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
<TABLE>
<CAPTION>
PRO FORMA BALANCE SHEET
MARCH 31, 1996
(IN 000'S)
(UNAUDITED)
Combined Proforma
The Historical Pro Forma The
Company FREIF Advantage Total Adjustments Company
<S> <C> <C> <C> <C> <C>
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.
</TABLE>
<TABLE>
<CAPTION>
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:
<S> <C> <C> <C> <C> <C> <C>
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
===== ===== ===== ======
</TABLE>
See Notes to Pro Forma Financial Statements.
<TABLE>
<CAPTION>
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
<S> <C> <C> <C> <C> <C> <C>
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
===== ===== ===== ======
</TABLE>
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)
<TABLE>
<CAPTION>
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
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
===========================================================================================
</TABLE>
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
<TABLE>
<CAPTION>
Franklin Real Estate Income Fund
- --------------------------------------------------------------------------------
for the years ended December 31, 1995, 1994 1995 1994 1993
and 1993 (Dollars in 000's)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
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
===================================
- --------------------------------------------------------------------------------
</TABLE>
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
<TABLE>
<CAPTION>
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
<S> <C> <C>
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:
<S> <C> <C>
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
<S> <C> <C> <C> <C> <C> <C> <C>
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
=======================================================================================================
</TABLE>
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)
<TABLE>
<CAPTION>
Common Stock
Series A Series B
Unrealized Accumulated
Gain (Loss) Distributions
on in
Shares Amount Shares Amount Mortgage-BackeExcess of Total
Securities Net Income
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
==============================================================================================
</TABLE>
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
<TABLE>
<CAPTION>
NOTE 9 - SUPPLEMENTARY QUARTERLY FINANCIAL DATA (Unaudited)
Three Months Ended
---------------------------------------------------------
March 31, 1995 June 30, September 30, December 31,
1995 1995 1995
---------------------------------------------------------
<S> <C> <C> <C> <C>
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
</TABLE>
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)
<TABLE>
<CAPTION>
Common Stock
Series A Series B
Accumulated
Unrealized Distributions in
Gain/Loss on Excess of
Shares Amount Shares Amount Securities Net Income Total
<S> <C> <C> <C> <C> <C> <C> <C>
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
=======================================================================================================
</TABLE>
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
