-----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, LZhSu5C6+bz1ArEsUYTQd7jXnKRDX9lpVKGlS4gVyB10j3SH59dtdc56K83POtkZ MrRguEyAkAHdUXpqfrzjfQ== 0000845613-95-000002.txt : 19951119 0000845613-95-000002.hdr.sgml : 19951119 ACCESSION NUMBER: 0000845613-95-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951114 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRANKLIN SELECT REAL ESTATE INCOME FUND CENTRAL INDEX KEY: 0000845613 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 943095938 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-12708 FILM NUMBER: 95592665 BUSINESS ADDRESS: STREET 1: 1800 GATEWAY DR - STE 200 CITY: SAN MATEO STATE: CA ZIP: 94404 BUSINESS PHONE: 4153122000 MAIL ADDRESS: STREET 1: P O BOX 7777 CITY: SAN MATEO STATE: CA ZIP: 94403-7777 FORMER COMPANY: FORMER CONFORMED NAME: FRANKLIN CALIFORNIA REAL ESTATE FUND DATE OF NAME CHANGE: 19890307 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) (x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended SEPTEMBER 30, 1995 -------------------------------------------------- OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE CHANGE ACT OF 1934 For the transition period from TO --------------------- --------------------------- Commission file number 1-12708 ---------------------------------------------------------- FRANKLIN SELECT REAL ESTATE INCOME FUND - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) CALIFORNIA 94-3095938 - -------------------------------------------------------------------------------- (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) P. O. BOX 7777, SAN MATEO, CALIFORNIA 94403-7777 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (415) 312-2000 N/A - -------------------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Common Stock Shares Outstanding as of September 30, 1995, Series A: 5,383,297 Common Stock Shares Outstanding as of September 30, 1995, Series B: 185,866 PART I - FINANCIAL INFORMATION Item 1. Financial Statements FRANKLIN SELECT REAL ESTATE INCOME FUND BALANCE SHEETS SEPTEMBER 30, 1995 AND DECEMBER 31, 1994 (Dollars in 000's except per share amounts) (Unaudited) (Audited) 1995 1994 ASSETS Rental property: Land $ 9,686 $ 9,686 Buildings and improvements 33,308 33,243 42,994 42,929 Less: accumulated depreciation 6,584 5,536 36,410 37,393 Cash and cash equivalents 3,182 2,423 Mortgage-backed securities, available for sale 5,372 5,484 Deferred rent receivable 1,050 1,022 Other assets 540 582 Total assets $46,554 $46,904 LIABILITIES AND STOCKHOLDERS' EQUITY Tenants' deposits and other liabilities $ 330 $ 218 Advance rents 14 21 Dividends payable 592 592 Total liabilities 936 831 Stockholders' equity: Common stock, Series A, without par value. Stated value $10 per share; 50,000,000 shares authorized; 5,383,297 and 5,383,439 shares issued and outstanding in 1995 and 1994 48,857 48,858 Common stock, Series B, without par value. Stated value $10 per share; 1,000,000 shares authorized; 185,866 shares issued and outstanding in 1995 and 1994 1,859 1,859 Unrealized loss on mortgage-backed securities (139) (417) Accumulated dividends in excess of net income (4,959) (4,227) Total stockholders' equity 45,618 46,073 Total liabilities and stockholder's equity $46,554 $46,904 See notes to financial statements. Item 1. Financial Statements (continued) FRANKLIN SELECT REAL ESTATE INCOME FUND STATEMENTS OF OPERATIONS FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1994 (Unaudited) (Dollars in 000's except per share amounts) 1995 1994 Revenue: Rent $1,108 $1,115 Interest 126 99 Dividends 2 2 Total revenue 1,236 1,216 Expenses: Depreciation and amortization 373 370 Operating 390 414 Related party 113 90 Consolidation expense, net 66 - General and administrative 51 80 Total expenses 993 954 Net income $ 243 $ 262 Net income per share, based on shares outstanding of Series A common stock of 5,383,297 and 5,383,767 in 1995 and 1994 $ .05 $ .05 Dividends per share, based on shares outstanding of Series A common stock of 5,383,297 and 5,383,767 in 1995 and 1994 $ .11 $ .10 See notes to financial statements. Item 1. Financial Statements (continued) FRANKLIN SELECT REAL ESTATE INCOME FUND STATEMENTS OF OPERATIONS FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1994 (Unaudited) (Dollars in 000's except per share amounts) 1995 1994 Revenue: Rent $3,396 $3,343 Interest 358 272 Dividends 5 5 Total revenue 3,759 3,620 Expenses: Depreciation and amortization 1,119 1,094 Operating 1,050 1,082 Related party 336 268 Consolidation expense, net 66 - General and administrative 144 208 Loss on sale of mortgage-backed securities - 13 Total expenses 2,715 2,665 Net income $ 1,044 $ 955 Net income per share, based on shares outstanding of Series A common stock of 5,383,297 and 5,383,767 in 1995 and 1994 $ .19 $ .18 Dividends per share, based on shares outstanding of Series A common stock of 5,383,297 and 5,383,767 in 1995 and 1994 $ .33 $ .30 See notes to financial statements. Item 1. Financial Statements (continued) FRANKLIN SELECT REAL ESTATE INCOME FUND STATEMENT OF STOCKHOLDERS' EQUITY FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1995 (Unaudited) (Dollars in 000's)
Common Stock Series A Series B Excess of Accumulated Unrealized Dividends Gain/Loss in Excess on of Net Shares Amount Shares Amount Securities Income Total Balance, beginning of period 5,383,439 $48,858 185,866 $1,859 $ (417) $(4,227) $46,073 Redemption of Series A Common Stock (142) (1) - - - - (1) Unrealized gain on mortgage-backed securities - - - - 278 - 278 Net income - - - - - 1,044 1,044 Dividends Declared - - - - - (1,776) (1,776) Balance, end of period 5,383,297 $48,857 185,866 $1,859 $(139) $(4,959) $45,618
See notes to financial statements. Item 1. Financial Statements (continued) FRANKLIN SELECT REAL ESTATE INCOME FUND STATEMENTS OF CASH FLOWS FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1994 (Unaudited) (Dollars in 000's) 1995 1994 Cash flows from operating activities: Net income $1,044 $ 955 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,119 1,094 Increase in deferred rent receivable (28) (26) Decrease in Due from Advisor - 129 Increase in other assets (29) - Increase in tenants' deposits and other liabilities 112 80 Decrease in advance rents (7) (23) 1,167 1,254 Net cash provided by operating activities 2,211 2,209 Cash flow from investing activities: Improvements to rental property (65) (104) (Increase) decrease in investment in mortgage-backed securities 390 (579) Net cash provided by (used in) investing activities 325 (683) Cash flow from financing activities: Redemption of Series A common stock (1) - Dividends paid (1,776) (1,076) Net cash used in financing activities (1,777) (1,076) Net increase in cash and cash equivalents 759 450 Cash and cash equivalents, beginning of period 2,423 1,763 Cash and cash equivalents, end of period $3,182 $2,213 See notes to financial statements. FRANKLIN SELECT REAL ESTATE INCOME FUND NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1995 NOTE 1 - ORGANIZATION Franklin Select Real Estate Income Fund (the "Company") is a California corporation formed on January 5, 1989 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 1989. Under the Internal Revenue Code and applicable state income tax law, a qualified REIT is not subject to income tax if at least 95% of its taxable income is currently distributed to its stockholders and other REIT tests are met. The Company has distributed at least 95% of its taxable income and intends to distribute substantially all of its taxable income in the future. Accordingly, no provision is made for income taxes in these financial statements. As of September 30, 1995, the Company's real estate portfolio consisted of a 60% undivided interest in the Shores Office Complex, a three-building office complex located in Redwood City, California, and a fee interest in the Data General Building located in Manhattan Beach, California. NOTE 2 - BASIS OF PRESENTATION The accompanying unaudited financial statements contain all adjustments (consisting of normal recurring accruals) which are necessary, in the opinion of management, for a fair presentation. The statements, which do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements, should be read in conjunction with the Company's financial statements for the year ended December 31, 1994. RECLASSIFICATION Certain amounts in the 1994 financial statements have been reclassified to correspond to the 1995 presentation. These reclassifications did not affect previously reported net income. NOTE 3 - RELATED PARTY TRANSACTIONS The Company has an agreement with Franklin Properties, Inc. (The "Advisor") to administer the day-to-day operations of the Company. On October 1, 1994, the Company and the Advisor amended the agreement. Under the terms of the amended agreement, which is renewable annually, the Advisor will receive quarterly an annualized fee equal to .5% of the Company's gross real estate assets, defined generally as the book value of the assets before depreciation. The fee will be reduced to .4% for gross real estate assets exceeding $200 million. Prior to October 1, 1994, the Advisor received quarterly an annualized fee equal to 1% of invested assets and .4% of mortgage investments. One half of the fee was subordinate to declaring dividends to Series A common stock shareholders totaling at least 7% per annum on their adjusted price per share, as defined. At September 30, 1995, cash equivalents included $219,000 invested in Franklin Money Fund, an investment company managed by an affiliate of the Advisor. Dividends earned from the Franklin Money Fund totaled $5,000 for the nine month period ended September 30, 1995. FRANKLIN SELECT REAL ESTATE INCOME FUND NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1995 NOTE 3 - RELATED PARTY TRANSACTIONS (Continued) The agreements between the Company and the Advisor, or affiliates, provide for certain types of compensation and payments including but not limited to the following for those services rendered for the nine month period ended September 30, 1995: Advisory fee expense, charged to related party expense $161,000 Reimbursement for data processing, accounting and certain other expenses, charged to related party expense $22,000 Property management fee, charged to related party expense $153,000 Leasing commission, capitalized and amortized over the term of the related lease $39,000 Construction supervision fee, capitalized and amortized over the life of the related investment or the term of the related lease $2,000 NOTE 4 - COMMON STOCK AND INCOME PER SHARE In connection with the conversion of the Company from a finite-life real estate investment trust to an infinite life real estate investment trust in 1994 (the "Conversion"), the Company issued to the Advisor an exchange right (the "Exchange Right") to exchange its Series B common stock for Series A common stock on a one-for-one basis. The Option is exercisable only when the Series A shares achieve a trading price on the stock exchange equal to or greater than $10.35 per share for at least 20 consecutive trading days. The rate of exchange and the target price will be subject to change under certain circumstances as provided in the Exchange Right Agreement. No dividends may be paid on the Series B shares prior to exercise of the Option. After exercise of the Option, the Advisor, like any other shareholder, will receive dividends on its Series A shares. Prior to the Conversion, no dividends were ever paid on the Series B common stock. Series A and Series B common stock have the same voting rights. Dividends on Series A common stock are declared at the discretion of the Board of Directors. NOTE 5 - SUBSEQUENT EVENT On November 2, 1995 the Board of Directors of the Company and of two other real estate investment trusts that Franklin Properties, Inc. advises, Franklin Real Estate Income Fund ("FREIF") and Franklin Advantage Real Estate Income Fund ("Advantage"), authorized the execution of a Merger Agreement and the filing of a Joint Proxy Statement/Registration Statement with the Securities and Exchange Commission. The Registration Statement was filed on November 13, 1995. In the proposed merger, the FREIF and/or Advantage would be merged into the Company, which would be renamed Franklin Select Realty Trust. The shares of the Company will be offered to shareholders of the FREIF and Advantage in exchange for their shares on the basis described in the Joint Proxy Statement/Registration Statement. The merger is subject to certain conditions including approval by a majority of the shareholders of the Company, FREIF, and/or Advantage. A special meeting of the shareholders of each REIT will be held to vote on the proposed merger upon the effectiveness of the Registration Statement and the close of the solicitation period. PART I - FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition AND RESULTS OF OPERATIONS INTRODUCTION Management's discussion and analysis of financial condition and results of operations should be read in conjunction with the Financial Statements and Notes thereto. FUNDS FROM OPERATIONS For the nine months ended September 30, (Dollars in 000's) 1995 1994 Funds Provided By: Properties (a) $2,193 $2,113 Interest and Dividend Income 363 222 Company Expenses (393) (328) Funds from Operations (b) $2,163 $2,062 Reconciliation to Net Income: Depreciation and Amortization: Buildings and Improvements (653) (652) Tenant Improvements (395) (369) Leasing Commission Amortization (70) (66) Other Amortization (1) (7) Loss on sale of mortgage-backed securities - (13) Net Income: $1,044 $ 955 Dividends Declared $1,776 $1,614 (a) Property operations are net of property management fees. (b) As defined by the National Association of Real Estate Investment Trusts, the Company believes that funds from operations is an appropriate supplemental measure of operating performance. However, funds from operations should not be considered as a substitute for net income as an indicator of the Company's operating performance, or for cash flows as a measure of liquidity. RESULTS OF OPERATIONS COMPARISON OF THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1994 Net income for the nine month period ended September 30, 1995 increased $89,000, or 9%, compared to 1994 due to the following factors: an increase in rental revenue of $53,000; an increase in interest and dividends of $86,000; an increase in depreciation and amortization of $25,000; a decrease in operating expenses of $32,000; an increase in related party expenses of $68,000; an increase in consolidation expense of $66,000; a decrease in general and administrative expense of $64,000 and a decrease in loss on sale of mortgage-backed securities of $13,000. Explanations of the material changes are as follows: PART I - FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS (Continued) Rental revenue for the nine month period ended September 30, 1995 increased $53,000, or 2%, primarily due to increased rental revenue at the Shores Office Complex, as a result of an increase in average occupancy and rental rates. The average occupancy rate at the Shores Office Complex during the nine month periods ended September 30, 1995 and 1994 was 98% and 91%, respectively. The occupancy rate at the Data General Building was 100% for both periods. Interest and dividend income for the nine month period ended September 30, 1995 increased $86,000, or 31%, due to higher yields realized on investments in mortgage-backed securities. Total expenses for the nine month period ended September 30, 1995, increased by $50,000, or 2%, from $2,665,000 in 1994 to $2,715,000. The increase in total expenses is attributable to the following factors: an increase in depreciation and amortization of $25,000, or 2%; a decrease in operating expenses of $32,000, or 3%; an increase in related party expenses of $68,000, or 25%; an increase in consolidation expense of $66,000, or 100%; a decrease in general and administrative expense of $64,000, or 31%; and a decrease in loss on sale of mortgage-backed securities of $13,000. Depreciation and amortization increased $25,000 for the nine month period ended September 30, 1995, reflecting tenant improvement costs at the Shores Office Complex related to new leases commencing in late 1994. Operating expenses for the nine month period ended September 30, 1995 decreased $32,000, primarily due to a decrease in property tax expense at the Data General Building. Related party expense for the nine month period ended September 30, 1995 increased $68,000, primarily due to an increase in advisory fees. Consolidation expense for the nine month period ended September 30, 1995 of $66,000 relates to the proposed consolidation. General and administrative expense for the nine month period ended September 30, 1995 decreased $64,000 due to non-recurring costs associated with listing the Company's stock on the American Stock Exchange in January 1994. LIQUIDITY AND CAPITAL RESOURCES The Company's principal source of capital for the acquisition and major renovation of properties has been the proceeds from the initial public offering of its stock. The Company's funds from operations have been its principal source of capital for minor property improvements, leasing costs and the payment of quarterly dividends. At September 30, 1995, the Company's cash reserves, including mortgage-backed securities, aggregated $8,554,000. The Company is currently examining the possibility of raising additional capital through arranging debt financing on its existing portfolio. Any capital raised in this manner would be used to acquire additional properties and for other corporate purposes. PART I - FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES (Continued) As of September 30, 1995, the Company had no formal borrowing arrangements with a bank and has no long-term debt. Each of the Company's properties is owned free and clear of mortgage indebtedness. Management continues to evaluate other properties for acquisition by the Company. In the short-term and in the long term, management believes that the Company's current sources of capital will continue to be adequate to meet both its operating requirements and the payment of dividends. IMPACT OF INFLATION The Company's management believes that inflation may have a positive effect on the Company's property portfolio, but this effect generally will not be fully realized until such properties are sold or exchanged. The Company's policy of negotiating leases which incorporate operating expense "pass-through" provisions is intended to protect the Company against increased operating costs resulting from inflation. DIVIDENDS Dividends are declared quarterly at the discretion of the Board of Directors. The Company's present dividend policy is to at least annually evaluate the current dividend rate in light of anticipated tenant turnover over the next two or three years, the estimated level of associated improvements and leasing commissions, planned capital expenditures, any debt service requirements and the Company's other working capital requirements. After balancing these considerations, and considering the Company's earnings and cash flow, the level of its liquid reserves and other relevant factors, the Company seeks to establish a dividend rate which: i) provides a stable dividend which is sustainable despite short term fluctuations in property cash flows; ii) maximizes the amount of funds from operations paid out as dividends consistent with the above listed objective; and iii)complies with the Internal Revenue Code requirement that a REIT annually pay out as dividends not less than 95% of its taxable income. During the nine-month period ended September 30, 1995, the Company declared dividends totaling $1,776,000. On November 2, 1995 the Board of Directors of the Company and of two other real estate investment trusts that Franklin Properties, Inc. advises, Franklin Real Estate Income Fund ("FREIF") and Franklin Advantage Real Estate Income Fund ("Advantage"), authorized the execution of a Merger Agreement and the filing of a Joint Proxy Statement/Registration Statement with the Securities and Exchange Commission. The Registration Statement was filed on November 13, 1995. In the proposed merger, the FREIF and/or Advantage would be merged into the Company, which would be renamed Franklin Select Realty Trust. The shares of the Company will be offered to shareholders of the FREIF and Advantage in exchange for their shares on the basis described in the Joint Proxy Statement/Registration Statement. The merger is subject to certain conditions including approval by a majority of the shareholders of the Company, FREIF, and/or Advantage. A special meeting of the shareholders of each REIT will be held to vote on the proposed merger upon the effectiveness of the Registration Statement and the close of the solicitation period. PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Not applicable (b) Reports on Form 8-K No reports on Form 8-K were filed by the Registrant during the quarter ended September 30, 1995. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FRANKLIN SELECT REAL ESTATE INCOME FUND By: /S/ DAVID P. GOSS David P. Goss Chief Executive Officer Date: NOVEMBER 10, 1995 EX-27 2
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM REGISTRANT'S FINANCIAL STATEMENTS FOR THE QUARTER ENDED SEPTEMBER 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1995 SEP-30-1995 3,182 5,372 1,050 0 0 0 42,994 6,584 46,554 0 0 50,716 0 0 0 46,554 0 1,236 0 993 0 0 0 0 0 0 0 0 0 243 0 0
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