as follows: 1996 44,000 1997 44,000 1998 44,000 1999 1,805,000 ------------ $ 1,937,000 ============ NOTE 7 - RENTAL INCOME The Company's rental income from commercial property is received principally from tenants under non-cancelable operating leases. The leases typically provide for guaranteed minimum rent plus contingent rents. Minimum future rentals on noncancellable operating leases at December 31, 1995 are as follows: 1996 $ 3,639,000 1997 3,303,000 1998 3,163,000 1999 2,857,000 2000 2,369,000 Thereafter 12,718,000 --------------- $ 28,049,000 =============== Minimum future rentals do not include contingent rents, which represent reimbursements of property operating expenses. Contingent rents amounted to $675,000, $678,000 and $426,000 for the years ended December 31, 1995, 1994 and 1993, respectively. N O T E S T O F I N A N C I A L S T A T E M E N T S NOTE 8 - PROPOSED MERGER On November 2, 1995 the Boards of Directors of the Company and of two other real estate investments 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/Prospectus with the Securities and Exchange Commission. The Prospectus 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/Prospectus. 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 Prospectus and the close of the solicitation period. The Company expenses non-recurring consolidation costs in the periods in which they are incurred. Expenses recorded in 1993 and 1994 relate to a previous plan of consolidation and are net of certain reimbursements by the Advisor. NOTE 9 - SUPPLEMENTARY QUARTERLY FINANCIAL DATA (UNAUDITED) Three Months Ended ------------------------------------------------------ March 31, June 30, September 30, December 31, 1995 1995 1995 1995 ------------------------------------------------------ Revenues $1,128,000 $1,177,000 $1,232,000 $1,171,000 Net income 442,000 454,000 336,000 367,000 Net income per share .11 .11 .08 .09 Three Months Ended ------------------------------------------------------- March 31, June 30, September 30, December 31, 1994 1994 1994 1994 ------------------------------------------------------- Revenues $1,030,000 $1,145,000 $1,133,000 $1,172,000 Net income 292,000 476,000 406,000 392,000 Net income per share .07 .12 .10 .10 Three Months Ended ------------------------------------------------------- March 31, June 30, September 30, December 31, 1993 1993 1993 1993 ------------------------------------------------------- Revenues $1,337,000 $847,000 $930,000 $1,024,000 Net income 651,000 174,000 150,000 456,000 Net income per .16 .04 .04 .12 share
- -------------------------------------------------------------------------------------------------------------------------------- R E A L E S T A T E A N D A C C U M U L A T E D D E P R E C I A T I O N - -------------------------------------------------------------------------------------------------------------------------------- Franklin Real Estate Income Fund as of, and for the years ended December 31, 1995, 1994 and 1993 Col A. Col B. Col C. Col D. Col E. Col F. Col G. Col H. Col I. ------ ------ ------ ------ ------ ------ ----- ------ ------ Cost Capitalized Initial Subsequent To Gross Amount at Which Cost to Fund Acquisition Carried at Close of Period Buildings Accumu- Carry and lated Date of Date Encum- Improve- ing Improve- Deprec- construc- Acqui- Description brances Land Buildings ments Costs Land ments Total iation tion red --------------------------------------------------------------------------- ----------------------------------------- ----------- Shopping $ - $2,233,000 $7,006,000 $597,000 $ - $2,233,000 $7,603,000 $ 9,836,000 $1,680,000 85/88 11/88 Center & 9/92 Reno, Nevada Office - 2,719,000 7,924,000 775,000 - 2,719,000 8,699,000 11, 418,000 1,784,000 82/87 09/89 Complex Redwood City, CA R&D Buildings - 2,874,000 8,708,000 379,000 - 2,874,000 9,087,000 11,961,000 1,822,000 85 01/91 Fremont, CA Shopping 1,937,000 2,500,000 4,200,000 77,000 - 2,500,000 4,277,000 6,777,000 235,000 89 01/94 Center Vallejo, CA - ----------------------------------------------------------------------------------------------------------------------------------- $1,937,000 $10,326,000 $27,838,000 $1,828,000 $ - $10,326,000 $29,666,000 $39,992,000 $5,521,000 (1) (2) (3) =================================================================================================================================== Life on Which Deprecia-tion in Latest Operat-ions State-ment is Description Computed ------------ ------------ Shopping Center Reno, Nevada 35 Office Complex Redwood City 35 CA R&D Buildings Fremont, CA 35 Shopping Center 35 Vallejo, CA
=============================================================================== R E A L E S T A T E A N D A C C U M U L A T E D D E P R E C I A T I O N =============================================================================== NOTES: (1) The aggregate cost for federal income tax purposes is $39,992,000. (2) Reconciliation of Real Estate 1995 1994 1993 ----------------------------------------- Balance at beginning of period $39,995,000 $33,016,000 $32,513,000 Dispositions (153,000) Additions during period: Acquisitions - 6,700,000 - Improvements 150,000 279,000 503,000 ----------------------------------------- Balance at end of period $39,992,000 $39,995,000 $33,016,000 ========================================= (3) Reconciliation of Accumulated Depreciation 1995 1994 1993 ----------------------------------------- Balance at beginning $4,535,000 $3,508,000 $2,511,000 of period Dispositions (53,000) Depreciation expense 1,039,000 1,027,000 997,000 for the period ----------------------------------------- Balance at end of period $5,521,000 $4,535,000 $3,508,000 ========================================= Item 9. Disagreements on Accounting and Financial Disclosure None. PART III Item 10. Directors and Executive Officers Of The Company And The Advisor Directors of the Company are elected annually by the shareholders. The Officers of the Company are appointed by the Board of Directors, and serve under the supervision, and, at the pleasure of the Board of Directors. There is an Audit Committee consisting of the Independent Directors of the Company. The Audit Committee's responsibilities generally include review of the internal controls of the Company, accounting compliance and review of the Company's financial reporting. In performing these reviews, the Audit Committee met once during the year ended December 31, 1995. The Directors and Officers of the Company and/or the Advisor are: NAME POSITION David P. Goss Chief Executive Officer, President and Director Frank W. T. LaHaye Independent Director Egon H. Kraus Independent Director Michael J. McCulloch Executive Vice President Richard S. Barone Secretary Mark A. TenBoer Vice President - Finance and Chief Financial Officer All such officers and directors have served in these capacities with the Company since January 1988 with the exceptions of Mr. TenBoer, who was appointed in December 1993, and Mr. LaHaye, who was elected in June 1995. NAME, AGE AND FIVE-YEAR BUSINESS EXPERIENCE DIRECTOR SINCE David P. Goss (48) 1988 Mr. Goss is the Chief Executive Officer, President and Director of the Company. He is also Chief Executive Officer, President and Director of Property Resources, Inc., Property Resources Equity Trust (1987 to date), the Advisor, Franklin Select Real Estate Income Fund (1988 to date), Franklin Advantage Real Estate Income Fund (1990 to date), and Franklin Real Estate Management, Inc. (1991 to date). Mr. Goss has a B.A. degree from the University of California, Berkeley, and a J.D. degree from the New York University School of Law. Egon H. Kraus (66) 1988 Mr. Kraus is an Independent Director of the Company. He was formerly Vice President and director of McNiel Investors Inc. (1991-1995). He is a Certified Public Accountant, primarily involved in real estate transactions. He has a B.S. and an M.B.A. from the University of California, Berkeley, where he was elected to Phi Beta Kappa. Mr. Kraus is a member of the American Institute of Certified Public Accountants, and a former member of the Financial Executives Institute and the Tax Executives Institute. He is also a Director of Franklin Select Real Estate Income Fund (1989 to date) and Franklin Advantage Real Estate Income Fund (1990 to date). Item 10. Directors and Executive Officers Of The Company And The Advisor (Continued) Frank W. T. LaHaye (66) 1995 Mr. LaHaye is an independent director of the Company. He is General Partner, Peregrine Associates and Miller & LaHaye, which are General Partners of Peregrine Ventures and Peregrine Ventures II (venture capital firms); Chairman of the Board and Director, Quarterdeck Office Systems, Inc.; Director, Fischer Imaging Corporation; and director or trustee, as the case may be, of 25 of the investment companies in the Franklin Group of Funds. The executive officers of the Company other than those listed above are: Michael J. McCulloch, age 48, is Executive Vice President of the Company (1988 to date). He is also Executive Vice President of Property Resources, Inc., Property Resources Equity Trust (1987 to date), the Advisor, Franklin Select Real Estate Income Fund (1989 to date), Franklin Advantage Real Estate Income Fund (1990 to date), and Franklin Real Estate Management, Inc. (1991 to date). He attended California State University, Los Angeles and the University of Southern California. Richard S. Barone, age 45, is Secretary of the Company (1988 to date). He is also secretary of the Advisor, Property Resources, Inc., Property Resources Equity Trust, Franklin Select Real Estate Income Fund (1989 to date), Franklin Advantage Real Estate Income Fund (1990 to date), and Franklin Real Estate Management, Inc. (1991 to date). He is also Senior Vice President - Legal of the Advisor, Property Resources, Inc. (1988 to date), and Franklin Real Estate management, Inc. (1991 to date); and Corporate Counsel of Franklin Resources, Inc. (1988 to date). Mr. Barone received a B.A. degree and a J.D. degree from the University of San Francisco. He is a member of the State Bar of California. Mark A. TenBoer, age 39, is Vice President - Finance and Chief Financial Officer of the Company, Franklin Select Real Estate Income Fund and Franklin Advantage Real Estate Income Fund (1993 to date), and has served as Vice President - Asset Management for the Advisor, Property Resources, Inc., and Franklin Real Estate Management, Inc., since 1994. From 1983 to 1991 he was Director - Portfolio Management and Controller of the Advisor and Property Resources, Inc. He received a B.S. degree in Accounting from the University of Illinois. Mr. TenBoer is a Certified Public Accountant. The Advisor and Continental Property Management Co. The principal executive officers, directors and key employees of the Advisor are as follows: NAME POSITION David P. Goss Chief Executive Officer, President and Director Harmon E. Burns Director Rupert H., Johnson, Jr. Director Charles E. Johnson Director Michael J. McCulloch Executive Vice President Richard S. Barone Senior Vice President - Legal and Secretary Martin L. Flanagan Vice President - Finance and Chief Financial Officer Mark A. TenBoer Vice President - Asset Management David P. Rath Vice President - Asset Management David N. Popelka Vice President - Asset Management Item 10. Directors and Executive Officers Of The Company And The Advisor (Continued) The principal executive officers of Continental Property Management Co. are as follows: NAME POSITION Thomas J. Bennett President, Chief Financial Officer and Director Charles L. Gee Senior Vice President and Secretary For a description of the occupations and affiliations of Messrs. Goss, McCulloch, Barone and TenBoer, see "The Company" above. NAME, AGE AND FIVE-YEAR BUSINESS EXPERIENCE DIRECTOR SINCE Harmon E. Burns (51) 1988 Mr. Burns has served since 1990 as Executive Vice President, Secretary and Director of Franklin Resources, Inc. He also serves as Executive Vice President of Franklin/Templeton Distributors, Inc., Executive Vice President of Franklin Advisers, Inc., Director of Templeton Worldwide, Inc., Franklin/Templeton Investor Services, Inc. and Franklin Bank and as an officer of most of the mutual funds in the Franklin Templeton Group of Funds. Mr. Burns received a B.B.A. degree from George Washington University in 1969 and received a J.D. degree from San Mateo Law School in 1976. He is a member of the State Bar of California and is a licensed General Securities Principal with the National Association of Securities Dealers, Inc. Rupert H. Johnson, Jr. (55) 1988 Mr. Johnson has served since 1990 as Executive Vice President and Director of Franklin Resources, Inc. Previously, he was Senior Vice President of Franklin Resources, Inc. He holds similar positions with is subsidiaries and affiliates including the position of President and Director of Franklin Advisors, Inc. He has also served as Director of Property Resources, Inc. since 1985 and currently serves as a Director or Trustee and Vice President on most of the mutual funds in the Franklin Templeton Group of Funds, and as a Director of Franklin Bank. Charles E. Johnson, Jr. (39) 1988 Mr. Johnson has served as the Senior Vice President (1990) and a Director of Franklin Resources, Inc. since 1987. He is also the Senior Vice President of Franklin Templeton Distributors, Inc. (1990 to date), and the President and a Director of Templeton Worldwide, Inc. and Franklin Institutional Services Corporation (1991 to date). He is also an officer and/or director or trustee, as the case may be, of 24 of the investment companies in the Franklin Templeton Group of Funds. The executive officers of the Advisor and Continental Property Management Co. other than those listed above are as follows: Martin L. Flanagan, age 35, has been associated with the Templeton Group since 1983. He is currently the Executive Vice President, Chief Operating Officer and a Director of Templeton, Galbraith & Hansberger ltd., John Templeton Counselors, Inc., and Templeton Global Investors, Inc.; General Manager of Templeton Financial Advisory Services, S.A.; Managing Director of Templeton Global Investors, Ltd.; Finance Director of Templeton Investment Management; Senior Vice President - Finance, Secretary and a Director of Templeton Investment Counsel Ltd.; and Senior Vice president - Finance and a Director of Templeton Investment Counsel, Inc. He is also a Director and/or Chairman of Templeton Funds Annuity Company, Templeton Funds Trust Company, Templeton Funds Management, Inc., Templeton Funds Distributor, Inc. Forcecare Ltd., Templeton Global Strategic Services, S.A., Universal Investment Management, Inc., Templeton Life Assurance Ltd., Structured Asset management, Item 10. Directors and Executive Officers Of The Company And The Advisor (Continued) Inc., The DIAS Group, Inc., Templeton Global Bond Managers, Inc., Templeton Emerging Markets, Templeton Investment Services, Inc., Templeton Management (Lux), S.A., Templeton Unit Trust Managers Ltd., and Templeton Investment Management Ltd. He is also Vice President - Finance and Chief Financial Officer of Property Resources, Inc., Property Resources Equity Trust and Franklin Properties, Inc. Mr. Flanagan received a B.A. degree from Southern Methodist University and is a Certified Public Accountant and a Chartered Financial Analyst. He is currently a member of the American Institute of Certified Public Accountants and the International Society of Financial Analysts. Thomas J. Bennett, age 47, has served since 1988 as the President of Continental Property Management Co. and since 1989 as sole Director and Chief Financial Officer. Previously, he served as Regional Vice President, Utah Region, of Continental Property management Co. He is a graduate of California State University at Long Beach and holds the Certified Property Manager (CPM) designation awarded by the Institute of Real Estate Management. David P. Rath, age 47, has served since 1992 as the Vice President - Asset Management for the Advisor, Property Resources, Inc. and Franklin Real Estate Management, Inc. Previously, he was Assistant Vice President-Research and Analysis for the Advisor. Mr. Rath operated his own real estate investment company, Rath Investments, from 1987 to 1990. Mr. Rath received a B.S. degree in Mechanical Engineering from Bucknell University and a M.B.A. degree from the University of California at Berkeley. David N. Popelka, age 43, has served since 1992 as Vice President - Asset Management for the Advisor, Property Resources, Inc. and Franklin Real Estate Management, Inc. Prior to joining Franklin Properties, Inc., Mr. Popelka was Vice President - Portfolio Management for the Glenborough Management Company in Redwood City, California. Mr. Popelka is a graduate of Illinois State University and received an M.B.A. degree from the University of Washington. He has been a guest lecturer on real estate investments and finance at Golden Gate University. Charles L. Gee, age 49, has served since 1991 as the Senior Vice President of Continental Property Management Co. and as its Secretary since 1989. From 1986 to 1991, he held the office of Vice President for Continental Property Management Co. Mr. Gee holds the Certified Property manager (CPM) designation awarded by the Institute of Real Estate Management and is a California real estate broker. Item 11. Executive Compensation No direct compensation has been paid by the Company to its directors and officers, or directors and officers of the Advisor, except that the independent directors of the Company receive fees of $2,000 per year plus $400 per each regular meeting attended and $300 per each telephonic meeting attended. Each independent director also received $2,500 per quarter and $400 per meeting for attending independent committee meetings related to the proposed merger. For the fiscal year ended December 31, 1995, fees to all independent directors related to any attendance at board meetings, independent committee and reimbursement of expenses totaled $18,300. The Company has no annuity, pension or retirement plans or any existing plans or arrangement under which payments have or would in the future be made to any director or officer. The Company has paid certain fees and will reimburse certain expenses of the Advisor, as described below under "Item 13. Certain Relationships and Related Transactions". Item 12. Security Ownership Of Certain Beneficial Owners And Management The following table sets forth the beneficial ownership of the Company's Common Stock by the Directors and by all Directors and Officers as a group, as of December 31, 1995. At such date, all Directors and Officers as a group owned less than 1% of the outstanding Common Stock of the Company. AMOUNT AND NATURE OF SHARES Name TITLE OF CLASS BENEFICIALLY OWNED David P. Goss, Chief Executive Officer, Common Stock, 1,500 President and Director Series A Frank W. T. LaHaye, Independent Common Stock, - Director Series A Egon H. Kraus Common Stock, 5,000 Series A Directors and officers as a group Common Stock, 7,000 Series A To the Company's knowledge, as of December 31, 1995, no person beneficially owned more than 5% of the outstanding Common Stock except as set forth below: AMOUNT AND NATURE OF SHARES % OF NAME AND ADDRESS TITLE OF CLASS BENEFICIALLY CLASS1 OWNED Commonwealth of Massachusetts Common Stock, 634,177 14.68% Pension Reserve Investment Series A Management Board ( " PRIM" ) 125 Summer Street 10th Floor Boston, MA 02110 Franklin Properties, Inc. Common Stock, 319,3081 7.39% Series B - --------------- 1 The Company has one class of common stock in two series, designated Series A and Series B. The Series A and Series B shares vote together as one class with each share being entitled to one vote. The 319,308 Series B Shares (7.4% of the total number of outstanding shares of Common Stock) were originally issued to Franklin Resources, Inc., the parent company of the Advisor, in return for capital contributions to the Company, applied to pay a portion of the sales commission in connection with the Company's offering of its Series A common stock. Franklin Resources, Inc. transferred these Series B Shares to the Advisor. Item 13. Certain Relationships And Related Transactions Franklin Properties, Inc. (the "Advisor") has entered into an agreement with the Company 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 advisory fee equal to 1% of invested assets and .4% of the mortgage investments of the Company. The fee is payable provided the Series A shareholders receive distributions for the year at least equal to an 8% return on their adjusted price per share. The Company pays all expenses of its operations except for the following, which are borne by the Advisor (i) employment expenses of the Company's Chairman, President, Executive Vice President, Senior Vice President, Chief Financial Officer, Secretary and of the Company's directors who are also officers of the Advisor, (ii) advertising and promotional expenses incurred in seeking and disposing of investments (iii) office expenses of the Advisor, and (iv) overhead expenses of the Advisor not properly attributable to the performance of its duties and obligations under the Advisor Agreement. The agreement also provides for the following compensation and payments to the Advisor and its affiliates: Acquisition fees not to exceed 6% of the contract price of the acquired property for services rendered in connection with the investigation, selection, acquisition and mortgage placement of real property. Financing fees determined at market rates for services rendered in obtaining secured or unsecured financing for the Company. Sales commission on 3% of the gross selling price of the Company's real property. Subordinated incentive fee of 15% of net proceeds, as defined, from proceeds due to the sale or refinancing of Company real property. The fee is payable to the Advisor provided the Series A Stockholders have received cumulative distributions in cash from sales or refinancing equal to their adjusted price per share, as defined, plus a 6% per annum cumulative return. The Company pays a property management fee to Continental Property Management Co. based on actual services performed. If Continental retains independent management companies to perform a portion or all of the services required for the management of the Company's properties, it pays any fees charged by those persons without additional cost to the Company. The fee paid to Continental does not include any fees or expenses paid to on-site property managers or leasing commissions paid to third parties, both of which are borne by the Company. During the year ended December 31, 1995, the Company earned $7,000 of dividends from Franklin Money Fund, an investment company managed by an affiliate of the Advisor. At December 31, 1995, the Company had $330,000 invested in Franklin Money Fund. Item 13. Certain Relationships And Related Transactions (Continued) During the year ended December 31, 1995, the Company paid or accrued the following amounts for the reimbursements and services noted above: Property management fee, charged to related party expense $175,000 Reimbursement for data processing, accounting, and certain other expenses charged to related party expense 47,000 Leasing commission, capitalized and amortized over the term of the related lease 124,000 Construction supervision fee, capitalized and amortized over the life of the related investment or the term of the related lease 12,000 =============================================================================== PART IV =============================================================================== Item 14. Exhibits, Financial Statement Schedules And Reports On Form 8-K (a) 1. The financial statements of the Company included in Item 8 of this report are listed on the index on page 16. 2. The supplemental financial statement schedule of the Company included in Item 8 of this report are listed on the index on page 16. 3. Exhibits: (3.1) Articles of Incorporation 1 (3.2) Bylaws 1 (10.1) Material Contracts - Advisory Agreement 1 (10.2) Material Contracts - Property Management Agreement 2 (11.) Statement regarding computation of earnings per share. See the Statement of Operations included in the Financial Statements. Although there are warrants outstanding at December 31, 1995, the net income per share calculation does not include common stock equivalents because the warrant exercise price is equal to or greater than the market value of the Series A common stock. Thus, the treasury stock method would result in common stock equivalents of zero. 1 Documents were filed in the Company's Form S-11 Registration Statement, dated May 12, 1988 (Registration No. 33-16508) and are incorporated herein by reference. 2 Document was filed in the Company's Form 10-K for the year ended December 31, 1994, and is incorporated herein by reference. (b) Reports filed on Form 8-K. No reports on Form 8-K were filed by the Company for the quarter ended December 31, 1995. =============================================================================== SIGNATURE =============================================================================== Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FRANKLIN REAL ESTATE INCOME FUND (Company) Date: March 19, 1996 By: :/s/ David P. Goss David P. Goss Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company, and in the capacities and on the dates indicated. Signature Title Date Chief Executive /s/ David P. Goss Officer March 19, 1996 - ----------------------- ------------------- David P. Goss /s/ Egon H. Kraus Director1 March 19, 1996 - ----------------------- ------------------- Egon H. Kraus /s/ Frank W. T. LaHaye Director1 March 19, 1996 - ----------------------- ------------------- Frank W. T. LaHaye 1 Independent Director EX-27 2
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM REGISTRANT'S FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 year DEC-31-1995 DEC-31-1995 1,586 512 745 0 0 0 39,992 5,521 37,855 0 0 0 0 38,895 0 37,855 0 4,708 0 2,904 0 0 205 0 0 0 0 0 0 1,599 0 0
-----END PRIVACY-ENHANCED MESSAGE-----