-----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, FYXTEm417TgTyc9lij38FbegL4Q4KRRuz503GDVgG6puDxDnU/6n5W9DBMGRFtNE IZAo2/xqlS9kkrxhLZEg+w== 0000845613-96-000007.txt : 19960523 0000845613-96-000007.hdr.sgml : 19960523 ACCESSION NUMBER: 0000845613-96-000007 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960507 ITEM INFORMATION: Acquisition or disposition of assets ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19960522 SROS: AMEX 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: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-12708 FILM NUMBER: 96570930 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 8-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 Date of Report (Date of earliest event reported) May 7, 1996 Franklin Select Real Estate Income Fund (Exact Name of Registrant as Specified in its Charter) California 1-12708 94-0395938 State or other Commission File Number IRS Employer jurisdiction of Identification incorporation Number 1800 Gateway Drive, San Mateo, CA 94404 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (415)312-3000 ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS On November 2, 1995, the boards of directors of the Company, Franklin Real Estate Income Fund ("FREIF") and Franklin Advantage Real Estate Income Fund ("Advantage"), each of which is a real estate investment trust advised by Franklin Properties, Inc. (the "Advisor"), authorized the execution of an Agreement and Plan of Merger (the "Merger Agreement") pursuant to which FREIF and/or Advantage would merge with and into the Company. The boards also authorized the filing of a Joint Proxy Statement/Prospectus with the Securities and Exchange Commission (the "SEC") to solicit the consent of their respective shareholders to the proposed merger at special meetings to be held on May 7, 1996. The Joint Proxy Statement/Prospectus was initially filed with the SEC on November 13, 1995 and it became effective on March 14, 1996. At the special meetings held on May 7, 1996, the shareholders of each of the Company, FREIF and Advantage approved the merger and such other actions which are necessary or appropriate to consummate the merger. As of May 7, 1996, each of FREIF and Advantage merged into the Company and ceased to exist as separate corporations. The Company, as the surviving corporation, assumed all of the assets and liabilities of FREIF and Advantage. The Company acquires and holds for investment income-producing real estate assets, as did FREIF and Advantage prior to the merger. As a result of the merger, the Company now holds the following properties: PROPERTIES HELD BY THE COMPANY AFTER MERGER Property Location Type Sq. Ft. The Shores* Redwood City, CA Office Complex 138,546 one three-story bldg. one one-story bldg. one five-story bldg. Data General Manhattan Beach, CA Office Building 118,443 one five-story building Northport** Fremont, CA R & D Facility 144,568 three one-story bldgs. Mira Loma** Reno, NV Shopping Center 94,026 Glen Cove** Vallejo, CA Shopping Center 66,000 Fairway Center*** Brea, CA Office Building 146,131 one two-story bldg. Carmel Mountain*** San Diego, CA Shopping Center 44,230 - -------------------- * Acquired 40% interest from FREIF. Company now holds 100% ownership interest. ** Acquired from FREIF. *** Acquired from Advantage. ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS (Continued) Pursuant to the Merger Agreement, as consideration for the merger, each shareholder of FREIF is entitled to receive 1.286 shares of Series A or Series B Common Stock of the Company, as appropriate, for each share of Series A or Series B Common Stock of FREIF held by such shareholder. Each shareholder of Advantage is entitled to receive 1.2 shares of Series A or Series B Common Stock of the Company, as appropriate, for each share of Series A or Series B Common Stock of Advantage held by such shareholder. No fractional shares will be issued, but instead the shares have been rounded up to the nearest whole share. The conversion ratios were set based on the median closing price of the Series A Common Stock of the Company, FREIF and Advantage during the twenty-five trading days prior to and including November 1, 1995. The Company has authorized Chemical Mellon Shareholder Services, L.L.C. to act as exchange agent (the "Exchange Agent") under the Merger Agreement. As soon as reasonably practicable after May 7, 1996, the Exchange Agent will send a transmittal letter to each shareholder of FREIF or Advantage. The transmittal letter will contain instructions with respect to the surrender of certificates representing shares of FREIF or Advantage common stock to be exchanged for shares of common stock of the Company. Shareholders representing approximately 635,638 shares of FREIF Series A Common Stock, 4,234 shares of Advantage Series A Common Stock, and 1,077,667 shares of Company Series A Common Stock elected to exercise dissenter's rights pursuant to Chapter 13 of the California General Corporation Law. The Company, as the surviving corporation after the merger, is required to pay the fair market value for such dissenting shares. The Company has offered the dissenting shareholders approximately $8 million as the fair market value for their shares, based on the closing price of Series A common stock of the Company, FREIF and Advantage on November 6, 1995. The shareholders have asserted approximately $12 million as the fair market value. If the Company and any dissenting shareholder cannot agree on the fair market value, either party may file a complaint in the superior court within six months of mailing the notice of merger, asking the court to determine the fair market value of the dissenting shares. The Company's source of capital to purchase the dissenting shares will vary depending upon the amount of funds required. The most likely sources are the Company's cash reserves, the liquidation of its marketable securities, or debt financing. At March 31, 1996, on a pro forma, post-merger basis, the cash reserves and marketable securities of the Company totaled approximately $12.4 million, and the assets and liabilities of the Company were approximately $115.3 million and $9 million, respectively. The effect of the purchase of dissenting shares on the net income per share or cash distributions per share of the Company will vary depending upon the ultimate determination of the fair market value for such dissenting shares. If the Company liquidates certain marketable securities in order to make payments to dissenting shareholders, it will recognize a one time loss on such sale which may negatively affect its net income per share in the short term. However, the Company will benefit in the long term from the decrease in shares outstanding due to the corresponding reduction in the Company's overall cash distribution payout. Although the Company may be required to borrow funds to satisfy its obligation to dissenting shareholders, it does not expect that this borrowing will have a material adverse effect on the net income per share or cash distribution per share because the cost of capital will be offset or balanced by the reduction in cash distribution payout. Shareholders of the Company also approved (i) an amendment to the Articles of Incorporation of the Company to change the name of the Company to "Franklin Select Realty Trust," and to eliminate dividends from operations to the Series B Common Stock of the Company, and (ii) the adoption of second amended and restated bylaws which provide, among other things, that the number of directors on the board of the Company may vary from five to nine. ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS (Continued) Approval of the Merger by the shareholders of FREIF and Advantage included approval of the issuance of a Series B Exchange Right to the Advisor in respect of the shares of Series B Common Stock held by the Advisor in FREIF and Advantage which are being exchanged in the merger for Series B Shares of the Company. This exchange right, which had been previously approved by the shareholders of the Company in respect of the shares of Series B Common Stock held by the Advisor in the Company, grants the Advisor a right to exchange its shares of Series B Common Stock for shares of Series A Common Stock if the Series A Common Stock reaches certain trading levels. Different trading levels have been set with respect to the Series B Common Stock exchanged in the merger for shares of Series B Common Stock of the Company (for former FREIF Series B Shares, $11.33, and for former Advantage Series B Shares, $8.42). The Company is, and FREIF and Advantage were, advised by the Advisor. Franklin Resources, Inc. ("Franklin Resources") is the parent corporation of the Advisor. Prior to the Merger, Franklin Resources and its affiliates (including the Advisor) owned approximately 3.5%, 7.6% and 48.7%, respectively, of the outstanding common stock of the Company, FREIF and Advantage. Franklin Resources and its affiliates now hold approximately 18.9% of the outstanding common stock of the Company, assuming that all of the dissenting shares are bought back by the Company. ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS. (a) Pro Forma Financial Statements The Pro Forma financial statements of the Company reflecting the merger are listed on the Index to Financial Statements on page 5. (b) Historical Financial Statements The historical financial statements of Franklin Real Estate Income Fund and Franklin Advantage Real Estate Income Fund are listed on the Index to Financial Statements on pages 5 and 6. (c) Exhibits 2.1 Agreement and Plan of Merger among Franklin Select Real Estate Income Fund, Franklin Real Estate Income Fund, Franklin Advantage Real Estate Income Fund, and Franklin Properties, Inc. filed with the Company's Registration Statement on Form S-4 (No. 33-64131) and incorporated herein by reference. INDEX TO FINANCIAL STATEMENTS PRO FORMA FINANCIAL STATEMENTS: PAGE Unaudited pro forma balance sheet as of March 31, 1996 7 Unaudited pro forma statement of operations for the three months ended March 31, 1996 8 Unauidted pro forma statement of operations for the year ended December 31, 1995 9 Notes to the pro forma financial statements 10 FRANKLIN REAL ESTATE INCOME FUND As included in 1995 Annual Report on Form 10-K Report of Independent Accountants 11 Balance Sheets as of December 31, 1994 and 1995 12 Statement of Operations for the years ended December 31, 1993, 1994 and 1995 13 Statement of Stockholders' Equity for the years ended December 31, 1993, 1994 and 1995 14 Statement of Cash Flows for the years ended December 31, 1993, 1994 and 1995 15 Notes to Financial Statements 16 - 21 As included in March 31, 1996, Quarterly Report on Form 10-Q Balance Sheets as of March 31, 1996, and December 31, 1995 22 Statement of Operations for the three-month ` periods ended March 31, 1996, and 1995 23 Statement of Stockholders' Equity for the three-month period ended March 31, 1996 24 Statement of Cash Flows for the three-month periods ended March 31, 1996, and 1995 25 Notes to Financial Statements 26 - 27 INDEX TO FINANCIAL STATEMENTS (Continued) FRANKLIN ADVANTAGE REAL ESTATE INCOME FUND As included in 1995 Annual Report on Form 10-K Report of Independent Accountants 28 Balance Sheets as of December 31, 1994 and 1995 29 Statement of Operations for the years ended December 31, 1993, 1994 and 1995 30 Statement of Stockholders' Equity for the years ended December 31, 1993, 1994 and 1995 31 Statement of Cash Flows for the years ended December 31, 1993, 1994 and 1995 32 Notes to Financial Statements 33 - 39 As included in March 31, 1996, Quarterly Report on Form 10-Q Balance Sheets as of March 31, 1996, and December 31, 1995 40 Statement of Operations for the three-month ` periods ended March 31, 1996, and 1995 41 Statement of Stockholders' Equity for the three-month period ended March 31, 1996 42 Statement of Cash Flows for the three-month periods ended March 31, 1996, and 1995 43 Notes to Financial Statements 44 - 45
PRO FORMA BALANCE SHEET MARCH 31, 1996 (IN 000'S) (UNAUDITED) Combined Proforma The Historical Pro Forma The Company FREIF Advantage Total Adjustments Company ASSETS Rental property: Land $9,686 $10,326 $10,937 $30,949 $30,949 Buildings and 33,462 29,712 20,070 83,244 83,244 improvements ------ ------ ------ ------ ------ 43,148 40,038 31,007 114,193 114,193 Less accumulated 7,285 5,772 2,123 15,181 15,181 depreciation ----- ----- ----- ------ ------ 35,863 34,266 28,883 99,012 99,012 Cash and cash equivalents 3,375 1,377 866 5,618 5,618 Mortgage-backed securities, 4,954 477 1,378 6,809 6,809 available for sale Deferred rent receivable 968 761 229 1,958 1,958 Other assets, net of accumulated 663 775 440 1,878 ______ 1,878 amortization --- --- --- ----- ----- Total assets $45,823 $37,656 $31,796 $115,275 $ - $115,275 ======= ======= ======= ======== =========== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Note and bonds payable $0 $1,926 $4,721 $6,647 $6,647 Tenants' deposits and other 327 315 234 876 876 liabilities Dividends payable 592 500 429 1,521 1,521 Advance rents 9 0 46 55 55 - - -- -- -- Total liabilities 928 2,741 5,430 9,099 9,099 --- ----- ----- ----- ----- Dissenting shareholders' 0 0 0 0 7,964(A) 7,964 interests - - - - -------- ----- Stockholders' equity 44,895 34,915 26,366 106,176 (7,964)(A) 98,212 ------ ------ ------ ------- ---------- ------ Total liabilities and $45,823 $37,656 $31,796 $115,275 $ - $115,275 stockholders' equity ======= ======= ======= ======== =========== ======== See Notes to Pro Forma Financial Statements.
PRO FORMA STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1996 (IN 000'S EXCEPT PER SHARE AMOUNTS) (UNAUDITED) Combined Proforma The Historical Pro Forma The Company FREIF Advantage Total Adjustments Company Revenue: Rent $1,154 $1,107 $1,024 $3,285 $3,285 Interest and 127 25 37 189 ____ 189 dividends --- -- -- --- --- Total revenue 1,281 1,132 1,061 3,474 ____ 3,474 ----- ----- ----- ----- ----- Expenses: Interest 0 48 113 161 161 Depreciation and 378 274 173 825 825 amortization Property operations 312 265 253 830 830 General and 96 47 50 193 193 administrative Related party 115 51 84 250 55 (B) 305 Consolidation 176 168 118 462 ____ 462 expense --- --- --- --- --- Total expenses 1,077 853 791 2,721 55 2,776 ----- --- --- ----- -- ----- Net income $204 $279 $270 $753 $(55) $698 ==== ==== ==== ==== ===== ==== Net income per share $0.04 $0.07 $0.09 $0.05 ===== ===== ===== ===== Weighted average shares of Series A common 5,383 4,000 3,014 14,143 stock outstanding ===== ===== ===== ======
See Notes to Pro Forma Financial Statements.
PRO FORMA STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995 (IN 000'S EXCEPT PER SHARE AMOUNTS) (UNAUDITED) Combined Proforma The Historical Pro Forma The Company FREIF Advantage Total Adjustments Company Revenue: Rent $4,511 $4,613 $4,259 $13,383 $13,383 Interest and 494 85 139 718 718 dividends Other 0 10 0 10 ____ 10 - -- - -- -- Total revenue 5,005 4,708 4,398 14,111 ____ 14,111 ----- ----- ----- ------ ------ Expenses: Interest 0 205 474 679 679 Depreciation 1,495 1,141 699 3,335 3,335 and amortization Property 1,404 1,225 1,076 3,705 3,705 operations General and 204 173 129 506 506 administrative Related party 444 222 364 1,030 220 (B) 1,250 Consolidation 150 143 101 394 ____ 394 expense --- --- --- --- --- Total expenses 3,697 3,109 2,843 9,649 220 9,869 ----- ----- ----- ----- --- ----- Net income $1,308 $1,599 $1,555 $4,462 $(220) $4,242 ====== ====== ====== ====== ====== ====== Net income per share $0.24 $0.40 $0.52 $0.30 ===== ===== ===== ===== Weighted average shares of Series A common 5,353 4,000 3,014 14,143 stock outstanding ===== ===== ===== ======
See Notes to Pro Forma Financial Statements. NOTES TO THE PRO FORMA FINANCIAL STATEMENTS (IN 000'S EXCEPT PER SHARE AMOUNTS) (UNAUDITED) 1. BASIS OF PRESENTATION: Effective May 7, 1996, Franklin Real Estate Income Fund ( "FREIF" ) and Franklin Advantage Real Estate Income Fund ( "Advantage" ) merged into the Company. In connection with the Merger, the Company issued approximately 7,937,000 shares of Series A common stock and 559,718 shares of Series B common stock in exchange for 3,363,877 and 3,009,479 shares of Series A common stock and 319,308 and 124,240 shares of Series B common stock of FREIF and Advantage, respectively, in each case excluding dissenting shares. Shareholders representing approximately 635,638 shares of FREIF Series A common stock, 4,234 shares of Advantage Series A common stock and 1,077,667 shares of Company Series A common stock elected to exercise dissenter's rights pursuant to Chapter 13 of the California General Corporation Law. The Company, as the surviving corporation after the merger, is required to pay the fair market value for such dissenting shares. The Company has offered the dissenting shareholders approximately $7,964,000 for their shares. The shareholders have asserted approximately $12 million as the fair market value. If the Company and any dissenting shareholder cannot agree on the fair market value, either party may file a complaint in the superior court within six months of mailing the notice of merger, asking the court to determine the fair market value of the dissenting shares. The pro forma financial statements of the Company, which are unaudited, have been prepared based on the historical financial statements of the Company, FREIF and Advantage. The pro forma balance sheet of the Company at March 31, 1996, has been prepared as if the Merger and the exercise of dissenters' rights had been consummated on March 31, 1996. The pro forma statements of operations for the three months ended March 31, 1996, and for the year ended December 31, 1995, have been prepared as if these transactions had been consummated on January 1, 1995. The pro forma financial information of the Company has been presented as a reorganization of entities under common control; therefore, the amounts have been reported at their historical bases as adjusted to give effect to these transactions. In management's opinion, all adjustments necessary to reflect the effects of these transactions have been made. The pro forma financial statements should be read in conjunction with the historical financial statements of the Company, FREIF and Advantage. The pro forma financial statements are not necessarily indicative of the financial position or results from operations for future periods. 2. PRO FORMA ADJUSTMENTS: A. As previously discussed, the Company has offered the dissenting shareholders $7,964 in cash in exchange for their shares. The adjustment is to record this obligation and to reflect a corresponding reduction of stockholders' equity. B. Changes in the advisory fee structure of FREIF and Advantage versus the Company are reflected as an adjustment to related party expenses. 3. NET INCOME PER SHARE Pro forma weighted average number of Series A shares outstanding has been calculated assuming that shares attributable to dissenting shareholders (equivalent to 1,900,000 shares of the Company's common stock) were outstanding for the periods indicated. If such shares had been retired effective January 1, 1995, pro forma net income per share would have been $.06 and $.35 for the three months ended March 31, 1996, and year ended December 31, 1995, respectively. In addition, the final number of shares to be issued and outstanding is subject to adjustment for rounding of fractional shares. 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 authorized; 3,193 3,193 319,308 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 (347) (1) - - - - (1) stock 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 (138) (1) - - - - (1) stock 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
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 --------------------- Accumulated Unrealized Distributions Gain/Loss 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. 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 Stockholders Franklin Advantage Real Estate Income Fund We have audited the accompanying balance sheets of Franklin Advantage 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 Advantage 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 Advantage 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 Advantage Real Estate Income Fund - ---------------------------------------------------------------------------- as of December 31, 1995 and 1994 (dollars in 000's except 1995 1994 per share amounts) - ---------------------------------------------------------------------------- ASSETS Rental property: Land $10,937 $10,937 Buildings and improvements 20,070 19,972 ---------------------- 31,007 30,909 Less: accumulated depreciation 1,961 1,312 ---------------------- 29,046 29,597 Cash and cash equivalents 1,349 804 Mortgage-backed securities, available for sale 1,421 1,494 Deferred rent receivable 247 306 Deferred costs and other assets 348 538 ---------------------- Total assets $32,411 $32,739 ====================== LIABILITIES AND STOCKHOLDERS' EQUITY Notes and bonds payable $5,208 $5,298 Tenants' deposits and other liabilities 193 128 Distributions payable 429 490 Advance rents 53 82 ---------------------- Total liabilities 5,883 5,998 ---------------------- Stockholders' equity: Common stock, Series A, without par value; 27,010 27,011 stated value $10 per share; 50,000,000 shares authorized; 3,013,713 and 3,013,775 shares issued and outstanding for 1995 and 1994, respectively Common stock, Series B, without par value; 1,242 stated value $10 per share; 1,000,000 shares authorized; 124,240 shares issued and outstanding 1,242 Unrealized loss on mortgage-backed securities (53) (124) Accumulated distributions in excess of net income (1,671) (1,388) ---------------------- Total stockholders' equity 26,528 26,741 ====================== Total liabilities and stockholders' equity $32,411 $32,739 ====================== - ---------------------------------------------------------------------------- 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 Advantage Real Estate Income Fund - -------------------------------------------------------------------------------- for the years ended December 31, 1995, 1994 and 1993 (Dollars in 000's except per share amounts) 1995 1994 1993 - -------------------------------------------------------------------------------- Revenue: Rent $4,259 $3,280 $3,248 Interest and dividends 139 414 479 -------------------------- Total revenue 4,398 3,694 3,727 -------------------------- Expenses: Interest 474 289 263 Depreciation and amortization 699 533 429 Property operations 1,076 922 875 Related party 364 306 308 Consolidation expense (recovery), net 101 1 (88) General and administrative 129 167 156 Loss on sale of mortgage-backed securities - 237 - -------------------------- Total expenses 2,843 2,455 1,943 -------------------------- Net income $1,555 $1,239 $1,784 ========================== Net income per share, based on the weighted average shares outstanding of Series A common stock of 3,013,734, 3,013,894 and 3,013,910 for the years ended December 31, 1995, 1994 and 1993, respectively $.52 $.41 $.59 ========================== Distributions per share, based on the weighted average shares outstanding of Series A common stock of 3,013,734, 3,013,894 and 3,013,910 for the years $.61 $.65 $.65 ended December 31, 1995, 1994 and 1993, respectively ========================== - -------------------------------------------------------------------------------- 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 ' E Q U I T Y Franklin Advantage 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 Accumulated Gain (Loss) Distributions on in Shares Amount Shares Amount Mortgage-BackeExcess of Total Securities Net Income ---------------------------------------------------------------------------- Balance, December 31, 3,013,910 $27,011 124,240 $1,242 - $(493) $27,760 1992 Net income - - - - - 1,784 1,784 Distributions declared - - - - - (1,959) (1,959) - ---------------------------------------------------------------------------------------------- Balance, December 31, 3,013,910 27,011 124,240 1,242 - (668) $27,585 1993 Redemption of Series A (135) - - - - - - common stock Unrealized loss on mortgage- backed securities - - - - (124) - (124) Net Income - - - - - 1,239 1,239 Distributions declared - - - - - (1,959) (1,959) - ---------------------------------------------------------------------------------------------- Balance, December 31, 1994 3,013,775 27,011 124,240 1,242 (124) (1,388) 26,741 Redemption of Series A common stock (62) (1) - - - - (1) Unrealized gain on mortgage- backed securities - - - - 71 - 71 Net Income - - - - - 1,555 1,555 Distributions declared - - - - - (1,838) (1,838) - ---------------------------------------------------------------------------------------------- Balance, December 31, 1995 3,013,713 $27,010 124,240 $1,242 $(53) $(1,671) $26,528 ==============================================================================================
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 Advantage Real Estate Income Fund - ----------------------------------------------------------------------------- for the years ended December 31, 1995, 1994 and 1993 (Dollars in 000's) 1995 1994 1993 - ----------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $1,555 $1,239 $1,784 ------------------------------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 699 533 429 Decrease in deferred rent receivable 59 123 53 (Increase) decrease in other assets 140 284 (571) Increase in tenants' deposits and other liabilities 65 22 12 Increase (decrease) in advance rents (29) 82 - ------------------------------- 934 1,044 (77) ------------------------------- Net cash provided by operating activities 2,489 2,283 1,707 ------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of rental property - (6,210) - Improvements to rental property (98) (562) (26) Investment in mortgage-backed securities - (980) - Disposition of mortgage-backed securities 144 6,525 1,364 ------------------------------- Net cash provided by (used in ) investing activities 46 (1,227) 1,338 ------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Redemption of Series A common stock (1) - - Principal payment on notes and bonds payable (90) (67) (60) Distributions paid (1,899) (1,469) (1,959) ------------------------------- Net cash used in financing activities (1,990) (1,536) (2,019) ------------------------------- Net increase (decrease) in cash and cash equivalents 545 (480) 1,026 Cash and cash equivalents, beginning of year 804 1,284 258 ------------------------------- Cash and cash equivalents, end of year $1,349 $804 $1,284 =============================== - ----------------------------------------------------------------------------- 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 Advantage Real Estate Income Fund (the "Company") is a California corporation formed on June 8, 1990 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 1991. 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 has made two real estate investments. On January 2, 1992, the Company acquired its first property, the Fairway Center, an office building located in Brea, California. On November 1, 1994, the Company acquired the Carmel Mountain Gateway Plaza, a specialty retail center, located in San Diego, California. 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. Significant improvements and betterments are capitalized. Maintenance, repairs and minor renewals are charged to expense when incurred. 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. 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 Organization costs are deferred and amortized using the straight-line method over a five year period. Lease commissions are deferred and amortized using the straight-line method over the term of the related lease. 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 RENTAL REVENUES Rental revenues are recorded on the straight-line method over the related lease term. As a result, a deferred rent receivable is created to reflect scheduled rent increases 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 mortgaged-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 during 1995, 1994 and 1993. Percent of Straight-Line Rental Revenue Tenant Name Lease Expirations 1995 1994 1993 - ---------------------------------------------------------------------------- Insurance Company 10/31/97 42.5% 44.9% 57.8% Insurance Company 04/30/2001 20.0% 29.6% 18.2% 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 commencing twelve months after the offering is terminated. One half of 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. The agreement also provides for the Advisor to receive fees in connection with property acquisitions and sales. 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 the years ended December 31, 1995, 1994 and 1993: 1995 1994 1993 -------------------------------- Advisory fees, charged to related party expense $135,000 $116,000 $86,000 Reimbursement for data processing, accounting and certain other expenses, charged to related party expense $26,000 $19,000 $25,000 Property management fees, charged to related party expense $203,000 $171,000 $197,000 Property acquisition fee, capitalized and amortized over the life of the related investment - $480,000 - Leasing commissions, capitalized and amortized over the term of the related lease $1,000 $44,000 - Construction supervision fee, capitalized and amortized over the life of the related investment or the term of the related lease $7,000 $22,000 - At December 31, 1995 and 1994, cash equivalents included $261,000 and $79,000, respectively, 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 $7,000 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 3 - MORTGAGE-BACKED SECURITIES, AVAILABLE FOR SALE Mortgage-backed securities, available for sale at December 31, 1995, had coupon rates of 7.21% and 7.25%, maturing in 2017 and 2022, respectively. Amortized cost was $1,474,000, market value was $1,421,000, resulting in a gross unrealized loss of $53,000. Mortgage-backed securities at December 31, 1994 had an aggregate market value of $1,494,000 and an amortized cost of $1,618,000, resulting in a gross unrealized loss of $124,000. NOTE 4 - NOTES AND BONDS PAYABLE Notes and bonds payable at December 31, 1995 and 1994 are comprised of the following: 1995 1994 -------------------------- FAIRWAY CENTER Note payable, collateralized by a deed of trust, payable interest only until maturity in March, 1996. Interest is paid monthly at a rate of 9% annually $480,000 $480,000 Bonds payable, net of prepaid reserve of $300,000,collateralized by a lien, issued in three types:serial bonds maturing through October 1, 2000,at interest rates ranging from 5.75% to 7.60%, term bonds maturing October 1, 2006, and October 1, 2013,at interest rates of 8% and 8.125%, respectively. The annual payment on the bonds is calculated in an amount sufficient to fully amortize the 2,405,000 2,470,000 indebtedness. CARMEL MOUNTAIN Note payable, collateralized by a deed of trust. The note bears interest, payable monthly, at the Union Bank Reference Rate plus 1.5%, together with variable monthly principal 2,323,000 2,348,000 payments through maturity in 1999. ========================== $5,208,000 $5,298,000 ========================== - ------------------------------------------------------------------------- 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 Aggregate principal payments required in future years are as follows: 1996 $578,000 1997 105,000 1998 118,000 1999 2,322,000 2000 95,000 Thereafter 1,990,000 -------------- $5,208,000 ============== For the years ended December 31, 1995, 1994 and 1993, the Company paid interest of $483,000, $266,000 and $271,000, respectively. NOTE 5 - COMMON STOCK AND INCOME PER SHARE Series A and Series B common stock have the same voting rights. Distributions from sources other than cash from sale or refinancing of the Company's property, as defined, 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 to 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. NOTE 6 - 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 Total Year Paid Income Capital Paid - ------------------------------------------------ 1995 $.60 $.01 $.61 1994 $.51 $.14 $.65 1993 $.49 $.16 $.65 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 7 - RENTAL INCOME The Company's rental income from commercial property is received principally from tenants under non-cancelable operating leases. The tenant leases typically provide for guaranteed minimum rent plus contingent rents. Minimum future rentals on non-cancelable tenant operating leases at December 31, 1995 are as follows: 1996 $ 4,001,000 1997 3,584,000 1998 2,168,000 1999 2,186,000 2000 2,170,000 Thereafter 7,181,000 ------------- $ 21,290,000 ============= Minimum future rentals do not include contingent rents, which represent reimbursements of property operating expenses. Contingent rents amounted to $280,000 and $96,000 for the years ended December 31, 1995 and 1994 respectively. NOTE 8 - PROPOSED MERGER On November 2, 1995 the Board of Directors of the Company and of two other real estate investments trusts that Franklin Properties, Inc. advises, Franklin Real Estate Income Fund ("FREIF') 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 FREIF 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 FREIF 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 FREIF. 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. 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 9 - SUPPLEMENTARY QUARTERLY FINANCIAL DATA (Unaudited) Three Months Ended --------------------------------------------------------- March 31, 1995 June 30, September 30, December 31, 1995 1995 1995 --------------------------------------------------------- Revenues $1,077,000 $1,116,000 $1,129,000 $1,076,000 Net income 416,000 484,000 314,000 341,000 Net income per share .14 .16 .10 .12 Three Months Ended --------------------------------------------------------- March 31, 1994 June 30, September 30, December 31, 1994 1994 1994 --------------------------------------------------------- Revenues $845,000 $897,000 $931,000 $1,021,000 Net income 358,000 384,000 331,000 166,000 Net income per share .12 .13 .11 .05 Three Months Ended --------------------------------------------------------- March 31, 1993 June 30, September 30, December 31, 1993 1993 1993 --------------------------------------------------------- Revenues $926,000 $937,000 $980,000 $884,000 Net income 381,000 348,000 232,000 823,000 Net income per share .13 .12 .08 .27
PART I - FINANCIAL INFORMATION Item 1. Financial Statements FRANKLIN ADVANTAGE 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 $10,937 $10,937 Buildings and improvements 20,070 20,070 - ------------------------------------------------------------------ 31,007 31,007 Less: accumulated depreciation 2,124 1,961 - ------------------------------------------------------------------ 28,883 29,046 Cash and cash equivalents 866 1,349 Mortgage-backed securities, available 1,378 1,421 for sale Deferred rent receivable 229 247 Other assets 440 348 - ------------------------------------------------------------------ Total assets $31,796 $32,411 ================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Notes and bonds payable $4,721 $5,208 Tenants' deposits and other liabilities 234 193 Distributions payable 429 429 Advance rents 46 53 - ------------------------------------------------------------------ Total liabilities 5,430 5,883 - ------------------------------------------------------------------ Stockholders' equity: Common stock, Series A, without par value. Stated value $10 per share; 50,000,000 shares 27,010 27,010 authorized; 3,013,713 shares issued and outstanding in 1996 and 1995 Common stock, Series B, without par value. Stated value $10 per share; 1,000,000 shares 1,242 1,242 authorized; 124,240 shares issued and outstanding in 1996 and 1995 Unrealized loss on mortgage-backed (56) (53) securities Accumulated Distributions in excess of (1,830) (1,671) net income - ------------------------------------------------------------------ Total stockholders' equity 26,366 26,528 - ------------------------------------------------------------------ Total liabilities and stockholders' $31,796 $32,411 equity ================================================================== See notes to financial statements. Item 1. Financial Statements (continued) FRANKLIN ADVANTAGE 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 $1,024 $1,045 Interest 36 31 Dividends 1 1 - ------------------------------------------------------------------------------- Total revenue 1,061 1,077 - ------------------------------------------------------------------------------- Expenses: Interest 113 120 Depreciation and amortization 173 176 Operating 253 244 Related party 84 90 Consolidation expense 118 - General and administrative 50 31 - ------------------------------------------------------------------------------- Total expenses 791 661 - ------------------------------------------------------------------------------- Net income $270 $416 =============================================================================== Net income per share, based on shares outstanding of Series A common stock of 3,013,713 and 3,013,775 in March 31, 1996 and 1995 $.09 $.14 =============================================================================== Distributions per share, based on shares outstanding of Series A common stock of 3,013,713 and 3,013,775 in March 31, 1996 and 1995 $ .14 $.16 =============================================================================== See notes to financial statements. Item 1. Financial Statements (continued) FRANKLIN ADVANTAGE 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 Accumulated Unrealized Distributions in Gain/Loss on Excess of Shares Amount Shares Amount Securities Net Income Total Balance, beginning of period 3,013,713 $27,010 124,240 $1,242 $(53) $(1,671) $26,528 Unrealized loss on mortgage- backed securities - - - - (3) - (3) Net income - - - - - 270 270 Distributions (429) declared - - - - - (429) - ------------------------------------------------------------------------------------------------------- Balance, end of period 3,013,713 $27,010 124,240 $1,242 $(56) $(1,830) $26,366 =======================================================================================================
See notes to financial statements. Item 1. Financial Statements (continued) FRANKLIN ADVANTAGE 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 $270 $416 - ------------------------------------------------------------------------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 173 176 Decrease in deferred rent receivable 18 14 (Increase) decrease in other assets (102) 67 Increase in tenants' deposits and other liabilities 41 78 Decrease in advance rents (7) (8) - ------------------------------------------------------------------------- 123 327 Net cash provided by operating activities 393 743 - ------------------------------------------------------------------------- Cash flows from investing activities: Disposition of mortgage-backed securities 40 22 Improvements to rental property - (61) - ------------------------------------------------------------------------- Net cash provided by (used in) investing activities 40 (39) - ------------------------------------------------------------------------- Cash flow from financing activities: Principal payment on notes and bonds payable (487) (6) Distributions paid (429) (490) - ------------------------------------------------------------------------- Net cash used in financing activities (916) (496) - ------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (483) 208 Cash and cash equivalents, beginning of period 1,349 804 - ------------------------------------------------------------------------- Cash and cash equivalents, end of period $866 $1,012 ========================================================================= See notes to financial statements. FRANKLIN ADVANTAGE REAL ESTATE INCOME FUND NOTES TO FINANCIAL STATEMENTS MARCH 31, 1996 NOTE 1 - ORGANIZATION Franklin Advantage Real Estate Income Fund (the "Company") is a California corporation formed on June 8, 1990 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 1991. 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 has made two real estate investments. On January 2, 1992, the Company acquired its first property, the Fairway Center, an office building located in Brea, California. On November 1, 1994, the Company acquired the Carmel Mountain Gateway Plaza, a specialty retail center, located in San Diego, California. 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. One half of 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. At March 31, 1996, cash equivalents included $92,000 invested in Franklin Money Fund which is an investment company managed by an affiliate of the Advisor. Dividends earned from Franklin Money Fund totaled $1,000 for the three month period ended March 31, 1996. FRANKLIN ADVANTAGE 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 of the Advisor, 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: Advisory fees, charged to related party expense $34,000 Reimbursement for data processing, accounting and certain other expenses, charged to related party expense $4,000 Property management fees, charged to related party expense $46,000 NOTE 4 - COMMON STOCK AND INCOME PER SHARE Series A and Series B common stock have the same voting rights. Distributions from sources other than cash from sale or refinancing of the Company's property, as defined, 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 to 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. NOTE 5 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION For the three month period ended March 31, 1996, the Company paid interest of $113,000. 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 $.084 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 1.2 shares of Select Series A and Series B common stock, respectively. Because of the merger, this is the Company's final report. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned heretofore duly authorized. Dated: May 21, 1996 FRANKLIN SELECT REAL ESTATE INCOME FUND BY: /s/ David P. Goss David P. Goss President -----END PRIVACY-ENHANCED MESSAGE-----