-----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, Vp9H0tsLf/KCnIFliH+uOjVk2tNs4yXk92I4XmZEfI5urXxpTmMcXsF/cAZNIsf+ 7JMGVh7ayulnWFwH+qrDag== 0000820206-96-000006.txt : 19960517 0000820206-96-000006.hdr.sgml : 19960517 ACCESSION NUMBER: 0000820206-96-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960515 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-12700 FILM NUMBER: 96564871 BUSINESS ADDRESS: STREET 1: 1800 GATEWAY DR STREET 2: 3RD FLOOR CITY: SAN MATEO STATE: CA ZIP: 94404 BUSINESS PHONE: 4153123000 MAIL ADDRESS: STREET 1: P O BOX 7777 CITY: SAN MATEO STATE: CA ZIP: 94403-7777 FORMER COMPANY: FORMER CONFORMED NAME: PROPERTY RESOURCES EQUITY TRUST II DATE OF NAME CHANGE: 19880515 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) (x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1996 -------------------------------------------------- OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE CHANGE ACT OF 1934 For the transition period from to -------------------------------------------------- Commission file number 1-12700 ---------------------------------------------------------- Franklin Real Estate Income Fund - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) California 77-0185558 - -------------------------------------------------------------------------------- (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) P. O. Box 7777, San Mateo, California 94403-7777 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (415) 312-2000 ------------------------------ N/A - -------------------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- -------- Common Stock Shares Outstanding as of March 31, 1996, Series A: 3,999,515 Common Stock Shares Outstanding as of March 31, 1996, Series B: 319,308 PART I - FINANCIAL INFORMATION Item 1. Financial Statements FRANKLIN REAL ESTATE INCOME FUND BALANCE SHEETS MARCH 31, 1996 AND DECEMBER 31, 1995 (Unaudited) (Dollars in 000's except per share amounts) 1996 1995 ASSETS Rental property: Land $10,326 $10,326 Buildings and improvements 29,712 29,666 - -------------------------------------------------------------------------------- 40,038 39,992 Less: accumulated depreciation 5,772 5,521 - -------------------------------------------------------------------------------- 34,266 34,471 Cash and cash equivalents 1,377 1,586 Mortgage-backed securities, available for sale 477 512 Deferred rent receivable 761 745 Other assets 775 541 - -------------------------------------------------------------------------------- Total assets $37,656 $37,855 ================================================================================ LIABILITIES AND STOCKHOLDERS' EQUITY Note payable $1,926 $1,937 Tenants' deposits and other liabilities 315 276 Distributions payable 500 500 - -------------------------------------------------------------------------------- Total liabilities 2,741 2,713 - -------------------------------------------------------------------------------- Stockholders' equity: Common stock, Series A, without par value. Stated value $10 per share; 10,000,000 shares authorized; 3,999,515 shares issued and outstanding in 1996 and 1995 35,702 35,702 Common stock, Series B, without par value. Stated value $10 per share; 500,000 shares authorized; 319,308 shares issued and outstanding in 1996 and 1995 3,193 3,193 Unrealized loss on mortgage-backed securities (4) 2 Accumulated distributions in excess of net income (3,976) (3,755) - -------------------------------------------------------------------------------- Total stockholders' equity 34,915 35,142 - -------------------------------------------------------------------------------- Total liabilities and stockholders' equity $37,656 $37,855 ================================================================================ See notes to financial statements. Item 1. Financial Statements (continued) FRANKLIN REAL ESTATE INCOME FUND STATEMENTS OF OPERATIONS FOR THE THREE MONTH PERIODS ENDED MARCH 31, 1996 AND 1995 (Unaudited) (Dollars in 000's except per share amounts) 1996 1995 Revenue: Rent $1,107 $1,106 Interest 22 17 Dividends 3 1 Other - 4 - ----------------------------------------------------------------------------- Total revenue 1,132 1,128 - ----------------------------------------------------------------------------- Expenses: Interest 48 51 Depreciation and amortization 274 286 Operating 265 248 Related party 51 52 Consolidation expense 168 - General and administrative 47 49 - ----------------------------------------------------------------------------- Total expenses 853 686 - ----------------------------------------------------------------------------- Net income $279 $442 ============================================================================= Net income per share, based on shares outstanding of Series A common stock of 3,999,515 and 3,999,653 in March 31, 1996 and 1995 $.07 $.11 ============================================================================= Distributions per share, based on shares outstanding of Series A common stock of 3,999,515 and 3,999,653 in March 31, 1996 and 1995 $.13 $.13 ============================================================================= See notes to financial statements. Item 1. Financial Statements (continued) FRANKLIN REAL ESTATE INCOME FUND STATEMENT OF STOCKHOLDERS' EQUITY FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1996 (Unaudited) (Dollars in 000's)
Common Stock Series A Series B -------------------------------------------- Unrealized Accumulated Gain/Loss Distributions on in Excess of Shares Amount Shares Amount Securities Net Income Total Balance, beginning of period 3,999,515 $35,702 319,308 $3,193 $2 $(3,755) $35,142 Unrealized loss on mortgage- backed securities - - - - (6) - (6) Net income - - - - - 279 279 Distributions declared - - - - - (500) (500) - ---------------------------------------------------------------------------------------------------- Balance, end of period 3,999,515 $35,702 319,308 $3,193 $(4) $(3,976) $34,915 ====================================================================================================
See notes to financial statements. Item 1. Financial Statements (continued) FRANKLIN REAL ESTATE INCOME FUND STATEMENTS OF CASH FLOWS FOR THE THREE MONTH PERIODS ENDED MARCH 31, 1996 AND 1995 (Unaudited) (Dollars in 000's) 1996 1995 Cash flows from operating activities: Net income $279 $442 - -------------------------------------------------------------------------------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 274 286 Increase in deferred rent receivable (16) (16) Increase in other assets (257) (28) Increase in tenants' deposits and other liabilities 39 103 - -------------------------------------------------------------------------------- 40 345 - -------------------------------------------------------------------------------- Net cash provided by operating activities 319 787 - -------------------------------------------------------------------------------- Cash flows from investing activities: Improvements to rental property (46) (7) Disposition of mortgage-backed securities 29 8 - -------------------------------------------------------------------------------- Net cash provided by (used in) investing activities (17) 1 - -------------------------------------------------------------------------------- Cash flows from financing activities: Distributions paid (500) (500) Principal payments on note payable (11) (11) - -------------------------------------------------------------------------------- Net cash used in financing activities (511) (511) - -------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (209) 277 Cash and cash equivalents, beginning of period 1,586 973 - -------------------------------------------------------------------------------- Cash and cash equivalents, end of period $1,377 $1,250 ================================================================================ See notes to financial statements. FRANKLIN REAL ESTATE INCOME FUND NOTES TO FINANCIAL STATEMENTS MARCH 31, 1996 NOTE 1 - ORGANIZATION Franklin Real Estate Income Fund (the "Company") is a California corporation formed on August 7, 1987 for the purpose of investing in income-producing real property. The Company is a real estate investment trust ("REIT") having elected to qualify as a REIT under the applicable provisions of the Internal Revenue Code since 1988. Under the Internal Revenue Code and applicable state income tax law, a qualified REIT is not subject to income tax if at least 95% of its taxable income is currently distributed to its stockholders and other REIT tests are met. The Company has distributed at least 95% of its taxable income and intends to distribute substantially all of its taxable income in the future. Accordingly, no provision is made for income taxes in these financial statements. As of March 31, 1996, the Company's real estate portfolio consisted of the Mira Loma Shopping Center located in Reno, Nevada; a 40% undivided interest in the Shores Office Complex located in Redwood City, California; three separate R&D buildings in the Northport Business Park located in Fremont, California; and the Glen Cove Center located in Vallejo, California. The Company has also purchased two small parcels of land located adjacent to the Mira Loma Shopping Center. The Company has completed its property acquisition phase and no additional property acquisitions are currently anticipated. NOTE 2 - BASIS OF PRESENTATION The accompanying unaudited financial statements contain all adjustments (consisting of normal recurring accruals) which are necessary, in the opinion of management, for a fair presentation. The statements, which do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements, should be read in conjunction with the Company's financial statements for the year ended December 31, 1995 NOTE 3 - RELATED PARTY TRANSACTIONS The Company has an agreement with Franklin Properties, Inc. (the "Advisor"), to administer the day-to-day operations of the Company. Under the terms of the agreement, which is renewable annually, the Advisor will receive quarterly, an annualized fee equal to 1% of invested assets and .4% of mortgage investments. The fee is subordinate to declared dividends to Series A common stock shareholders totaling at least an 8% per annum non-cumulative non-compounded return on their adjusted price per share, as defined. Accordingly, no advisory fee was paid to the Advisor. At March 31, 1996, cash equivalents included $193,000, which was invested in Franklin Money Fund, an investment company managed by an affiliate of the Advisor. Dividends earned from Franklin Money Fund totaled $3,000 for the three month period ended March 31, 1996. FRANKLIN REAL ESTATE INCOME FUND NOTES TO FINANCIAL STATEMENTS MARCH 31, 1996 NOTE 3 - RELATED PARTY TRANSACTIONS (Continued) The agreements between the Company and the Advisor, or affiliates, provide for certain types of compensation and payments including but not limited to the following, for those services rendered for the three month period ended March 31, 1996: Reimbursement for data processing, accounting and certain other expenses, charged to related party expense $7,000 Property management fee, charged to related party expense $44,000 Leasing commission, capitalized and amortized over the term of the related lease $66,000 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. The Warrants were exercisable at a price of $10.00 per share for a 12-month period which expired on January 31, 1996. No warrants were exercised. NOTE 5 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION For the three month period ended March 31, 1996, the Company paid interest on the note payable of $48,000. NOTE 6 - SUBSEQUENT EVENT On May 7, 1996, the Company merged into Franklin Select Real Estate Income Fund ("Select") on the basis described in the Joint Proxy Statement/Prospectus dated November 13, 1995. Prior to the merger, the Company declared a final cash distribution in the amount of $.09 per share to shareholders of record on May 7, 1996, holding Series A common stock. Under the terms of the merger, as fully described in the Joint Proxy Statement/Prospectus dated November 13, 1995, each share of the Company's Series A and Series B common stock will be exchanged for 1.286 shares of Select Series A and Series B common stock, respectively. Because of the merger, this is the Company's final report. PART I - FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Introduction Management's discussion and analysis of financial condition and results of operations should be read in conjunction with the Financial Statements and Notes thereto. Results of Operations COMPARISON OF THE THREE MONTH PERIODS ENDED MARCH 31, 1996 AND 1995 Net income for the three month period ended March 31, 1996 decreased $163,000, or 37%, compared to the same period in 1995 primarily due to consolidation expenses of $168,000 related to the proposed merger of the Company with Franklin Select Real Estate Income Fund and Franklin Advantage Real Estate Income Fund. See PART II, Item 4. "Submission of Matters to a Vote of Security Holders" for additional information regarding the merger. Total expenses increased for the three month period ended March 31, 1996 by $167,000, or 24%, from $686,000 in 1995 to $853,000. The increase in total expenses is attributable to the following factors: a decrease in interest expense of $3,000; a decrease in depreciation and amortization of $12,000, or 4%; an increase in operating expenses of $17,000, or 7%; a decrease in related party expense of $1,000, or 2%; an increase in consolidation expense of $168,000 or 100%, and a decrease in general and administrative expense of $2,000, or 4%. Operating expenses for the three month period ended March 31, 1996, increased $17,000 compared to the same period in 1995. The increase was primarily due to a property tax refund received in 1995 totaling $41,000 that reduced that year's operating expenses. This effect was partially offset by a decrease in bad debt expense in 1996 of $15,000, and minor reductions in other expense accounts. Consolidation expense increased $168,000 as a result of the proposed consolidation. 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 been its principal source of capital for property improvements, leasing costs and the payments of quarterly distributions. At March 31, 1996, the Company's cash reserves, including mortgage backed securities, aggregated $1,854,000. 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 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. As of March 31, 1996, one of the Company's properties was subject to secured financing with an outstanding balance of approximately $1,926,000. Otherwise, the Company's properties are owned free of any indebtedness. Interest on the note accrues at a variable rate of 1.5% in excess of the Union Bank Reference Rate. Monthly installments of principal and interest commenced August 1, 1994, and continue until maturity of the note on May 1, 1999. Principal installments are payable in the amount of $3,700 per month. The note may be prepaid in whole or in part at any time without penalty. For the foreseeable future, management believes that the Company's current sources of capital will continue to be adequate to meet both its operating requirements and the payment of distributions. PART I - FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources (Continued) Net cash provided by operating activities for the three month period ended March 31, 1996 decreased $468,000 to $319,000 compared to the same period in 1995. The decrease in cash flow is primarily attributable to consolidation expense of $168,000; payment of annual insurance premiums in January, 1996, of $120,000; and an increase in leasing commissions paid of $128,000. The remainder of the change in cash flow is due to changes in tenant deposits and other liability accounts. Net cash provided by (used in) investing activities for the three month period ended March 31, 1996, decreased $18,000 when compared to the same period in 1995. The decrease was due to an increase in improvements to rental property offset by increase in principal payments received from mortgage-backed securities. Net cash used in financing activities remained unchanged. Funds from Operations for the three month period ended March 31, 1996 decreased $175,000, or 24%, to $553,000 compared to the same period in 1995. The decrease is primarily due to the increase in consolidation expense as described under "Results of Operations" above. 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 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. PART I - FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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. For the three-month period ended March 31, 1996, the Company declared distributions totaling $500,000. PART II - OTHER INFORMATION Item 4. Submission of Matters to Vote of Security Holders On November 2, 1995, the Boards of Directors of the Company and of two other real estate investment trusts that Franklin Properties, Inc. advises, Franklin Advantage Real Estate Income Fund ("Advantage") and Franklin Select Real Estate Income Fund ("Select"), authorized the execution of a Merger Agreement and the filing of a Joint Proxy Statement/Prospectus with the Securities and Exchange Commission. The Prospectus was filed on November 13, 1995, and became effective on March 14, 1996. At a Special Meeting of Shareholders held on May 7, 1996, the proposed merger of the Company with Advantage and Select was approved. Among other requirements, completion of the merger was subject to the approval of a majority of the outstanding shares of each of the three companies. The actual tabulation of the vote was as follows: FOR AGAINST ABSTAIN Franklin Real Estate Income Fund 54.34% 20.84% 3.12% Franklin Select Real Estate Income Fund 52.30% 24.78% 2.66% Franklin Advantage Real Estate Income Fund 73.79% 4.05% 2.43% In the merger, the Company and Advantage were merged into Select, which will be renamed Franklin Select Realty Trust. Shares of Select will be issued in exchange for the shares of the Company and Advantage on the basis described in the Joint Proxy Statement/Prospectus. There were no other matters submitted to a vote of security holders during the quarter covered by this report. Item 6. Exhibits and Reports on Form 8-K (a) Not applicable (b) Reports on Form 8-K No reports on Form 8-K were filed by the Registrant during the quarter ended March 31, 1996. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FRANKLIN REAL ESTATE INCOME FUND By:/s/David P. Goss David P. Goss Chief Executive Officer Date: May 12, 1996 EX-27 2
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM REGISTRANT'S FINANCIAL STATEMENTS FOR THE QUARTER ENDED MARCH 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1996 MAR-31-1996 1,377 477 761 0 0 0 40,038 5,772 37,656 0 0 0 0 38,895 (3,980) 37,656 0 1,132 0 805 0 0 48 0 0 0 0 0 0 279 0 0
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