<PAGE> 1
As filed with the Securities and Exchange Commission on November 13, 1995
--
Registration Statement No. 33-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
FRANKLIN SELECT REAL ESTATE INCOME FUND
(Exact name of registrant as specified in its charter)
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California 6512 94-3095938
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
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777 Mariners Island Boulevard DAVID P. GOSS, ESQ.
San Mateo, California 94403-7777 Franklin Select Real Estate Income Fund
(415) 312-3000 777 Mariners Island Boulevard
(Address, including zip code, and telephone number, San Mateo, California 94403-7777
including area code, of agent for service) (415) 312-3000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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Copies to:
DAVID J. ROMANSKI, ESQ.
Steinhart & Falconer
333 Market Street, Suite 3200
San Francisco, California 94105
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
in connection with the formation of a holding company, check the following box.
/ /
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. / /
CALCULATION OF REGISTRATION FEE
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Proposed Maximum Proposed Maximum Amount of
Title of Each Class of Amount to be Offering Price Aggregate Offering Registration
Securities to be Registered Registered Per Share(1) Price(1) Fee(2)
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Shares of Series A Common Stock 8,759,973 (2) $42,195,652 $14,550
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(1) Estimated solely for purposes of calculating the registration
fee in accordance with Rule 457(f) of the Securities Act of
1933 on the basis of the market value of the securities to be
exchanged.
(2) This Registration Statement relates to the proposed merger of
Franklin Real Estate Income Fund ("FREIF") and/or Franklin
Advantage Real Estate Income Fund ("Advantage") into Franklin
Select Real Estate Income Fund. At the merger, there will be
a maximum of 3,999,514 shares of Series A Common Stock of
FREIF outstanding, and a maximum of 3,013,713 shares of Series
A Common Stock of Advantage outstanding. The average of the
high and low prices of such securities reported on the
American Stock Exchange on November 7, 1995 were $5.44 and
$5.31, respectively.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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FRANKLIN SELECT REAL ESTATE INCOME FUND
Cross Reference Sheet Showing Location in Prospectus
of Information Required by Form S-4
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Registration Statement Item Location in Prospectus
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A. Information About the Transaction
1. Forepart of Registration Front Cover Page
Statement and Outside Front Cover
Page of Prospectus
2. Inside Front and Outside Back Inside Front and Outside Back Cover
Cover Pages of Prospectus Pages
3. Risk Factors, Ratio of Earnings Summary; Investment Considerations;
to Fixed Charges and Other Selected Financial Information of
Information the Company, FREIF and Advantage;
Pro Forma Financials
4. Terms of the Transaction Summary; Terms of the Merger;
Voting Procedure; Rights of
Dissenting Shareholders; Comparative
Information; Description
of Capital Stock; Income Tax
Considerations; Appendix A, D and E
5. Pro Forma Financial Information Summary; Pro Forma Financials;
Selected Financial Information of
the Company; The Company's Management
Discussion and Analysis of Financial
Condition and Results of Operations
6. Material Contacts with the Summary; Investment Considerations;
Company Being Acquired Terms of the Merger
7. Additional Information Required *
for Reoffering by Persons and
Parties Deemed to be Underwriters
8. Interests of Named Experts and Legal Opinions; Experts
Counsel
9. Disclosure of Commission Position Part II
on Indemnification for Securities
Act Liabilities
B. Information About the Registrant
10. Information with Respect to S-3 *
Registrants
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* Omitted as inapplicable
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11. Incorporation of Certain *
Information By Reference
12. Information with Respect to S-2 *
or S-3 Registrants
13. Incorporation of Certain *
Information By Reference
14. Information with Respect to The Company; Policies of the
Registrants Other than S-2 or S-3 Company With Respect to Certain
Registrants Activities; Description of Real
Properties; Summary; Financial
Information of the Company and the
Funds; Pro Forma Financials;
Selected Financial Information of
the Company; Market Price,
Dividends and Holders of the
Company's and the Funds'
Securities; The Company's
Management's Discussion and
Analysis of the Financial Condition
and Results of Operations
C. Information About the Company Being
Acquired
15. Information with Respect to S-3 *
Companies
16. Information with Respect to S-2
or S-3 Companies
17. Information with Respect to The Funds; Description of Real
Companies Other than S-2 or S-3 Properties; Investment Policies
Companies and Activities of the Funds;
Market Price, Dividends and Holders
of the Company's and the Funds'
Securities; Summary; Selected
Financial Information of FREIF;
FREIF's Management's Discussion
and Analysis of Financial Condition
and Results of Operations; Selected
Financial Information of Advantage;
Advantage's Management's Discussion
and Analysis of Financial Condition
and Results of Operations; Financial
Information of the Company and the
Funds
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* Omitted as inapplicable
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D. Voting and Management Information
18. Information if Proxies, Consents Notice of Special Meetings; Front
or Authorizations are to be Cover Page; Voting Procedure; Rights
Solicited of Dissenting Shareholders; Investment
Considerations; Terms of the Merger;
Security Ownership of Certain
Beneficial Owners and Management of
the Company and the Funds;
Compensation of the Company, the
Advisor and Continental; Comparative
Information; Management of the
Company, the Advisor and
Continental
19. Information if Proxies, Consents *
or Authorizations are not to be
Solicited or in an Exchange Offer
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* Omitted as inapplicable
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FRANKLIN SELECT REAL ESTATE INCOME FUND
777 MARINERS ISLAND BOULEVARD
SAN MATEO, CA 94403-7777
(415) 312-3000
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD , 1996
Dear Shareholder:
Notice is hereby given that a Special Meeting (the "Special Meeting") of
Shareholders of Franklin Select Real Estate Income Fund (the "Company") will be
held on , 1996, at 10:00 a.m., Pacific Standard Time (PST), at the
offices of Franklin Properties, Inc., 777 Mariners Island Boulevard, San Mateo,
California for the following purposes:
1. To consider and vote upon an Agreement and Plan of Merger between
the Company, Franklin Real Estate Income Fund ("FREIF") and Franklin
Advantage Real Estate Income Fund ("Advantage") pursuant to which FREIF
and/or Advantage would be merged with and into the Company (the "Merger").
Upon consummation of the Merger, if the Company Shareholders and FREIF
Shareholders approve the Merger, each share of FREIF Series A Common Stock
or Series B Common Stock would be converted into the right to receive 1.286
shares of Company Series A Common Stock or Series B Common Stock,
respectively. Upon consummation of the Merger, if the Company Shareholders
and Advantage Shareholders approve the Merger, each share of Advantage
Series A Common Stock or Series B Common Stock would be converted into the
right to receive 1.2 shares of Company Series A Common Stock or Series B
Common Stock, respectively. Approval of the Merger by Company Shareholders
will also approve (i) amendments to the Company's Articles of Incorporation
to change the Company's name to "Franklin Select Realty Trust," and to
eliminate dividends from operations to the Company Series B Common Stock,
and (ii) the adoption of amended and restated bylaws that will, among other
things, increase the variable number of directors on the board of directors
from three to five to five to nine.
2. To transact such other business as may properly come before the
Special Meeting or any adjournments thereof.
Pursuant to the Company's Bylaws, the Board of Directors has fixed the
close of business on , 1995 as the record date for the determination
of Shareholders entitled to notice of and to vote at the Special Meeting. Only
Shareholders of record at that time will be entitled to vote at the Special
Meeting or any adjournment thereof.
You are cordially invited to attend the Special Meeting in person. Even if
you plan to attend the Special Meeting, please complete, date, sign, and return
the enclosed proxy promptly in the enclosed self-addressed, stamped envelope. If
you attend and wish to withdraw your proxy, you may vote personally at the
Special Meeting.
Dated: , 1995 Sincerely,
RICHARD S. BARONE
Secretary
PLEASE RETURN YOUR PROXY CARD PROMPTLY
YOUR VOTE IS IMPORTANT NO MATTER HOW MANY SHARES YOU OWN
SHAREHOLDERS ARE CORDIALLY INVITED TO ATTEND THE SPECIAL MEETING IN PERSON.
IF YOU DO NOT EXPECT TO ATTEND THE SPECIAL MEETING, PLEASE INDICATE YOUR VOTING
INSTRUCTIONS ON THE ENCLOSED PROXY CARD, DATE AND SIGN IT, AND RETURN IT IN THE
ENVELOPE PROVIDED, WHICH IS ADDRESSED FOR YOUR CONVENIENCE AND NEEDS NO POSTAGE
IF MAILED IN THE UNITED STATES. IN ORDER TO AVOID THE ADDITIONAL EXPENSE TO THE
COMPANY OF FURTHER SOLICITATION, WE ASK YOUR COOPERATION IN MAILING YOUR PROXY
PROMPTLY.
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FRANKLIN REAL ESTATE INCOME FUND
777 MARINERS ISLAND BOULEVARD
SAN MATEO, CA 94403-7777
(415) 312-3000
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD , 1996
Dear Shareholder:
Notice is hereby given that a Special Meeting (the "Special Meeting") of
Shareholders of Franklin Real Estate Income Fund ("FREIF") will be held on
, 1996, at 10:00 a.m., Pacific Standard Time (PST), at the offices
of Franklin Properties, Inc., 777 Mariners Island Boulevard, San Mateo,
California for the following purposes:
1. To consider and vote upon an Agreement and Plan of Merger between
FREIF, Franklin Select Real Estate Income Fund ("the Company") and Franklin
Advantage Real Estate Income Fund ("Advantage") pursuant to which FREIF
and/or Advantage would be merged with and into the Company (the "Merger").
Upon consummation of the Merger, if the Company Shareholders and FREIF
Shareholders approve the Merger, each share of FREIF Series A Common Stock
or Series B Common Stock would be converted into the right to receive 1.286
shares of Company Series A Common Stock or Series B Common Stock,
respectively. Upon consummation of the Merger, if the Company Shareholders
and Advantage Shareholders approve the Merger, each share of Advantage
Series A Common Stock or Series B Common Stock would be converted into the
right to receive 1.2 shares of Company Series A Common Stock or Series B
Common Stock, respectively.
2. To transact such other business as may properly come before the
Special Meeting or any adjournments thereof.
Pursuant to the Company's Bylaws, the Board of Directors has fixed the
close of business on , 1995 as the record date for the determination
of Shareholders entitled to notice of and to vote at the Special Meeting. Only
Shareholders of record at that time will be entitled to vote at the Special
Meeting or any adjournment thereof.
You are cordially invited to attend the Special Meeting in person. Even if
you plan to attend the Special Meeting, please complete, date, sign, and return
the enclosed proxy promptly in the enclosed self-addressed, stamped envelope. If
you attend and wish to withdraw your proxy, you may vote personally at the
Special Meeting.
Dated: , 1995 Sincerely,
RICHARD S. BARONE
Secretary
PLEASE RETURN YOUR PROXY CARD PROMPTLY
YOUR VOTE IS IMPORTANT NO MATTER HOW MANY SHARES YOU OWN
SHAREHOLDERS ARE CORDIALLY INVITED TO ATTEND THE SPECIAL MEETING IN PERSON.
IF YOU DO NOT EXPECT TO ATTEND THE SPECIAL MEETING, PLEASE INDICATE YOUR VOTING
INSTRUCTIONS ON THE ENCLOSED PROXY CARD, DATE AND SIGN IT, AND RETURN IT IN THE
ENVELOPE PROVIDED, WHICH IS ADDRESSED FOR YOUR CONVENIENCE AND NEEDS NO POSTAGE
IF MAILED IN THE UNITED STATES. IN ORDER TO AVOID THE ADDITIONAL EXPENSE TO
FREIF OF FURTHER SOLICITATION, WE ASK YOUR COOPERATION IN MAILING YOUR PROXY
PROMPTLY.
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FRANKLIN ADVANTAGE REAL ESTATE INCOME FUND
777 MARINERS ISLAND BOULEVARD
SAN MATEO, CA 94403-7777
(415) 312-3000
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD , 1996
Dear Shareholder:
Notice is hereby given that a Special Meeting (the "Special Meeting") of
Shareholders of Franklin Advantage Real Estate Income Fund ("Advantage") will be
held on , 1996, at 10:00 a.m., Pacific Standard Time (PST), at the
offices of Franklin Properties, Inc., 777 Mariners Island Boulevard, San Mateo,
California for the following purposes:
1. To consider and vote upon an Agreement and Plan of Merger between
Advantage, Franklin Real Estate Income Fund ("FREIF") and Franklin Select
Real Estate Income Fund ("the Company") pursuant to which FREIF and/or
Advantage would be merged with and into the Company (the "Merger"). Upon
consummation of the Merger, if the Company Shareholders and Advantage
Shareholders approve the Merger, each share of Advantage Series A Common
Stock or Series B Common Stock would be converted into the right to receive
1.2 shares of Company Series A Common Stock or Series B Common Stock,
respectively. Upon consummation of the Merger, if the Company Shareholders
and FREIF Shareholders approve the Merger, each share of FREIF Series A
Common Stock or Series B Common Stock would be converted into the right to
receive 1.286 shares of Company Series A Common Stock or Series B Common
Stock, respectively.
2. To transact such other business as may properly come before the
Special Meeting or any adjournments thereof.
Pursuant to the Company's Bylaws, the Board of Directors has fixed the
close of business on , 1995 as the record date for the determination
of Shareholders entitled to notice of and to vote at the Special Meeting. Only
Shareholders of record at that time will be entitled to vote at the Special
Meeting or any adjournment thereof.
You are cordially invited to attend the Special Meeting in person. Even if
you plan to attend the Special Meeting, please complete, date, sign, and return
the enclosed proxy promptly in the enclosed self-addressed, stamped envelope. If
you attend and wish to withdraw your proxy, you may vote personally at the
Special Meeting.
Dated: , 1995 Sincerely,
RICHARD S. BARONE
Secretary
PLEASE RETURN YOUR PROXY CARD PROMPTLY
YOUR VOTE IS IMPORTANT NO MATTER HOW MANY SHARES YOU OWN
SHAREHOLDERS ARE CORDIALLY INVITED TO ATTEND THE SPECIAL MEETING IN PERSON.
IF YOU DO NOT EXPECT TO ATTEND THE SPECIAL MEETING, PLEASE INDICATE YOUR VOTING
INSTRUCTIONS ON THE ENCLOSED PROXY CARD, DATE AND SIGN IT, AND RETURN IT IN THE
ENVELOPE PROVIDED, WHICH IS ADDRESSED FOR YOUR CONVENIENCE AND NEEDS NO POSTAGE
IF MAILED IN THE UNITED STATES. IN ORDER TO AVOID THE ADDITIONAL EXPENSE TO
ADVANTAGE OF FURTHER SOLICITATION, WE ASK YOUR COOPERATION IN MAILING YOUR PROXY
PROMPTLY.
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FRANKLIN SELECT REAL ESTATE INCOME FUND
PROSPECTUS
FRANKLIN SELECT REAL ESTATE INCOME FUND
FRANKLIN REAL ESTATE INCOME FUND
FRANKLIN ADVANTAGE REAL ESTATE INCOME FUND
JOINT PROXY STATEMENT
SPECIAL MEETINGS OF SHAREHOLDERS
, 1996
This Joint Proxy Statement/Prospectus is being furnished to holders of
shares of Series A Common Stock ("Company Common Stock") of Franklin Select Real
Estate Income Fund (the "Company"), holders of Series B Common Stock of the
Company ("Series B Shares of the Company") holders of shares of Series A Common
Stock ("FREIF Common Stock") of Franklin Real Estate Income Fund ("FREIF"),
holders of Series B Common Stock of FREIF ("Series B Shares of FREIF"), holders
of shares of Series A Common Stock ("Advantage Common Stock") of Franklin
Advantage Real Estate Income Fund ("Advantage" and together with FREIF, the
"Funds") and holders of Series B Common Stock of Advantage ("Series B Shares of
Advantage") in connection with the solicitation of proxies of each for use at
special meetings of Shareholders of the Company, FREIF and Advantage to be held
at the offices of Franklin Properties, Inc., 777 Mariners Boulevard, San Mateo,
California 94403-7777, on , 1996 at 10:00 a.m. Pacific Standard Time,
and any and all adjournments thereof. Holders of Company Common Stock, FREIF
Common Stock and Advantage Common Stock are referred to as the "Company Series A
Shareholders," "FREIF Series A Shareholders" and "Advantage Series A
Shareholders," respectively, or "Series A Shareholders," collectively.
This Joint Proxy Statement/Prospectus relates to the proposed merger of
FREIF and/or Advantage with and into the Company (the "Merger") pursuant to the
Agreement and Plan of Merger attached as Appendix A to this Joint Proxy
Statement/Prospectus (the "Merger Agreement"). If approved by its Shareholders,
each share of FREIF Common Stock or Series B Shares exchanged in the Merger will
be converted into the right to receive 1.286 fully paid and non-assessable
shares of Company Common Stock or Series B Shares of the Company, respectively.
If approved by its Shareholders, each share of Advantage Common Stock or Series
B Shares exchanged in the Merger will be converted into the right to receive 1.2
fully paid and non-assessable shares of Company Common Stock or Series B Shares
of the Company, respectively. Fractional shares will not be issued but instead
will be rounded up to the nearest whole share. Approval of the Merger by Company
Shareholders will also approve (i) amendments to the Company's articles of
incorporation to change the Company's name to "Franklin Select Realty Trust,"
and to eliminate dividends from operations to the Series B Shares and (ii) the
adoption of amended and restated bylaws. Consummation of the Merger is subject
to various conditions, including approval of the Merger by a majority of
outstanding shares entitled to vote on the Merger as follows: for the Company,
the Company Series A Shareholders and Series B Shareholder; for FREIF, the FREIF
Series A Shareholders and Series B Shareholder; and for Advantage, the Advantage
Series A Shareholders and Series B Shareholder.
This Joint Proxy Statement/Prospectus also constitutes a Prospectus of the
Company for the issuance of up to 8,759,831 shares of Company Common Stock to be
issued in connection with the Merger. The Company Common Stock is traded on the
American Stock Exchange (the "AMEX") under the symbol "FSN." On , 1995,
the closing price of the Company Common Stock on the AMEX was $ . The
FREIF Common Stock is traded on the AMEX under the symbol "FIN." On ,
1995, the closing price of the FREIF Common Stock on the AMEX was $ .
The Advantage Common Stock is traded on the AMEX under the symbol "FAD." On
, 1995, the closing price of the Advantage Common Stock on the AMEX was
$ . There is no established trading market for the Series B Shares of
the Company, FREIF, and Advantage.
(continued on following page)
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OF ADEQUACY OF THIS JOINT PROXY STATEMENT/PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON, OR ENDORSED THE
MERITS OF, THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
The date of this Joint Proxy Statement/Prospectus is , 1995.
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Franklin Resources, Inc. and its Affiliates have significant relationships
with the Company, FREIF and Advantage. Franklin Resources, Inc. owns
approximately 44.8% of Advantage Common Stock. Franklin Properties, Inc. (the
"Advisor"), a subsidiary of Franklin Resources, Inc., owns all of the Series B
Shares of the Company, FREIF and Advantage. See "Security Ownership of Certain
Beneficial Owners and Management of the Company and the Funds." The Series B
Shares of the Company and each of the Funds vote together as a single class with
the Company, FREIF and Advantage Common Stock, respectively. Franklin Resources,
Inc. and its Affiliates have indicated an intention to vote all shares of the
Company, FREIF and Advantage Common Stock and Series B Shares beneficially owned
in favor of approval of the Merger. The boards of directors of the Company,
FREIF and Advantage, based on recommendations of special committees composed of
independent directors, the recommendation of the Advisor and the fairness
opinion of Bear, Stearns & Co., Inc., unanimously recommend that the Company,
FREIF and Advantage Series A Shareholders, respectively, vote for the Merger.
The Merger involves certain investment considerations that should be
considered by all Series A Shareholders, particularly Series A Shareholders of
FREIF and Advantage, including the following:
- - If they approve the Merger into the Company, which is an infinite life REIT,
FREIF and Advantage Series A Shareholders will not receive proceeds from the
future sale of properties and liquidation of the Funds. Instead, Series A
Shareholders will be able to liquidate their investment in the Company by
selling their shares in the securities market.
- - Because the Company is an infinite life REIT, certain of its policies differ
from those of FREIF and Advantage -- the Company has broader, growth-oriented
acquisition policies, and is more likely to issue equity securities in share
exchanges or to future investors and to leverage its investments.
- - Calculation of the advisory fee by the Company differs from the current
calculation by FREIF and Advantage, and as a consequence the advisory fee
payable in respect of the current real estate assets of the Funds will
initially increase.
- - The Advisor has initiated and participated in the structuring of the Merger.
The Merger was not the result of arm's length negotiations among the Company,
FREIF, Advantage, their Series A Shareholders or any person negotiating on
behalf of the Series A Shareholders. As a result, the terms of the Merger may
be less favorable for the Series A Shareholders than if they had been the
result of arm's length negotiations.
- - The initial level of quarterly distributions to Advantage Series A
Shareholders is expected to be lower after the Merger than before. Advantage
Series A Shareholders are expected to receive approximately $.011 (7.4%) less
and FREIF Shareholders are expected to receive approximately $.017 (13.1%)
more in regular quarterly dividends per share of their Common Stock converted.
- - Under California law, Shareholders of each of the Company and the Funds will
be entitled to Dissenter's Rights in connection with the Merger only if
demands for payment are filed with respect to 5% or more of the outstanding
common stock of the Company or each Fund, respectively. However, under the
terms of the Merger Agreement, the boards of directors of the Company and each
of the Funds may elect not to participate in the Merger if Shareholders
holding in the aggregate 5% or more of the outstanding common stock of the
Company or such Fund exercise Dissenter's Rights.
See "Investment Considerations." For a discussion of potential benefits of the
Merger, see "Summary -- Potential Benefits of the Merger" and "Terms of the
Merger -- Potential Benefits of the Merger."
This Joint Proxy Statement/Prospectus is first being mailed on or about
, 1995 to Company, FREIF and Advantage Series A Shareholders and the
Series B Shareholder of record at the close of business on , 1995 (the
"Record Date").
Bear, Stearns & Co., Inc. ("Bear Stearns") has rendered a fairness opinion
in connection with the Merger. (See "Terms of the Merger -- Fairness Opinion").
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE FUNDS OR
THE ADVISOR. THIS JOINT PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR THE SOLICITATION OF AN OFFER TO BUY IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION IS UNLAWFUL. THE DELIVERY OF THIS JOINT PROXY
STATEMENT/PROSPECTUS SHALL NOT UNDER ANY CIRCUMSTANCES IMPLY THAT INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
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TABLE OF CONTENTS
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AVAILABLE INFORMATION............................................................ 1
INCORPORATION BY REFERENCE....................................................... 1
SUMMARY.......................................................................... 2
The Company and the Funds...................................................... 2
The Special Meetings........................................................... 4
The Merger..................................................................... 4
Surrender of Certificates...................................................... 6
Opinion of Bear Stearns........................................................ 6
Investment Considerations...................................................... 6
Policy Risks................................................................ 6
Advisory Fee Changes........................................................ 6
Differing Impact on Certain Shareholders.................................... 7
Conflicts of Interest....................................................... 7
Potential Benefits of the Merger............................................... 8
Background of the Merger....................................................... 9
Recommendations of the Boards of Directors..................................... 10
Comparative Per Share Data..................................................... 10
Comparative Per Share Prices................................................... 11
Certain Federal Income Tax Consequences of the Merger.......................... 12
INVESTMENT CONSIDERATIONS........................................................ 13
Policy Risks................................................................... 13
Advisory Fee Changes........................................................... 14
Differing Impact on Certain Shareholders....................................... 14
Conflicts of Interest.......................................................... 16
Certain Relationships and Related Transactions................................. 17
Advisor and its Affiliates..................................................... 18
TERMS OF THE MERGER.............................................................. 19
General........................................................................ 19
Amendment of Articles of Incorporation and Adoption of Amended and Restated
Bylaws...................................................................... 19
Effective Time................................................................. 20
Conversion of Shares; Procedures for Exchange of Certificates.................. 20
Conditions to the Merger....................................................... 20
Costs of the Transaction....................................................... 21
Tax Consequences of the Merger................................................. 22
Accounting for the Merger...................................................... 22
Shareholders' Approval of the Merger........................................... 22
Rights of Dissenting Shareholders.............................................. 23
Potential Benefits of the Merger............................................... 23
Background of the Merger....................................................... 25
Analysis of Alternative to the Merger.......................................... 27
Conversion Factors............................................................. 28
Series B Exchange Right........................................................ 28
Fairness of the Merger......................................................... 30
General..................................................................... 30
Analysis of the Independent Committees...................................... 30
Fairness Analysis of the Company, the Funds and the Advisor................. 31
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Fairness to the Company and the Funds....................................... 31
Fairness Among the Company and the Funds.................................... 32
Fairness Opinion............................................................ 33
VOTING PROCEDURE................................................................. 38
Special Meetings of the Company and the Funds.................................. 38
Vote Required.................................................................. 38
Voting Procedure............................................................... 38
Closing Date of the Merger..................................................... 39
Solicitation of Proxies........................................................ 39
Right to Inspect and Copy Shareholders' List................................... 39
RIGHTS OF DISSENTING SHAREHOLDERS................................................ 40
COMPARATIVE INFORMATION.......................................................... 43
Operating Policies............................................................. 43
Principal Investment Policies.................................................. 44
Borrowing Policies............................................................. 44
Comparison of Fees............................................................. 45
Acquisition Fee............................................................. 45
Disposition Fee............................................................. 45
Advisory Fee................................................................ 46
Reimbursement of Expenses................................................... 47
Compensation from Sales and Refinancings.................................... 47
Summary Comparison of Compensation Arrangements................................ 48
Effect of Changes in Operations on Pro Forma Fees.............................. 49
Comparison of Fees in the Future............................................... 49
Conflicts of Interest Caused by the Company's Compensation Structure........... 51
THE COMPANY...................................................................... 52
The Company.................................................................... 52
Investment and Operating Strategy.............................................. 52
Investment Policy.............................................................. 53
Properties and Other Assets.................................................... 53
Dividend Policy................................................................ 53
Competition.................................................................... 54
Employees...................................................................... 54
Property Management............................................................ 54
POLICIES OF THE COMPANY WITH RESPECT TO CERTAIN ACTIVITIES....................... 54
Redemption and Prohibition of Transfer of Common Stock......................... 55
Transactions with Affiliates................................................... 55
Mortgage Loans, Securities, and Undeveloped Land............................... 55
Restrictions on Investments.................................................... 55
Amendments..................................................................... 56
Acquisition Policies........................................................... 56
Borrowing Policies -- Subsequent Leverage...................................... 56
Loans by the Company........................................................... 57
Miscellaneous Policies......................................................... 57
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY...................................... 57
General........................................................................ 57
Redemption and Prohibition of Transfer of Shares............................... 58
Dividend Reinvestment Plan..................................................... 58
</TABLE>
ii
<PAGE> 12
<TABLE>
<CAPTION>
PAGE
----------
<S> <C>
THE FUNDS........................................................................ 59
FREIF..........................................................................
Advantage......................................................................
General........................................................................
INVESTMENT POLICIES AND ACTIVITIES OF THE FUNDS..................................
Investment Policies............................................................ 59
Borrowing Policies............................................................. 60
MANAGEMENT OF THE COMPANY, THE ADVISOR AND CONTINENTAL........................... 61
The Company.................................................................... 61
The Advisor and Continental.................................................... 62
COMPENSATION OF MANAGEMENT OF THE COMPANY,
THE ADVISOR AND CONTINENTAL.................................................... 65
Executive Compensation.........................................................
Special Compensation of Independent Directors..................................
Compensation of the Advisor and Continental.................................... 65
DESCRIPTION OF REAL PROPERTIES................................................... 66
Existing Properties Held by the Company and the Funds.......................... 66
The Company Properties......................................................... 66
The Company's Significant Tenants.............................................. 67
FREIF Properties............................................................... 68
FREIF's Significant Tenants.................................................... 69
Advantage Properties........................................................... 69
Advantage's Significant Tenants................................................ 71
Occupancy Rates for Past Five Years............................................ 71
Average Annual Rental Rates.................................................... 72
Lease Expirations.............................................................. 73
Property Taxes................................................................. 74
Depreciation................................................................... 75
Insurance...................................................................... 76
Government Regulations......................................................... 76
Legal Proceedings.............................................................. 77
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT OF THE COMPANY AND THE FUNDS........................................ 78
The Company.................................................................... 78
FREIF.......................................................................... 79
Advantage...................................................................... 79
MARKET PRICE, DIVIDENDS AND HOLDERS OF THE COMPANY'S AND
THE FUNDS' SECURITIES.......................................................... 81
Market Price of the Company's and the Funds' Securities........................ 81
Security Holders of the Company and the Funds.................................. 82
Dividends Declared by the Company and the Funds................................ 82
PRO FORMA FINANCIALS............................................................. 83
SELECTED FINANCIAL INFORMATION OF THE COMPANY.................................... 102
THE COMPANY'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.......................................................... 104
Introduction................................................................... 104
Pro Forma for the six months ended June 30, 1995............................... 104
The Company, FREIF and Advantage Combined................................... 104
The Company and FREIF Combined.............................................. 104
</TABLE>
iii
<PAGE> 13
<TABLE>
<CAPTION>
PAGE
----------
<S> <C>
The Company and Advantage Combined.......................................... 105
Pro forma for the year ended December 31, 1994................................. 105
The Company, FREIF and Advantage Combined................................... 105
The Company and FREIF Combined.............................................. 105
The Company and Advantage Combined.......................................... 106
Historical..................................................................... 107
Results of Operations....................................................... 107
Comparison of six month periods ended June 30, 1995 and 1994................ 107
Comparison of year ended December 31, 1994 to year ended December 31,
1993....................................................................... 108
Comparison of year ended December 31, 1993 to year ended December 31,
1992....................................................................... 109
Liquidity and Capital Resources................................................ 110
Impact of Inflation............................................................ 110
Dividends...................................................................... 110
SELECTED FINANCIAL INFORMATION OF FREIF.......................................... 111
FREIF'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.................................................................. 112
Introduction................................................................... 112
Results of Operations.......................................................... 112
Comparison of six month periods ended June 30, 1995 and 1994................... 112
Comparison of year ended December 31, 1994 to year ended December 31, 1993..... 113
Comparison of year ended December 31, 1993 to year ended December 31, 1992..... 113
Liquidity and Capital Resources................................................ 114
Impact of Inflation............................................................ 114
Dividends...................................................................... 115
SELECTED FINANCIAL INFORMATION OF ADVANTAGE...................................... 116
ADVANTAGE'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.......................................................... 117
Introduction................................................................... 117
Results of Operations.......................................................... 117
Comparison of six month periods ended June 30, 1995 and 1994................... 117
Comparison of year ended December 31, 1994 to year ended December 31, 1993..... 118
Comparison of year ended December 31, 1993 to year ended December 31, 1992..... 118
Liquidity and Capital Resources................................................ 119
Impact of Inflation............................................................ 120
Dividends...................................................................... 120
INCOME TAX CONSIDERATIONS........................................................ 121
Taxation of the Merger......................................................... 121
General..................................................................... 121
Effect of Merger on REIT Status of the Company................................. 122
Short Taxable Year.......................................................... 122
Effect of Section 382....................................................... 122
Taxation of the Company........................................................ 123
Requirements for Qualification................................................. 124
Income Tests................................................................ 124
Asset Test.................................................................. 125
Annual Distribution Requirements............................................ 125
Failure to Qualify............................................................. 125
Taxation of Taxable Domestic Shareholders...................................... 126
</TABLE>
iv
<PAGE> 14
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Backup Withholding............................................................. 126
Taxation of Tax-Exempt Shareholders............................................ 126
Taxation of Foreign Shareholders............................................... 126
State and Local Taxes.......................................................... 127
LEGAL OPINIONS................................................................... 127
EXPERTS.......................................................................... 127
SHAREHOLDER PROPOSALS............................................................ 127
GLOSSARY......................................................................... 128
INDEX TO FINANCIAL INFORMATION OF THE COMPANY AND THE FUNDS...................... 130
APPENDICES
Form of Agreement and Plan of Merger......................................... Appendix A
Bear Stearns' Fairness Opinion............................................... Appendix B
Dissenters' Rights -- Chapter 13 of the California General Corporation Law... Appendix C
Proposed Amendments to Company Articles of Incorporation..................... Appendix D
Proposed Amended and Restated Company Bylaws................................. Appendix E
</TABLE>
v
<PAGE> 15
AVAILABLE INFORMATION
The Company and the Funds are subject to the informational requirements of
the Securities Exchange Act of 1934, as amended, and in accordance therewith
file reports and other information with the Securities and Exchange Commission
(the "SEC"). After the Merger, the Company will continue to file similar
information with the SEC. Such reports, proxy statements, and other information
can be inspected and copied at the public reference facilities maintained by the
SEC at Judiciary Plaza, Room 1204, 450 Fifth Street, N.W., Washington, D.C.
20549, and at its regional offices at 500 W. Madison St., Suite 1400, Chicago,
Illinois 60661, at Seven World Trade Center, New York, New York 10048, and at
the New York Stock Exchange Public Reference Section, 20 Broad Street, New York,
New York 10005. Such material can be inspected and copied at the public
reference section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549
at prescribed rates.
The Company has filed with the SEC a registration statement on Form S-4
(herein, together with all amendments and exhibits, the "Registration
Statement") under the Securities Act of 1933, as amended. This Joint Proxy
Statement/Prospectus does not contain all the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the SEC. For further information, reference is
hereby made to the Registration Statement.
INCORPORATION BY REFERENCE
THIS JOINT PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE
WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS (INCLUDING
DOCUMENTS FILED SUBSEQUENT TO THE DATE HEREOF), EXCEPT THE EXHIBITS TO SUCH
DOCUMENTS (UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE IN
SUCH DOCUMENTS), SHALL BE DELIVERED TO ANY PERSON TO WHOM THIS JOINT PROXY
STATEMENT/PROSPECTUS IS DELIVERED, UPON WRITTEN OR ORAL REQUEST OF SUCH PERSON
AND BY FIRST CLASS MAIL. REQUESTS FOR SUCH COPIES SHOULD BE DIRECTED TO DAVID P.
GOSS, FRANKLIN SELECT REAL ESTATE INCOME FUND, 777 MARINERS ISLAND BOULEVARD,
SAN MATEO, CA 94403-7777 OR BY TELEPHONE AT (415) 312-3000. IN ORDER TO ENSURE
TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY ,
1996.
1
<PAGE> 16
SUMMARY
This Joint Proxy Statement/Prospectus relates to the proposed merger of
FREIF and/or Advantage with and into the Company. The summary below is qualified
in its entirety by the more detailed information appearing elsewhere in this
Joint Proxy Statement/Prospectus. See "Glossary" for definitions of certain
terms used in this Joint Proxy Statement/Prospectus.
THE COMPANY AND THE FUNDS
The Company is a California corporation formed on January 5, 1989 for the
purpose of acquiring and holding for investment income-producing real estate
assets. The Company is an infinite life real estate investment trust ("REIT").
The properties currently owned by the Company are described in the chart below.
For more information about the Company, see "The Company," "Financial
Information of the Company and the Funds," "Policies of the Company with Respect
to Certain Activities," "Market Price, Dividends and Holders of the Company and
the Funds' Securities" and "Description of Real Properties."
The Company shares the principal investment policies of the Funds, but as
an infinite life REIT it has more flexibility to grow and manage its portfolio
to carry out these policies. The Company has adopted a business strategy which
is intended to expand the size and scope and increase the profitability of its
current operations. Traditionally, the Company has identified individual
properties suitable for acquisition and acquired them for cash. The Company now
also intends to acquire property portfolios in exchange for equity. In
particular, the Company is seeking to establish strategic relationships with and
acquire property portfolios from selected real estate developers who appear to
have a competitive advantage within their local market areas. This strategy
potentially will allow the Company to increase its asset size, significantly
diversify its portfolio and increase its revenues and earnings per share in a
comparatively short period of time while reducing its exposure to any single
property type or market area. In October 1995, the Company retained Prudential
Securities Incorporated as its exclusive financial advisor in connection with
the implementation of its portfolio acquisition strategy.
FREIF is a California corporation formed on August 7, 1987 for the purpose
of acquiring and holding for investment income-producing real estate assets.
FREIF is a finite life REIT. The properties currently owned by FREIF are
described in the chart below. For more information about FREIF, see "The Funds,"
"Financial Information of the Company and the Funds," "Investment Policies and
Activities of the Funds," "Market Price, Dividends and Holders of the Company's
and the Funds' Securities" and "Description of Real Properties."
Advantage is a California corporation formed on June 8, 1990 for the
purpose of acquiring and holding for investment income-producing real estate
assets. The properties currently owned by Advantage are described in the chart
below. For more information about Advantage, see "The Funds," "Financial
Information of the Company and the Funds," "Investment Policies and Activities
of the Funds," "Investment Policies and Activities of the Funds," "Market Price,
Dividends and Holders of the Company's and the Funds' Securities" and
"Description of Real Properties."
2
<PAGE> 17
PROPERTIES CURRENTLY HELD BY THE COMPANY AND THE FUNDS
<TABLE>
<CAPTION>
DATE OF
PROPERTY LOCATION PURCHASE TYPE SQ. FT.
- ----------------------- -------------------- -------- ------------------------- --------
<S> <C> <C> <C> <C>
THE COMPANY
The Shores(1).......... Redwood City, CA 9/89 Office Complex 138,546
one three-story bldg.
one one-story bldg.
one five-story bldg.
Data General........... Manhattan Beach, CA 12/89 Office Building 118,443
one five-story building
FREIF
The Shores(1).......... Redwood City, CA 9/89 Office Complex 138,546
one three-story bldg.
one one-story bldg.
one five-story bldg.
Northport.............. Fremont, CA 1/91 R & D Facility 144,568
three one-story bldgs.
Mira Loma.............. Reno, NV 11/88 Shopping Center 94,026
Glen Cove.............. Vallejo, CA 1/94 Shopping Center 66,000
ADVANTAGE
Fairway Center......... Brea, CA 1/92 Office Building 146,131
one two-story bldg.
Carmel Mountain........ San Diego, CA 11/94 Shopping Center 44,230
</TABLE>
- ---------------
(1) The Shores is owned jointly by the Company and FREIF, 60% and 40%,
respectively.
None of the Company, FREIF or Advantage has any employees. The day-to-day
operations of the Company, FREIF and Advantage are managed by the Advisor under
the terms of advisory agreements which are renewable annually. The Advisor
manages the Company and each of the Funds subject to the overall approval of the
boards of directors of each of the Company, FREIF and Advantage. Continental
Property Management Co., an Affiliate of the Advisor, acts as property manager
for the properties owned by the Company and the Funds.
The principal executive office of the Company and each Fund is located at
777 Mariners Island Boulevard, San Mateo, California 94403-7777. The telephone
number is (415) 312-3000.
3
<PAGE> 18
THE SPECIAL MEETINGS
<TABLE>
<CAPTION>
THE COMPANY FREIF ADVANTAGE
---------------------- ---------------------- ----------------------
<S> <C> <C> <C>
Meeting Date: , 1996 at 10 a.m. , 1996 at 10 a.m. , 1996 at 10 a.m.
P.S.T. P.S.T. P.S.T.
Record Date: , 1995 , 1995 , 1995
Purpose: To Approve the Merger, To Approve the Merger To Approve the Merger
Name Change,
Elimination of Series
B Shares Dividends
from Operations and
Adoption of Proposed
Amended and Restated
Bylaws
Shares Outstanding:
Common Stock 5,383,297 3,999,514 3,013,713
Series B Shares 185,866 319,308 124,240
Vote Required: Majority of Shares Majority of Shares Majority of Shares
Outstanding Outstanding Outstanding
Percentage Ownership
of Executive
Officers, Directors
and their
Affiliates:(1)
Common Stock .1% .1% 44.8%
Series B Shares 100% 100% 100%
Shareholder Lists: Available upon written Available upon written Available upon written
demand demand demand
</TABLE>
- ---------------
(1) Each of the directors and executive officers of the Company and the Funds
and their Affiliates (including the Advisor and its parent corporation) have
indicated an intention to vote all shares of the Company, FREIF or Advantage
Common Stock and Series B Shares beneficially owned in favor of approval of
the Merger.
THE MERGER
Upon consummation of the transactions contemplated by the Merger Agreement,
(i) each Fund whose Shareholders have approved the Merger will be merged with
and into the Company, (ii) if the Shareholders of FREIF approve the Merger, each
issued and outstanding share of FREIF Common Stock and Series B Shares will be
converted into the right to receive 1.286 fully paid and non-assessable shares
(the "FREIF Conversion Factor") of Company Common Stock and Series B Shares,
respectively, and (iii) if the Shareholders of Advantage approve the Merger,
each issued and outstanding share of Advantage Common Stock and Series B Shares
will be converted into the right to receive 1.2 fully paid and non-assessable
shares (the "Advantage Conversion Factor") of Company Common Stock and Series B
Shares, respectively. Fractional shares of Company Common Stock or Series B
Shares will not be issued in connection with the Merger, but instead will be
rounded up to the nearest whole share. See "Terms of the Merger -- Conversion of
Shares; Procedures for Exchange of Certificates." Approval of the Merger by
Company Shareholders also includes approval of (i) amendments to the Company's
articles of incorporation to change the name of the Company to "Franklin Select
Realty Trust," and to eliminate dividends from operations to the Series B
Shares, and (ii) the adoption of amended and restated bylaws. The proposed
amendments to the Company's articles of incorporation are set forth as Appendix
D to this Joint Proxy Statement. The proposed amended and restated bylaws are
set forth as Appendix E to this Joint Proxy Statement/Prospectus.
4
<PAGE> 19
The obligations of the Company and the Funds to effect the Merger are
subject to the satisfaction of certain conditions, including, among others:
(1) approval of the Merger as to the Company, by the Company Series A
Shareholders and the Series B Shareholder, as to FREIF, by the FREIF Series
A Shareholders and the Series B Shareholder, and, as to Advantage, by the
Advantage Series A Shareholders and Series B Shareholder;
(2) receipt of a fairness opinion from Bear Stearns in form and
substance acceptable to the boards of directors of Company and the Funds,
which opinion has not been withdrawn prior to the closing date of the
Merger;
(3) the boards of directors of the Company or either Fund may
determine not to participate in the Merger if Shareholders holding in the
aggregate 5% or more of the aggregate outstanding common stock of the
Company or either Fund exercise Dissenter's Rights;
(4) the receipt of any necessary consents and approvals, including
those required from governmental authorities or regulatory bodies, on or
before (and remaining in effect at) the closing date. Except as required by
applicable securities laws, the Company does not know of any federal or
state regulatory requirements that must be complied with or any approval
that must be obtained in connection with the Merger;
(5) the Registration Statement of which this Joint Proxy
Statement/Prospectus is a part covering the shares of Company Common Stock
issuable in connection with the Merger must be effective, no stop order
suspending the effectiveness of such Registration Statement or preventing
or suspending the use of the Joint Proxy Statement/Prospectus or order
under the proxy rules of the Commission pursuant to the Securities Exchange
Act of 1934, as amended, with respect to the transactions contemplated in
the Merger Agreement may be in effect, and no proceedings for any such
purpose may be pending or threatened before the Commission;
(6) receipt of an opinion from the Company's special counsel,
Steinhart & Falconer, to the effect that the Merger will be a tax free
reorganization under the Internal Revenue Code, and the Merger will not
adversely affect the qualification of the Company or either Fund as a REIT
within the meaning of Section 856 of the Internal Revenue Code; and
(7) the boards of directors of the Company or either Fund must not
have determined that the Merger has become impractical or imprudent.
The Merger Agreement may be terminated as to the Company or either Fund at
any time prior to the closing date of the Merger, whether before or after
obtaining Shareholder approval: (a) by the mutual consent of the boards of
directors of the Company and either Fund; or (b) by the boards of directors of
the Company or either Fund if any action has been threatened or instituted to
restrain or modify the Merger which in the good faith judgment of the Company or
the Fund, acting on advice of counsel, has a reasonable probability of success.
See "Terms of the Merger -- Conditions to the Merger."
Under California General Corporation Law, the holders of the outstanding
common stock of the Company and the Funds are not entitled to Dissenter's Rights
with respect to the Merger unless demands for payment are filed with respect to
5% or more of the outstanding shares of Common Stock and Series B Shares of the
Company, FREIF or Advantage, respectively. In addition, under the terms of the
Merger Agreement, the boards of directors of the Company and either of the Funds
may elect not to participate in the Merger if Shareholders holding in the
aggregate 5% or more of the outstanding common stock of the Company or such Fund
exercise Dissenter's Rights. See "Rights of Dissenting Shareholders."
Upon consummation of the Merger, the Company will issue to the Advisor an
Exchange Right to exchange the Series B Shares of the Company received in the
Merger in respect of the Series B Shares of each Fund whose Shareholders
approved the Merger for Company Common Stock on a one-for-one basis. The Series
B Exchange Right is exercisable only when the Company Common Stock achieves
certain specified trading prices. See "Terms of the Merger -- Series B Exchange
Right."
5
<PAGE> 20
SURRENDER OF CERTIFICATES
The Company has authorized Chemical Trust Company of California to act as
Exchange Agent under the Merger Agreement (the "Exchange Agent"). As soon as
reasonably practicable after the Effective Time (as defined below) of the
Merger, the Exchange Agent will send a transmittal letter to each Shareholder of
the Fund or Funds whose Shareholders have approved the Merger. The transmittal
letter will contain instructions with respect to the surrender of certificates
representing FREIF and/or Advantage Common Stock to be exchanged for Company
Common Stock. See "Terms of the Merger -- Conversion of Shares; Procedures for
Exchange of Certificates."
SERIES A SHAREHOLDERS OF FREIF AND/OR ADVANTAGE SHOULD NOT FORWARD
CERTIFICATES FOR FREIF OR ADVANTAGE COMMON STOCK TO THE EXCHANGE AGENT UNTIL
THEY HAVE RECEIVED TRANSMITTAL LETTERS. FREIF AND/OR ADVANTAGE SERIES A
SHAREHOLDERS SHOULD NOT RETURN STOCK CERTIFICATES WITH THE ENCLOSED PROXY.
OPINION OF BEAR STEARNS
Bear, Stearns & Co., Inc. has delivered a written opinion, dated January
, 1996, to the boards of the Company and each Fund, that the Merger is fair to
the Series A Shareholders of each of the Company, FREIF and Advantage, from a
financial point of view, as of the date of such opinion. A copy of the written
opinion of Bear Stearns, which sets forth the respective assumptions made,
matters considered and limitations on the reviews undertaken, is attached as
Appendix B to this Joint Proxy Statement/Prospectus and should be read carefully
in its entirety. See "Terms of the Merger -- Fairness Opinion."
INVESTMENT CONSIDERATIONS
In considering whether to approve the Merger, Shareholders should carefully
review and consider the information contained below under the caption
"Investment Considerations." Some of the significant considerations include:
Policy Risks
The Company has an infinite life and has no plans to liquidate in the
future. If they approve the Merger, FREIF and Advantage Series A Shareholders
will not receive proceeds from the sale of properties and liquidation of their
respective Funds. Upon liquidation of the Funds, FREIF and Advantage Series A
Shareholders would have received their share of net liquidation proceeds.
Liquidation at this time would not be consistent with the present policies of
the Funds, and is not an alternative proposed by this Joint Proxy
Statement/Prospectus.
Changes in Funds' policies. The Company is an infinite life REIT and
consequently, certain of its policies differ from those of the Funds -- the
Company has broader, growth-oriented acquisition policies, and is more likely to
issue equity securities in share exchanges or to future investors and to
leverage its investments. The Company's policy is to increase its asset size and
earnings per share not only through capital appreciation like the Funds, but
also through a continuous program of owning, investing in and operating real
properties.
Advisory Fee Changes
The quarterly advisory fee payable in respect of the current real estate
assets of the Funds will increase initially. The Company pays an advisory fee
based on the book value before depreciation of the Company's real estate assets,
whereas the Funds' advisory fees are based on the current market values of their
respective real estate assets. Since the book values before depreciation of the
Funds' real estate assets are greater than their estimated market values, the
portion of the advisory fee which would be attributable to the assets now held
by the Funds is expected to increase initially after the Merger. Also, after the
Merger for FREIF all, and for Advantage one-half, of the advisory fee will no
longer be subordinated to an 8% per annum dividend from operations, based on the
original purchase price for the FREIF and Advantage Common Stock. The Company's
advisory fee will increase as the Company acquires additional real estate
assets. This feature of the
6
<PAGE> 21
advisory fee may give the Advisor an incentive to recommend action that will
cause the Company's real estate asset base to increase even if earnings per
share do not increase.
Differing Impact on Certain Shareholders
Real estate risks. As a result of the Merger, the assets and liabilities
of the Company and each Fund whose Shareholders approve the Merger will be
combined. As a consequence, risks associated with the ownership of a particular
property, including tenant turnover and environmental risks, will be shared by
all of the Company Shareholders after the Merger. See "Description of Real
Properties."
Lower level of quarterly distributions to Advantage Series A Shareholders
after the Merger. The initial level of quarterly dividends to Advantage Series
A Shareholders is expected to be lower after the Merger than before. Based on an
Advantage Conversion Factor of 1.2 and the current regular quarterly dividend
rates for the Company ($.11 per share) and Advantage ($.1425 per share),
Advantage Series A Shareholders would receive approximately $.011 (7.4%) less in
regular quarterly dividends per share of Advantage Common Stock converted in the
Merger from the Company than before the Merger from Advantage. This reduction is
a consequence of the conversion of Advantage Common Stock to Company Common
Stock, which has a lower dividend rate in relation to its share price (lower
dividend yield) than Advantage Common Stock.
Higher level of quarterly distributions to FREIF Series A Shareholders
after the Merger. The initial level of quarterly dividends to FREIF Series A
Shareholders is expected to be higher after the Merger than before. Based on a
FREIF Conversion Factor of 1.286 and the current regular quarterly distribution
rates for the Company ($.11 per share) and FREIF ($.125 per share) FREIF Series
A Shareholders would receive approximately $.017 (13.1%) more in regular
quarterly distributions per share of FREIF Common Stock converted in the Merger
from the Company than before the Merger from FREIF. This increase is a
consequence of the conversion of FREIF Common Stock which has a higher dividend
rate in relation to its share price (higher dividend yield) than FREIF Common
Stock.
Limited Dissenter's Rights. Under California law, if the Merger is
approved, Shareholders of each of the Company and the Funds will be entitled to
Dissenter's Rights in connection with the Merger only if demands for payment are
filed with respect to 5% or more of the outstanding common stock of the Company
or each Fund, respectively. However, under the terms of the Merger Agreement,
each of the Company and the Funds may elect not to participate in the Merger if
Shareholders holding in the aggregate 5% or more of the outstanding common stock
of the Company or a Fund exercise Dissenter's Rights.
Conflicts of Interest
The Merger was not the result of arm's length negotiations among the
Company, the Funds, the Series A Shareholders or any person negotiating on
behalf of the Series A Shareholders; as a result, the terms of the Merger may be
less favorable for the Series A Shareholders than if they had been the result of
arm's length negotiations. The Advisor, the affiliated directors and certain
officers of the Company and the Funds, who have interests and affiliations
different in some respects from those of the Series A Shareholders, have
initiated and participated in the structuring of the Merger. The Company and
each Fund have a majority of unaffiliated directors on their boards who reviewed
the Merger on behalf of the Series A Shareholders of the Company and each Fund,
but no outside independent representative was retained to negotiate the Merger
on behalf of the Company and the Funds. If conflicts should arise regarding
advisors who perform services for the Advisor and its Affiliates and who also
perform services for the Company and the Funds, the unaffiliated directors will
consider the extent to which the interests of the Company and the Funds diverge
from those of the Advisor or its Affiliate and, if necessary, will retain
separate advisors.
Potential benefits to Franklin Resources, Inc. Franklin Resources, Inc.,
the parent corporation of the Advisor, and the Advisor together own 3.5%, 7.5%
and 48.7% of the outstanding shares of the Company, FREIF and Advantage,
respectively, eligible to vote on the Merger. The Advisor is subject to a
conflict of interest because the Advisor and its Affiliates own a substantial
share of Advantage. As a consequence, the Advisor and its Affiliates would
benefit if the Conversion Factors or other terms of the Merger favored
Advantage.
7
<PAGE> 22
Upon consummation of the Merger, the Advisor will receive an Exchange Right
to exchange Series B Shares for Company Common Stock. The Advisor will receive
an Exchange Right to exchange the Series B Shares of the Company received in the
Merger in respect of the Series B Shares in each Fund whose Shareholders approve
the Merger for Company Common Stock if certain specified trading prices for the
Company Common Stock are met. See "Terms of the Merger -- Series B Exchange
Right."
POTENTIAL BENEFITS OF THE MERGER
The principal potential benefits to Shareholders if the Merger is approved
are:
The Company may have greater access to capital markets. After the Merger,
assuming Shareholders of both FREIF and Advantage approve the Merger, the
Company will (i) own 7 properties aggregating approximately 750,000 square feet
of gross leasable space and (ii) have combined funds from operations on a pro
forma basis of approximately $8 million in 1996. The larger asset base and
combined balance sheet of the Company is expected to make it possible to access
the capital markets more effectively, enabling the Company to continue to grow
in asset size and earnings per share since larger REITs are viewed by the
investment community as less risky and more capable of withstanding short term
losses or other market difficulties than smaller REITs. These benefits will be
reduced if Shareholders of only one of the Funds approve the Merger.
After the Merger, the Company will have a larger market capitalization and
is expected to have a more active trading market. Based on the market price of
the Company Common Stock on , 1995 and the FREIF and Advantage
Conversion Factors, the market capitalization of the Company after the Merger,
assuming Shareholders of both FREIF and Advantage approve the Merger, would be
approximately $ million, which is considerably larger than the market
capitalization of either of the Funds or the Company individually. The Company
after the Merger will have a greater number of Series A Shareholders, and
correspondingly is expected to have a more active trading market. These benefits
will be reduced if Shareholders of only one of the Funds approve the Merger.
The Company has broader, growth-oriented investment and reinvestment
policies than the Funds. In addition to identifying individual properties
suitable for acquisition, the Company intends to acquire property portfolios.
Part of its acquisition strategy includes establishing strategic relationships
with and acquiring property portfolios from selected real estate developers who
appear to have competitive advantages within their local market areas. The
Company anticipates that a significant portion of these future acquisitions will
be achieved through the issuance of common stock equity or partnership equity
and it is committed to limiting carefully its use of debt financing. The Company
also may acquire additional properties with the proceeds from securities
offerings, and reinvest the net proceeds from the disposition or financing of
properties (subject to REIT distribution requirements). As a result, the Company
is expected to be better able than the Funds to take advantage of favorable
conditions in the real estate markets, when they permit the acquisition of
investment properties at a positive spread to the cost of either debt or equity
financing. Accordingly, after the Merger, the Company is expected to have a
greater potential to increase its revenues and earnings per share.
Diversification of assets and potentially greater stability of
dividends. Since the Company's asset base will be larger after the Merger, it
will have a more diversified portfolio of assets than either the Company or the
Funds individually. This increased diversification and size is expected to
reduce overall portfolio risk. The Company and the Funds expect the increase in
the number of properties to provide potentially greater stability of dividends
to Company Series A Shareholders by reducing the impact on the Company after the
Merger of tenant turnover, capital expenditures and adverse developments
affecting local economies, types of properties and individual properties and
tenants. See "Terms of the Merger -- Potential Benefits of the Merger." The
benefits of diversification will be reduced if Shareholders of only one of the
Funds approve the Merger.
After the Merger, pursuant to the Company's advisory fee compensation
structure, the fees payable to the Advisor in respect of the Funds' current real
estate assets are expected to be reduced over time. These reductions result
primarily from the elimination of disposition fees, which are charged when a
property is sold. Taking into account the elimination of disposition fees and
the change in the advisory fee, which will increase initially, the Funds expect,
based upon certain assumptions, that the fees payable to the Advisor in respect
of
8
<PAGE> 23
the Funds' current assets after the Merger will be lower than the fees that
would have been payable to the Advisor over the next five years in the absence
of Merger. See "Comparative Information -- Summary Comparison of Compensation
Arrangements."
After the Merger, the Company may realize economies of scale in
expenses. The Merger of the Company, FREIF and/or Advantage may lead to
improvements in operating efficiencies through economies of scale, if the
Company after the Merger realizes expected savings in general and administrative
costs and expenses. This benefit will be reduced if Shareholders of only one of
the Funds approve the Merger.
Advantage will no longer be obligated to redeem the Advisor's Series B
Shares in Advantage. Currently, Advantage is subject to an obligation to redeem
the Advisor's Series B Shares in Advantage at cost upon termination of the
Advantage advisory agreement without cause. If the Shareholders of Advantage
approve the Merger, this obligation will be eliminated.
BACKGROUND OF THE MERGER
In their initial public offerings, the Funds included as one of their
policies a finite operating life with an anticipated holding period, running
from the date the last property was acquired, of five to seven years with
respect to FREIF and seven to ten years with respect to Advantage. FREIF
acquired its last property in January 1994, and Advantage acquired its last
property in November 1994. After the holding period, the Funds would be expected
to sell their properties, distribute the net proceeds to the their respective
Shareholders and dissolve.
The finite life policy was originally chosen because it was then believed
that the shares of a finite life REIT would trade at less of a discount to net
asset value than other forms of public direct real estate ownership such as
limited partnerships. At the time, the finite life characteristic also was not
believed to be an impediment to raising additional equity capital or debt or to
joint ventures or other financing techniques.
Since that time, there has been a significant growth in the interest of
both institutional investors and private investors in infinite life REITs. As
reflected by their higher dividend yields, finite life REITs generally now have
a lower market valuation and trade at a greater discount to net asset value than
infinite life REITs. Investment bankers generally are not willing to raise new
equity for finite life REITs. Real estate developers and property owners
generally are not willing to enter into joint ventures or stock for property
exchanges with finite life REITs. Commercial banks and other institutional
lenders generally are not willing to provide credit to finite life REITs in the
form of acquisition lines of credit, unsecured lines of credit and portfolio
loans. As a consequence of these changes, the Advisor and the boards of
directors of the Funds concluded that the Funds would have more opportunities
for asset growth, better access to the capital markets and an improved
opportunity for a higher market valuation when merged into the Company which is
an infinite life REIT.
In 1993, the boards of directors of the Company (which at that time was a
finite life REIT), FREIF and Advantage recommended to their respective
Shareholders a merger whereby the Company and each Fund would have been merged
into a newly formed corporation, Franklin Realty Trust, Inc. Among other things,
as a result of the proposed merger, the Company and each Fund would have been
merged into an infinite life REIT that had the same advisory fee compensation
structure by which the Advisor is now compensated by the Company. 61.3%, 62.5%
and 39.5%, respectively, of the Company, FREIF and Advantage Common Stock voted
in favor of the merger. However, because a majority of the shares of Advantage
Common Stock voted against the merger, the merger transaction was not approved.
A majority of the Advantage Common Stock did not approve the proposed
merger in 1993 primarily because the largest shareholder of Advantage at that
time, Massachusetts State Teachers' and Employees' Retirement Systems Trust
("MASTERS"), which held 44.8% of the Advantage Common Stock, voted against the
merger. In August 1994, Franklin Resources, Inc. purchased all of the Advantage
Common Stock held by MASTERS. See "Investment Considerations -- Certain
Relationships and Related Transactions." MASTERS also held 19.4% and 14.7% of
Common Stock of the Company and FREIF, respectively. In June 1995, MASTERS
transferred these shares to the Commonwealth of Massachusetts Pension Reserves
Investment Management Board ("PRIM"), a related entity of MASTERS.
9
<PAGE> 24
In September 1994, at the annual meeting of the Shareholders of the
Company, the Shareholders approved conversion of the Company from a finite to an
infinite life REIT and changes to the compensation fee structure of the Advisor
that were similar to the advisory fee compensation structure of Franklin Realty
Trust, Inc.
The Company shares the principal investment policies of the Funds, but as
an infinite life REIT it has more flexibility to grow and manage its portfolio
to carry out these policies. The Company has adopted a business strategy which
is intended to expand the size and scope and increase the profitability of its
current operations. Traditionally, the Company has identified individual
properties suitable for acquisition and acquired them for cash. The Company now
also intends to acquire property portfolios in exchange for equity. In
particular, the Company is seeking to establish strategic relationships with and
acquire property portfolios from selected real estate developers who appear to
have a competitive advantage within their local market areas. This strategy
potentially will allow the Company to increase its asset size, significantly
diversify its portfolio and increase its revenues and earnings per share in a
comparatively short period of time while reducing its exposure to any single
property type or market area. In October 1995, the Company retained Prudential
Securities Incorporated ("PSI") as its exclusive financial advisor in connection
with the implementation of the Company's portfolio acquisitions strategy.
The directors of the Funds believe that FREIF and Advantage Shareholders
will derive various benefits from the proposed Merger with the Company for the
reasons described above. The directors of the Funds also believe that each Fund
will derive such benefits whether or not the Shareholders of the other Fund
approve the Merger. The directors of the Funds believe that the compensation
payable to the Advisor by the Company would be fair and reasonable to the Funds
and their respective Shareholders. The Advisor and the Funds considered, as an
alternative to the Merger, continuing the Funds in their current form. An
analysis of this alternative is set forth below under "Terms of the
Merger -- Analysis of Alternative to the Merger."
RECOMMENDATIONS OF THE BOARDS OF DIRECTORS
The boards of directors of the Company, FREIF and Advantage each have
unanimously approved the terms of the Merger Agreement. The board of directors
of the Company believes that the terms of the Merger Agreement are fair to, and
in the best interest of, the Company and its Shareholders and unanimously
recommends that holders of shares of Company Common Stock and Series B Shares
vote "FOR" approval of the Merger. The board of directors of FREIF believes that
the terms of the Merger Agreement are fair to, and in the best interest of,
FREIF and its Shareholders and unanimously recommends that holders of shares of
FREIF Common Stock and Series B Shares vote "FOR" approval of the Merger. The
board of directors of Advantage believes that the terms of the Merger Agreement
are fair to, and in the best interest of, Advantage and its Shareholders and
unanimously recommends that holders of shares of Advantage Common Stock and
Series B Shares vote "FOR" approval of the Merger. See "Terms of the
Merger -- Background of the Merger," and "-- Fairness Opinion."
COMPARATIVE PER SHARE DATA
The following table presents historical and unaudited pro forma combined
per share data of the Company and the Funds after giving effect to the Merger
using the pooling method of accounting, assuming the Merger had been effective
during all periods presented, and assuming that Shareholders of the Company,
FREIF and Advantage approved the Merger. The pro forma combined data have been
calculated by allocating the pro forma combined data to the respective
shareholder groups based on their adjusted percentage ownership interest of the
combined company. The pro forma data do not purport to be indicative of the
results of future operations or the results that would have occurred had the
Merger been consummated at the beginning of the periods presented. The
information set forth below should be read in conjunction with the historical
financial statements and notes thereto of the Company and the Funds included in
this Joint Proxy Statement/Prospectus, and the unaudited Pro Forma Financials
included elsewhere in this Joint Proxy Statement/Prospectus. Such unaudited Pro
Forma Financials include information as to a Merger approved only by the Company
and FREIF Shareholders, and a Merger approved only by the Company and Advantage
Shareholders.
10
<PAGE> 25
The unaudited pro forma combined and unaudited pro forma equivalent per
share data combine the historical results of the Company and the Funds for each
of the five fiscal years prior to and including December 31, 1994 and for the
six months ended June 30, 1994 and 1995.
<TABLE>
<CAPTION>
SIX MONTHS
FISCAL YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
------------------------------------------------- ---------------
1990 1991 1992 1993 1994 1994 1995
------ ------ ------ ------ ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
COMPANY COMMON STOCK
Net income/(loss) from operations per
share:
Historical............................ $ .59 $ .51 $ .28 $ .23 $ .27 $ .13 $ .15
Pro Forma combined (with FREIF and
Advantage).......................... .54 .46 .30 .31 .30 .16 .18
Cash dividend per share:
Historical............................ .72 .66 .45 .40 .41 .20 .22
Pro Forma combined (with FREIF and
Advantage).......................... .65 .59 .47 .43 .44 .22 .22
Book value per share at period end:
Historical............................ 10.50 9.05 8.95 8.77 8.55 8.65 8.53
Pro forma combined (with FREIF and
Advantage).......................... 8.97 8.49 7.91 7.83 7.66 7.73 7.64
FREIF COMMON STOCK
Net income/(loss) from operations per
share:
Historical............................ .65 .51 .32 .36 .39 .19 .22
Pro Forma combined (with the Company
and Advantage)...................... .70 .59 .39 .40 .39 .20 .24
Cash dividend per share:
Historical............................ .76 .76 .55 .50 .50 .25 .25
Pro Forma combined (with the Company
and Advantage)...................... .84 .76 .60 .56 .56 .28 .29
Book value per share at period end:
Historical............................ 9.59 9.37 9.14 8.99 8.87 8.92 8.85
Pro forma combined (with the Company
and Advantage)...................... 11.54 10.92 10.17 10.07 9.85 9.94 9.83
ADVANTAGE COMMON STOCK
Net income/(loss) from operations per
share:
Historical............................ -- .57 .50 .59 .41 .25 .30
Pro Forma combined (with the Company
and FREIF).......................... -- .55 .37 .38 .36 .19 .22
Cash dividend per share:
Historical............................ -- .57 .65 .65 .65 .32 .32
Pro Forma combined (with the Company
and FREIF).......................... -- .71 .56 .52 .52 .26 .27
Book value per share at period end:
Historical............................ -- 11.47 9.02 9.15 8.87 8.98 8.86
Pro forma combined (with the Company
and FREIF).......................... -- 10.19 9.49 9.40 9.19 9.28 9.17
</TABLE>
COMPARATIVE PER SHARE PRICES
The Company, FREIF and Advantage Common Stock have been listed on the AMEX
since January 14, 1994. On November 6, 1995, the last full trading day prior to
the first announcement of the proposed Merger, the reported closing prices per
share of Company, FREIF and Advantage Common Stock on the AMEX were $4.125,
$5.50 and $5.25, respectively. On , 1995, the last full trading day
prior to the date of this Joint Proxy Statement/Prospectus, the reported closing
prices per share of Company, FREIF and Advantage Common Stock on the AMEX were
$ , $ and $ , respectively. Prior to January 14, 1994, there
11
<PAGE> 26
was no established public trading market for the Common Stock of the Company,
FREIF and Advantage. There is no established trading market for the Series B
Shares of the Company, FREIF and Advantage.
The following table sets forth the high and low sales prices per share of
the Common Stock of the Company, FREIF and Advantage for the calendar quarters
indicated, as reported on the AMEX composite tape.
<TABLE>
<CAPTION>
COMPANY FREIF ADVANTAGE
COMMON STOCK COMMON STOCK COMMON STOCK
------------ ------------ ------------
HIGH LOW HIGH LOW HIGH LOW
---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C>
Calendar 1994:
First Quarter.................................... $5 3/4 $3 $6 3/8 $4 1/2 $8 3/8 $5 1/4
Second Quarter................................... 49/16 3 3/4 5 5/8 4 3/4 7 1/4 5 3/4
Third Quarter.................................... 4 1/2 3 7/8 5 3/4 4 1/2 7 1/4 6
Fourth Quarter................................... 4 1/8 3 5/8 5 4 1/8 6 1/4 5 5/8
Calendar 1995:
First Quarter.................................... 4 3/8 3 3/4 5 3/8 4 1/8 6 1/8 5
Second Quarter................................... 4 5/8 3 3/4 5 7/8 4 1/4 6 3/8 5 1/8
Third Quarter.................................... 411/16 3 7/8 513/16 5 6 3/8 5 1/2
Fourth Quarter (through )............
</TABLE>
Because the FREIF and Advantage Conversion Factors are fixed at 1.286 and
1.2 and because the market price of Company Common Stock is subject to
fluctuation, the market value of the shares of Company Common Stock that holders
of Common Stock of FREIF and/or Advantage will receive in the Merger may
increase or decrease prior to and following the Merger. SERIES A SHAREHOLDERS
ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR COMMON STOCK OF THE COMPANY,
FREIF AND ADVANTAGE. NO ASSURANCE CAN BE GIVEN AS TO THE FUTURE PRICES OR
MARKETS FOR THE COMMON STOCK OF THE COMPANY, FREIF AND ADVANTAGE.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The Company has been advised by special counsel that the Merger will
constitute a tax-free reorganization for income tax purposes, and that none of
the Company, the Funds or any participating Shareholder will recognize gain or
loss for tax purposes as a result of the Merger. A Shareholder who exercises
Dissenter's Rights generally will recognize gain or loss, as the case may be,
measured by the difference between the payment received for its shares and its
adjusted tax basis for such shares.
12
<PAGE> 27
INVESTMENT CONSIDERATIONS
Shareholders of the Company, FREIF and Advantage should carefully consider
the following:
POLICY RISKS
The Company is an infinite life REIT and has no plans to liquidate in the
future. If they approve the Merger, FREIF and Advantage Series A Shareholders
will not receive proceeds from liquidation of their respective Funds. As
currently structured, FREIF and Advantage Series A Shareholders would receive
their share of net liquidation proceeds upon liquidation of the Funds. Company
Series A Shareholders liquidate their investment by selling their shares in the
securities market. The current estimated net asset value per share is greater
than the current market price per share of the Company and each Fund, and the
Advisor believes this situation is likely to be the case immediately after the
Merger. However, the Advisor believes the current spread between estimated net
asset value per share and market value per share is insignificant because if the
Merger is consummated and the Company's growth strategy is successful, the
Company's market value per share is expected to increase at a greater rate than
net asset value per share. Also, liquidation at this time would not be
consistent with the present policies of the Funds, and is not an alternative
proposed by this Joint Proxy Statement/Prospectus.
Changes in the Funds' policies. The Company is an infinite life REIT and
consequently certain of its policies differ from those of the Funds. The Company
has broader, growth-oriented acquisition policies, and is more likely to issue
equity securities in share exchanges or to future investors and to leverage its
investments. The Company's policy is to increase its asset size and earnings per
share not only through capital appreciation like the Funds, but also through a
continuous program of owning and operating real properties, which includes the
possibility of selling existing properties and the acquisition of additional
properties. The Company anticipates that a significant portion of its future
acquisitions will be achieved through the issuance of common stock equity or
partnership equity and it is committed to limiting carefully its use of debt
financing. The Company also may raise additional capital for acquisitions.
Issuance of equity in exchange for real properties and raising additional
capital involves the risk of diluting Company Series A Shareholders' percentage
interests in the Company, while borrowing involves the risks associated with
leverage. These risks are described below. Although the Company maintains a
conservative leverage policy, and has no specific plans to finance any real
property or to acquire new property using borrowed funds, it is more likely to
borrow money in the future than the Funds.
Potential dilution from exchange of shares for properties. The Company and
each Fund are permitted to offer their Common Stock in exchange for properties,
but the Funds have not done so. The Company intends to make such exchanges. The
risk of exchanging shares for properties, rather than purchasing properties for
cash, is the potential dilution of Shareholders' proportionate voting power in
the Company.
Potential dilution from new issuance of equity. In order to obtain
additional properties, the Company requires access to additional equity and/or
debt financing. Although the availability of capital for investment in real
estate has been limited by market conditions and regulatory requirements and
other policies that have limited the lending activities of banks and savings and
loan institutions, the Merger should make it easier for the Company to raise
additional funds in the future for the acquisition of real estate assets.
However, there is no assurance that the Company will be able to obtain the
financing required for additional investments on favorable terms or at all. Any
additional equity financing may dilute the percentage interests of Shareholders
in the Company.
Risks of buying properties without established operating histories. Each
of the Funds presently has a general policy against buying newly constructed
properties or properties without established operating histories. The Company
has no similar policy. Vacancy rates and operating income of newly constructed
properties may be more volatile than those of properties with established
operating histories.
Increased leverage could adversely affect Company Shareholder distributions
and the Company's financial condition. Although it currently has no
indebtedness, the Company may incur additional indebtedness in the future for
various purposes, including to acquire additional properties, to provide
necessary working
13
<PAGE> 28
capital, to finance capital expenditures and to refinance existing indebtedness.
If the Merger is approved by the Shareholders of both FREIF and Advantage, the
Company will assume the indebtedness of each Fund. A more highly leveraged
Company may experience more volatility in its cash available for distribution to
Company Series A Shareholders. An increase in debt service requirements also
could adversely affect the Company's financial condition and results of
operations. In addition, increased leverage could increase the risk of default
by the Company on its debt obligations, with the potential for loss of cash flow
to, and asset value of, the Company.
ADVISORY FEE CHANGES
The quarterly advisory fee payable in respect of the current real estate
assets of the Funds will increase initially. The Merger will result in certain
changes to the quarterly advisory fee paid to the Advisor in respect of real
estate assets now held by the Funds, which initially will cause the advisory fee
to be greater than the advisory fee previously paid by the Funds. The Funds'
current advisory fee is (i) 1.0% of the market value of the assets invested in
real property and (ii) .4% of its mortgage loan investments, if any. Under the
present structure, for FREIF all, and for Advantage one-half, of the advisory
fee of 1.0% of the market value of real property assets is subordinated to a 8%
per annum dividend from operations, based on the original purchase price for
their respective Common Stock. By contrast, the Company pays an advisory fee of
.5% of the book value before depreciation of the Company's real estate assets
only, which is not subordinated to any dividend payments. This fee is reduced to
.4% of the book value before depreciation of real estate assets exceeding $200
million. Currently, the book values before depreciation of the Funds' real
estate assets are greater than their estimated market values. For this reason,
the advisory fees which are payable with respect to the assets held by the Funds
prior to the Merger will increase from their prior amounts. Basing the advisory
fee on book value before depreciation, rather than estimated market value, means
that the advisory fee will not increase or decrease to reflect any temporary
change in the market value of the real property unless the book value before
depreciation of the property is written down in accordance with generally
accepted accounting principles (e.g., if there is a permanent decline in the
market value of the real property). Also, under the Company's compensation
structure, as under the Fund's present structure, the Advisor will benefit from
an increase in the Company's real estate asset base in a manner that is
different from any benefit to Shareholders in general. The dollar amount paid as
an advisory fee will increase as the Company acquires additional real estate
assets. This feature of the advisory fee (which also exists in the Funds'
present structure) may give the Advisor an incentive to recommend actions that
will cause the Company's real estate asset base to increase even if earnings per
share do not increase. See "Comparative Information -- Comparison of
Fees -- Advisory Fee."
DIFFERING IMPACT ON CERTAIN SHAREHOLDERS
Lower level of quarterly distributions to Advantage Series A Shareholders
after the Merger. The initial level of quarterly dividends to Advantage Series
A Shareholders is expected to be lower after the Merger than before. Based on an
Advantage Conversion Factor of 1.2 and the current regular quarterly
distribution rates for the Company ($.11 per share) and Advantage ($.1425 per
share), Advantage Series A Shareholders would receive approximately $.011 (7.4%)
less in regular quarterly distributions per share of Advantage Common Stock
converted in the Merger from the Company than before the Merger from Advantage.
This reduction is a consequence of the conversion of Advantage Common Stock to
Company Common Stock, which has a lower dividend rate in relation to its share
price (lower dividend yield) than Advantage Common Stock.
Higher level of quarterly distributions to FREIF Series A Shareholders
after the Merger. The initial level of quarterly dividends to FREIF Series A
Shareholders is expected to be higher after the Merger than before. Based on a
FREIF Conversion Factor of 1.286 and the current regular quarterly distribution
rates for the Company ($.11 per share) and FREIF ($.125 per share) FREIF Series
A Shareholders would receive approximately $.017 (13.1%) more in regular
quarterly distributions per share of FREIF Common Stock converted in the Merger
from the Company than before the Merger from FREIF. This increase is a
consequence of the conversion of FREIF Common Stock which has a higher dividend
rate in relation to its share price (higher dividend yield) than FREIF Common
Stock.
14
<PAGE> 29
Potential change in control of the Company. The Advisor and its Affiliates
own 3.5% of the outstanding shares of the Company eligible to vote on the
Merger. After the Merger, the Advisor and its Affiliates will own 23.3% of the
outstanding shares of the Company if the Shareholders of both Funds approve the
Merger, or 33.8% of the outstanding shares of the Company if only the
Shareholders of Advantage and the Company approve the Merger. In either case,
the Advisor and its Affiliates will be the largest Shareholder of the Company
after the Merger, with the potential to control or influence its affairs.
Limited Dissenter's Rights. Under California law, if the Merger is
approved, objecting Shareholders of the Company and each of the Funds will have
Dissenter's Rights (i.e., the right, instead of receiving Company Common Stock,
to compel the Company, FREIF or Advantage to purchase Company, FREIF or
Advantage Common Stock for cash), only if demands for payment are made with
respect to 5% or more of the outstanding Common Stock of the Company, FREIF or
Advantage, respectively. However, under the terms of the Merger Agreement, the
boards of directors of the Company and the Funds may elect not to participate in
the Merger if Shareholders holding an aggregate of 5% or more of the outstanding
common stock of the Company or such Fund exercise Dissenter's Rights. See
"Rights of Dissenting Shareholders."
Any future changes in the value of any one property will be shared by all
Shareholders, rather than solely by Shareholders of the Company or the Fund that
purchased the property. As a result of the Merger, the assets and liabilities
of the Company and each Fund whose Shareholders have approved the Merger will be
combined. Future changes in the value of the Company's combined assets or in
operating cash flow, capital expenditures, tenant turnover costs and other
expenses related to such assets will be shared by all Shareholders of the
Company. For example, if the properties formerly held by a Fund decrease in
value or in operating cash flow or experience increases in capital expenditures,
tenant turnover costs and other expenses, then former Shareholders of the other
Fund (provided that its Shareholders approve the Merger) and the Shareholders of
the Company will share in these decreases or increases. As a result, the
Company's ability to pay dividends and/or the market price of the Company Common
Stock could be adversely or positively affected.
Material percentages of rental income of the Company and each Fund are
scheduled to expire in the near future. The following chart shows the
cumulative percentages of annualized base rental income of the Company and each
Fund which are scheduled to expire before the year 2000:
<TABLE>
<CAPTION>
THE COMPANY FREIF ADVANTAGE
----------- ----- ---------
<S> <C> <C> <C>
1995................ 2.1% 2.1 % --
1995-1996........... 4.5 20.9 --
1995-1997........... 28.1 22.9 46.5%
1995-1998........... 37.6 31.7 46.5
1995-1999........... 75.0 42.6 46.5
</TABLE>
For a more complete chart showing annualized base rental income on a yearly
basis, see "Terms of the Merger -- Potential Benefits of the Merger." Although
the Company and the Funds each receive a material percentage of rental income
from leases which are scheduled to expire before the end of 1999, the risk of
non-renewal of leases scheduled to expire is different for Advantage than for
the Company or FREIF because 42% of Advantage's base rental income is derived
from a single tenant. If Advantage merges into the Company, 14% of the Company's
rental income will be derived from this tenant. An extended delay in renewing or
reletting such a large space in a single year would have a material adverse
impact on the Company after the Merger.
Potential environmental liability. As part of the investigation of a
property prior to its acquisition, the Company and the Funds typically have
obtained inspection reports concerning the condition of a property, including
specialized environmental inspection reports concerning the presence of
hazardous substances on the property. The Company will continue to obtain
inspection reports on new properties after the Merger, but neither the Company
nor the Funds will obtain new inspection reports concerning properties being
combined in the Merger. The Company could be required to remove hazardous
substances or sources, and could experience lost revenues during any such
cleanup, or lower lease rates, decreased occupancy or difficulty selling the
affected property either prior to or following any such cleanup. If the Merger
is approved by their
15
<PAGE> 30
Shareholders, FREIF and Advantage will share in any environmental liability
associated with the Company's properties. See "Description of Real
Properties -- Government Regulations."
Potential liability under Americans with Disabilities Act. The Americans
with Disabilities Act (the "ADA") generally requires that buildings be made
accessible to people with disabilities. If certain uses by tenants of a building
constitute a "public accommodation," the ADA imposes liability for
non-compliance on both the tenant and the owner/operator of the building. The
Advisor has conducted inspections of each of the properties now held by the
Company and the Funds to determine whether the exterior and common area of such
properties are in compliance with the ADA. If it were later determined that one
or more of the Company or the Funds' properties did not comply with the ADA,
after the Merger the Company could be required to remove access barriers or to
pay fines or damages related to such non-compliance.
Competition. In seeking real property investments, the Company competes
with a wide variety of institutions and other investors, many of which have
greater financial resources than those of the Company. An increase in the amount
of funds available for real estate investments may increase competition for
ownership of interests in properties and may reduce yields. The Company also
competes for tenants at its existing properties. The Company believes that the
significant real estate experience of its board of directors and the Advisor
enables the Company to compete effectively.
CONFLICTS OF INTEREST
The Company is subject to various conflicts of interest arising out of its
relationship with the Advisor, the Property Manager (Continental Property
Management, an affiliate of the Advisor) ("CPMC" or "Continental"), and the
directors and officers of the Advisor, some of whom are also directors and
officers of the Company, as follows:
Conflicts in initiation and structuring of the Merger. The Advisor, and
certain non-independent directors and officers of the Company, are subject to a
conflict of interest in recommending to the Series A Shareholders that they vote
in favor of the Merger because the Advisor will receive certain benefits from
the Merger. The Advisor and such directors and officers, who have interests and
affiliations different in some respects from those of a Series A Shareholder of
the Company or the Funds, have initiated and participated in structuring the
Merger.
Potential benefits to Franklin Resources, Inc. Franklin Resources, Inc.,
the parent corporation of the Advisor, and the Advisor together own 3.5%, 7.5%
and 48.7% of the outstanding common stock of the Company, FREIF and Advantage,
respectively, eligible to vote on the Merger. The Advisor is subject to a
conflict of interest because the Advisor and its Affiliates own a substantial
share of Advantage. As a consequence, the Advisor and its Affiliates would
benefit if the Conversion Factors or other terms of the Merger favored
Advantage. In addition, Franklin Resources, Inc. and the other Advantage Series
A Shareholders will benefit more from the increased diversification of the
Company after the Merger because the assets and revenues of Advantage are
materially less diverse than those of the Company or FREIF.
Potential benefits to the Advisor. The Merger will result in certain
changes to the portion of the advisory fee paid to the Advisor with respect to
assets currently held by the Funds, including the following: (i) the asset base
on which the Funds' advisory fee is charged will be larger since the base will
be the book value before depreciation rather than the market value of the real
estate assets; and (ii) the advisory fee paid with respect to the Funds'
properties will not be subordinated to any dividend payments to FREIF or
Advantage Series A Shareholders. See "Comparative Information -- Comparison of
Fees -- Advisory Fee." In conjunction with these changes, the Advisor will not
receive disposition fees from the Funds, but the dollar amount paid as advisory
fees in respect of the properties now held by the Funds will likely increase
immediately, and as the real estate asset base of the Company increases. Fees in
respect of the properties now held by the Funds also may be paid to the Advisor
for a longer period of time than if the Merger were not to occur because the
Company has a perpetual life rather than finite life. The Advisory Agreement
between the Company and the Advisor, however, has a one-year term and is
terminable upon 120 days' notice by the Advisor or upon 60 days' notice by the
Company. The board of directors of the Company reviews the Advisory Agreement
and fee structure annually and has approved the current Advisory Agreement and
fee structure.
16
<PAGE> 31
The Advisor also will receive an Exchange Right to exchange the Series B
Shares of the Company it receives in the Merger in respect of the Series B
Shares of each Fund whose Shareholders approve the Merger for Company Common
Stock. The Series B Exchange Right will be exercisable only if certain specified
trading prices of the Company Common Stock are met. See "Terms of the
Merger -- Series B Exchange Right."
No arm's length negotiations. The terms of the Merger are not the result
of arm's length negotiations involving the Company, Series A Shareholders of the
Company or the Funds, or any person employed to negotiate on behalf of the
Series A Shareholders of the Company or the Funds; however, the Merger and
changes to advisory fees have been reviewed by the independent directors of the
Funds who have deemed it to be fair to the Series A Shareholders of the Funds.
No independent representative retained. No independent representative has
been retained to negotiate the terms of the Merger on behalf of the Company or
the Fund Series A Shareholders. As a result, the terms of the Merger may be less
favorable to the Series A Shareholders than if an independent representative had
been retained. However, the Company and the Funds each have formed committees of
independent directors on their respective boards, who reviewed the Merger on
behalf of their respective Series A Shareholders and have retained Bear Stearns
to render an opinion on the fairness of the Merger to the Series A Shareholders
of the Company and the Funds. Independent special counsel has been retained to
advise the committees of independent directors of the Company and the Funds. The
attorneys and other experts who perform services for the Advisor and its
Affiliates may also perform services for the Company. If a conflict should
arise, the unaffiliated directors will consider the extent to which the
interests of the Company and/or the Funds diverge from those of the Advisor or
its Affiliates and, if necessary, will retain separate counsel or experts, as
the case may be.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company, FREIF and Advantage each have entered into advisory
agreements, renewable annually upon approval of their respective boards of
directors, with the Advisor to administer the day-to-day operations of the
Company. For the year ended December 31, 1994, the Company, FREIF and Advantage
paid to the Advisor $148,000, $0 and $116,000, respectively, in advisory fees.
Continental acts as property manager for the properties of the Company,
FREIF and Advantage. During the year ended December 31, 1994, the Company, FREIF
and Advantage paid CPMC property management fees totaling $196,000, $157,000 and
$171,000, respectively.
The boards of directors (including all independent directors) of the
Company, FREIF and Advantage have determined, after review, that the
compensation paid to the Advisor and to CPMC in 1994, as well as the
reimbursements made to the Advisor for certain types of compensation and
payments are fair and reasonable to the Company, FREIF and Advantage. David P.
Goss, the Chief Executive Officer, President and Director of the Company, FREIF
and Advantage, is also Chief Executive Officer, President and Director of the
Advisor and of Property Resources, Inc., the parent corporation of CPMC.
In August 1994, Franklin Resources, Inc., the parent corporation of the
Advisor, purchased 1,404,500 shares of Advantage Common Stock held by MASTERS
for an aggregate purchase price of $13,483,200. The purchase price reflected a
premium of $3.475 per share over the closing price for Advantage Common Stock on
the AMEX the day prior to the purchase. A related entity of MASTERS, PRIM, now
owns 19.4% and 14.7% of the outstanding Common Stock of the Company and FREIF,
respectively.
17
<PAGE> 32
ADVISOR AND ITS AFFILIATES
The chart below shows the relationship among the three Franklin companies
which receive compensation from, or own shares in, the Company and the Funds.
- ---------------
* Continental Property Management Co. is an indirect wholly-owned subsidiary of
Franklin Resources, Inc.
18
<PAGE> 33
TERMS OF THE MERGER
This section of the Joint Proxy Statement/Prospectus describes certain
aspects of the proposed Merger. To the extent that it relates to the Merger
Agreement and the terms of the Merger, the following description does not
purport to be complete and is qualified in its entirety by reference to the
Merger Agreement, which is attached as Appendix A to this Joint Proxy
Statement/Prospectus and is incorporated herein by reference. All Shareholders
are urged to read the Merger Agreement in its entirety.
GENERAL
The Merger Agreement provides that the Merger will be consummated between
the Company and one or both Funds if the required approvals of the Company and
such Fund Series A Shareholders and Series B Shareholder are obtained and all
other conditions to the Merger are satisfied or waived as provided in the Merger
Agreement. Upon consummation of the Merger, each Fund that has approved the
Merger will be merged with and into the Company.
Upon consummation of the Merger, if Shareholders of FREIF approve the
Merger, each outstanding share of FREIF Common Stock and Series B Shares will be
converted into the right to receive 1.286 fully paid and nonassessable shares of
Company Common Stock or Series B Shares, respectively. Upon consummation of the
Merger, if Shareholders of Advantage approve the Merger, each outstanding share
of Advantage Common Stock and Series B Shares will be converted into the right
to receive 1.2 fully paid and nonassessable shares of Company Common Stock or
Series B Shares, respectively. Fractional shares will not be issued but instead
will be rounded up to the nearest whole share as described in the Merger
Agreement. The Series A Shareholders of each Fund that approve the Merger will
then automatically become Series A Shareholders in the Company, without any
further action on their part, unless they elect to exercise their Dissenter's
Rights. For a discussion of Dissenter's Rights and their availability to the
Company and the Fund Series A Shareholders, see the section entitled "Rights of
Dissenting Shareholders" below.
If Shareholders of both Funds and the Company approve the Merger, the
Series A Shareholders of FREIF and Advantage will own approximately 36.3% and
25.6%, respectively, of the outstanding Company Common Stock following
consummation of the Merger. If Shareholders of the Company and FREIF only
approve the Merger, FREIF Series A Shareholders will own approximately 48.9% of
the outstanding Company Common Stock following consummation of the Merger. If
Shareholders of the Company and Advantage only approve the Merger, Advantage
Series A Shareholders will own approximately 40.2% of the outstanding Company
Common Stock following consummation of the Merger.
AMENDMENT OF ARTICLES OF INCORPORATION AND ADOPTION OF AMENDED AND RESTATED
BYLAWS
Approval of the Merger by Company Shareholders also approves (i) amendments
to the Company's articles of incorporation to change of the name of the Company
to "Franklin Select Realty Trust," and to eliminate dividends from operations to
the Series B Shares, and (ii) the adoption of amended and restated bylaws. The
Company's current bylaws provide that the numbers of directors on the board of
directors shall be not less than three nor more than five, as determined from
time to time by resolution of the board of directors. The proposed amended and
restated bylaws would increase the variable number of directors from five to
nine, as determined from time to time by resolution of the board of directors.
The Company currently has five directors serving on its board. It is anticipated
that the directors will increase the size of the board if the Merger is
approved. The proposed amended and restated bylaws also delete a provision
excluding from the definition of "independent director" anyone serving as a
director of three or more REITs or mutual funds organized by Franklin Resources,
Inc., and incorporate technical changes to provisions related to the advisory
fee that conform such provisions to the compensation structure approved by the
Company Shareholders in September 1994. The proposed amendments to the Company's
articles of incorporation are set forth as Appendix D to this Joint Proxy
Statement/Prospectus. The full text of the proposed amended and restated bylaws
is set forth as Appendix E to this Joint Proxy Statement/Prospectus.
19
<PAGE> 34
EFFECTIVE TIME
The effective time of the Merger (the "Effective Time") will occur upon the
filing of a Certificate of Merger with the Secretary of State of the State of
California (the "Certificate of Merger") or at such later time as is specified
on such certificate. The filing of the Certificate of Merger will occur as soon
as practicable after the closing of the transactions contemplated by the Merger
Agreement. The Merger Agreement may be terminated by any of the parties if the
Merger has not been consummated on or before , 19 and under
certain other conditions. See "-- Conditions to the Merger."
CONVERSION OF SHARES; PROCEDURES FOR EXCHANGE OF CERTIFICATES
The conversion of the Common Stock and Series B Shares of FREIF and/or
Advantage into the right to receive Company Common Stock or Series B Shares of
the Company, respectively, will occur automatically at the Effective Time.
As soon as practicable after the Effective Time, a transmittal letter will
be mailed by the Exchange Agent to each FREIF and/or Advantage Shareholder or
Series B Shareholder, as appropriate, informing such holder of the procedures to
follow in forwarding FREIF or Advantage stock certificates to the Exchange
Agent. Upon receipt of FREIF or Advantage stock certificates, the Exchange Agent
will deliver whole shares of Company Common Stock or Series B Shares of the
Company, as appropriate, to such holder pursuant to the terms of the Merger
Agreement and in accordance with the transmittal letter, together with any
dividends or other distributions to which such holder may be entitled.
If any issuance of shares of Company Common Stock or Series B Shares in
exchange for shares of FREIF or Advantage Common Stock or Series B Shares is to
be made to a person other than the Shareholder in whose name the certificate is
registered at the Effective Time, it will be a condition of such exchange that
the certificate so surrendered be properly endorsed or otherwise be in proper
form for transfer and that the Shareholder of FREIF or Advantage requesting such
issuance either pay any transfer or other tax required or establish to the
satisfaction of the Exchange Agent that such tax has been paid or is not
payable.
After the Effective Time, there will be no further transfers of FREIF
and/or Advantage Common Stock or Series B Shares on the stock transfer books of
the Company and the Funds. If a certificate representing FREIF or Advantage
Common Stock or Series B Shares is presented for transfer, it will be cancelled
and a certificate representing the appropriate number of full shares of Company
Common Stock or Series B Shares of the Company and any dividends and
distributions will be issued in exchange therefor.
After the Effective Time and until surrendered, shares of FREIF or
Advantage Common Stock or Series B Shares will be deemed for all corporate
purposes, other than the payment of dividends and distributions, to evidence
ownership of the number of full shares of Company Common Stock or Series B
Shares into which such shares of FREIF or Advantage Common Stock or Series B
Shares were converted at the Effective Time. No dividends or other
distributions, if any, payable to holders of Company Common Stock or Series B
Shares will be paid to the holders of any certificates for shares of FREIF or
Advantage Common Stock or Series B Shares until such certificates are
surrendered. Upon surrender of such certificates, all such declared dividends
and distributions which shall have become payable with respect to such Company
Common Stock or Series B Shares in respect of a record date after the Effective
Time will be paid to the holder of record of the full shares of Company Common
Stock or Series B Shares represented by the certificate issued in exchange
therefor, without interest.
FREIF AND ADVANTAGE SHAREHOLDERS SHOULD NOT FORWARD THEIR CERTIFICATES TO
THE EXCHANGE AGENT UNTIL THEY HAVE RECEIVED TRANSMITTAL LETTERS. FREIF AND
ADVANTAGE SHAREHOLDERS SHOULD NOT RETURN STOCK CERTIFICATES WITH THE ENCLOSED
PROXY.
CONDITIONS TO THE MERGER
Consummation of the Merger as to the Company and each Fund is conditioned
upon each of the following as of, or prior to, the closing date, which with the
exception of the conditions specified in
20
<PAGE> 35
subparagraphs (1) and (2) below, may be waived in the discretion of the board of
directors of the Company and the Funds:
(1) approval of the Merger as to the Company, by the Company Series A
Shareholders and the Series B Shareholder, as to FREIF, by the FREIF Series
A Shareholders and the Series B Shareholder, and, as to Advantage, by the
Advantage Series A Shareholders and Series B Shareholder;
(2) receipt of a fairness opinion from Bear Stearns in form and
substance acceptable to the boards of directors of the Company and the
Funds, which opinion has not been withdrawn prior to the closing date of
the Merger;
(3) the board of directors of the Company or either Fund may determine
not to participate in the Merger if Shareholders holding in the aggregate
5% or more of the aggregate outstanding common stock of the Company or
either Fund exercise Dissenter's Rights;
(4) the receipt of any necessary consents and approvals, including
those required from governmental authorities or regulatory bodies, on or
before (and remaining in effect at) the closing date. Except as required by
applicable securities laws, the Company does not know of any federal or
state regulatory requirements that must be complied with or any approval
that must be obtained in connection with the Merger;
(5) the Registration Statement covering the shares of Company Common
Stock issuable in connection with the Merger of which this Joint Proxy
Statement/Prospectus is a part must be effective, no stop order suspending
the effectiveness of such Registration Statement or preventing or
suspending the use of the Joint Proxy Statement/Prospectus or order under
the proxy rules of the Commission pursuant to the Securities Exchange Act
of 1934, as amended, with respect to the transactions contemplated in the
Merger Agreement may be in effect, and no proceedings for any such purpose
may be pending or threatened before the Commission;
(6) receipt of an opinion from the Company's special counsel,
Steinhart & Falconer, to the effect that the Merger will be a tax free
reorganization under the Internal Revenue Code, and the Merger will not
adversely affect the qualification of the Company or either Fund as REITs
within the meaning of Section 856 of the Internal Revenue Code; and
(7) the boards of directors of the Company or either Fund must not
have determined that the Merger has become impractical or imprudent.
The Merger Agreement may be terminated as to the Company or either Fund at
any time prior to the closing date of the Merger, whether before or after
obtaining Shareholder approval: (a) by the mutual consent of the boards of
directors of the Company and either Fund; or (b) by the boards of directors of
the Company or either Fund if any action has been threatened or instituted to
restrain or modify the Merger which in the good faith judgment of the Company or
the Fund, acting on advice of counsel, has a reasonable probability of success.
The Merger Agreement may be amended by the mutual agreement of the boards
of directors of the Funds and the Company and the Funds any time prior to the
approval of the Merger by the Shareholders. After such approval has been
obtained, no amendment may be made to change the Merger Agreement in a manner
which is materially adverse to the Shareholders unless such amendment is
approved by the Shareholders.
COSTS OF THE TRANSACTION
Expenses of the Merger will be shared by the Company and the Funds whether
or not the Merger is approved by their respective Shareholders. The allocation
of expenses will be proportionately based as follows: as to the Company, on the
number of shares of Company Common Stock outstanding as of November 1, 1995, and
as to each Fund, on the number of shares of Company Common Stock that would have
been issued
21
<PAGE> 36
to holders of Series A Common Stock of each Fund if the Merger had occurred on
November 1, 1995, based on the Conversion Factors. Expenses are expected to be
approximately $750,000 and consist of the following:
<TABLE>
<S> <C>
Fairness Opinion.................................................. $250,000
Accounting, Legal and other Professional Fees and Expenses........ $310,000
Filing Fees....................................................... $ 15,000
Proxy Solicitors.................................................. $ 25,000
Printing/Miscellaneous............................................ $150,000
</TABLE>
The Advisor and its Affiliates will not receive any fees or payments in
connection with the Merger. Expenses of the Merger will be paid from current
cash resources of the Company and the Funds.
TAX CONSEQUENCES OF THE MERGER
The Company has been advised by special counsel that the Merger will
constitute a tax-free reorganization for income tax purposes, and that none of
the Company, the Funds or any participating Shareholder will recognize gain or
loss for tax purposes as a result of the Merger. A Shareholder who exercises
Dissenter's Rights generally will recognize gain or loss, as the case may be,
measured by the difference between the payment received for its shares and its
adjusted tax basis for these shares. See "Income Tax Considerations -- Taxation
of the Merger."
The Company and each of the Funds have elected to be taxed as REITs for
federal income tax purposes. The Company has been advised by special counsel
that the Merger will not adversely affect the qualification of the Company as a
REIT. As a REIT, under federal income tax laws the Company generally is not
taxed at the corporate level to the extent it currently distributes its taxable
income to its Shareholders. REITs are subject to a variety of complex and
technical restrictions and requirements. If the Company fails to qualify as a
REIT in any taxable year, the Company will be subject to federal income tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Even if the Company qualifies for taxation as a REIT,
the Company may be subject to certain federal, state and local taxation on its
income and property. See "Income Tax Considerations."
ACCOUNTING FOR THE MERGER
The Merger will be accounted for as a reorganization of entities under
common control carrying over historical costs or pooling. Therefore, the Company
and the Funds' assets and liabilities have been reflected in the "Pro Forma
Financial Statements" at their book value.
SHAREHOLDERS' APPROVAL OF THE MERGER
This Joint Proxy Statement/Prospectus solicits the approval of the Company
and each Fund's Series A Shareholders and Series B Shareholder for the Merger,
including such other actions as may be required by the Funds and/or the Company
to consummate the Merger. Those persons who are Series A Shareholders or the
Series B Shareholder of record in the Company or either Fund on the Record Date
will be entitled to vote at the Special Meetings or to submit a proxy. The
Advisor owns all of the Series B Shares of the Company and each Fund. Each
Series B Share has the same vote as a share of Common Stock. Through the Series
B Shares, the Advisor controls approximately 3.3% of the votes in the Company,
7.4% of the votes in FREIF, and 4.0% of the votes in Advantage. In addition,
Franklin Resources, Inc., the parent corporation of the Advisor, through
ownership of 46.6% of the Advantage Common Stock, controls approximately 48.7%
of the votes in Advantage (including the shares held by the Advisor). The
Advisor will vote its Series B Shares in the Company and each Fund, and Franklin
Resources will vote its Advantage Common Stock "For" the Merger.
22
<PAGE> 37
Approval of the Merger by Shareholders of the Company and a Fund will
constitute approval of the following actions resulting from the Merger:
(1) merger of such Fund into the Company, pursuant to which the Fund
will cease to exist and the Company will be the surviving corporation;
(2) conversion pursuant to the Merger of Common Stock of the Fund into
Company Common Stock, in accordance with the applicable Conversion Factor;
(3) conversion pursuant to the Merger of Series B Shares of the Fund
into Series B Shares of the Company, in accordance with the applicable
Conversion Factor;
(4) amendment of the Company's articles of incorporation to change of
the name of the Company to "Franklin Select Realty Trust," and to eliminate
dividends from operations to the Series B Shares;
(5) adoption of amended and restated bylaws of the Company, which will
provide, among other things, that the number of directors may vary from
five to nine, as may be determined by a resolution of the board of
directors;
(6) approval of the issuance of the Series B Exchange Right to the
Advisor in respect of its Series B Shares of the Company received in
exchange for its Series B Shares of the Fund; and
(7) the authorization of such other actions which, in the discretion
of the respective boards of directors of the Company and such Fund are
necessary or appropriate to consummate the Merger.
RIGHTS OF DISSENTING SHAREHOLDERS
Under California General Corporation Law, Shareholders of each of the
Company and the Funds are not entitled to Dissenter's Rights with respect to the
Merger unless demands for payment are filed with respect to 5% or more of the
outstanding shares of Common Stock and Series B Shares of the Company, FREIF or
Advantage, respectively. See "Rights of Dissenting Shareholders." However, under
the terms of the Merger Agreement, the boards of directors of each of the
Company and the Funds may elect not to participate in the Merger if Shareholders
holding in the aggregate 5% or more of the outstanding common stock of the
Company or such Fund exercise Dissenter's Rights.
POTENTIAL BENEFITS OF THE MERGER
The Advisor and the directors of the Company and each Fund believe that
their respective Shareholders will benefit from the Merger. They also believe
that these potential benefits will exist if Shareholders of the Company and only
one of the Funds approve the Merger. They believe that because of the finite
life policy of the Funds, the limited prospects for growth imposed by a finite
life structure and their relatively small asset size, it is difficult to attract
significant private investor and institutional interest in the Fund Common
Stock. As a consequence, the Funds can do little to diversify their portfolios
or increase revenues and earnings per share. With an infinite life and
growth-oriented investment and reinvestment strategy, the Company has more
flexibility in managing its portfolio and greater access to the capital markets.
In addition, after the Merger the Company will have a larger asset base and
market capitalization, which is expected to attract wider investor and possibly
institutional interest, with the potential to increase the market value of the
Company Common Stock, despite the tendency of the market to discount the value
of shares of REITs like the Company that are managed by outside advisors. As the
Company grows, its administrative costs as a percentage of assets are expected
to decline due to economies of scale, although the dollar amount of the advisory
fees will increase as the Company acquires additional real estate assets.
The Company has broader, growth-oriented investment and reinvestment
policies than the Funds. In addition to identifying individual properties
suitable for acquisition, the Company intends to acquire property portfolios.
Part of its acquisition strategy includes establishing strategic relationships
with and acquiring property portfolios from selected real estate developers who
appear to have competitive advantages within their local market areas. The
Company anticipates that a significant portion of these future acquisitions will
be achieved through the issuance of common stock equity or partnership equity
and it is committed to limiting
23
<PAGE> 38
carefully its use of debt financing. The Company also may acquire additional
properties with the proceeds from securities offerings, and reinvest the net
proceeds from the disposition or financing of properties (subject to REIT
distribution requirements). As a result, the Company is expected to be better
able than the Funds to take advantage of favorable conditions in the real estate
markets. Accordingly, after the Merger the Company is expected to have a greater
potential to increase its revenues and earnings per share.
Since the Company's asset base will be larger after the Merger, it will
have a more diversified portfolio of assets than either of the Funds or the
Company individually. This increased diversification, and additional
diversification upon the future acquisition of properties, is expected to reduce
overall portfolio risk. Diversification should reduce the impact on the Company
of tenant turnover, capital expenditures and adverse developments affecting
local economies, types of properties and individual properties and tenants. Some
of the expected benefits of diversification are illustrated by the following
chart, which shows the percentage of total annualized base rental income as of
June 30, 1995 of the Company and each Fund which arises from leases which are
scheduled to expire during the next ten years, and the percentage of total
annualized base rental income of the Company after the Merger scheduled to
expire during this period, assuming both Funds are merged into the Company.
<TABLE>
<CAPTION>
THE MERGED
COMPANY FREIF ADVANTAGE COMPANY
---------- ----- --------- -------
<S> <C> <C> <C> <C>
1995............................. 2.1% 2.1 % 0% 1.4%
1996............................. 2.4 18.8 0 7.0
1997............................. 23.6 2.0 46.5 24.2
1998............................. 9.5 8.8 0 6.1
1999............................. 37.4 10.9 0 16.0
2000............................. 5.7 6.0 2.5 4.7
2001............................. 0.4 1.3 30.5 10.9
2002............................. 7.1 9.7 0.6 5.7
2003............................. 0 11.8 0 3.9
2004............................. 0 0 5.3 1.8
2005............................. 0 8.4 0 2.8
After 2005....................... 11.8 20.2 14.6 15.5
</TABLE>
The chart below shows the total number of leases, square feet leased and
occupancy rates for the Company, FREIF and Advantage individually, and the
Company after the Merger.
<TABLE>
<CAPTION>
THE MERGED
COMPANY(1) FREIF ADVANTAGE COMPANY
---------- ------- --------- -------
<S> <C> <C> <C> <C>
Current number of leases........ 27 59 10 73
Total square feet............... 201,571 360,013 190,361 751,945
Total square feet leased........ 200,783 340,482 190,361 731,626
Percent leased.................. 99.6% 94.6% 100.0% 97.3%
</TABLE>
- ---------------
(1) The number of leases reported for the Company and FREIF both include 23
leases for the Shores Office Complex since it is jointly owned. The total
square feet and percentage of rental income expiring reflect the Company's
and FREIF's ownership percentages of 60% and 40%, respectively.
Also, the advisory fee compensation structure of the Company is expected to
result in the reduction over time of the total amount of fees payable to the
Advisor in respect of the real property now held by the Funds. The Company has
eliminated disposition fees, which are payable by the Funds to the Advisor when
a property is sold. Taking into account the elimination of disposition fees and
the change in the advisory fee, which will increase initially, the directors of
the Company and the Funds expect, based upon certain assumptions, that the fees
payable to the Advisor will be lower than the fees that would have been payable
to the Advisor in respect of the real property now held by the Funds over the
next five years in the absence of the Merger. See "Comparative
Information -- Summary Comparison of Compensation Arrangements."
24
<PAGE> 39
The Advisor and each Fund believe that the expected benefits of enhanced
access to capital markets, greater flexibility in managing its portfolio,
potential growth in earnings per share, greater asset diversification and a
projected reduction of fees payable to the Advisor over time in respect of real
estate assets now held by the Funds, offset the potential detriments to Fund
Series A Shareholders from the Merger.
BACKGROUND OF THE MERGER
The principal investment policies of the Funds are (i) to preserve and
protect capital, (ii) to provide current income through the payment of cash
dividends (a portion of which will be accounted for as a return of capital
primarily due to depreciation expense), (iii) to provide capital gains through
potential appreciation of the properties and (iv) to provide market liquidity
through transferable shares of stock. To date, the Funds have met their
objective of providing current income through the payment of dividends. FREIF
has paid dividends at the current annual rate of $.50 per share since mid-1992.
Since early 1991, Advantage paid dividends at an annual rate of $.65 per share,
but recently reduced such rate to the current annual rate of $.57 per share.
Because the Funds have owned their properties for a shorter period of time than
the originally contemplated investment period and due to the general weakness in
rental levels in the real estate market, it is premature to state whether or not
the Funds have met their investment objective of preserving capital and
providing capital appreciation. However, if the Funds were liquidated today, the
Advisor estimates that their Series A Shareholders would receive significantly
less than the original issuance price of $10 per share for their respective
Common Stock.
The Company, FREIF and Advantage Common Stock each began trading on the
AMEX on January 14, 1994 which satisfied the objective of providing their Series
A Shareholders with market liquidity through transferable shares of stock. For
the nine month period ended September 30, 1995, the trading volume in FREIF
Common Stock has averaged 2,546 shares per day, and the trading price has ranged
from a high of $5 7/8 to a low of $4 1/8 per share; and trading volume in
Advantage Common Stock has averaged 1,293 shares per day, and the trading price
has ranged from a high of $6 3/8 to a low of $5 per share as reported on the
AMEX composite tape.
In their initial public offerings, the Funds included as one of their
investment policies a finite operating life with an anticipated holding period,
running from the date the last property was acquired, of from five to seven
years for FREIF, and seven to ten years for Advantage. FREIF acquired its last
property in January 1994 and Advantage acquired its last property in November
1994. After the holding period, the Funds would be expected to sell the
properties, distribute the net proceeds to their respective Shareholders and
dissolve.
The finite life policy was originally chosen because it was then believed
that the shares of a finite life REIT would trade at less of a discount to net
asset value than other forms of public direct real estate ownership such as
limited partnerships. At the time, the finite life characteristic also was not
thought to be an impediment to raising additional equity capital or debt.
Since that time, there has been a significant growth in the interest of
both institutional investors and private investors in infinite life REITs.
Institutional investors, who historically made their real estate investments
through private vehicles, are now investing in public, infinite life REITs. As
reflected by their higher dividend yields, finite life REITs generally now have
a lower market valuation and trade at a greater discount to net asset value than
infinite life REITs. Investment bankers generally are not willing to raise new
equity for finite life REITs. Real estate developers and property owners
generally are not willing to enter into joint ventures or stock for property
exchanges with finite life REITs. Commercial banks and other institutional
lenders generally are not willing to provide credit to finite life REITs in the
form of acquisition lines of credit, unsecured lines of credit and portfolio
loans. These adverse developments in the status of finite life REITs are
confirmed by the experience of the Advisor. As a consequence of these changes,
the Advisor and the boards of directors of FREIF and Advantage concluded that
the Funds would have better access to the capital markets and an opportunity for
a higher market valuation when merged with the Company which is an infinite life
REIT.
In 1993, the boards of directors of the Company (which was a finite life
REIT at that time), FREIF, and Advantage recommended to their respective
Shareholders a merger whereby the Company and the Funds
25
<PAGE> 40
would be merged into the newly formed Franklin Realty Trust, Inc. Among other
things, as a result of the proposed merger, the Company, FREIF and Advantage
would have been merged into an infinite life REIT that had the same advisory fee
compensation structure by which the Advisor is now compensated by the Company. A
vote of a majority of the outstanding Common Stock of the Company and each Fund
was required to approve the transaction, including the merger into an infinite
life REIT and the Advisor's fee structure. 61.3%, 62.5%, and 39.6% of the Common
Stock of the Company, FREIF and Advantage, respectively, voted in favor of the
merger. However, because a majority of Advantage Common Stock voted against the
merger, the merger transaction was not approved.
A majority of the Advantage Common Stock did not approve the proposed
merger in 1993 primarily because the largest shareholder of Advantage at that
time, MASTERS, which held 44.8% of the Advantage Common Stock, voted against the
merger. In August 1994, Franklin Resources, Inc. purchased all of the Advantage
Common Stock held by MASTERS. See "Investment Considerations -- Certain
Relationships and Related Transactions." MASTERS also held 19.4% and 14.7% of
Common Stock of the Company and FREIF. In June 1995, MASTERS transferred these
shares to PRIM, a related entity to MASTERS.
In September 1994, at the annual meeting of the Shareholders of the
Company, the Shareholders approved conversion of the Company from a finite to an
infinite life REIT and changes to the compensation structure of the Advisor
similar to the advisory fee compensation structure of Franklin Realty Trust,
Inc.
The Company shares the principal investment policies of the Funds, but as
an infinite life REIT it has more flexibility to grow and manage its portfolio
to carry out these policies. The Company has adopted a business strategy which
is intended to expand the size and scope and increase the profitability of its
current operations. Traditionally, the Company has identified individual
properties suitable for acquisition and acquired them for cash. The Company now
also intends to acquire property portfolios in exchange for equity. In
particular, the Company is seeking to establish strategic relationships with and
acquire property portfolios from selected real estate developers who appear to
have a competitive advantage within their local market areas.
The Company anticipates that a substantial portion of its future
acquisitions will be achieved through the issuance of common stock equity or
partnership equity. The Company will carefully limit its use of debt financing.
It is anticipated that the Company will create one or more partnerships whereby
the Company will issue partnership units to make certain acquisitions. The
issuance or exchange of such partnership units can provide important tax
benefits to a real estate seller that can enhance the price paid for such
property and other terms of the acquisition. It is expected that the Company
will serve as the general partner of any such acquisition partnership vehicles.
In October 1995, the Company retained Prudential Securities Incorporated
("PSI") as its exclusive financial advisor in connection with the implementation
of the Company's portfolio acquisition strategy. In addition to helping identify
appropriate asset acquisition opportunities, PSI will serve as the Company's
financial advisor regarding the structuring and financing of such acquisitions,
including providing assistance with arranging financing necessary to complete
the transactions. It is important that the Company's overall acquisition
program, as well as any major acquisitions, be well received by the financial
community. PSI's guidance is expected to help in this regard. PSI has
significant experience in providing financial advisory and funding services to
REITs and was selected by the Company based upon this experience. In addition,
it is currently expected that over time PSI or one of its affiliates will make
an equity investment in Company Common Stock.
The Company will concentrate on a range of property types within the major
metropolitan markets of California including industrial, suburban office,
anchored retail and multi-family, in order to build a large, well diversified
portfolio while maintaining flexibility regarding which property types represent
the best investment value at a given time. Portfolios of assets acquired by the
Company may include different types of properties and be located in markets
outside the Company's areas of concentration. The Company believes that the
investment community and capital markets will support a REIT such as the Company
which is diversified by property type and locations throughout California.
26
<PAGE> 41
ANALYSIS OF ALTERNATIVE TO THE MERGER
In reaching their decision to recommend the Merger, the boards of directors
of the Funds considered the alternative of continuing FREIF and Advantage in
their current forms. If the Funds continued in their current forms, FREIF and
Advantage Series A Shareholders would avoid the detriments of the Merger
discussed above under "Investment Considerations," i.e., principally risks
associated with surrender of the right to receive liquidation proceeds at the
end of the Funds' finite life, additional operating policy risks and changes in
the Advisor's compensation. On the other hand, FREIF and Advantage Series A
Shareholders also would lose the benefits of Merger discussed above under
"-- Potential Benefits of the Merger," i.e., principally the possibility of
greater access to capital markets and of increasing the market value of the
Company Common Stock they receive as a result of the Merger and avoidance of
future disposition fees payable to the Advisor. After weighing the likely
material risks and benefits of such continuation, the boards of the Funds
believe that proceeding with the Merger is a more beneficial alternative to
FREIF and Advantage Series A Shareholders than the alternative of continuing the
Funds in their current form.
Although the Funds could sell their real estate assets now, pay off
existing liabilities and distribute the proceeds to their respective
Shareholders, such a possibility was not considered as an alternative to the
Merger, for the reasons given below.
During the period from the late 1980s and early 1990s (when the Funds were
organized) to the present, the commercial property market, both nationally and
locally, experienced a substantial decline. During this period, trends included:
(i) the general deterioration of the real estate market, which has significantly
affected property values and decreased sale activities; (ii) the reduced sources
of real estate financing caused, in part, by regulatory changes; and (iii) a
current oversupply of certain classes of real estate assets in certain markets,
which resulted from overbuilding and sales of properties acquired by financial
institutions and governmental agencies. These developments have caused a number
of bankruptcies, workouts, defaults and disappointing returns on real estate
investments, which have been widely publicized. These developments also have
resulted in a generally unfavorable market for the sale and/or refinancing of
the Funds' real estate. Although the Advisor believes these trends may be
reversing, there is no way to forecast the duration of these problems or to
forecast the impact, if any, on the future value of real estate in general and
the Funds' portfolios specifically. In addition, the Funds' properties were
acquired relatively recently with the intention that they be held considerably
longer than they have been held thus far. The Advisor and the Funds believe that
the objectives of capital appreciation and preservation would be more likely to
be achieved if the Funds' properties are held for at least as long as the
original investment policies contemplated, rather than if these properties were
sold at the present time.
There also would be certain costs associated with liquidation. If the Funds
were to liquidate, the Advisor and the Funds believe a Shareholders' vote would
be required, since the original investment policies of the Funds were to hold
their properties for a significantly longer time. Liquidation would also involve
transaction costs, such as selling expenses (including commissions payable to
third parties), transfer taxes, recording costs, title insurance premiums, legal
fees, escrow expense and other related closing costs that would be incurred in
connection with the sale and disposition of real estate assets. Based upon the
Advisor's experience, transaction costs would be likely to range between 4% and
6% of the total value of the assets being sold, before consideration of the
Advisor's 3% disposition fee. These transaction costs would be deducted from the
gross sales price in determining the cash available for distribution by the
Funds to their respective Shareholders.
Currently, the estimated net asset value per share is greater than the
current market price per share of the Company and each Fund, and the Advisor
believes this situation is likely to be the case immediately after the Merger.
However, the Advisor believes the current spread between estimated net asset
value per share and market value per share is insignificant because if the
Merger is consummated and the Company's growth strategy is successful, the
Company's market value per share will increase at a greater rate than net asset
value per share.
For these reasons, and the uncertainty of whether or not market conditions
are likely to improve in the next several years to permit more favorable sales
of the Funds' properties, despite the fact that real estate has
27
<PAGE> 42
been considered a stable long-term investment, the Advisor and the Funds do not
consider this to be an appropriate time to liquidate the real estate assets of
the Funds.
As part of the Merger, Shareholders of the Funds that approve the Merger
will become Shareholders of the Company, whose policies differ in certain
respects from those of the Funds. The compensation structure of the Company's
advisory agreement also differs from those of each Fund. The boards of the Funds
and the Advisor believe that the Merger offers FREIF and Advantage Shareholders
an investment in the Company, whose policies provide the potential for greater
portfolio diversification, opportunity for growth, and the potential of enhanced
access to capital markets. The Funds and the Advisor believe that the Company's
policies and compensation changes are benefits that substantially outweigh any
detriments associated with the Merger.
CONVERSION FACTORS
For purposes of allocating the Company Common Stock among the Company and
the Funds, the FREIF Conversion Factor and the Advantage Conversion Factor have
been calculated based on the median closing price of the Company, FREIF and
Advantage Common Stock during the twenty-five (25) trading days prior to and
including November 1, 1995. Only days upon which trading occurred were included
in the calculation of the Conversion Factors.
The following table shows the method used to establish the FREIF and
Advantage Conversion Factors, the percentage of the Company Common Stock each
Fund's Series A Shareholders will receive in the Merger and the number of shares
of Company Common Stock the Series A Shareholders of each Fund will receive for
each share of Common Stock owned in FREIF or Advantage, assuming that
Shareholders of both Funds approve the Merger:
<TABLE>
<CAPTION>
COMPANY FREIF ADVANTAGE TOTAL
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
Shares Outstanding................... 5,383,297 3,999,514 3,013,713
Median Share Price(1)................ $ 4.375 $ 5.625 $ 5.25
Conversion Factors................... 1.286 1.2
Company Common Stock per Fund Common
Stock Exchanged(2)................. 5,383,297 5,143,375 3,616,456 14,143,128
Ownership Ratio...................... 38.1% 36.3% 25.6%
</TABLE>
- ---------------
(1) Median share price for the twenty-five trading days prior to and including
November 1, 1995. Only days upon which trading occurred were included in the
calculation of the Conversion Factors.
(2) Assumes no exercise of Dissenter's Rights.
SERIES B EXCHANGE RIGHT
The Series B Exchange Right is structured to provide a mechanism for the
Advisor to retain an economic interest equivalent to its existing interest in
the Series B Shares of the Funds, and to align the interests of the Advisor and
the Company Series A Shareholders by providing the Advisor with an economic
incentive to increase the market value of the Company Common Stock.
In connection with the initial public offerings of each Fund, the Funds
issued Series B Shares to Franklin Resources, the Advisor's parent and sole
shareholder, in return for Franklin Resources' payment of part of the brokerage
commissions incurred by the Funds. Franklin Resources received one share of
Series B Shares for each $10 it paid in commissions. Ten dollars was also the
purchase price for the FREIF and Advantage Common Stock sold to the public.
Franklin Resources paid commissions of $3,193,080 and $1,242,400 and received
319,308 and 124,240 Series B Shares in FREIF and Advantage, respectively. In
1993, Franklin Resources sold these Series B Shares of FREIF and Advantage to
the Advisor.
The Series B Shares of FREIF and Advantage have equal voting rights (on a
per share basis) with the FREIF and Advantage Common Stock, but the FREIF and
Advantage Common Stock have certain dividend
28
<PAGE> 43
and liquidation preferences over the Series B Shares. The table below describes
the subordination features currently governing the Series B Shares of FREIF and
Advantage:
For FREIF:
Cash from operations: First, 8% per annum non-compounded,
noncumulative to Common Stock; and second, pro rata to Common Stock and
Series B Shares.
Cash from sales/refinancings: First, return of capital plus 6%
cumulative, non-compounded (on an adjusted price per share) to Common
Stock; second, return of capital plus 6% cumulative, non-compounded (on an
adjusted price per share) to Series B Shares; and third, 85% of balance pro
rata to Common Stock and Series B Shares and 15% to Advisor as subordinated
incentive fee.
For Advantage:
Cash from operations: First, 8% per annum non-compounded,
noncumulative to Common Stock; and second, pro rata to Common Stock and
Series B Shares.
Cash from sales/refinancings: First, return of capital to Common
Stock; second, return of capital to Series B Shares; third, 12% cumulative
non-compounded to Common Stock (on adjusted price per share); fourth, pro
rata to Common Stock and Series B Shares.
Adjusted price per share means $10 per share (the original purchase price)
less any dividends paid with the proceeds from sales and refinancings.
In connection with the Merger, the Series B Shares of each Fund whose
Shareholders have approved the Merger will be converted into Series B Shares of
the Company using the applicable Conversion Factor. The Company also will issue
to the Advisor an Exchange Right to exchange the Series B Shares of the Company
received in the Merger for Company Common Stock on a one-for-one basis. The
Series B Exchange Right will be exercisable if and when the last reported sale
price of the Company Common Stock on the AMEX or such other exchange upon which
the Company Common Stock is then listed equals or exceeds certain "Target
Prices" (as defined below) for at least 20 consecutive trading days. If the
Company Common Stock reaches and maintains the Target Price for twenty
consecutive trading days set with respect to Series B Shares of the Company
received in the Merger in exchange for Series B Shares of FREIF, then the
Advisor may convert such Series B Shares into Company Common Stock as set forth
in the table below. Similarly, if the Company Common Stock reaches and maintains
the Target Price for twenty consecutive trading days set with respect to Series
B Shares of the Company received in the Merger in exchange for Series B Shares
of Advantage, then the Advisor may convert such Series B Shares into Company
Common Stock as set forth in the table below.
The Target Price mechanism retains a provision comparable to the existing
basic share preferences applicable to distributions of cash from sales or
refinancing of properties. For FREIF, the existing basic preference requires
that each Series A Shareholder receive an amount equal to the original purchase
price for the FREIF Common Stock plus a 6% annual, cumulative, non-compounded
return before the Advisor is entitled to receive a return of its investment in
the Series B Shares. For Advantage, the existing basic preference requires that
each Series A Shareholder receive an amount equal to the original purchase price
for Advantage Common Stock before the Advisor is entitled to receive a return of
its investment in the Series B Shares. In order to track the existing basic
share preferences, each Target Price has been set so that upon exercise, the
market value of the Company Common Stock held by the original Series A
Shareholders of each Fund would then be equivalent to the original purchase
price for the Common Stock of such Fund plus, in the case of FREIF, their 6%
annual, cumulative, non-compounded preferred return accrued through December 31,
1995. The Target Price for each Fund has been set as if the exercise of the
Series B Exchange Right would dilute the market value of the Company Common
Stock, even though the exercise will not have a dilutive effect on the
outstanding Company's Common Stock and is not expected to have any impact on the
market value of the Company Common Stock.
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<PAGE> 44
The following table shows the number of shares of Common Stock to be issued
upon exercise of the Series B Exchange Right:
<TABLE>
<CAPTION>
SERIES B SHARES OF
COMPANY ISSUED IN PERCENTAGE OF
THE MERGER IN OUTSTANDING SHARE OF
EXCHANGE FOR SHARES OF COMPANY COMPANY COMMON
SERIES B SHARES OF: TARGET PRICE(1) COMMON STOCK(2) STOCK(3)
- ------------------- --------------- ----------------- ---------------------
<S> <C> <C> <C>
FREIF $ 11.33 287,498 1.97%
Advantage 8.42 149,088 1.02
</TABLE>
- ---------------
(1) The Target Price reflects an adjustment for the dilution to Series A
Shareholders of the Company when the Series B Exchange Right is exercised.
(2) Number of shares for each Fund equals number of Series B Shares currently
outstanding multiplied by the applicable Conversion Factor, and in the case
of FREIF, less a downward adjustment to reflect the accrued and unpaid 6%
preferred return to FREIF Series A Shareholders at December 31, 1995.
(3) Based on 14,143,128 shares of Company Common Stock outstanding immediately
following the Merger assuming that the Merger is approved by all
Shareholders and exercise of the Series B Exchange Right.
Generally, each Series B Share of the Company will be exchangeable for one
share of Company Common Stock. No fractional shares will be issued upon exercise
of the Series B Exchange Right but instead will be rounded up to the nearest
whole share. The rates of exchange and the Target Prices will be subject to
adjustment in the manner provided in the Series B Exchange Right for certain
events, including the payment of certain stock dividends, the issuance of
certain rights or warrants to all holders of the Company Common Stock entitling
them to subscribe for or purchase Company Common Stock at a price less than the
current market price thereof, and the distribution by the Company to all holders
of its Common Stock of evidences of indebtedness or assets of the Company (other
than normal cash dividends). The Target Prices will be reduced if the Company
pays dividends from cash generated by sales or financing. The Company's board of
directors will determine when the dividends have been paid from a source that
requires a reduction in the Target Prices.
FAIRNESS OF THE MERGER
General
The Advisor, the Company and the Funds believe that the terms of the Merger
are fair to the Series A Shareholders of the Company and each Fund. As a result
of the proposed Merger of FREIF and Advantage into the Company, the Company
would become a larger infinite life REIT, which the Advisor, the Company and the
Funds believe should enhance the Company's attractiveness in the capital markets
and to investors generally. The Company believes that it should have improved
opportunities for capital growth and greater flexibility to redeploy assets so
as to take advantage of market cycles and buying opportunities which, in turn,
could lead to increased value for Company Series A Shareholders.
The terms of the Merger were reviewed by independent committees for the
Company and each of the Funds. These committees were formed to review the
Merger, and to make recommendations to the boards of directors of the Company
and the Funds as to what would be in the best interests of their respective
Series A Shareholders. The members of the independent committees were the
independent directors of the Company and each Fund, and they constitute a
majority of the board of directors of each. Relying in part upon Bear Stearns'
fairness opinion regarding the Merger, the independent committees reached the
conclusion that the Merger was fair to the Series A Shareholders of the Company
and each Fund. In reaching the opinions and beliefs expressed below, the boards
of directors have in turn relied in part upon the conclusions of the independent
committees, the fairness opinion of Bear Stearns and advice from the Advisor.
Analysis of the Independent Committees
The independent committees held a series of meetings and received advice
and information from the Advisor and counsel to the committees for the Company
and the Funds. The committees also received an opinion from Bear Stearns that
the Merger is fair, from a financial point of view, to the Series A Shareholders
30
<PAGE> 45
of the Company and each Fund. See "-- Fairness Opinion." During those meetings,
the independent committees considered whether, and ultimately concluded that the
Merger was in the best interest of the Series A Shareholders of the Company and
each Fund. In connection with those meetings, the committees considered the
following factors. First, they considered the alternative of not entering into
the Merger and continuing the Company and the Funds as separate REITs. After
such consideration, the committees determined that they concurred with the
Advisor's analysis of this alternative as described under "-- Analysis of
Alternative to the Merger" and determined that this analysis supported the
committees' fairness conclusion. The committees did not consider liquidation as
an alternative to the Merger, because the sale of the Funds' properties was not
appropriate at this time. This conclusion was based on conditions in the real
estate and financial markets and the likelihood that current liquidation would
not allow the Funds to achieve the long term investment potential for the
property portfolios. The committees' conclusion about liquidation was also based
on their review of the Advisor's internal estimates of the current value of the
Funds' properties, the committees' members' own knowledge of the real estate and
financial markets, and on advice from the Advisor.
The committees also reviewed the FREIF and Advantage Conversion Factors and
the methodology employed in connection therewith with the Advisor and with Bear
Stearns.
The independent committees considered, in reaching their conclusion, the
proposed changes of the Advisor's compensation with respect to the Funds. The
independent committees compared the compensation received by the Advisor from
the Company with the compensation currently received by the Advisor from the
Funds. They reviewed an analysis prepared by the Advisor of advisory fees paid
by the Company compared to advisory fees paid by other comparable REITs. The
committees also considered the fact that Bear Stearns reviewed the fee structure
in connection with its fairness opinion, as described under "-- Fairness
Opinion." The committees believed that the structure of the compensation paid
the Advisor by the Company supported the conclusion that the Merger is fair to
the Series A Shareholders of the Funds.
The independent committees considered and relied on Bear Stearns' fairness
opinion, as such opinion and related analysis are described under "-- Fairness
Opinion." The committees concluded that Bear Stearns' opinion supported their
fairness conclusion. After considering these factors, the independent committees
determined to recommend that the Merger, in its final form, be approved by the
Series A Shareholders of the Company and the Funds.
Fairness Analysis of the Company, the Funds and the Advisor
Set forth below is the Company, the Funds and the Advisor's analysis of the
fairness of the Merger to the Company and the Funds and among the Company and
the Funds. As described in more detail below, the Company, the Funds and the
Advisor considered the following factors in analyzing the fairness of the
Merger: (i) the relative likely differences between the aggregate market
capitalization of the Company's and the Funds' market capitalization, (ii) the
merger of the Funds into an infinite life REIT and the associated consequences,
(iii) the compensation paid the Advisor under the Company's compensation
structure, (iv) the safeguards provided by the procedures associated with the
Merger, (v) the rights offered to dissenters, (vi) the methodology used to
arrive at the FREIF and Advantage Conversion Factors, (vii) the similarity among
the Company's and the Funds' business plans and operating, investment and
borrowing policies, (viii) the alternative to the Merger of continuing the Funds
as separate finite life REITs, and (ix) the recommendation of the independent
committees. For a more complete discussion of these factors, see the following
cross-references "-- Background of the Merger," "-- Fairness to the Company and
the Funds," and "-- Fairness Among the Company and the Funds."
Fairness to the Company and the Funds
For the reasons described under "-- Background of the Merger" and to
maximize the trading price for shares, the Advisor and the Funds believe that
the Funds should merge into the Company, which is a larger, infinite life REIT,
and is in a better position to implement a growth-oriented business strategy,
increase Shareholder value and thereby attract the investor interest necessary
for an active trading market.
31
<PAGE> 46
In reaching the conclusion that the Merger is fair, the Advisor and the
boards of directors of the Funds considered the fact that Series A Shareholders
will not receive a return of capital from the Funds upon their liquidation at
some time in the future. The Advisor and the Funds believe that the objective of
receiving net liquidation proceeds from finite life entities is outweighed by
the Company's potential for profitable growth and its greater flexibility with
respect to its investment portfolio because it is an infinite life REIT. The
Funds originally intended to invest in a limited number of properties and to
liquidate at some time in the future. The Company, on the other hand, will have
the opportunity to invest in additional properties (subject to available funds),
operates for an indefinite period of time, and has the flexibility to determine
the appropriate time for acquisition or disposition of properties. Currently,
the estimated net asset value per share is greater than the market price per
share of the Company and each Fund, and the Advisor believes this situation is
likely to be the case immediately after the Merger. However, the Advisor
believes the current spread between estimated net asset value per share and
market value per share is insignificant because if the Merger is consummated and
the Company's growth strategy is successful, the Company's market value per
share will increase at a greater rate than net asset value per share. The
Advisor and the Funds believe that this change to an infinite life policy is
fair to Fund Series A Shareholders, because of the benefits accompanying such
change, as described in this paragraph, and because the Company Series A
Shareholders may choose the time at which to liquidate their investment by
selling their stock on the AMEX.
While the Merger will allow the Advisor, if retained by the Company, to
receive fees over an indefinite period of time, the compensation payable to the
Advisor by the Company differs from that paid by the Funds and certain fees
payable to the Advisor in respect of the Funds' properties will be eliminated.
The Funds and the Advisor believe that the changes from the compensation
structure paid by the Funds will benefit Fund Series A Shareholders, because the
fees to be paid to the Advisor over time in respect of real property now held by
the Funds are reduced for the Series A Shareholders of the Funds.
In reaching their conclusion that the Merger is fair among the Company and
the Funds, and to the Company and the Funds, the Advisor and the boards
considered the extent to which the Company's investment and borrowing policies
differ from the Funds. The Company, the Funds and the Advisor believe that the
principal difference between the Company and the Funds' investment and borrowing
policies is primarily a result of the difference between a finite and an
infinite life REIT. See "Comparative Information."
The Advisor, the Company and the Funds believe that the Merger is fair from
a procedural standpoint for the following reasons. First, the Merger is required
to be approved by a majority of the Company's and each Fund's outstanding common
shares. Second, a condition to the Merger is the receipt of a favorable fairness
opinion of Bear Stearns, the investment banker selected by the committees of the
Company's and the Funds' independent directors. Third, three committees, each
composed of all of the Company's and each Fund's independent directors, examined
the terms of the Merger and unanimously recommend that the Series A Shareholders
of the Company and each Fund vote "FOR" the Merger. The committees selected
their own common counsel and retained Bear Stearns to assist them in evaluating
the fairness of the transaction. Fourth, Company and Fund Shareholders will have
the opportunity to exercise Dissenter's Rights.
The Advisor, the Company and the Funds believe that the Merger is fair to
dissenters because each dissenter will be given the right to receive the "fair
market value" of his or her shares in the Company or each Fund upon compliance
with certain provisions of the California General Corporation Law. Fair market
value is expected to be the price of the shares as reported on the AMEX
composite tape on the trading day prior to the announcement of the Merger.
However, the Merger may not be consummated if Shareholders of 5% or more of the
aggregate outstanding common stock of the Company or the Funds exercise
Dissenter's Rights, at the election of their respective boards.
Fairness Among the Company and the Funds
While the Company, the Funds and the Advisor believe the Merger is fair to
the Series A Shareholders, certain differences in the structure and investments
of the Company and each Fund raise issues specific to the Company and each Fund.
32
<PAGE> 47
The Company currently has no debt. FREIF's real property is subject to a
loan with an outstanding balance of approximately $1,959,000, and Advantage's
real property is subject to encumbrances totalling approximately $5,285,000.
Advantage's encumbrances consist of a first and second loan totalling
approximately $2,815,000, and the remainder represents local improvement bonds.
After the Merger, assuming Shareholders of both Funds approve it, the Company
will be obligated for this debt. The percentage of the Company's debt to total
assets will be approximately 6.2%. For the risks associated with leverage, see
"Investment Considerations." The Company, the Funds and the Advisor do not
believe this consideration alters their conclusion that the Merger is fair to
Series A Shareholders of the Company and the Funds.
Through the Merger, the Company, FREIF and Advantage Shareholders will be
acquiring interests in properties currently owned by the others which have
significantly different lease expiration schedules. See "-- Potential Benefits
of the Merger." Therefore, the potential volatility of the cash flows provided
by each property is different. For example, by the end of 1999, 22 leases are
scheduled to expire in the Company, 44 in FREIF, and two in Advantage. These
leases represent 43%, 75%, and 46% of annual base rental income, respectively.
The financial strength of the tenants in the properties of the Company and
each Fund differs as well. For example, the two largest tenants in Advantage are
well known insurance companies, whose leases represent 62% of Advantage's annual
base rental income. The Company's two largest tenants are a nationally known
computer manufacturer and a local credit union, representing about 47% of its
rental income. FREIF's two largest tenants are regional grocery stores
representing 23% of its rental income.
None of the advisory fee payable by the Company is subordinated to
dividends paid to Series A Shareholders. All of the advisory fee payable by
FREIF is subordinated. As a result, FREIF has never paid any advisory fees.
FREIF and the Advisor believe that, subject to certain assumptions, over the
next five years, the amount of compensation to be paid to the Advisor by the
Company under the Advisory Agreement in respect of real property now held by
FREIF should be substantially equivalent to the fees that would have been paid
by FREIF in the absence of the Merger. This result primarily derives from the
elimination of disposition fees that FREIF would have to pay under the current
advisory fee structure. See "Comparative Information -- Comparison of Fees in
the Future."
As part of their determination of the appropriate Conversion Factors, the
Advisor evaluated the potential effects on distributable cash flow of lease
turnover, tenant defaults, and the advisory fee structure of the Company and the
Funds. The Conversion Factors are based on share prices. The Advisor believes
that the share prices of the Company, FREIF and Advantage indirectly reflect
differences in the potential volatility of cash flows, the possibility of tenant
defaults, and the different advisory fee structures which impact dividends
(yield). As noted above, the Company, the Funds and the Advisor believe that the
other issues relevant to the Company or a particular Fund will not adversely
affect the Company, such Fund or its Series A Shareholders. For these reasons,
the Company, the Funds and the Advisor believe that the Merger is fair to their
Series A Shareholders.
The Advisor, the Company and the Funds believe that the Merger is fair to
the Company and each Fund from a procedural point of view for the reasons
discussed above under "-- Fairness to the Company and the Funds."
Fairness Opinion
In connection with the Merger, Bear Stearns has rendered an opinion
relating to the fairness of the Merger, from a financial point of view, to the
Company, FREIF and Advantage Series A Shareholders. Committees comprised of all
the independent directors of each Fund decided to retain Bear Stearns on the
basis of its experience in rendering fairness opinions.
On November 2, 1995, Bear Stearns rendered its oral opinion to the
independent committees of the boards of directors of the Company and each Fund
for their use in determining the fairness of the Merger to the Company and the
Fund Series A Shareholders, which opinion was updated and confirmed in writing
on January , 1996 (the "Fairness Opinion"). Based upon and subject to the
matters discussed in the Fairness
33
<PAGE> 48
Opinion, Bear Stearns is of the opinion that the Merger is fair, from a
financial point of view, to the Series A Shareholders of the Company and each
Fund. The Fairness Opinion is set forth in full in Appendix B and should be read
in its entirety for information with respect to the assumptions made, the
matters considered and the scope of the review undertaken by Bear Stearns in
rendering such opinion and the limitations of such opinion. Any description of
the Fairness Opinion is subject to, and qualified in its entirety by reference
to, the full text of such opinion as set forth in Appendix B.
Bear Stearns is an international investment banking firm engaged in a
variety of investment banking activities including mergers and acquisitions,
underwritings, private placements and rendering of fairness opinions. Bear
Stearns rendered a fairness opinion in 1993 in connection with the proposed
merger of the Company and the Funds into Franklin Realty Trust, Inc. See
"-- Background of the Merger." Other than rendering the 1993 fairness opinion,
Bear Stearns and its Affiliates have no other pre-existing relationship with the
Advisor or any of its Affiliates, and have not participated in the offering of
any securities program sponsored by the Advisor or any of its Affiliates, other
than acting as a broker in selling shares of certain mutual funds managed by
Affiliates of the Advisor and acting as a broker for the purchase and sale of
securities in the ordinary course of business for Affiliates of the Advisor. In
the course of rendering such services to Affiliates of the Advisor, Bear Stearns
has received, and expects it will continue to receive, commissions from
Affiliates of the Advisor, as are customary for the performance of such
services.
In requesting the opinion from Bear Stearns, the Advisor and the
independent committees of the Company and the Funds did not impose any
instructions or limitations upon the scope of Bear Stearns' investigation. The
Fairness Opinion only addresses the fairness of the Merger from a financial
point of view to the Series A Shareholders of the Company and each Fund. No
opinion was requested or given with respect to the fairness of the Merger from
any other point of view, the fairness of the Merger to the Series B Shareholder,
or the fairness of any other combination other than the Merger. Additionally,
pursuant to its engagement, Bear Stearns was not requested to and did not
consider alternative structures for, or transactions to, the Merger.
In arriving at its opinion Bear Stearns (i) reviewed this Joint Proxy
Statement/Prospectus; (ii) reviewed the Company's and each Fund's annual reports
on Form 10-K and annual reports to Shareholders for the years ended December 31,
1992 through 1994, and the Company's and each Fund's quarterly reports on Form
10-Q for the periods ended March 31, 1995 and June 30, 1995; (iii) reviewed
certain unaudited financial statements and certain projections for the Company
and each Fund prepared by the Advisor, (iv) met with the management of the
Advisor, the Company and each Fund to review operations, historical and
projected financial statements and future prospects; (v) visited properties held
by the Company and the Funds; (vi) reviewed the historical prices and trading
volumes of the Common Stock of the Company, FREIF and Advantage; and (vii)
conducted such other studies, analyses, inquiries and investigations that Bear
Stearns deemed appropriate.
In arriving at the Fairness Opinion presented to the independent directors
on November 2, 1995, Bear Stearns reviewed the proposed Conversion Factors,
current and prospective dividends of the Company and the Funds, property net
asset values ("NAV") of the Company and the Funds, and discounted cash flows
("DCF") of the Company and the Funds.
Bear Stearns reviewed the historical closing prices of the Company and the
Funds and the means and medians for the 25 and 20 day periods ended November 1,
1995. It observed that the median closing prices were the same for either period
and that the arithmetic means differed by less than 1%. It advised the
independent directors that the selection of the 25-day median of the closing
prices as the basis for determining the Conversion Factors was reasonable.
Bear Stearns pointed out that based on current quarterly dividend rates for
the Company and the Funds, Advantage would be paying out a higher percentage of
its fund cash flow than the Company and FREIF, and that the Company was paying
out a higher percentage of its fund cash flow than FREIF. It also noted that if
the Company maintained its quarterly dividend rate, the dividend payment to
Advantage Series A Shareholders would be reduced 7.4% by the Merger, and that
the quarterly dividend payment to FREIF Series A Shareholders would be increased
by 13.1%.
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<PAGE> 49
Bear Stearns reviewed the NAV of the Company and the Funds, based on its
review of the Advisor's valuation of each of the properties as adjusted by Bear
Stearns, and on the other assets and liabilities of the Company and the Funds as
of June 30, 1995. With respect to Advantage, calculations were made assuming (i)
that the large insurance company tenant renewed its lease on market terms; (ii)
that it did not renew, and (iii) that there was a 50% probability that it would
renew. It compared the portion of the combined Company to which the Series A
Shareholders of the Company and the Funds would have been entitled to if the
allocation had been based on Bear Stearns' calculation of NAV, and compared
those figures with the proposed Conversion Factors. It also compared the number
of shares to which the Series A Shareholders of the Funds would have been
entitled to if the allocation had been based on Bear Stearns' calculation of
NAV, and compared those figures with the proposed Conversion Factors. The data
is presented in the table below.
PROPOSED EXCHANGE RATIOS
<TABLE>
<CAPTION>
FREIF ADVANTAGE COMPANY
------ --------- -------
<S> <C> <C> <C>
% of Shares............... 36.36% 25.57% 38.07%
Conversion Factor......... 1.286 1.200 1.000
</TABLE>
ASSUMING INSURANCE COMPANY TENANT RENEWS
<TABLE>
<CAPTION>
FREIF ADVANTAGE COMPANY
------ --------- -------
<S> <C> <C> <C>
% of NAV.................. 36.29% 26.70% 37.01%
Difference................ 0.07% -1.13% 1.06%
% Difference.............. 0.19% -4.42% 2.79%
Conversion Factor......... 1.320 1.289 1.000
Difference................ -0.034 -.089 NA
% Difference.............. -2.67% 7.42% NA
</TABLE>
ASSUMING INSURANCE COMPANY TENANT VACATES
<TABLE>
<CAPTION>
FREIF ADVANTAGE COMPANY
------ --------- -------
<S> <C> <C> <C>
% of NAV.................. 37.30% 24.66% 38.04%
Difference................ -0.94% 0.91% 0.03%
% Difference.............. -2.59% 3.57% 0.08%
Conversion Factor......... 1.320 1.158 1.000
Difference................ -0.034 0.042 NA
% Difference.............. -2.67% 3.49% NA
</TABLE>
ASSUMING 50% LIKELIHOOD THAT INSURANCE COMPANY TENANT RENEWS
<TABLE>
<CAPTION>
FREIF ADVANTAGE COMPANY
------ --------- -------
<S> <C> <C> <C>
% of NAV.................. 36.79% 25.70% 33.75%
Difference................ -0.43% 0.12% 0.55%
% Difference.............. -1.18% 0.48% 1.45%
Conversion Factor......... 1.320 1.224 1.000
Difference................ -0.034 -0.024 NA
% Difference.............. -2.67% -1.96% NA
</TABLE>
Bear Stearns reviewed the DCF value of the Company and the Funds, based on
cash flow as forecast by the Advisor and on the other assets and liabilities of
the Company and the Funds as of June 30, 1995. Bear Stearns used a 12% discount
rate, which it considered appropriate. With respect to Advantage, calculations
were made assuming (i) that the large insurance company tenant renewed its lease
on market terms; (ii) that it did not renew, and (iii) that there was a 50%
probability that it would renew. It compared the portion of the combined Company
to which the Series A Shareholders of the Company and the Funds would have been
entitled to if the allocation had been based on Bear Stearns' calculation of DCF
value, and compared those
35
<PAGE> 50
figures with the proposed Conversion Factors. It also compared the number of
shares to which the Series A Shareholders of the Funds would have been entitled
to if the allocation had been based on Bear Stearns' calculation of DCF value,
and compared those figures with the proposed exchange ratios. The data is
presented in the table below.
PROPOSED EXCHANGE RATIOS
<TABLE>
<CAPTION>
FREIF ADVANTAGE COMPANY
------ --------- -------
<S> <C> <C> <C>
% of Shares............... 36.36% 25.57% 38.07%
Conversion Factor......... 1.286 1.200 1.000
</TABLE>
ASSUMING INSURANCE COMPANY TENANT RENEWS
<TABLE>
<CAPTION>
FREIF ADVANTAGE COMPANY
------ --------- -------
<S> <C> <C> <C>
% of DCF Value............ 37.39% 28.01% 36.60%
Difference................ -1.03% -0.44% 1.47%
% Difference.............. 2.84% -1.70% 3.86%
Conversion Factor......... 1.375 1.269 1.000
Difference................ 0.090 -0.069 NA
% Difference.............. -6.97% -5.78% NA
</TABLE>
ASSUMING INSURANCE COMPANY TENANT VACATES
<TABLE>
<CAPTION>
FREIF ADVANTAGE COMPANY
------ --------- -------
<S> <C> <C> <C>
% of DCF Value............ 37.99% 24.84% 37.18%
Difference................ -1.62% 0.74% 0.89%
% Difference.............. -4.47% 2.88% 2.33%
Conversion Factor......... 1.375 1.193 1.000
Difference................ 0.090 0.007 NA
% Difference.............. -6.97% 0.55% NA
</TABLE>
ASSUMING 50% LIKELIHOOD THAT INSURANCE COMPANY TENANT RENEWS
<TABLE>
<CAPTION>
FREIF ADVANTAGE COMPANY
------ --------- -------
<S> <C> <C> <C>
% of DCF Value............ 37.59% 25.43% 36.89%
Difference................ -1.33% 0.15% 1.18%
% Difference.............. -3.65% 0.57% 3.10%
Conversion Factor......... 1.375 1.231 1.000
Difference................ 0.090 -0.089 NA
% Difference.............. -6.97% -2.61% NA
</TABLE>
Bear Stearns noted that based on the statistics set forth above, FREIF was
receiving a slightly smaller share of the combined Company than it would have
received had the Conversion Factors been based on NAV or DCF value, while the
Company was in the inverse position. However, Bear Stearns pointed out to the
independent directors that (i) FREIF was receiving a materially higher share of
the dividends of the combined Company; (ii) the Company was an infinite life
REIT; and (iii) the Company had liquid assets available for investment. Based on
its review of all the data it reviewed with the independent directors. Bear
Stearns concluded that the Merger was fair, from a financial point of view, to
the Series A Shareholders of the Company and both of the Funds.
Bear Stearns also discussed with the independent directors the proposed fee
structure for the combined Company. It compared the fees paid by selected
externally managed REITs with the fees to be paid by the combined Company. It
also noted that FREIF was not currently paying such fees due to subordination,
but that the Advisor was giving up future acquisition and disposition fees with
respect to the Funds. It advised the
36
<PAGE> 51
independent directors of the Funds that the fee structure did not affect Bear
Stearn's conclusion that the Merger was fair, from a financial point of view, to
the Series A Shareholders of the Funds.
In addition, Bear Stearns reviewed certain other terms of the Merger. With
respect to the Series B Exchange Right to be issued Advisor in respect of the
Series B Shares of the Company received in the Merger in exchange for the Series
B Shares of each Fund, Bear Stearns' analysis indicated that the issuance of
such Exchange Right represents a reasonable and consistently applied mechanism
for the Advisor to retain an economic interest in the Company that is similar to
its existing interest in the Series B Shares of each of the Funds. See
"-- Series B Exchange Right." Bear Stearns' analysis indicated that each of this
aspect of the Merger was consistent with its opinion that the Merger is fair,
from a financial point of view.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description.
Notwithstanding the separate analyses and factors summarized above, Bear Stearns
believes that its entire analysis must be considered as a whole and that
selecting portions of its analyses and the factors considered by it, without
considering all analyses and factors, could create an incomplete view of the
evaluation process underlying its opinion.
In its analysis, Bear Stearns made certain assumptions. Bear Stearns
assumed the accuracy and completeness of financial and other information
provided or otherwise made available to it by the Advisor. With respect to the
Company's, FREIF's and Advantage's projected financial results, Bear Stearns
assumed that they were reasonably prepared on bases reflecting the best
currently available estimates and judgments of the managements of the Advisor,
the Company, FREIF and Advantage as to the expected future performance of the
Company, FREIF and Advantage, respectively. Bear Stearns did not assume any
responsibility for the information or projections provided to them. Bear Stearns
relied upon the assurances of the managements of the Advisor, the Company and
Advantage that they are unaware of any of the facts that would make the
information or projections provided to Bear Stearns incomplete or misleading. In
arriving at the Fairness Opinion, Bear Stearns did not perform or obtain any
independent appraisal of the assets of the Company, FREIF and Advantage. The
Fairness Opinion is necessarily based on economic, market and other conditions,
and the information made available to Bear Stearns as of the date of the
Fairness Opinion.
The Fairness Opinion is dated as of January , 1996 and addresses the
transactions to which it relates in the context of the information available on
that date. Events occurring after that date and before the closing date may
materially affect the assumptions used in preparing the Fairness Opinion.
Prior to rendering its Fairness Opinion, Bear Stearns met various times
with the independent committees of the boards of directors of the Company and
each Fund on the status of its review of the Merger. Bear Stearns engaged in
discussions with the independent committees of various matters, including, among
other things, Conversion Factors, exchange values, adjustments to the exchange
values, the proposed fee structure and the treatment of the Series B Shares of
the Funds. On November 2, 1995, Bear Stearns orally reported to the independent
committees of the boards of directors of the Company and each Fund its
preliminary view, subject to consideration by Bear Stearns' Valuation Committee,
that the Merger, as proposed on that date, was fair, from a financial point of
view, to the Company, FREIF and Advantage Series A Shareholders.
For rendering the Fairness Opinion, Bear Stearns will be paid a fee of
$250,000, of which $100,000 was paid at the time its engagement letter was
executed, and $150,000 was payable when the opinion was delivered. The
independent committees of directors, together with their independent counsel,
and Bear Stearns negotiated the amount of Bear Stearns' fee. The payment of such
fee does not depend on whether such opinion was favorable or unfavorable. Bear
Stearns will also receive reimbursement for its reasonable expenses in
connection with the Fairness Opinion, subject to a cap of $20,000. The Funds,
the Advisor and the Company have agreed to indemnify Bear Stearns against
certain liabilities arising out of its engagement to render the Fairness
Opinion. Bear Stearns will receive no other fees or compensation from the
Company, the Funds, the Advisor or any of their Affiliates in connection with
the Merger, and no amounts paid to Bear Stearns were contingent upon the
consummation of the Merger.
The independent committees also interviewed Robert Stanger & Company and
Houlihan Lokey Howard & Zukin Inc. about rendering fairness opinions. The
committees concluded that Bear Stearns, Robert Stanger
37
<PAGE> 52
& Company and Houlihan Lokey Howard & Zukin Inc. were highly qualified, but that
Bear Stearns should be chosen because of its perceived strengths in the fairness
area, its prior work with the independent committees, and its knowledge of
similar transactions. Robert Stanger & Company and Houlihan Lokey Howard & Zukin
Inc. were not engaged, and did not undertake any detailed analysis of the
Merger. No views were expressed, preliminary or otherwise, on the Merger by
Robert Stanger & Company and Houlihan Lokey Howard & Zukin Inc.
VOTING PROCEDURE
SPECIAL MEETINGS OF THE COMPANY AND THE FUNDS
Special Meetings of the Shareholders of the Company and each Fund will be
held at their principal executive offices, located at 777 Mariners Island
Boulevard, San Mateo, California 94403-7777 at 10:00 a.m. Pacific Standard Time
on , 1996 (or any adjournment thereon) to consider and vote on the
Merger and certain related matters. All unrevoked proxies received by the
Company or the Funds prior to the Special Meetings will be voted.
VOTE REQUIRED
The Merger is subject to the condition, among others, that the Company and
each Fund must approve it by the affirmative vote of shareholders as of the
Record Date holding at least a majority of the outstanding Common Stock and
Series B Shares of the Company or each Fund voting together, respectively.
Presence, in person or by proxy, of a majority of the shares of Company Common
Stock, FREIF Common Stock or Advantage Common Stock, respectively, together with
the Series B Shares of each of the Company, FREIF and Advantage, respectively,
counted together as a single class, constitute a quorum.
VOTING PROCEDURE
Holders of Common Stock and Series B Shares of the Company, FREIF and
Advantage of record as of the Record Date will be entitled to have notice of and
vote on the Merger. As of the Record Date, the Company had 5,383,297 shares of
Common Stock and 185,866 Series B Shares outstanding, FREIF had 3,999,514 shares
of Common Stock and 319,308 Series B Shares outstanding, and Advantage had
3,013,713 shares of Common Stock and 124,240 Series B Shares outstanding. All of
the Series B Shares of the Company and the Funds are owned by the Advisor. The
Advisor intends to vote its Series B Shares for the Merger.
Each Company, FREIF or Advantage Series A Shareholder or Series B
Shareholder may grant proxies to vote the shares held by him or her as of the
Record Date. To grant a proxy, such Shareholder must complete the proxy card
accompanying this Joint Proxy Statement/Prospectus. The persons named in such
proxy card will vote as instructed by each Shareholder with respect to the
Merger and will have authority, as a result of holding such proxy, to vote in
their discretion as to procedural matters relating to the Special Meetings
including, without limitation, the adjournment of the Special Meetings from time
to time.
To vote on the Merger, each Shareholder must check a box on the front of
the proxy card, and must either vote "for," "against," or "abstain" as to the
entire Merger with respect to all the shares he or she owns in that Fund or the
Company. If a Shareholder has shares in one or both of the Funds and/or the
Company,
he or she can vote such shares in each Fund or the Company differently from the
shares in the other Fund or the Company. (Separate proxy cards have been
included for the Company and each Fund.) The failure to return a signed proxy or
returning it with an "abstain" vote has the effect of, and is equivalent to, a
vote "against" the Merger. A signed proxy which is returned without a vote will
be voted in favor of the Merger.
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<PAGE> 53
Each Shareholder is asked to complete and execute the enclosed proxy card
in accordance with the instructions contained therein. For his or her proxy to
be effective, each Shareholder must deliver his or her proxy card at any time
prior to the Special Meetings (or any adjournment thereof) as follows:
For Company Shareholders:
Franklin Select Real Estate Income Fund
777 Mariners Island Boulevard
San Mateo, CA 94403-7777
For FREIF Shareholders:
Franklin Real Estate Income Fund
777 Mariners Island Boulevard
San Mateo, CA 94403-7777
For Advantage Shareholders:
Franklin Advantage Real Estate Income Fund
777 Mariners Island Boulevard
San Mateo, CA 94403-7777
Any proxy may be withdrawn or changed at any time prior to the date of the
Special Meetings by obtaining, completing, executing and returning an additional
proxy card indicating the changed vote. Any such withdrawal will be effective
when the Company or the applicable Fund receives a signed proxy card with a
later date. A Shareholder may also revoke his or her proxy by appearing and
voting at the Special Meeting of the Company, the Fund or Funds in which he or
she owns shares.
If a Shareholder has any questions or wishes to obtain copies of any
document mentioned in this Joint Proxy Statement/Prospectus, he or she should
send a written request to the Advisor at P.O. Box 7777, San Mateo, California
94403-7777. A copy of any such document will be provided free of charge.
A self-addressed, stamped envelope has been included with this Joint Proxy
Statement/Prospectus. Proxies should be mailed, not delivered, to the Company
and the Funds.
CLOSING DATE OF THE MERGER
The closing date of the Merger will occur as soon as practicable following
the Special Meetings. Because of the waiting period associated with the exercise
of Dissenter's Rights, the Company anticipates that the closing date will occur
approximately 40 days after the Special Meetings. As soon as practicable
following the closing date, the Company will notify former FREIF and Advantage
Series A Shareholders of their ownership of the Company Common Stock. The
Company Common Stock will not be evidenced by certificates unless a Shareholder
requests otherwise.
SOLICITATION OF PROXIES
The Company and the Funds are soliciting proxies to vote at the Special
Meetings. The Company and the Funds will enter into an agreement with a proxy
solicitor to solicit proxies from Series A Shareholders.
RIGHT TO INSPECT AND COPY SHAREHOLDERS' LIST
Under Rule 14a-7 of the Securities Exchange Act of 1934, a shareholder of a
corporation has the right, at the shareholder's option, either (i) for the
corporation to mail (at the shareholder's expense) copies of any proxy
statement, proxy form, or other soliciting material furnished by the shareholder
to the corporation's record holders designated by the shareholder, or (ii) for
the corporation to deliver, within five business days of the receipt of the
request, (a) a reasonably current list of the names, addresses, and security
positions of the record holders of the corporation's common shares, or a more
limited group of record holders if available under the corporation's transfer
agent system; and (b) the most recent list of beneficial owners in the
corporation's possession. In general, California law provides all shareholders
of a corporation (or their
39
<PAGE> 54
authorized agents) with the right to inspect and copy that corporation's list of
shareholders' names and addresses at any time during usual business hours upon
written request for a purpose reasonably related to the shareholder's interest
in the corporation.
RIGHTS OF DISSENTING SHAREHOLDERS
Pursuant to Chapter 13 of the California General Corporation Law ("Chapter
13"), a Shareholder of the Company, FREIF or Advantage Common Stock may, in some
instances, be entitled to require the Company, FREIF or Advantage, respectively,
to purchase his or her shares for cash at their fair market value as of the day
before the first announcement of the terms of the Merger, excluding any
appreciation or depreciation in consequence of the Merger. The general terms of
the Merger were first announced on November 7, 1995. The following is a brief
summary of the procedures to be followed by a Company, FREIF or Advantage
Shareholder in order to perfect his or her right, if any, to payments under
Chapter 13 and is qualified in its entirety by reference to the text of Chapter
13 attached to this Joint Proxy Statement/Prospectus as Appendix C, to which
reference is hereby made for a definitive statement of the rights of dissenting
shareholders (the "Dissenting Shareholders") and the procedures to be followed.
Shares of the Company, FREIF or Advantage Common Stock will qualify as
Dissenting Shares only if demands for payment are filed with respect to 5% or
more of the outstanding shares of such Common Stock. This 5% or more requirement
is applicable because the Company, FREIF and Advantage Common Stock are listed
on the AMEX, a national securities exchange certified by the California
Commissioner of Corporations, as provided in Section 1300(b)(1) of Chapter 13.
However, under the terms of the Merger Agreement, the boards of directors of the
Company and the Funds may elect not to participate in the Merger if Shareholders
holding in the aggregate 5% or more of the outstanding common stock of the
Company or such Fund exercise Dissenter's Rights.
A Dissenting Shareholder who wishes to require the Company or the Funds to
purchase his or her shares of Common Stock must:
(1) vote against the Merger any or all of the shares of the Company,
FREIF or Advantage Common Stock entitled to be voted (shares of the
Company, FREIF or Advantage Common Stock not voted are not considered to be
voted against the Merger and will not be counted toward the 5% minimum for
Dissenters' Rights to exist); provided that if a Company, FREIF or
Advantage Shareholder votes part of the shares entitled to be voted in
favor of the Merger, and fails to specify the number of shares voted, it is
conclusively presumed under California law that such shareholder's
approving vote is with respect to all shares entitled to be voted;
(2) make written demand upon the Company or the Funds or their
transfer agent at the addresses listed below, which is received not later
than the date of the meeting of the Company, FREIF or Advantage
Shareholders, setting forth the number of shares of the Company, FREIF or
Advantage Common Stock demanded to be purchased by the Company or the Funds
and a statement as to claimed fair market value of such shares at November
6, 1995; and
(3) submit for endorsement, within thirty (30) days after the date on
which the notice of approval of the Merger by the Company, FREIF or
Advantage Shareholders described below is mailed to such shareholders, to
the Company or the Funds or their transfer agent at the addresses listed
below, the certificates representing any shares of the Company, FREIF or
Advantage Common Stock in regard to which demand for purchase is being
made, or to be exchanged for certificates of appropriate denominations so
endorsed, with a statement that the shares are Dissenting Shares.
The statement of fair market value in clause (2) above will constitute an
offer by the Dissenting Shareholder to sell his or her shares at a price equal
to such fair market value. Neither a vote against approval of the Merger nor the
giving of a proxy directing a negative vote will be sufficient to constitute the
demand described in clause (2) above. A proxy which fails to include
instructions with respect to approval of the Merger will be voted in favor of
the Merger. Accordingly, shares covered by such a proxy will not be
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<PAGE> 55
Dissenting Shares. In addition a vote in favor of the Merger, or a failure to
vote at all, will nullify any previously filed written demand for payment.
If the holders of 5% or more of the outstanding common stock of the
Company, FREIF or Advantage, respectively, have made demands for payment on or
prior to the date of the Company, FREIF or Advantage Shareholder Special
Meetings to approve the Merger, and have voted against the Merger at such
meetings unless the board of directors has elected not to participate in the
Merger because of such demands, within 10 days after the date of the approval of
the Merger, the Company, FREIF or Advantage, respectively, will mail to each
Dissenting Shareholder who holds the Company, FREIF or Advantage Common Stock a
notice of such approval together with a statement of the price determined by the
Company or the Funds to represent the fair market value of Dissenting Shares,
which is expected to be the share price as reported on the AMEX composite tape
on the trading day prior to the announcement of the Merger, a copy of certain
sections of Chapter 13, and a brief description of the procedure to be followed
if the Shareholder desires to exercise Dissenter's Rights. The statement of
price will constitute an offer by the Company or the Funds to purchase at the
price stated therein any Dissenting Shares.
If the Company, FREIF or Advantage, respectively, and the Dissenting
Shareholder agree that any shares of Company, FREIF or Advantage Common Stock,
respectively, are Dissenting Shares, and agree upon the price of such shares,
the Dissenting Shareholder will be entitled to the agreed price plus interest
thereon at the legal rate on judgments from the date of such agreement. Subject
to the provisions of the California General Corporation Law, payment of the fair
market value of the Dissenting Shares will be made within 30 days after such
agreement or within 30 days after any statutory or contractual conditions to the
Merger are satisfied, whichever is later. If the Company or the Funds deny that
the shares are Dissenting Shares or if the Company or the Funds and the
Dissenting Shareholder fail to agree upon the fair market value of the shares,
then the Dissenting Shareholder, within 6 months after the date on which notice
of approval of the Merger by the Shareholders of the Company, FREIF or Advantage
is mailed to such shareholder, and not thereafter, may file a complaint in the
Superior Court of San Mateo County, California, requiring the court to determine
whether the shares are Dissenting Shares, or the fair market value of the
Dissenting Shares, or both, or may intervene in any pending action for the
appraisal of any shares of the Company, FREIF or Advantage Common Stock. The
court will direct payments of the appraised value of such shares, together with
interest thereon at the legal rate on judgments from the date on which the
judgment was entered, by the Company, FREIF or Advantage to the Shareholder upon
the surrender of the certificates representing such shares to the Company, FREIF
or Advantage. The costs of the proceeding shall be apportioned as the court
considers equitable, but if the appraisal exceeds the price offered by the
Company, FREIF or Advantage, they shall pay the costs, and if the appraisal is
more than 125% of the price offered by the Company, FREIF or Advantage, they may
be required to pay attorneys' and other fees and interest at the legal rate on
judgments from the date the Dissenting Shareholder complied with Sections
1300-1302 of Chapter 13.
A Dissenting Shareholder may not withdraw demand for purchase of Dissenting
Shares without consent of the Company or the Funds. Written demands for payment
and submissions for endorsement with respect must be addressed to:
For Company Common Stock:
Franklin Select Real Estate Income Fund
777 Mariners Island Boulevard
San Mateo, California 94403-7777
Attention: Investor Services Department
For FREIF Common Stock:
Franklin Real Estate Income Fund
777 Mariners Island Boulevard
San Mateo, California 94403-7777
Attention: Investor Services Department
41
<PAGE> 56
For Advantage Common Stock:
Franklin Advantage Real Estate Income Fund
777 Mariners Island Boulevard
San Mateo, California 94403-7777
Attention: Investor Services Department
or to the transfer agent for the Company and each Fund, Chemical Trust Company
of California, 50 California Street, 10th Floor, San Francisco, California
94111.
Any reference to "Dissenting Shareholder" in this section means the
recordholder of Dissenting Shares and includes a transferee of record.
A Company, FREIF or Advantage Shareholder receiving cash upon the exercise
of Dissenter's Rights may recognize gain or loss for income tax purposes. See
"Income Tax Considerations -- Taxation of the Merger -- General."
Company, FREIF or Advantage Shareholders are entitled, upon written demand,
to inspect and copy the corporate records of Company, FREIF or Advantage
Shareholders at any time during usual business hours to communicate with other
Company, FREIF or Advantage Shareholders with respect to the Merger.
42
<PAGE> 57
COMPARATIVE INFORMATION
The following discussion sets forth certain attributes of the ownership of
the Company and the Funds, including comparative information about compensation
to the Advisor and tables showing historical and pro forma payment of fees.
<TABLE>
<S> <C>
OPERATING POLICIES
The Funds The Company
LIQUIDATION VS. PERPETUAL LIFE
Each Fund is self-liquidating, although The Company is a infinite life REIT which
each Fund's organizational documents do operates for an indefinite period of time
not require that the Funds terminate by and may raise new capital, giving it the
any particular date. The Funds anticipate potential for continued growth as new
holding their real properties for a investments are made. The Company may
limited period ranging from five to seven reinvest cash flow or sale or financing
years in the case of FREIF, and seven to proceeds in new properties, except to the
ten years in the case of Advantage, in extent such reinvestment would preclude
each case from the time the Fund acquired the Company from satisfying the REIT
its last property. Each Fund's prospectus distribution requirements. The Company
stated that the Fund would reinvest sale also is more likely than the Funds to
or financing proceeds in additional exercise its existing power to acquire
properties only during the first five properties in exchange for its securities.
years following the end of its initial The Company may raise new capital by a
public offering. variety of methods, including the issuance
of senior securities that would have
priority over Company Common Stock as to
distributions and liquidation proceeds.
THREE CONSEQUENCES OF THESE DIFFERENCES
ARE (I) COMPANY SERIES A SHAREHOLDERS DO
NOT RECEIVE PROCEEDS FROM THE LIQUIDATION
OF COMPANY PROPERTIES AND WILL BE REQUIRED
TO RELY ON THE SECURITIES MARKETS IN ORDER
TO LIQUIDATE THEIR INVESTMENT; (II) AN
IMMEDIATE SALE OF THE COMPANY COMMON STOCK
IS LIKELY TO PROVIDE LESS THAN AN
EQUIVALENT SHARE OF THE AMOUNT THAT MIGHT
BE REALIZED IF THE FUNDS COULD LIQUIDATE
NOW AND THIS SAME SITUATION MAY EXIST IN
THE FUTURE; AND (III) COMPANY SERIES A
SHAREHOLDERS' INTERESTS IN THE COMPANY CAN
BE DILUTED THROUGH THE FUTURE ISSUANCE OF
OTHER SECURITIES BY THE COMPANY.
</TABLE>
43
<PAGE> 58
<TABLE>
<S> <C>
The Fund The Company
PRINCIPAL INVESTMENT POLICIES
The principal investment policies of each The Company generally has the same
Fund are to protect the Fund's capital, investment policies as the Funds. However,
to provide for partially tax-sheltered the Company is an infinite-life REIT which
dividends, to provide capital gains may reinvest the net proceeds from the
through appreciation of real property, and disposition of properties, and may invest
to provide market liquidity through additional capital obtained through
transferable shares of stock. securities offerings, mortgage financing,
Each Fund has a policy of investing in or may issue its stock in exchange for
income-producing real estate projects, properties.
which may include multi-family residential The Company has the power to invest in the
complexes, office buildings, shopping same types of properties, mortgage loans
centers, research and development and mortgage securities as the Funds.
facilities, industrial parks, warehouses However, the Company may make investments
and, in certain circumstances, undeveloped that may involve more risk than the Funds'
land. FREIF may invest primarily, and current investment policy, including
Advantage may invest only, in California. investment in properties with no operating
Each Fund can also invest in mortgage history.
loans and mortgage securities (which THE PRINCIPAL DIFFERENCE BETWEEN THE
include mortgage loans, mortgage-backed COMPANY'S POLICIES AND THE FUNDS' POLICIES
securities, notes, bonds or other similar IS THAT THE COMPANY IS AN INFINITE LIFE
obligations that are secured by real REIT WHOSE PORTFOLIO OF PROPERTIES IS
estate), and has invested some of its CHANGED AND ADDED TO FROM TIME TO TIME AND
assets in mortgage-backed securities, WHICH IS EXPECTED TO GROW IN SIZE BY
pending investment in real property. Each EXCHANGING EQUITY FOR PROPERTY PORTFOLIOS,
Fund has a policy of buying only REINVESTING THE PROCEEDS FROM DISPOSITIONS
properties with some established operating OF PROPERTIES AND RAISING FUNDS IN THE
history. CAPITAL MARKETS FOR THE ACQUISITION OF
PROPERTIES.
BORROWING POLICIES
Each Fund has the policy that its The Company generally has a conservative
aggregate secured borrowings will not leverage policy of a debt to total assets
exceed 50% of the then fair market value ratio of no more than 50%.
of all of its properties; the amount
borrowed with respect to any individual
property may not exceed 80% of its fair
market value. Each Fund is also able to
borrow in an amount not to exceed 75% of
its gross assets.
</TABLE>
44
<PAGE> 59
COMPARISON OF FEES
The Company and each Fund retain the Advisor under advisory agreements to
provide executive, investment management and accounting services which would
otherwise be performed by salaried employees. The Company and each Fund believes
that the aggregate annual cost of these services under such advisory agreements
is less than the salary and benefits cost of hiring employees to provide the
same services. If the Shareholders of the Funds approve the Merger, the Funds
expect that advisory fees paid under the compensation structure of the Company
will be less over time in respect of the real property now owned by the Funds
than the fees paid by the Funds in their current compensation structure. The
advisory agreements of the Company and each Fund may be renewed annually only
with the approval of a majority of the independent directors of the Company and
each Fund, respectively. The fees payable under the current advisory agreements,
by the Company and by each Fund, are as follows.
<TABLE>
<S> <C>
The Funds The Company
ACQUISITION FEE
As an acquisition fee, each Fund pays the The Company does not pay the Advisor or
Advisor an amount which cannot exceed 6% its Affiliates an acquisition fee on the
of the purchase price of its real property purchase price of real property or
or of the amounts advanced in making mortgage loans. Acquisition or mortgage
mortgage loans (generally, mortgage loans, loan fees may be paid to unaffiliated
notes, bonds or similar obligations which parties and are not subject to a specific
are secured by interests in real estate) limit.
and which must include all fees,
commissions and acquisition expenses
relating to the property purchase,
including any third party brokerage
commissions. Currently, each Fund is fully
invested and does not anticipate paying
further acquisition fees to the Advisor.
DISPOSITION FEE
Each Fund pays the Advisor a disposition The Company does not pay any fee to the
fee of up to 3% of the gross sales price Advisor or its Affiliates in connection
of real property or mortgage loans (but with the disposition of any asset.
not mortgage securities) in return for
services rendered in the sale of a
property or mortgage loan. Any disposition
fee paid to the Advisor cannot exceed the
lesser of (i) one-half the total
commission paid, or (ii) 3% of the gross
sale price of the property.
</TABLE>
45
<PAGE> 60
<TABLE>
<S> <C>
The Funds The Company
ADVISORY FEE
Each Fund pays to the Advisor an As an annual advisory fee to the Advisor,
annualized fee of 1.0% of the market the Company pays .5% of its gross real
value of assets invested in real property; estate assets, which means the book value
however, FREIF has subordinated all, and before depreciation of such assets. The
Advantage has subordinated the payment of fee will be reduced to .4% for gross real
one-half, of this fee to certain dividend estate assets exceeding $200 million. The
levels. If the dividend levels are not book value before depreciation of the
met, the Advisor must return the lesser of Company's real estate assets is currently
(i) all of the fee, in the case of FREIF, greater than the Advisor's estimated
and one-half of the fee in the case of market value of those assets.
Advantage or (ii) the amount required to The Company does not pay any advisory fee
meet the required dividend level which is for investments in mortgage loans.
an 8% per annum dividend from operations PRINCIPAL DIFFERENCES BETWEEN THE
(non-cumulative, non-compounded). This COMPANY'S ADVISORY FEE ARRANGEMENT AND THE
dividend level is calculated on each FUNDS' ADVISORY FEE ARRANGEMENT ARE AS
Fund's "adjusted price per share," which FOLLOWS:
means the original purchase price of the - FIRST, THE ASSET BASE ON WHICH THE
Common Stock ($10) less dividends paid COMPANY'S BASE ADVISORY FEE IS CHARGED IS
from the proceeds of sales or financing. LARGER THAN THAT OF THE FUNDS SINCE THE
Each Fund pays an advisory fee of .4% of BASE IS THE BOOK VALUE BEFORE
the market value of assets invested in DEPRECIATION, RATHER THAN THE MARKET VALUE
mortgage loans (generally, mortgage loans, OF THE REAL ESTATE ASSETS. THE BOOK VALUE
notes, bonds or similar obligations which BEFORE DEPRECIATION OF THE COMPANY'S REAL
are secured by interests in real estate). ESTATE ASSETS IS CURRENTLY GREATER THAN
The Funds do not pay an advisory fee on THEIR CURRENT ESTIMATED MARKET VALUE.
uninvested cash. - SECOND, THE COMPANY DOES NOT PAY A FEE
FOR INVESTMENTS IN MORTGAGE LOANS OR
ACQUISITION OR DISPOSITION FEES TO THE
ADVISOR.
- THIRD, BECAUSE THE COMPANY'S ADVISORY
FEE IS BASED ON THE BOOK VALUE BEFORE
DEPRECIATION OF ITS REAL ESTATE ASSETS, AS
OPPOSED TO THE MARKET VALUE OF THOSE
ASSETS, A TEMPORARY DECLINE OR INCREASE IN
THE VALUE OF THE COMPANY'S REAL ESTATE
ASSETS DOES NOT CAUSE A CHANGE IN THE
ADVISORY FEE, UNLESS THE DECLINE OR
INCREASE RESULTS IN AN ADJUSTMENT TO BOOK
VALUE BEFORE DEPRECIATION.
</TABLE>
46
<PAGE> 61
<TABLE>
<S> <C>
The Fund The Company
REIMBURSEMENT OF EXPENSES
Each Fund pays all expenses of its The Company's reimbursement policy is the
operations and reimburses the Advisor same as the Funds, except that the Advisor
for expenses incurred on its behalf except does not pay the advertising and
for the following, which are expenses promotional expenses it incurs in seeking
borne by the Advisor: (i) employment and disposing of investments because the
expenses of each of the Chairman, Advisor does not receive an acquisition or
President, Executive Vice President and a disposition fee on an asset's purchase
Chief Financial Officer of each Fund, so or sale, against which such expenses could
long as they are also employed by the be offset.
Advisor, and expenses and compensation of
each Fund's directors who are also
officers of the Advisor, (ii) advertising
and promotional expenses incurred in
seeking and disposing of investments for
each Fund, (iii) office expenses of the
Advisor; and (iv) miscellaneous
administrative and other expenses of the
Advisor not related to the performance of
the duties and obligations assumed by it
in the advisory agreement.
COMPENSATION FROM SALES AND REFINANCINGS
FREIF is required to pay the Advisor, as The Company does not pay any fee to the
an incentive fee, 15% of the net Advisor or its Affiliates in connection
proceeds from sales or refinancing of its with the sale or refinancing of assets.
assets, but only after its Series A
Shareholders have received a return of
their capital plus a 6% cumulative, non-
compounded return on that capital.
</TABLE>
47
<PAGE> 62
SUMMARY COMPARISON OF COMPENSATION ARRANGEMENTS
The following illustrate the differences in the amounts paid as
compensation to the Advisor by the Funds prior to the Merger and after the
Merger, assuming that Shareholders of each Fund approve it:
HISTORICAL ADVISOR COMPENSATION (PER FORM 10K OR 10Q)
THREE YEAR COMPENSATION COMPARISON
1992 -- 1995
<TABLE>
<CAPTION>
SIX
YEAR ENDED DECEMBER 31, MONTHS
------------------------------------ ENDED
1992 1993 1994 JUNE 30, 1995 TOTAL
---------- -------- -------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Advisory Fees
FREIF........................ $ 0 $ 0 $ 0 $ 0 $ 0
Advantage.................... 0 86,000 116,000 68,000 270,000
Property Management Fees
FREIF........................ 167,000 168,000 192,000 185,000 712,000
Advantage.................... 156,000 197,000 237,000 104,000 694,000
Expense Reimbursements
FREIF........................ 55,000 58,000 56,000 24,000 193,000
Advantage.................... 24,000 25,000 19,000 13,000 81,000
Shareholder Services Fees
FREIF........................ 0 0 0 0 0
Advantage.................... 8,000 0 0 0 8,000
Acquisition Fees
FREIF........................ 0 0 250,000 0 250,000
Advantage.................... 1,073,000 0 480,000 0 1,553,000
---------- -------- -------- -------- ----------
TOTAL:
FREIF........................ $ 222,000 $226,000 $498,000 $ 209,000 $1,155,000
Advantage.................... 1,261,000 308,000 852,000 185,000 2,606,000
</TABLE>
48
<PAGE> 63
PRO FORMA ADVISOR COMPENSATION
ASSUMING THE COMPANY'S FEE STRUCTURE
THREE YEAR COMPENSATION COMPARISON
1992 -- 1995
<TABLE>
<CAPTION>
SIX
YEAR ENDED DECEMBER 31, MONTHS
------------------------------------ ENDED
1992 1993 1994 JUNE 30, 1995 TOTAL
---------- -------- -------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Advisory Fees
FREIF........................ $ 161,000 $164,000 $196,000 $ 100,000 $ 621,000
Advantage.................... 0 82,000 118,000 77,000 277,000
Property Management Fees
FREIF........................ 167,000 168,000 192,000 185,000 712,000
Advantage.................... 156,000 197,000 237,000 104,000 694,000
Expense Reimbursements
FREIF........................ 55,000 58,000 56,000 24,000 193,000
Advantage.................... 24,000 25,000 19,000 13,000 81,000
Shareholder Services Fees
FREIF........................ 0 0 0 0 0
Advantage.................... 0 0 0 0 0
Acquisition Fees
FREIF........................ 0 0 0 0 0
Advantage.................... 0 0 0 0 0
---------- -------- -------- -------- ----------
TOTAL:
FREIF........................ $ 383,000 $390,000 $444,000 $ 309,000 $1,526,000
Advantage.................... 180,000 304,000 374,000 194,000 1,052,000
</TABLE>
EFFECT OF CHANGES IN OPERATIONS ON PRO FORMA FEES
In the historical compensation table, each Fund's advisory fee is based on
the market value of each Fund's real estate assets, not book value before
depreciation. The book value before depreciation of the Funds' real estate
assets is currently higher than the estimated market value of their properties.
After the Merger, regardless of whether the value of real estate assets now held
by the Funds increases or decreases, the Advisor will receive its fee based on
the book value before depreciation of those assets.
COMPARISON OF FEES IN THE FUTURE
The historical and pro forma tables compare the fees actually paid by each
Fund in the past with the fees that would have been paid by each Fund if the
Company's compensation structure had been in place at the beginning of the
period. The pro forma table below compares the fees that would be paid under the
Company's compensation structure on a going forward basis, compared with each
Fund's fees under the present fee structure.
For example, if the Funds liquidated in five years, then the Funds would
pay estimated disposition fees of $2,195,000 to the Advisor on the portfolio of
properties, assuming that the properties appreciate at 4% per year. The
following table is a comparison of the fees that would be paid to the Advisor,
based on the above assumptions and the Advisor's estimates of the cash flows of
the properties.
49
<PAGE> 64
PRO FORMA FUTURE ADVISOR COMPENSATION -- STAND-ALONE VS. MERGED COMPANY
FIVE YEAR COMPENSATION COMPARISON
AMOUNTS IN $000'S
1996 -- 2000
<TABLE>
<CAPTION>
TOTAL FOR COMPANY FIVE YEARS TOTAL FOR FREIF FIVE YEARS
------------------------------------------ -------------------------------------------
ALLOCATED ALLOCATED
SHARE SHARE
OF OF
MERGED COMPANY MERGED FREIF
COMPANY FEES INCREASE COMPANY FEES INCREASE
ALLOCATION RATIO FEES (STAND-ALONE) (DECREASE) % FEES (STAND-ALONE) (DECREASE) %
- ----------------------- ------- ------------- ---------- --- ------- ------------- ---------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Advisory Fee
Unsubordinated....... $1,150 $ 1,207 $ (57) (5)% $1,099 $ 0 $ 1,099 --
Subordinated......... 0 0 0 -- 0 130 (130) (100)%
Reimbursements......... 188 162 25 15 179 260 (81) (31)
Property Management
Fees................. 1,276 1,378 (102) (7) 1,219 966 253 26
Acquisition
Fees -- 0%........... 0 0 0 -- 0 0 --
Disposition Fees....... 0 0 0 -- 0 1,264 (1,264) (100)
------ ------ ----- ---- ------ ------- -------- ----
TOTAL.................. $2,614 $ 2,747 $ (133) (5)% $2,497 $ 2,621 $ (123) (5)%
====== ====== ===== ==== ====== ======= ======== ====
</TABLE>
<TABLE>
<CAPTION>
TOTAL FOR ADVANTAGE FIVE YEARS
----------------------------------------- TOTAL FOR FIVE YEARS
ALLOCATED ----------------------------------------
SHARE PRO
OF FORMA
MERGED ADVANTAGE MERGED
COMPANY FEES INCREASE COMPANY COMPANY AND INCREASE
ALLOCATION RATIO FEES (STAND-ALONE) (DECREASE) % FEES FUNDS (DECREASE) %
- ---------------------------- ------- ------------- ---------- ----- ------- ------------- ---------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Advisory Fee
Unsubordinated............ $ 773 $ 718 $ 55 8% $3,022 $ 1,925 $ 1,097 57%
Subordinated.............. 0 143 (143) (100) 0 273 (273) (100)
Reimbursements.............. 126 70 56 79 493 493 0 0
Property Management Fees.... 857 888 (31) (3) 3,352 3,232 120 4
Acquisition Fees -- 0%...... 0 0 0 -- 0 0 0 --
Disposition Fees............ 0 930 (930) (100) 0 2,195 (2,195) (100)
------ ------ ----- ---- ------ ------- -------- ----
TOTAL....................... $1,756 $ 2,750 $ (994) (36)% $6,867 $ 8,118 $ (1,250) (15)%
====== ====== ===== ==== ====== ======= ======== ====
</TABLE>
This comparison is illustrative only. The comparison takes into
consideration each Fund's present arrangement whereby all or a portion of the
advisory fee is subordinated. Actual fees would differ under different
circumstances.
Under the existing fee structure, if a Fund borrows to finance additional
property acquisitions, the acquisition and disposition fees, as well as the
advisory fees, could be increased. Advantage can still borrow funds for property
acquisitions, but FREIF cannot. Advantage can borrow up to 50% of the fair
market value of its properties, assumed to be an aggregate of approximately $25
million on a secured basis. If Advantage were able to borrow $12.5 million and
invest it in real property, additional acquisition, disposition and advisory
fees paid by Advantage would be approximately $1.1 million. Under the Company's
fee structure, no acquisition or disposition fees would be payable by Advantage
and additional advisory fees would be approximately $313,000.
50
<PAGE> 65
CONFLICTS OF INTEREST CAUSED BY THE COMPANY'S COMPENSATION STRUCTURE
<TABLE>
<S> <C>
The Funds The Company
Under each Fund's compensation structure, Since the Advisor's compensation increases
the Advisor has an incentive to as the Company's real estate asset base
encourage each Fund to buy and sell increases, the Advisor would increase its
properties, because the Advisor receives compensation by advising the Company to
acquisition and disposition fees. issue additional securities or to borrow
money and invest such proceeds in real
estate assets.
Advisor's Ownership
Franklin Resources, Inc., the parent Subject to approval of the Merger, the
corporation of the Advisor, purchased Advisor will receive an Exchange Right to
the Series B Shares in each Fund's initial exchange the Series B Shares of the
public offering and, through the Series B Company in respect of Series B Shares of
Shares, owned approximately 7.4% and 4.0% the Funds received in the Merger for
of the total outstanding common shares of Company Common Stock. See "Terms of the
FREIF and Advantage, respectively. Merger -- Series B Exchange Right."
Franklin Resources paid $10 per share for No dividends from operations will be
these Series B Shares, and each Fund used payable on the Series B Shares prior to
the proceeds from this sale to pay all or exercise of the Series B Exchange Right.
a portion of the broker-dealer commissions After exercise of the Series B Exchange
paid in connection with each Fund's Right, the Advisor, like any other
initial public offering. Franklin Shareholder, will receive dividends on the
Resources sold its Series B Shares in the Common Stock. For an explanation of the
Company and the Funds to the Advisor in target price that must be met in order for
early 1993. the Series B Exchange Right to be
The Common Stock of each Fund has a exercisable, see "Terms of the
dividend preference over its respective Merger -- Series B Exchange Right."
Series B Shares. See "Terms of the
Merger -- Series B Exchange Right" for a
summary of the terms of this dividend
preference.
</TABLE>
51
<PAGE> 66
THE COMPANY
THE COMPANY
The Company is a California corporation formed on January 5, 1989 for the
purpose of acquiring and holding for investment income-producing real estate
assets. The Company is an infinite life REIT.
The Company owns the Data General Building in Manhattan Beach, California.
It also owns a 60% interest in the Shores Office Complex in Redwood City,
California. These properties were acquired during the period from September 1,
1989 to December 28, 1989. For more information about the Company, see
"Financial Information of the Company and the Funds," "Policies of the Company
with Respect to Certain Activities," "Market Price, Dividends and Holders of the
Company and the Funds' Securities" and "Description of Real Properties."
INVESTMENT AND OPERATING STRATEGY
The Company acquires income-producing real estate investments located in
California with cash flow growth potential, although it has the flexibility to
purchase properties elsewhere. The Company's investment focus is on the five
major metropolitan areas in California: the Los Angeles metropolitan area,
Orange County, San Diego County, the Sacramento metropolitan area and the San
Francisco metropolitan area.
Traditionally, the Company has identified individual properties suitable
for acquisition. To help locate these properties, the Advisor has developed an
extensive analytical model using available employment data to measure the
economic strength, diversity, growth trends, and stability of regional markets.
The Advisor also utilizes a geographic information system designed to recreate
the elements of a local real estate market on a personal computer. Because this
system compiles information on an area's economic base, demographic profile,
labor force and real estate inventory at many political and geographic boundary
levels, the Advisor believes that it is able to define and analyze highly
localized market areas. These research systems have allowed the Advisor to
distinguish certain submarkets within these five major metropolitan areas of
California that appear to offer attractive investment opportunities.
Having identified these submarkets, the Advisor investigates specific
properties available within the region to determine their suitability for
purchases while attempting to diversify the Company's portfolio by property
type. The Advisor also looks for properties diversified by tenant composition
and lease term. The types of properties considered for acquisition include
multi-family residential complexes, office buildings, shopping centers, research
and development facilities, industrial parks and other similar types of income-
producing properties. Before recommending any acquisition to the Company's board
of directors, property management specialists, who are affiliated with the
Advisor and skilled in handling the differing requirements of office,
industrial, retail and multi-family residential properties, perform an analysis
to confirm that the property should be acquired for the Company's portfolio. As
described above, however, the Advisor's ability to identify and locate such
properties within attractive submarkets may be limited by current conditions in
the real estate market.
The Company now also intends to acquire property portfolios in exchange for
equity. In particular, the Company is seeking to establish strategic
relationships with and acquire property portfolios from selected real estate
developers who appear to have a competitive advantage within their local market
areas. This strategy potentially will allow the Company to increase its asset
size, significantly diversify its portfolio and increase its revenues and
earnings per share in a comparatively short period of time while reducing its
exposure to any single property type or market area. In October 1995, the
Company retained Prudential Securities Incorporated as its exclusive financial
advisor in connection with the implementation of its portfolio acquisition
strategy.
The Company anticipates that a substantial portion of its future
acquisitions will be achieved through the issuance of common stock equity or
partnership equity. The Company will carefully limit its use of debt financing.
It is anticipated that the Company will create one or more partnerships whereby
the Company will issue partnership units to make certain acquisitions. The
issuance or exchange of such partnership units can
52
<PAGE> 67
provide important tax benefits to a real estate seller that can enhance the
price paid for such property and other terms of the acquisition. It is expected
that the Company will serve as the general partner of any such acquisition
partnership vehicles.
Once properties are acquired, the Company places a strong emphasis on
leasing and tenant retention in combination with a program of regular
maintenance, periodic renovation and capital improvement. Sophisticated
management and accounting systems linked together through a computer network
provide detailed and timely reports on property operations to the Advisor's
asset management staff. The Company views aggressive and involved property
management as crucial to maintaining and improving both cash flow from, and the
market value of, those properties.
Properties are acquired with a view to holding them as long-term
investments. When appropriate, however, the Company seeks to realize the value
of its properties through financings, refinancings, sales or exchanges.
While the Company currently follows the investment policies described
above, they are guidelines only and may be changed by the board of directors
without a vote of the Company Shareholders.
INVESTMENT POLICY
The Company's investment policies include providing Company Shareholders
with a professionally managed diversified portfolio of income-producing equity
real estate investments in strategic markets which represent the potential for
current cash flow and for capital appreciation. It seeks to maximize shareholder
value by pursuing a growth-oriented business strategy, which seeks to expand the
capital and asset base of the Company. The Company intends to pursue this
objective by reinvesting the proceeds from sales or dispositions of properties,
as well as through possible additional offerings of securities or acquisitions
of properties for securities. There can be no assurance that this objective will
be achieved.
PROPERTIES AND OTHER ASSETS
If Shareholders of the Company and both Funds approve the Merger, the
Company will own, in addition to its own properties, all of the properties
currently owned by the Funds and will succeed to all of the Funds' liabilities.
For a description of the real properties of the Company and the Funds, see
"Description of Real Properties."
DIVIDEND POLICY
Dividends are declared quarterly at the discretion of the board of
directors. The Company's present dividend policy is to evaluate at least
annually the current dividend rate in light of anticipated tenant turnover over
the next two or three years, the estimated level of associated improvements and
leasing commissions, planned capital expenditures, any debt service requirements
and the Company's other working capital requirements. After balancing these
considerations, and considering the Company's earnings and cash flow, the level
of its liquid reserves and other relevant factors, the Company seeks to
establish a dividend rate which (i) provides a stable dividend which is
sustainable despite short term fluctuations in property cash flows; (ii)
maximizes the amount of funds from operations paid out as dividends consistent
with the above listed objective; and (iii) complies with the Internal Revenue
Code requirements that a REIT annually pay out as dividends not less than 95% of
its taxable income.
The Company estimates that under present conditions, upon consummation of
the Merger it will have funds from operations available for dividends of
approximately $2 million per quarter (assuming that Shareholders do not exercise
Dissenter's Rights). The Company believes that its estimate of the funds from
operations that will be available for dividends constitutes a reasonable basis
for declaring dividends after the Merger, and the Company expects to maintain
its current quarterly dividend rate of $.11 per share after the Merger unless
actual results of operations, economic conditions or other factors significantly
differ from the assumptions used in the estimate. The actual return that the
Company will realize will be affected by a number of factors, including the
revenues received from rental properties, the operating expenses of the
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Company, the ability of the lessees to meet their obligations to the Company and
capital expenditures. No assurance can be given that the Company's estimate will
prove accurate.
COMPETITION
In seeking real property investments, the Company competes with a wide
variety of institutions and other investors, many of which have greater
financial resources than those of the Company. An increase in the amount of
funds available for real estate investments may increase competition for
ownership of interests in properties and may reduce yields. The Company also
competes for tenants at its existing properties. The Company believes that the
significant real estate experience of its board of directors and the Advisor
enables the Company to compete effectively.
EMPLOYEES
The Company does not have any employees. The Company's day-to-day
operations are managed by the Advisor under the terms of an Advisory Agreement
which is renewable annually. The Advisor manages the Company subject to the
overall approval of the board of directors, a majority of whom are independent
of the Advisor. See "Compensation of Management of the Company, the Advisor and
Continental -- Compensation of the Advisor and Continental."
PROPERTY MANAGEMENT
Each of the Company's real properties is managed by Continental Property
Management Co., an Affiliate of the Advisor. Property management includes
leasing, building maintenance, collection of rental income, payment of taxes and
insurance coverage. The Company believes that the terms of the property
management agreement with Continental are fair and not less favorable to the
Company than terms of a property management agreement obtainable from an
independent third party. The property management agreement has been approved by
a majority of the Company's independent directors. The fee paid to Continental
is based upon actual services performed and does not exceed the compensation
payable to comparable property managers or leasing commissions paid to third
parties, both of which are borne by the Company. Continental also provides
property management services to third parties, including Property Resources,
Inc., an Affiliate of the Advisor. Continental's address is 777 Mariners Island
Boulevard, San Mateo, California 94404-7777. See also "Compensation of
Management of the Company, the Advisor and Continental -- Compensation of the
Advisor and Continental."
POLICIES OF THE COMPANY WITH RESPECT TO CERTAIN ACTIVITIES
The terms of the Merger include the adoption of amended and restated bylaws
of the Company (the "Proposed Bylaws") by Company Shareholders. The Proposed
Bylaws are set forth as Appendix E to this Joint Proxy Statement/Prospectus. The
Proposed Bylaws would increase the variable number of directors on the board of
directors from three to five to five to nine, as may be determined from time to
time by resolution of the board of directors. It is anticipated that the
directors of the Company will increase the size of the board if the Merger is
approved by Company Shareholders.
The Proposed Bylaws also delete a provision excluding from the definition
of "independent director" anyone serving as a director of three or more REITs or
mutual funds organized by Franklin Resources, Inc., and incorporate certain
changes to provisions in the current bylaws related to advisory fees. These
technical changes conform such provisions to the advisory fee compensation
structure approved by the Company Shareholders in September 1994. The Proposed
Bylaws otherwise contain all of the provisions discussed in this section.
The Company's current amended and restated Bylaws (the "Bylaws") contain
restrictions on the acquisition of a certain number of shares of Company Common
Stock, transactions between the Company and the Advisor, the Company's directors
and their respective Affiliates. The Company also has certain policies regarding
borrowings, acquisition of properties, other investments and working capital,
which are described
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below. The investment policies of the Company, and its policies with respect to
certain other activities, including its growth, capitalization, borrowing
policy, distributions and other operating policies, are determined by the board
of directors. Although it has no present intention to do so, the board of
directors may amend or revise these policies from time to time at its discretion
without a vote of the Company Shareholders.
REDEMPTION AND PROHIBITION OF TRANSFER OF COMMON STOCK
For the Company to qualify as a REIT under the Code, among other things, no
more than 50% of its outstanding common shares may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of a taxable year. The Company's two
largest shareholders are PRIM, which holds approximately 19.4% of the
outstanding common shares, and the Advisor which holds approximately 3.3% of the
outstanding common shares (which represents all of the Series B Shares of the
Company). To comply with this REIT requirement, the Company limits generally the
direct and indirect ownership of Company Common Stock by Series A Shareholders
to no more than 9.9% of the outstanding shares of stock per holder (taking into
account the applicable ownership attribution rules in the Code). The Company has
the power, but not the obligation, to redeem a sufficient number of shares of
Company Common Stock in order to maintain or bring the ownership of such stock
into conformity with the 9.9% limitation requirement, and to prohibit the
transfer of Company Common Stock to persons whose acquisition would result in a
violation of this requirement. The price to be paid in the event of redemption
will be the last reported sale price for the shares of Company Common Stock on
the AMEX on the day before redemption. See "Description of Capital Stock of the
Company -- Redemption and Prohibition of Transfer of Shares."
TRANSACTIONS WITH AFFILIATES
The Company's Bylaws impose certain restrictions upon dealings between the
Company and the Advisor, its directors or Affiliates. In particular, the Company
may not: (i) make loans to the Advisor, its directors or any Affiliate; or (ii)
purchase real property or borrow money from, or invest in joint ventures or
enter into any other transaction with, the Advisor, its directors or Affiliates,
unless a majority of the directors (including a majority of the Company's
independent directors) not otherwise interested in such transaction approves the
transaction. None of the Company's property may be sold to the Advisor, any
director or any Affiliate of any of the Advisor or a director.
MORTGAGE LOANS, SECURITIES, AND UNDEVELOPED LAND
The Company's Bylaws permit it to invest in "Mortgage Loans" (generally,
mortgage loans, notes, bonds or similar obligations which are secured by
interests in real estate) under certain conditions, although the Company
presently has no intention of doing so. Similarly, the Company has the authority
to acquire and develop undeveloped land, but does not currently intend to
purchase or develop any undeveloped land, other than the undeveloped land that
is attached to one of the Funds' properties. The Company may also invest in
"Mortgage Securities" (generally, marketable, mortgage-backed or pass through
securities such as GNMAs and FNMAs), although ordinarily it will invest in
Mortgage Securities only temporarily, while seeking real property investments.
The Company has the power to invest its cash in other short-term securities as
well.
RESTRICTIONS ON INVESTMENTS
The Company's Bylaws prohibit investments in (i) commodities or commodity
future contracts; (ii) short sales; and (iii) any security in any company
holding investments, or engaging in activities, prohibited by the Company's
Bylaws.
In addition to other investment restrictions imposed by the directors from
time to time, the Company observes the following restrictions on its investments
as set forth in its Bylaws:
(i) Not more than 10% of the Company's total assets are invested in
unimproved real property or mortgage loans secured by unimproved real
property. For purposes of this paragraph, "unimproved real
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<PAGE> 70
property" does not include properties under construction, under contract
for development or planned for development within one year.
(ii) The Company may not invest in real estate contracts of sale,
unless they are in recordable form and are appropriately recorded in the
chain of title.
(iii) The Company may not invest in or make mortgage loans unless (a)
the Company shall have first obtained an appraisal as to the value of the
underlying real property; (b) the Company shall have first obtained a
mortgagee's or owner's title insurance policy or commitment therefor as to
the priority of the corresponding mortgage or the condition of title to the
underlying real property; and (c) the aggregate amount of all mortgage
loans outstanding on a single parcel of real property, including the amount
of the mortgage loan in which the Company has invested, shall not be
greater than 85% of the value of such real property as determined by the
appraisal, unless substantial justification exists because of the presence
of other mortgage loan underwriting criteria. The Company may not make or
invest in any mortgage loans that are subordinate to any mortgage or equity
interest of the Advisor, the directors or any of their Affiliates.
(iv) The Company may not invest in indebtedness, including
construction loans (herein called "junior debt") secured by a mortgage on
real property which is subordinate to the lien of other indebtedness
(herein called "senior debt") unless (a) the total amount of such junior
debt, plus the outstanding amount of senior debt, does not exceed 85% of
the appraised value of the property on an as-built basis; and (b) total
junior debt investments of the Company will not exceed 25% of the Company's
assets. The Company, however, may make junior debt investments which do not
meet the 85% limitation above; however, the aggregate of such investments
would be limited to 10% of the Company's assets (which would be included in
the 25% limitation). The Company has no present intention of investing in
any type of debt, with the possible exception of making loans to joint
ventures in connection with development projects.
AMENDMENTS
The Company's Bylaws may be amended by the affirmative vote of a majority
of the outstanding shares. In addition, a majority of the directors may, without
the approval or consent of the Company Shareholders, adopt any amendment to the
Bylaws which they in good faith determine to be necessary to conform the Bylaws
to the requirements of the REIT provisions of the Code or any other applicable
law or regulation.
ACQUISITION POLICIES
The Company may buy newly constructed properties or properties without
established operating histories. There is no limit on the percentage of the
Company's assets that may be invested in one property. The Company's current
policy is that all investments in real property will be made only with the prior
approval of a majority of the independent directors. Although there are
restrictions on transactions between the Advisor, its Affiliates and the
Company, the Advisor or any of its Affiliates are permitted to enter into joint
ventures with the Company and to purchase property in their own names, assume
loans and temporarily hold title to property for the purpose of facilitating the
acquisition of a property or for any other reason relating to the business of
the Company. All such transactions require the prior approval of a majority of
the Company's independent directors. For a description of the restrictions on
transactions between the Company and the Advisor and its Affiliates, see
"-- Transactions with Affiliates," above.
BORROWING POLICIES -- SUBSEQUENT LEVERAGE
The Company may choose to finance its existing portfolio and any properties
acquired in the future. The Company intends that its debt to total assets ratio
will not exceed 50%, but this policy is only a guideline, which may be changed
by the board of directors. Borrowings may be secured or unsecured. Unsecured
borrowings would allow a lender to pursue any of the Company's assets upon
default. A secured borrowing generally means that the lender would be able to
foreclose only on the particular property or properties securing the loan,
unless the lender pursues a judicial foreclosure to seek a deficiency judgment,
or as
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otherwise allowed under applicable law. Generally, the Company intends for its
borrowings to be non-recourse loans to the Company, secured by specific real
properties. The Company, however, may finance single properties or enter into
portfolio financing which could involve cross-defaults and
cross-collateralization, i.e. one property may secure amounts borrowed against
another property. The Company is prohibited from borrowing money from the
Advisor or its Affiliates without approval from a majority of the Company's
independent directors.
LOANS BY THE COMPANY
The Company generally does not make loans to other persons, but the Company
may provide financing to a buyer of one or more of the Company's real
properties. The terms of the loan and repayment will be determined at the time
of sale and will depend on then prevailing economic conditions. As mentioned
above, the Company is also authorized to invest in Mortgage Loans, although the
Company presently has no intention of doing so. No loans may be made to the
Advisor, its Affiliates or the Company's directors.
MISCELLANEOUS POLICIES
Nothing in the Company's governing documents prohibits the Company from
repurchasing its Common Stock on the open market or otherwise if the board of
directors authorizes such repurchase. Subject to compliance with the provisions
of applicable law, the Company may issue warrants and redeemable stock, but the
Company is prohibited from issuing securities on a deferred payment basis. The
Company does not underwrite the securities of another issuer, but it can invest
in the securities of another issuer. While the Company does not intend to invest
in another issuer's securities for the purpose of acquiring control, the board
of directors may authorize the Company to do so in the future (consistent with
the limitations imposed under the Code on a REIT's ownership of securities of
another issuer). The Company is authorized to exchange its securities for real
property. The Company may also issue debt securities, but only if the board of
directors determines that the Company has adequate projected cash flow to cover
the debt service on such securities for the first twelve months after issuance.
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
GENERAL
The terms of the Merger include the adoption of an amendment to the
Company's Articles of Incorporation, as amended, which will eliminate dividends
to the Series B Shares, other than distribution of net unreinvested proceeds of
sales, financings and refinancings. This proposed amendment is set forth in
Appendix D to this Joint Proxy Statement/Prospectus. If the Merger is approved
by Company Shareholders, the Articles of Incorporation, as amended, will be
amended to effect this change.
The following description sets forth the current general terms and
provisions of the Company Common Stock, and is in all respects subject to and
qualified in its entirety by reference to the applicable provisions of the
Company's Articles of Incorporation, as amended and its Bylaws. The Company's
authorized capital stock consists of one class of common stock in two series as
follows: 50,000,000 shares of Company Common Stock and 1,000,000 shares of Class
B Common Stock, which have the same rights, preferences, privileges and
restrictions as the Company Common Stock, except that the Series B Shares are
subordinated with respect to their receipt of dividends, and are not subject to
the redemption and transfer provisions set forth below. Each share of Company
Common Stock and Series B Shares entitles the holder to one vote on all
corporate matters submitted to the Company Series A Shareholders and Series B
Shareholders, including cumulative voting rights with respect to the election of
the board of directors, in accordance with California law. Cumulative voting
entitles each Shareholder of the Company to cast as many votes as there are
directors to be elected multiplied by the number of shares registered in his or
her name. A Shareholder may cumulate the votes for directors by casting all of
the votes for one candidate or by distributing the votes among as many
candidates as such shareholder chooses. Holders of Company Common Stock or
Series B Shares have no preemptive, subscription, redemption or conversion
rights.
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REDEMPTION AND PROHIBITION OF TRANSFER OF SHARES
For the Company to maintain its status as a REIT under the Code, not more
than 50% of its outstanding shares may be owned by five or fewer individuals
during the last half of a taxable year, and the shares must be owned by 100 or
more persons during at least 335 days of a taxable year of twelve months or
during a proportionate part of a shorter taxable year. See "Income Tax
Considerations." In order to meet these requirements, the Company has the power
to redeem a sufficient number of shares of Company Common Stock in order to
maintain or bring the ownership of the Company Common Stock into conformity with
these requirements, and to prohibit the transfer of the Company Common Stock to
persons whose acquisition would result in a violation of these requirements. The
price to be paid in the event of the redemption of Company Common Stock will be
the last sale price on the AMEX on the day before redemption or, as determined
in good faith by the board of directors of the Company. The effect of these
requirements is to generally limit direct and indirect ownership of the shares
by each of the five largest shareholders to no more than 9.9% of the outstanding
shares per holder. In addition, no Shareholder (including the Advisor and its
Affiliates) will be permitted to acquire additional shares of Common Stock
(except through the Dividend Reinvestment Plan) if, as a result of such
acquisition, such Shareholder would then hold in excess of 9.9% of the total
outstanding voting shares of the Company. Any shares of common stock acquired in
excess of the limitation will be deemed to be held in trust for the Company, and
will not be entitled to receive dividends or to vote. However, if any
Shareholder does acquire in excess of 9.9% of the shares of common stock, the
Directors may impose a lower percentage limit on the remaining Shareholders in
order to assure continued compliance with the "5/50" provision of the Code
described above.
The Company will issue 8,759,831 shares of Company Common Stock to FREIF
and Advantage Series A Shareholders and 436,586 Series B Shares to the Advisor
in the Merger, assuming that Shareholders of the Company and both Funds approve
the Merger and there is no exercise of Dissenter's Rights. The shares of Company
Common Stock to be issued in the Merger will, upon issuance, be fully paid and
non-assessable. In addition, 436,586 shares of Company Common Stock have been
reserved for issuance upon the exercise of the Series B Exchange Right. Chemical
Trust Company of California acts as transfer agent and registrar of the Company
Common Stock. The Common Stock to be issued to the FREIF or Advantage
Shareholders in the Merger has been approved for listing, subject to official
notice of issuance, and will trade on the AMEX under the symbol "FSN."
DIVIDEND REINVESTMENT PLAN
The Company has established a Dividend Reinvestment Plan (the "Plan") which
is designed to enable Company Series A Shareholders to choose to have dividends
automatically invested in additional shares of Company Common Stock at market
value, without the payment of any brokerage commission, service charge or other
expense. In order to participate in the Plan, investors must designate that they
would like their dividends reinvested. Company Series A Shareholders may elect
to participate in the Plan at any time. The Plan does not accept cash
contributions from Company Shareholders to purchase additional shares of
existing Company Common Stock. Only dividends on existing Company Common Stock
may be reinvested.
The Plan and the reinvestment of dividends in additional Company Common
Stock thereunder has been structured to enable the Company to continue to
qualify as a REIT under the applicable provisions of the Code. Therefore, any
dividends to which a participating Company Series A Shareholder is entitled will
be taxable to such shareholder substantially to the same extent as if the
dividends had been received in cash rather than reinvested in the Company. See
"Income Tax Considerations."
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THE FUNDS
FREIF
FREIF is a California corporation formed on August 7, 1987 for the purpose
of acquiring and holding for investment income producing real estate assets.
FREIF is a finite life REIT. It raised $40,000,000 of gross proceeds in an
initial public offering that ended on January 31, 1989. FREIF owns (i) Mira Loma
Shopping Center located in Reno, Nevada, (ii) Northport Business Park, a
research and development complex in Fremont, California, (iii) Glen Cove
Shopping Center, a retail shopping center located in Vallejo, California and
(iv) a 40% interest in the Shores Office Complex in Redwood City, California.
These properties were acquired during the period from November 1988 to January
1994. For more information about FREIF, see "Financial Information of the
Company and the Funds," "Investment Policies and Activities of the Funds,"
"Market Price, Dividends and Holders of the Company's and the Funds' Securities"
and "Description of Real Properties."
ADVANTAGE
Advantage is a California corporation formed on June 8, 1990 for the
purpose of acquiring and holding for investment income producing real estate
assets. Advantage is a finite life REIT. It raised $31,083,950 of gross proceeds
in an initial public offering that ended on February 20, 1992. Advantage owns
(i) Fairway Center, an office complex in Brea, California, acquired in January
1992, and (ii) Carmel Mountain Gateway Plaza, a specialty retail center in San
Diego, California, acquired in late 1994. For more information about Advantage,
see "Financial Information of the Company and the Funds," "Investment Policies
and Activities of the Funds," "Market Price, Dividends and Holders of the
Company's and the Funds' Securities" and "Description of Real Properties."
GENERAL
The Funds have no employees; instead, each Fund has contracted with the
Advisor to manage its day to day operations, subject to the approval of the
Fund's board of directors. The Funds' properties are managed by Continental,
which performs the leasing, re-leasing and management-related services for the
properties. The real estate business is highly competitive, and the Funds
compete with many other entities, many of which have greater assets than the
Funds.
INVESTMENT POLICIES AND ACTIVITIES OF THE FUNDS
INVESTMENT POLICIES
The principal investment policies of each of the Funds are the same: to
protect the Fund's capital, to provide for partially tax-sheltered dividends, to
provide capital gains through appreciation of real property and to provide
market liquidity through transferable shares of stock. Each of the Funds has a
policy of investing in income-producing real estate properties, which may
include multi-family residential complexes, office buildings, shopping centers,
research and development facilities, industrial parks, warehouses and, with
respect to Advantage, other similar types of income-producing property. As of
the date of this Joint Proxy Statement/Prospectus, each of the Funds is fully
invested. Advantage is invested only in California; FREIF is invested primarily
in California. There was no limit on the amount of assets that either of the
Funds could invest in any one property. To achieve its policy of providing cash
dividends to investors, each Fund generally acquired only properties with
established operating histories. FREIF further limited its range of investments
by not purchasing properties that were under initial construction or were less
than 50% leased.
Each Fund can also invest in Mortgage Loans, and each had invested some of
its assets in Mortgage Securities, pending investment in real property.
Advantage has the power to acquire and develop undeveloped land, and it has
acquired some undeveloped property in connection with an existing office
building. Neither of the Funds offered shares in exchange for real property,
although Advantage is permitted to do so with the approval of its board of
directors.
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The organization documents of each of the Funds do not require that they
terminate their existence by any particular date. The Funds' offering documents
state that the Funds will not reinvest the proceeds from the sale or financing
of properties after five years from their initial public offerings. Prior to
that time, the Funds were permitted to either reinvest or distribute such
proceeds. As a result, each of the Funds has a finite life, although there is no
specific limit on the length of such life. The Funds anticipate holding their
real properties for a limited period ranging from five to seven years in the
case of FREIF and seven to ten years in the case of Advantage from the date
their last properties were acquired. FREIF acquired its last property in January
1994, and Advantage acquired its last property in November 1994.
The Funds' boards of directors are not specifically empowered to change the
investment policies of the Funds. The boards anticipate that they would not make
major modifications in investment policies without first seeking Shareholder
approval.
BORROWING POLICIES
Each of the Funds had a general policy of acquiring its properties
initially on an all-cash basis. FREIF's real property is subject to a loan with
an outstanding balance of approximately $1,959,000, and Advantage's real
property is subject to encumbrances totalling approximately $5,285,000.
Advantage's encumbrances consist of a first and second loan totalling
approximately $2,815,000 and the remainder represents local improvement bonds.
The Funds also have the authority to leverage their investments subsequently and
to establish a line of credit, although neither of the Funds has done so. Each
Fund has a policy that aggregate secured borrowings may not exceed 50% of the
fair market value of such Fund's properties; the amount borrowed with respect to
any individual property may not exceed 80% of its then fair market value.
Advantage is also able to make unsecured borrowings in an amount not to exceed
75% of its gross assets.
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MANAGEMENT OF THE COMPANY, THE ADVISOR AND CONTINENTAL
THE COMPANY
The following table sets forth the current officers and directors of the
Company(1). If the Proposed Bylaws are approved by Company Shareholders, the
number of directors on the board of directors of the Company may vary from a
minimum of five to a maximum of nine directors, as may be determined by a
resolution adopted by the board. It is anticipated that the board will increase
its size if the Merger is approved.
<TABLE>
<CAPTION>
NAME POSITION
- ------------------------------ ----------------------------------------------
<S> <C>
David P. Goss................. Chief Executive Officer, President and
Director
Lloyd D. Hanford, Jr.......... Independent Director
Egon H. Kraus................. Independent Director
Lawrence C. Werner............ Independent Director
E. Samuel Wheeler............. Independent Director
Michael J. McCulloch.......... Executive Vice President
Richard S. Barone............. Secretary
Mark A. TenBoer............... Vice President -- Finance and Chief Financial
Officer
</TABLE>
- ---------------
(1) All such officers and directors have served in these capacities with the
Company since January 1989 with the exception of Mr. TenBoer, who was
appointed in December 1993.
NAME, AGE AND FIVE-YEAR BUSINESS EXPERIENCE DIRECTOR SINCE
- --------------------------------------------------------------------------------
David P. Goss (48) 1989
Mr. Goss is the Chief Executive Officer, President and Director of the Company.
He is also Chief Executive Officer, President and Director of Property
Resources, Inc., Property Resources Equity Trust (1987 to date), the Advisor,
FREIF (1988 to date), Advantage (1990 to date), and Franklin Real Estate
Management, Inc. (1991 to date). Mr. Goss has a B.A. degree from the University
of California, Berkeley, and a J.D. degree from the New York University School
of Law.
Lloyd D. Hanford, Jr. (67) 1989
Mr. Hanford is an Independent Director of the Company. In 1988, he was a
co-founder of, and until July, 1992, a principal of the Hanford/Healy Companies,
a San Francisco real estate appraisal, asset management and consulting firm,
practicing on a national basis. Mr. Hanford presently serves as Executive
Appraiser for the Hanford/Healy Appraisal Company. Mr. Hanford graduated from
the University of California, Berkeley and holds the professional designations
MAI, CRE and CPM awarded respectively by the Appraisal Institute, the American
Society of Real Estate Counselors and IREM. Mr. Hanford is also a Director of
Advantage (1990 to date).
Egon H. Kraus (66) 1989
Mr. Kraus is an Independent Director of the Company. He is a Certified Public
Accountant, primarily involved in real estate transactions. He has a B.S. and an
M.B.A. from the University of California, Berkeley, where he was elected to Phi
Beta Kappa. Mr. Kraus is a member of the American Institute of Certified Public
Accountants, and a former member of the Financial Executives Institute and the
Tax Executives Institute. He is also a Director of FREIF (1988 to date) and
Advantage (1990 to date).
Lawrence C. Werner (77) 1989
Mr. Werner is an Independent Director of the Company. He is a private investor
and is currently a Director of the Civic Interest League of Atherton,
California. He was formerly a sales executive with IBM. Mr. Werner is also a
director of Advantage (1990 to date).
E. Samuel Wheeler (52) 1989
Mr. Wheeler is an Independent Director of the Company. He is a Certified Public
Accountant. He is a current member of the National Association of Real Estate
Investment Trusts (NAREIT) Government Relations,
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Insurance Planning and Accounting Committees. He received his B.S. in Accounting
and Finance from San Jose State University in 1966, and is a member of the
American Institute of Certified Public Accountants and the California Society of
Certified Public Accountants. Mr. Wheeler is also a director of Advantage (1990
to date).
The executive officers of the Company other than those listed above are:
Michael McCulloch, age 48, is Executive Vice President of the Company (1989 to
date). He is also Executive Vice President of Property Resources, Inc., Property
Resources Equity Trust (1987 to date), the Advisor, FREIF (1988 to date),
Advantage (1990 to date), and Franklin Real Estate Management, Inc. (1991 to
date). He attended California State University, Los Angeles and the University
of Southern California.
Richard S. Barone, age 44, is Secretary of the Company (1989 to date). He is
also Secretary of the Advisor, Property Resources, Inc., Property Resources
Equity Trust, FREIF (1988 to date), Advantage (1990 to date), and Franklin Real
Estate Management, Inc. (1991 to date). He is also Senior Vice
President -- Legal of the Advisor, Property Resources, Inc. (1988 to date), and
Franklin Real Estate Management, Inc. (1991 to date); and Corporate Counsel of
Franklin Resources, Inc. (1988 to date). Mr. Barone received a B.A. degree and a
J.D. degree from the University of San Francisco. He is a member of the State
Bar of California.
Mark A. TenBoer, age 39, is Vice President -- Finance and Chief Financial
Officer of the Company, FREIF and Advantage (1993 to date), and has served as
Vice President -- Asset Management for the Advisor, Property Resources, Inc.,
and Franklin Real Estate Management, Inc. since 1991. From 1983 to 1991 he was
Director -- Portfolio Management and Controller of the Advisor and Property
Resources, Inc. He received a B.S. degree in Accounting from the University of
Illinois. Mr. TenBoer is a Certified Public Accountant and a real estate broker.
THE ADVISOR AND CONTINENTAL
The principal executive officers, directors and key employees of the
Advisor are as follows:
<TABLE>
<CAPTION>
NAME POSITION
- ------------------------------ ----------------------------------------------
<S> <C>
David P. Goss................. Chief Executive Officer, President and
Director
Harmon E. Burns............... Director
Rupert H. Johnson, Jr. ....... Director
Charles E. Johnson............ Director
Michael J. McCulloch.......... Executive Vice President
Richard S. Barone............. Senior Vice President -- Legal and Secretary
Martin L. Flanagan............ Vice President -- Finance and Chief Financial
Officer
Mark A. TenBoer............... Vice President -- Asset Management
David P. Rath................. Vice President -- Asset Management
David N. Popelka.............. Vice President -- Asset Management
</TABLE>
The principal executive officers of Continental are as follows:
<TABLE>
<CAPTION>
NAME POSITION
- ------------------------------ ----------------------------------------------
<S> <C>
Thomas J. Bennett............. President, Chief Financial Officer and
Director
Charles L. Gee................ Senior Vice President and Secretary
</TABLE>
For a description of the occupations and affiliations of Messrs. Goss,
McCulloch, Barone and TenBoer, see "-- The Company" above.
NAME, AGE AND FIVE-YEAR BUSINESS EXPERIENCE DIRECTOR SINCE
- --------------------------------------------------------------------------------
Harmon E. Burns (50) 1988
Mr. Burns has served since 1990 as Executive Vice President, Secretary and
Director of Franklin Resources, Inc. He also serves as Executive Vice President
of Franklin/Templeton Distributors, Inc., Executive Vice
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<PAGE> 77
President of Franklin Advisers, Inc., Director of Templeton Worldwide, Inc.,
Franklin/Templeton Investor Services, Inc. and Franklin Bank and as an officer
of most of the mutual funds in the Franklin Group of Funds. Mr. Burns received a
B.B.A. degree from George Washington University in 1969 and received a J.D.
degree from San Mateo Law School in 1976. He is a member of the State Bar of
California and is a licensed General Securities Principal with the National
Association of Securities Dealers, Inc.
Rupert H. Johnson, Jr. (55) 1988
Mr. Johnson has served since 1990 as Executive Vice President and Director of
Franklin Resources, Inc. Previously, he was Senior Vice President of Franklin
Resources, Inc. He holds similar positions with its subsidiaries and Affiliates
including the position of President and Director of Franklin Advisors, Inc. He
has also served as Director of Property Resources, Inc. since 1985 and currently
serves as a Director or Trustee and Vice President of most of the mutual funds
in the Franklin Group of Funds, and as a Director of Franklin Bank.
Charles E. Johnson, Jr. (38) 1988
Mr. Johnson has served as the Senior Vice President (1990) and a Director of
Franklin Resources, Inc. since 1987. He is also the Senior Vice President of
Franklin Templeton Distributors, Inc. (1990 to date), and the President and a
Director of Templeton Worldwide, Inc. and Franklin Institutional Services
Corporation (1991 to date). He is also an officer and/or director or trustee, as
the case may be, of 24 of the investment companies in the Franklin Templeton
Group of Funds.
The executive officers of the Advisor and Continental other than those listed
above are as follows:
Martin L. Flanagan, age 35, has been associated with the Templeton Group since
1983. He is currently the Executive Vice President, Chief Operating Officer and
a Director of Templeton, Galbraith & Hansberger Ltd., John Templeton
Counsellors, Inc., and Templeton Global Investors, Inc.; General Manager of
Templeton Financial Advisory Services, S.A.; Managing Director of Templeton
Global Investors, Ltd.; Finance Director of Templeton Investment Management;
Senior Vice President -- Finance, Secretary and a Director of Templeton
Investment Counsel Ltd.; and Senior Vice President -- Finance and a Director of
Templeton Investment Counsel, Inc. He is also a Director and/or Chairman of
Templeton Funds Annuity Company, Templeton Funds Trust Company, Templeton Funds
Management, Inc., Templeton Funds Distributor, Inc., Forcecare Ltd., Templeton
Global Strategic Services, S.A., Universal Investment Management, Inc.,
Templeton Life Assurance Ltd., Structured Asset Management, Inc., The DIAS
Group, Inc., Templeton Global Bond Managers, Inc., Templeton Emerging Markets,
Templeton Investment Services, Inc., Templeton Management (Lux), S.A., Templeton
Unit Trust Managers Ltd., and Templeton Investment Management Ltd. He is also
Vice President -- Finance and Chief Financial Officer of Property Resources
Equity Trust, Property Resources, Inc., Franklin Properties, Inc. and Franklin
Real Estate Management, Inc. Mr. Flanagan received a B.A. degree from Southern
Methodist University and is a Certified Public Accountant and a Chartered
Financial Analyst. He is currently a member of the American Institute of
Certified Public Accountants and the International Society of Financial
Analysts.
Thomas J. Bennett, age 46, has served since 1988 as the President of Continental
and since 1989 as sole Director and Chief Financial Officer of Continental.
Previously, he served as Regional Vice President, Utah Region, of Continental.
He is a graduate of California State University at Long Beach and holds the
Certified Property Manager (CPM) designation awarded by the Institute of Real
Estate Management.
David P. Rath, age 47, has served since 1992 as the Vice President -- Asset
Management for the Advisor, Property Resources, Inc. and Franklin Real Estate
Management, Inc. Previously, he was Assistant Vice President -- Research and
Analysis for the Advisor. Mr. Rath operated his own real estate investment
company, Rath Investments, from 1987 to 1990. Mr. Rath received a B.S. degree in
Mechanical Engineering from Bucknell University and an M.B.A. degree from the
University of California at Berkeley.
David N. Popelka, age 42, has served since 1992 as Vice President -- Asset
Management for the Advisor, Property Resources, Inc. and Franklin Real Estate
Management, Inc. Prior to joining Franklin Properties, Inc., Mr. Popelka was
Vice President -- Portfolio Management for the Glenborough Management Company in
Redwood City, California. Mr. Popelka is a graduate of Illinois State University
and received an M.B.A.
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<PAGE> 78
degree from the University of Washington. He has been a guest lecturer on real
estate investments and finance at Golden Gate University.
Charles L. Gee, age 49, has served since 1991 as the Senior Vice President of
Continental and as its Secretary since 1989. From 1986 to 1991, he held the
office of Vice President for Continental. Mr. Gee holds the Certified Property
Manager (CPM) designation awarded by the Institute of Real Estate Management and
is a California Real Estate Broker.
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<PAGE> 79
COMPENSATION OF MANAGEMENT OF THE COMPANY,
THE ADVISOR AND CONTINENTAL
EXECUTIVE COMPENSATION
No direct compensation has been paid by the Company to its directors and
officers, or directors and officers of the Advisor, except that the independent
directors of the Company receive fees of $2,000 per year plus $400 per each
regular meeting attended and $300 per each telephonic meeting attended. Each
independent director also received $400 for attending independent committee
meetings. For the fiscal year ended December 31, 1994, fees to all independent
directors, and reimbursement of expenses related to attendance at board
meetings, totaled $19,700. The Company has no annuity, pension or retirement
plans or any existing plans or arrangement under which payments have or would in
the future be made to any director or officer. The Company has paid certain fees
and will reimburse certain expenses of the Advisor, as described above under
"Comparative Information -- Comparison of Fees."
SPECIAL COMPENSATION OF INDEPENDENT DIRECTORS
Each independent director of the Company received $2,500 per quarter and
$400 per independent committee meeting attended from the Company as compensation
for their service on the committee of independent directors established to
evaluate the Merger. The aggregate special compensation paid to all independent
directors of the Company in connection with the Merger as of the date of this
Joint Proxy Statement/Prospectus is $ .
COMPENSATION OF THE ADVISOR AND CONTINENTAL
The Company has no employees. Its day-to-day operations are managed by the
Advisor under the terms of an Advisory Agreement. Continental acts as property
manager for the properties owned by the Company. See also "Investment
Considerations -- Certain Relationships and Related Transactions" and "The
Company -- Property Management."
The Company pays the Advisor, as an asset management fee, an annualized fee
of .5% of the book value of its real estate assets before depreciation. This fee
is reduced to .4% of the book value before depreciation of real estate assets
exceeding $200 million. The fee is calculated and paid at the end of each fiscal
quarter of the Company, based on the real estate assets at the end of such
quarter. For the year ended December 31, 1994 the Company paid the Advisor
$148,000 in advisory fees. The Company changed its advisory fee structure after
its conversion to an infinite life REIT in September 1994. Therefore the
advisory fee paid in 1994 does not reflect the amount that would have been paid
as an advisory fee if the changed compensation structure had been in place for
the entire year ended December 31, 1994. If such structure had been in place for
the Company throughout 1994, the Company would have paid the Advisor $214,000 in
advisory fees.
The Company pays all expenses of its operations except for the following,
which are borne by the Advisor (i) employment expenses of the Company's
Chairman, President, Executive Vice President, Senior Vice President, Chief
Financial Officer, Secretary and of the Company's directors who are also
officers of the Advisor, (ii) office expenses of the Advisor, and (iii) overhead
expenses of the Advisor not properly attributable to the performance of its
duties and obligations under the Advisory Agreement.
The Company pays a property management fee to Continental based on actual
services performed. If Continental retains independent management companies to
perform a portion or all of the services required for the management of the
Company's properties, it pays any fees charged by those persons without
additional cost to the Company. The fee paid to Continental does not include any
fees or expenses paid to on-site property managers or leasing commissions paid
to third parties, both of which are borne by the Company. During the year ended
December 31, 1994, the Company paid Continental property management and other
fees totaling $241,000. See also "The Company -- Property Management."
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<PAGE> 80
DESCRIPTION OF REAL PROPERTIES
If Shareholders of the Company and both Funds approve the Merger, the
Company will succeed to ownership of all of the real properties held by the
Funds. A list of these properties and the properties currently owned by the
Company is set forth below:
EXISTING PROPERTIES HELD BY THE COMPANY AND THE FUNDS
<TABLE>
<CAPTION>
DATE OF
PROPERTY LOCATION PURCHASE TYPE SQ. FT.
- ----------------------- -------------------- -------- ------------------------ --------
<S> <C> <C> <C> <C>
THE COMPANY
The Shores(1).......... Redwood City, CA 9/89 Office Complex 138,546
one three-story bldg.
one one-story bldg.
one five-story bldg.
Data General........... Manhattan Beach, CA 12/89 Office Building 118,443
one five-story
building
FREIF
The Shores(1).......... Redwood City, CA 9/89 Office Complex 138,546
one three-story bldg.
one one-story bldg.
one five-story bldg.
Northport.............. Fremont, CA 1/91 R & D Facility 144,568
three one-story bldgs.
Mira Loma.............. Reno, NV 11/88 Shopping Center 94,026
Glen Cove.............. Vallejo, CA 1/94 Shopping Center 66,000
ADVANTAGE
Fairway Center......... Brea, CA 1/92 Office Building 146,131
one two-story bldg.
Carmel Mountain........ San Diego, CA 11/94 Shopping Center 44,230
</TABLE>
- ---------------
(1) The Shores is owned jointly by the Company and FREIF, 60% and 40%,
respectively.
Each of these properties is described in detail below. Other than as
specifically noted, there are no plans for the improvement or development of any
of these properties. Each of the properties is expected to be used for the
purposes described below, and the Company and the Funds believe that each
property is suitable and adequate for its current use. Other than as described
below, these properties are not subject to any material lease, or option or
contract to purchase or sell the properties.
THE COMPANY PROPERTIES
The Shores Office Complex
On September 1, 1989, the Company purchased a 60% undivided fee interest in
the Shores Office Complex (the "Shores"). FREIF acquired the remaining 40% fee
interest as co-owner. This office complex consists of three buildings located at
100 Marine World Parkway, 1 Twin Dolphin Drive and 3 Twin Dolphin Drive, Redwood
City, San Mateo County, California. The Company and FREIF acquired the Shores as
tenants in common and have entered into a Co-Ownership Agreement which defines
their respective rights and obligations with respect to the property.
Located in the Redwood Shores community of Redwood City, California and
near the midpoint of the San Francisco Peninsula approximately 25 miles south of
San Francisco, the Shores is part of a 1,465 acre master-planned, mixed-use
development. Approximately 250 acres are devoted to commercial development
including office buildings, shopping centers, medical buildings, and hotels. The
remainder of Redwood Shores comprises residential properties, a 250 acre lagoon,
and 200 acres of reserved open space. The area contains
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<PAGE> 81
other existing and planned buildings which can be considered competitive with
the Shores. The Company and FREIF believe that the average effective rents
provided by existing leases at the Shores are at current market rates for
comparable space in the Redwood Shores area.
During 1992 and continuing into 1993, the Redwood Shores office market
experienced a decline in rental rates, resulting from over-building and the
economic recession. These factors had a substantial impact on the Shores' cash
flow. The property's operating income declined as leases and renewals were
signed at lower rental rates, and while the Company and FREIF incurred
additional costs associated with replacing tenants.
Late in 1993 the market stabilized, and by the end of 1994 the area's
vacancy rate had declined to less than 2%. As a result, effective market rental
rates increased about 9% during 1994 and rent concessions have substantially
ended. Rental rates have continued to increase during 1995. The Company and
FREIF believe that the long-term outlook for the Redwood Shores office market
remains favorable. The area continues to be attractive to potential tenants.
Data General Building
In 1989, the Company purchased the Data General Building, a five-story
office building located at 1500 Rosecrans Avenue, Manhattan Beach, Los Angeles
County, California.
The South Bay office market, which includes Manhattan Beach, stretches from
Los Angeles International Airport south along the Pacific Ocean to Long Beach.
The South Bay is dominated by aerospace and defense-related companies. Because
many of the defense programs these companies are engaged in have been curtailed,
their office space requirements have been substantially reduced, causing greater
vacancies and lower market rental rates. Based on information from local
sources, the Company believes that these trends will continue in 1996. The
Manhattan Beach/El Segundo sub-market, which contains nearly ten million
rentable square feet of office space, had a vacancy factor of 20% as of
December, 31, 1994, compared to 18% in 1993 and 11% in 1992. However, if and
when recovery begins, the Advisor expects that the Data General Building will
benefit sooner than many other buildings in the area due to its desirable
location in Manhattan Beach. The building's location has helped it maintain full
occupancy despite the leasing market's soft condition.
The Company believes that the effective rent provided by the computer
manufacturer's lease, which expires in 1999, is greater than current market
rates for comparable space in the Manhattan Beach area; the balance of the
leases are at current market rates.
For environmental and asbestos regulatory information on the Data General
Building, see "-- Government Regulations" below.
THE COMPANY'S SIGNIFICANT TENANTS
Two of the Company's tenants provide 10% or more of the Company's total
revenues. Both tenants are located at the Data General Building.
<TABLE>
<CAPTION>
ANNUALIZED % OF
BASE RENT CURRENT
TOTAL AT ANNUAL BASE LEASE RENEWAL
PRINCIPAL BUSINESS SQ. FT. 12/31/94 RENT EXPIRATION OPTIONS
- ---------------------------- ------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Credit Union................ 48,123 $872,000 22% 11/30/97 One 5-year
Computer Manufacturer....... 47,920 974,000 25 1/31/99 Two 5-year
</TABLE>
The credit union lease gives the tenant the right to cancel the lease on
November 15, 1996, if it pays the Company a cancellation penalty of $218,000.
Although the tenant has until February 15, 1996, to notify the Company of their
intent to cancel the lease, to date, no such notice has been given, and a
similar right to cancel the lease in 1995 was not exercised by the tenant. The
credit union's main operations occupy a five-story building located adjacent to
the Data General Building. The credit union leases their space from the Company
on a full-service basis, which means that the tenant is responsible for its
proportionate share of all allocable expenses of operating the property which
exceed base amounts defined in the lease.
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<PAGE> 82
The computer manufacturer is subject to a triple-net lease, which requires
the tenant to pay their pro rata share of real estate taxes, common area
expenses and insurance, in addition to base rent. This lease also provides for
two consecutive five-year renewal options. The tenant currently subleases
approximately 53% of their office space. When their lease expires in 1999, they
are unlikely to renew the subleased space. However, the Company has provided
each of the subtenants with a lease option commencing upon the expiration of
their subleases in 1999. Rental rates under the lease options, if exercised,
will be set at prevailing market rates in 1999.
FREIF PROPERTIES
In addition to its 40% interest in the Shores, FREIF owns the properties
described below.
Mira Loma Shopping Center
In 1988, FREIF purchased a fee interest in the Mira Loma Shopping Center
("Mira Loma"), a neighborhood shopping center located on the southeast corner of
Mira Loma Drive and McCarran Boulevard in Reno, Nevada. Located in the southeast
quadrant of Reno, Mira Loma is surrounded by single family homes as well as
residential apartment complexes and city recreational facilities which includes
a golf course. The number of households within Mira Loma's primary market area
grew by approximately 15% during the period from 1990 to 1994. The Advisor
believes that Mira Loma is in a strong competitive position in a neighborhood
which has a higher than average household income compared to other parts of
Reno. As the area continues to grow, Mira Loma is expected to benefit. Mira Loma
is the only neighborhood shopping center in the immediate market area and, under
present zoning laws, no other shopping centers may be built in Mira Loma's
immediate market area.
Reno is Nevada's second largest city with a population of approximately
150,000. Its geographic proximity to California and generally favorable business
climate enable Reno to attract companies wishing to benefit from Nevada's lack
of corporate income, personal income and payroll taxes as well as other lower
costs, while taking advantage of major California markets, including Sacramento
and the San Francisco Bay Area.
While the competitive retail market in Reno is approximately 90% occupied,
Mira Loma was 82% leased at December 31, 1994. FREIF believes that the average
effective rents payable under existing leases at Mira Loma are at current market
rates for comparable space in the Reno area.
In 1993, the drug store tenant at the Mira Loma Shopping Center vacated the
premises. This tenant leases approximately 16% of the rentable space at Mira
Loma. To date, the tenant has remained current on its rental obligations and
management has no reason to believe that the tenant intends to default.
Therefore, FREIF does not expect that the store closing will have any material
short-term impact on the operations of the property. FREIF is engaged in
negotiations with another drug store retailer to assume the existing tenant's
lease under similar terms. However, no formal agreement has yet been signed.
Northport Business Park
In 1991, FREIF purchased three research and development ("R&D") buildings
in the Northport Business Park, located at 45875 and 45635 Northport Loop East
and 4545 Cushing Parkway in Fremont, California (the "Northport Buildings"). The
Northport Business Park is located in the Bayside/Northport area of Fremont,
California, on the southeastern side of the San Francisco Bay in southern
Alameda County. Fremont is located in the northeastern part of Silicon Valley
and its lower development costs, good transportation access and affordable
housing have attracted a significant portion of the recent research and
development growth in Silicon Valley. The area is improved with a wide variety
of industrial facilities, many of which are competitive with the light
industrial nature of the Northport Buildings. The Advisor believes that the
average effective rents provided from the existing leases at the Northport
Buildings are at market rates for comparable space in the Fremont area.
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<PAGE> 83
The vacancy rate in the Fremont R&D market has declined to approximately
11% from 18% on January 1, 1994, and 25% on January 1, 1993. As a result, market
rental rates have stabilized after declining approximately 10% in 1993. If this
positive absorption rate continues, the Advisor believes that rental rates may
begin to increase in 1996.
The Northport Buildings are subject to local improvement assessments in the
following outstanding current principal amounts as of June 30, 1995:
<TABLE>
<S> <C>
Building 12............................................... $112,636
Building 13............................................... 93,031
Building 17............................................... 124,597
</TABLE>
Assessments are payable concurrently with property tax payments. Total
outstanding principal and interest as of June 30, 1995 was $330,264. The
assessments are scheduled to be fully paid in 2004.
Glen Cove Center
In January, 1994, FREIF purchased the Glen Cove Center ("Glen Cove"),
located at 100-170 Robles Drive, Vallejo, California. Vallejo has a population
of approximately 116,000, and is located about thirty miles northeast of San
Francisco, and twenty miles north of Oakland. Glen Cove is strategically located
at the only entrance and exit to the Glen Cove neighborhood which contains over
2,500 dwelling units. Within a one mile radius surrounding the property, there
are no competing neighborhood shopping centers, giving Glen Cove Center a
competitive advantage in serving the neighborhood.
As of December 31, 1994, the Glen Cove Center was 97% occupied, while the
competitive retail market in the vicinity was approximately 90% occupied. At the
time of acquisition, in January, 1994, the property was 90% occupied. Over the
past twelve months, rental rates have remained stable. The Advisor believes that
the average effective rents payable under existing leases at Glen Cove are
substantially at current market rates for comparable space in the Vallejo area.
The Glen Cove Center is subject to a loan with an outstanding balance of
approximately $1,959,000. The note bears interest at a variable rate of 1.5% in
excess of the Union Bank Reference Rate. Installments of principal and interest
are due monthly until maturity in May 1999. Principal installments are payable
in the amount of $3,700 per month. The note may be prepaid in whole or in part
at any time without penalty.
FREIF'S SIGNIFICANT TENANTS
Only one tenant provides 10% or more of FREIF's total revenues: the grocery
store anchor at Glen Cove Shopping Center. The tenant leases 50,360 square feet,
and makes base rental payments totaling approximately $528,000 annually, or
about 12% of FREIF's 1994 revenues. In addition, the tenant is responsible for
all allocable expenses of operating the property including their pro rata share
of real estate taxes, common area expenses and insurance. The lease expires on
January 31, 2010, and provides for four consecutive five-year renewal options.
ADVANTAGE PROPERTIES
Fairway Center
In 1992, Advantage purchased the Fairway Center, a two-story office
building located at 1800 East Imperial Highway in Brea, California. Brea,
located in north Orange County, with convenient access to several major
freeways, has a population of over 35,000 people. In addition, Brea has
available a skilled labor pool of over one million workers from the Orange
County, Pomona, and San Gabriel Valley areas. This access to a large labor work
force, together with Brea's convenient location to several major freeways and
affordable housing, has attracted a significant number of major businesses.
Major owner/users in the Brea area include Unocal, Bank of America and Suzuki.
Major office tenants include Allstate Insurance Co., the Equitable Life
Assurance Society, CNA, the Travelers Insurance Companies, The Capital Group,
NCR and other insurance
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<PAGE> 84
and financial service firms. Advantage believes that these benefits and
competitive lease rates have enabled Brea to establish itself as an attractive
back-office location for these and other companies.
Over the last three years, Brea's rental rates have remained relatively
stable while the rest of Orange County has experienced a steady decline. As of
December 31, 1994, the north Orange County office market contained over 4
million square feet and reported a vacancy rate of approximately 15%, while
Brea's vacancy rate remains below 8%. Given this low vacancy rate, the Advisor
believes that market rates in Brea could trend upward sooner than other parts of
southern California as the regional economy recovers.
The Fairway Center consists of two "phases." Phase I is a two story garden
office building that was constructed on approximately 6.6 acres of land in 1987.
Phase II consists of approximately 6.3 acres of additional undeveloped land,
which is currently zoned for commercial development and which is contiguous to
and located south of Phase I. Approximately 1.2 acres contain 100 parking spaces
serving Phase I. Advantage does not have any present plans to develop Phase II.
By acquiring Phase II, Advantage ensured its ability to control the timing and
type of any development that may occur there. Each of the leases at Fairway
Center is a full-service lease.
Advantage purchased the property on an all-cash basis, except for a
$480,000 loan made by the seller to Advantage and assumption of the Mello-Roos
Bonds described below. The $480,000 loan bears interest at 9% per annum and is
payable in monthly interest-only payments, with the entire principal amount due
on March 1, 1996. Advantage has set aside sufficient cash reserves to retire the
loan at maturity.
At the time of acquisition, the Fairway Center was subject to certain
improvement bonds issued pursuant to the Mello-Roos Community Act of 1982 (the
"Mello-Roos Bonds" or the "Bonds"), which authorizes the financing of public
facilities through the issuance of bonds that are repaid by levying special
assessments on properties located in a public improvement district, rather than
through general property tax revenues. The current outstanding principal
indebtedness of the Bonds is $2,705,000, less a prepaid reserve of $300,000 that
will earn interest for the benefit of Advantage and will be applied to repayment
of the outstanding principal balance of the Bonds at their last maturity date.
These Bonds were issued to pay for certain public facilities, improvements and
services provided for the benefit of Fairway.
The Bonds were issued in three types: $710,000 in serial bonds maturing
between October 1, 1991 and October 1, 2000, bearing interest at rates from
5.75% for the earliest maturity to 7.60% for the latest maturity; $780,000 in
term bonds due October 1, 2006 at 8.00%; and $1,510,000 in term bonds due
October 1, 2013 at 8.125%. The Bonds are paid through a special tax which is
levied and collected in the same manner and at the same time as the ad valorem
property taxes by the local tax collector. The annual payment on the Bonds is
calculated in an amount sufficient to amortize fully the indebtedness and
related charges (inclusive of the $300,000 prepaid reserve) represented by the
Bonds. The annual payment, net of administrative fees and interest credit to
Advantage on the $300,000 reserve for the 1995-1996 fiscal year, will equal
approximately $263,381. The annual payment will vary over the life of the Bonds,
but such payments are not expected to vary significantly from the 1995-1996
payment set forth above.
Carmel Mountain Gateway Plaza
On November 1, 1994, Advantage purchased the Carmel Mountain Gateway Plaza
("Carmel Mountain"), a specialty retail center located at 11465-11495 Carmel
Mountain Road, San Diego, San Diego County, California. Carmel Mountain is part
of Carmel Mountain Ranch, a 1,500 acre, nine-year old master-planned community,
with designated and strictly enforced land use. Upon final build-out, Carmel
Mountain Ranch is expected to be home to 4,970 dwelling units and approximately
1,400,000 square feet of retail commercial space. There is only one remaining
undeveloped retail site, which is directly across the street. Retail vacancy in
the Carmel Mountain Ranch sub-market historically has ranged from 2% to 5%, and
is currently 1.7%.
Home sales in Carmel Mountain Ranch have continued throughout the recent
recession, due largely to the community's well-thought-out plan, beneficial
location and the strong support base afforded by neighboring communities such as
Saber Springs, Scripps Ranch and Rancho Bernardo. Ultimately, the area will
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comprise 2,004 homes, with prices currently ranging in the $200,000 to $350,000
range, and 1,074 attached condominiums.
The Carmel Mountain Gateway Plaza is subject to a loan with an outstanding
balance of approximately $2,348,000. The note bears interest at a variable rate
of 1.5% in excess of the Union Bank Reference Rate. Installments of principal
and interest are due monthly until maturity in October 1999. Principal
installments are payable in the amount of $2,098 per month through December 1,
1995; then $2,300 per month through December 1, 1996; then $2,522 per month
through December 1, 1997; then $2,766 per month through December 1, 1998; then
$3,033 per month until maturity. The note may be prepaid in whole or in part at
any time without penalty.
ADVANTAGE'S SIGNIFICANT TENANTS
Three of Advantage's tenants provide 10% or more of its total revenues. All
three tenants are located at the Fairway Center.
<TABLE>
<CAPTION>
ANNUALIZED
BASE RENT
TOTAL AT % OF TOTAL LEASE RENEWAL
PRINCIPAL BUSINESS SQ. FT. 12/31/94 BASE RENT EXPIRATION OPTIONS
- ------------------------ ------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Insurance Company....... 74,515 $1,699,000 43% 10/31/97 One 5-year
Insurance Company....... 39,220 812,000 21 4/30/2001 One 5-year
Thrift Institution...... 21,173 406,000 10 4/30/2001 Two 5-year
</TABLE>
While there are no other scheduled lease expirations for the next five
years, an important concern in the near term is whether the large insurance
company tenant will renew its lease when it expires in 1997. Although Advantage
has initiated preliminary discussions with this tenant, it does not expect that
the tenant will engage in substantive negotiations until sometime in 1996.
Currently, the annual rate of this lease is $22.80 per square foot which is
above the current market rate estimated to be approximately $19.00 per square
foot.
Although it is impossible to predict the condition of Brea's office market
in late 1997, or the outcome of negotiations with the insurance company tenant,
if the tenant were to renew its lease at today's market rate, Advantage's rental
income would decline approximately $350,000, or $.12 per share of Common Stock,
including expense reimbursements. In addition, if the lease were renewed,
Advantage would likely provide the tenant with tenant improvements, which have
typically cost between $4.00 to $6.00 per square foot for other tenants at
Fairway, or $300,000 to $450,000 for the tenant's 75,000 square foot space. On
the other hand, if the tenant were to vacate its space and a single replacement
tenant could not be located, Advantage would have to reconfigure the space for
multiple tenants at a cost which could exceed $2 million.
In the absence of the Merger, Advantage's source of capital for these costs
will vary depending upon the amount of funds required. The most likely sources
are Advantage's cash reserves, debt financing or the sale of 5 acres of land at
the Fairway Center.
At Carmel Mountain, one tenant who provided 7% of Advantage's total revenue
during the six month period ended June 30, 1995 applied for protection under
Chapter 11 of the Federal Bankruptcy Act in August 1995. This tenant did not pay
the rent due in August 1995, but it has paid its monthly rent subsequently. See
"Advantage's Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
OCCUPANCY RATES FOR THE PAST FIVE YEARS
At December 31, 1994, the Company's properties were 100% leased, FREIF's
properties were 93% leased, and Advantage's properties were 99% leased, which
compares to 96%, 95% and 94% leased at the end of 1993 for the Company, FREIF
and Advantage, respectively. The following tables indicate the occupancy
71
<PAGE> 86
rates for each of the Company's, FREIF's and Advantage's properties and the
average annual rental rates of the Company's, FREIF's and Advantage's leases at
December 31 of each year.
OCCUPANCY RATES
<TABLE>
<CAPTION>
PROPERTY SQ. FT. 1990 1991 1992 1993 1994
- ------------------------------------------ ------- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C>
THE COMPANY
Data General.............................. 118,443 100% 100% 81% 100% 100%
The Shores................................ 83,127(1) 92 95 84 90 100
Overall................................... 201,570 97 98 82 96 100
FREIF
Mira Loma................................. 94,026 91 90 88 95(2) 82(2)
The Shores................................ 55,418(3) 92 95 84 90 100
Northport Buildings....................... 144,568 N/A 100 61 97 97
Glen Cove................................. 66,000 N/A N/A N/A N/A 97
Overall................................... 360,012 91 96 74 95 93
ADVANTAGE
Fairway Center............................ 146,131 N/A N/A 97 94 100
Carmel Mountain........................... 44,230 N/A N/A N/A N/A 99
Overall................................... 190,361 N/A N/A 97 94 99
</TABLE>
- ---------------
(1) Reflects the Company's 60% interest in the Shores.
(2) Includes 16%, which is leased by a drug store tenant, who has vacated its
space but remains current under the terms of the lease.
(3) Reflects FREIF's 40% interest in the Shores.
AVERAGE ANNUAL RENTAL RATES
AVERAGE ANNUAL RENTAL RATES/SQ. FT.
<TABLE>
<CAPTION>
PROPERTY 1990 1991 1992 1993 1994
- ---------------------------------------------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
THE COMPANY
Data General(1)............................... $15.38 $15.57 $15.65 $15.27 $18.19
The Shores.................................... 23.01 21.54 21.03 20.98 21.09
FREIF
Mira Loma(2).................................. 8.55 8.49 8.60 8.92 8.98
The Shores.................................... 23.01 21.54 21.03 20.98 21.09
Northport Buildings........................... N/A 8.73 7.81 7.91 7.95
Glen Cove..................................... N/A N/A N/A N/A 11.83
ADVANTAGE
Fairway Center................................ N/A N/A 21.86 22.57 21.58
Carmel Mountain............................... N/A N/A N/A N/A 18.50
</TABLE>
- ---------------
(1) The average annual rental rates at December 31, 1990, and 1991 for Data
General represented triple-net leases, while the rates shown for 1992
through 1994 are a combination of triple-net and full-service leases. The
large increase in Data General's average rental rate at December 31, 1994,
was due to scheduled rent escalations that occurred during the year. The
escalations had a lesser effect on reported rental income in the Company's
financial statements since rental income is recorded on the straight-line
basis.
(2) Average rental rate per square foot excludes income from a restaurant land
lease and an ATM.
72
<PAGE> 87
LEASE EXPIRATIONS
At December 31, 1994, the Company's properties contained a total of 29
leases, FREIF's properties contained a total of 61 leases and Advantage's
properties contained a total of 9 leases. The following schedule lists the lease
expiration dates of each portfolio of the Company, FREIF and Advantage, and the
related annual base rental income for each of the Company, FREIF and Advantage
as of December 31, 1994.
LEASE EXPIRATIONS
<TABLE>
<CAPTION>
SQ.
YEAR EXPIRING FT. BASE RENT ANNUAL RENT
--------------------------------- -------- ------ ---------- -----------
<S> <C> <C> <C> <C>
THE COMPANY(1)
1995............................. 7 10,869 $ 231,000 6%
1996............................. 5 16,517 316,000 8
1997............................. 3 50,981 926,000 24
1998............................. 5 13,858 289,000 7
1999............................. 5 71,396 1,446,000 37
2000............................. 2 11,399 239,000 6
2001............................. 0 0 0 0
2002............................. 0 0 0 0
2003............................. 0 0 0 0
2004............................. 0 0 0 0
2005............................. 0 0 0 0
2006............................. 0 0 0 0
2007............................. 0 0 0 0
2008............................. 1 22,400 301,000 8
2009............................. 0 0 0 0
2010............................. 0 0 0 0
2011............................. 0 0 0 0
2012............................. 1 3,600 148,000 4
FREIF(2)
1995............................. 11 73,676 723,000 19
1996............................. 17 77,487 794,000 21
1997............................. 5 4,249 73,000 2
1998............................. 8 14,743 245,000 7
1999............................. 8 22,557 409,000 11
2000............................. 5 13,149 252,000 7
2001............................. 1 2,695 41,000 1
2002............................. 1 23,365 177,000 5
2003............................. 0 0 0 0
2004............................. 0 0 0 0
2005............................. 1 36,000 274,000 7
2006............................. 0 0 0 0
2007............................. 0 0 0 0
2008............................. 0 0 0 0
2009............................. 0 0 0 0
2010............................. 1 50,360 528,000 14
2011............................. 0 0 0 0
2012............................. 2 2,400 123,000 3
2013............................. 1 15,025 109,000 3
</TABLE>
73
<PAGE> 88
<TABLE>
<CAPTION>
SQ.
YEAR EXPIRING FT. BASE RENT ANNUAL RENT
--------------------------------- -------- ------ ---------- -----------
<S> <C> <C> <C> <C>
ADVANTAGE
1995............................. 0 0 0 0
1996............................. 0 0 0 0
1997............................. 2 82,160 1,859,000 47
1998............................. 0 0 0 0
1999............................. 0 0 0 0
2000............................. 1 3,578 75,000 2
2001............................. 2 60,393 1,218,000 31
2002............................. 1 1,000 * 0
2003............................. 0 0 0 0
2004............................. 1 13,504 211,000 5
2005............................. 0 0 0 0
2006............................. 0 0 0 0
2007............................. 0 0 0 0
2008............................. 0 0 0 0
2009............................. 1 16,648 372,000 9
2010............................. 1 12,078 217,000 5
</TABLE>
- ---------------
(1) Total Square Feet and Annual Base Rent reflect the Company's 60% interest in
the Shores.
(2) Total Square Feet and Annual Base Rent reflect FREIF's 40% interest in the
Shores.
* Tenant was in a free rent period at December 31, 1994. Base rental payments
of $2,000 per month commenced on March 1, 1995.
PROPERTY TAXES
The Merger is expected to cause the properties in California of each Fund
whose Shareholders approve the Merger to be reassessed for property tax
purposes. The effect of these reassessments is estimated to increase the
aggregate amount of property taxes for the Company by approximately $28,000 per
year in respect of former FREIF properties and approximately $11,000 per year in
respect of former Advantage properties.
The following schedule lists the real property tax rate and the estimated
annual real property taxes of each property of the Company, FREIF and Advantage.
<TABLE>
<CAPTION>
PROPERTY REAL PROPERTY TAX RATE ANNUAL PROPERTY TAX PERIOD COVERED
--------------------------- ------------------------- ------------------- --------------
<S> <C> <C> <C>
Mira Loma.................. 3.2531% of assessed value $ 75,910 1995-1996
The Shores................. 1.0000% of assessed value 202,204 1995-1996
Northport.................. 1.0082% of assessed value 123,837(1) 1995-1996
Glen Cove.................. 1.0902% of assessed value 72,464 1995-1996
Data General............... 1.0000% of assessed value 131,985 1995-1996
Fairway Center............. 1.0544% of assessed value 197,277(2) 1995-1996
Carmel Mntn................ 1.0204% of assessed value 82,593 1995-1996
</TABLE>
- ---------------
(1) The property tax does not include annual payments made on local improvement
district bonds. The annual assessment payments for the 1995-1996 fiscal year
were $52,036.
(2) The property tax does not include annual payments made on the Mello-Roos
Bonds. The annual payment on the Mello-Roos Bonds for the 1995-1996 fiscal
year is $263,381.
74
<PAGE> 89
DEPRECIATION
The following schedule lists the federal tax basis depreciation rate and
life claimed with respect to each property of the Company, FREIF and Advantage.
All of the real properties are being depreciated for tax purposes on the
straight-line method under the modified accelerated cost recovery system.
<TABLE>
<CAPTION>
DEPRECIATION
RATE FOR
TAX 1995 NET BASIS
PROPERTY BASE COST ANNUALIZED LIFE JUNE 30, 1995
- --------------------------------------- ----------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
MIRA LOMA
Building and Improvements.............. $ 7,082,674 3% 31.5/39 yrs. $ 5,598,813
Land Improvements...................... 172,078 8 15 yrs. 130,778
Tenant Improvements.................... 300,314 13 7 yrs. 97,514
----------- -----------
Total........................ $ 7,555,066 $ 5,827,105
=========== ===========
THE SHORES
Building and Improvements.............. $20,730,584 3% 31.5/39 yrs. $ 16,906,184
Land Improvements...................... 28,786 9 15 yrs. 23,415
Tenant Improvements.................... 1,531,876 16 7 yrs. 795,460
----------- -----------
Total........................ $22,291,246 $ 17,725,059
=========== ===========
NORTHPORT
Building and Improvements.............. $ 8,334,354 3% 31.5 yrs. $ 7,154,754
Land Improvements...................... 10,642 9 15 yrs. 9,128
Tenant Improvements.................... 742,533 12 7 yrs. 257,162
----------- -----------
Total........................ $ 9,087,529 $ 7,421,044
=========== ===========
GLEN COVE
Building and Improvements.............. $ 4,200,000 3% 31.5 yrs. $ 4,016,667
Land Improvements...................... 76,728 10 15 yrs. 69,244
Tenant Improvements.................... 0 -- -- 0
----------- -----------
Total........................ $ 4,276,728 $ 4,085,911
=========== ===========
DATA GENERAL
Building and Improvements.............. $17,140,271 3% 31.5/39 yrs. $ 14,120,174
Land Improvements...................... 296,586 6 15 yrs. 206,043
Tenant Improvements.................... 2,196,544 15 7 yrs. 998,198
----------- -----------
Total........................ $19,633,401 $ 15,324,415
=========== ===========
FAIRWAY CENTER
Building and Improvements.............. $14,338,622 3% 31.5/39 yrs. $ 12,766,165
Land Improvements...................... 18,046 9 15 yrs. 14,656
Tenant Improvements.................... 586,568 25 7 yrs. 438,270
----------- -----------
Total........................ $14,943,236 $ 13,219,091
=========== ===========
CARMEL MOUNTAIN
Building and Improvements.............. $ 5,053,124 3% 31.5 yrs. $ 4,952,863
Land Improvements...................... 0 -- 15 yrs. --
Tenant Improvements.................... 18,842 -- 7 yrs. 18,842
----------- -----------
Total........................ $ 5,071,966 $ 4,971,705
=========== ===========
</TABLE>
75
<PAGE> 90
INSURANCE
The Company, FREIF and Advantage believe their properties are adequately
insured. The Company and each Fund currently carries earthquake insurance
coverage for its respective properties and the Company intends to continue to
carry earthquake coverage to the extent that it is available at economically
reasonable rates. However, the Company's, FREIF's and Advantage's earthquake
insurance coverage may, from time to time, be subject to substantial
deductibles.
GOVERNMENT REGULATIONS
Under various federal, state and local laws, ordinances and regulations, an
owner or operator of real property may become liable for the costs of removal or
remediation of certain hazardous substances released on or in its property. Such
laws often impose such liability without regard to whether the owner or operator
knew of, or was responsible for, the release of such hazardous substances, the
presence of such substances, or the failure to properly remediate such
substances, when released. As part of the investigation of properties prior to
acquisition, the Company and each Fund typically has obtained inspection reports
concerning the condition of the property, including specialized environmental
inspection reports concerning the presence of hazardous substances on the
property. The Company intends to continue this practice.
Such inspection reports, however, do not necessarily reveal all hazardous
substances or sources thereof, and substances not considered hazardous when a
property is acquired may subsequently be classified as such by amendments to
local, state, and federal laws, ordinances, and regulations. If it is ever
determined that hazardous substances on or in a property must be removed or the
release of such substances remediated, the Company could be required to pay all
costs of any necessary cleanup work, although under certain circumstances,
claims against other responsible parties could be made by the Company. The
Company could also experience lost revenues during any such cleanup, or lower
lease rates, decreased occupancy or difficulty selling or borrowing against the
affected property either prior to or following any such cleanup. None of the
Company, FREIF or Advantage is aware of any hazardous substances on or in their
respective properties except as described in this section and none of the
Company, FREIF or Advantage has been notified by any governmental authority of
any noncompliance, liability or other claim in connection with the environmental
condition of any of its properties.
The Company is aware of the existence of certain hazardous substances at
the Data General Building site. The Data General Building is located on property
that was formerly part of a site used for storage of crude oil and various
refined petroleum products. As a result, methane gas is present in the soil and
the groundwater is contaminated throughout the area where the property is
located. According to environmental reports prepared at the time the Data
General Building was acquired, a vapor ventilation system on the property, which
was installed and is maintained and monitored by a prior owner of the property,
Chevron Land Development Company, has mitigated any material risk associated
with the presence of the methane gas. The Company has not incurred any costs for
monitoring and remediating the presence of methane gas or the groundwater
contamination at the Data General Building and does not anticipate incurring any
cost with regard to such activities in the future. The contamination in the
groundwater generally presents a risk only if the groundwater is used as
drinking water, which it is not.
The Company has not received any reports from Federal or state agencies
relieving it for future clean-up responsibilities, but Federal and state
agencies have investigated these matters and have not, to date, required any
clean-up. The Company has no reason to believe at this time that it will be
required to take remediation steps in the future, particularly given the
geographic scope of the contaminated area. It is therefore difficult to predict
what, if any, costs might be incurred by the Company should the position of the
Federal or state agencies change. In any event, if the Company is required to
cure the contamination on the Data General Building site, it would seek full
indemnity from the oil companies which were the source of the contamination.
Data General Building's transit exterior panels and roof coverings contain
asbestos. Transit is "non-friable," which means that the asbestos fibers are not
released into the air, unless the transit is broken, cut or otherwise damaged.
The Advisor believes that absent such breakage or damage, the existence of
asbestos in the transit presents no measurable risk of asbestos-related
injuries. However, the presence of asbestos in the
76
<PAGE> 91
transit panels means that protective measures may need to be taken if the
transit panels are repaired or if they are damaged by the elements.
The Americans with Disabilities Act ("ADA"), which generally requires that
buildings be made accessible to people with disabilities, has separate
compliance requirements for "public accommodations" and "commercial facilities."
If certain uses by tenants of a building constitute a "public accommodation,"
the ADA imposes liability for noncompliance on both the tenant and the
owner/operator of the building. The Company and each Fund have conducted
inspections of their respective properties to determine whether the exterior and
common area of such property are in compliance with the ADA and the Company,
FREIF and Advantage believe that their respective properties are in compliance.
If, however, it were ever determined that one or more of the Company's, FREIF's
or Advantage's properties were not in compliance, the Company and/or each Fund
may be subjected to unanticipated expenditures incurred to remove access
barriers, or to pay fines or damages related to such non-compliance.
LEGAL PROCEEDINGS
There are no material legal proceedings pending to which the Company, FREIF
or Advantage is a party, or to which any of their respective properties is the
subject, required to be reported hereunder. From time to time, the Company,
FREIF or Advantage may be a party to ordinary routine litigation incidental to
its business.
77
<PAGE> 92
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT OF THE COMPANY AND THE FUNDS
THE COMPANY
The following table sets forth the beneficial ownership of the Company
Common Stock by the directors, and by all current directors and officers as a
group, as of September 30, 1995. At such date, all current directors and
officers as a group beneficially owned less than 1% of the outstanding Common
Stock of the Company.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF SHARES
NAME TITLE OF CLASS BENEFICIALLY OWNED
- ------------------------------------------------- ----------------------- ------------------
<S> <C> <C>
David P. Goss.................................... Common Stock, Series A 3,263
Chief Executive Officer, President and Director
E. Samuel Wheeler................................ Common Stock, Series A 100
Independent Director
Lloyd D. Hanford................................. Common Stock, Series A --
Independent Director
Laurence C. Werner............................... Common Stock, Series A --
Independent Director
Egon H. Kraus.................................... Common Stock, Series A 2,000
Independent Director
Directors and officers as a group................ Common Stock, Series A 7,818
</TABLE>
As of September 30, 1995, one Company Series A Shareholder of record was
known by the Company to own beneficially more than 5% of the outstanding Company
Common Stock.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF SHARES % OF
NAME AND ADDRESS TITLE OF CLASS BENEFICIALLY OWNED CLASS(1)
- ------------------------------------------ ----------------------- ------------------ -----
<S> <C> <C> <C>
Commonwealth of Massachusetts............. Common Stock, Series A 1,077,608 19.4%
Pension Reserve Investment
Management Board ("PRIM")(2)
125 Summer Street
10th Floor
Boston, MA 02110
Franklin Properties, Inc.................. Common Stock, Series B 185,866(1) 3.3%
</TABLE>
- ---------------
(1) The Company has one class of common stock in two series, designated Common
Stock and Series B. The Common Stock and Series B Shares vote together as
one class with each share being entitled to one vote. The 185,866 Series B
Shares (3.3% of the total number of outstanding shares of Common Stock) were
originally issued to Franklin Resources, Inc., the parent company of the
Advisor, in return for capital contributions to the Company, applied to pay
a portion of the sales commission in connection with the Company's offering
of its Common Stock. Franklin Resources, Inc. transferred these Series B
Shares to the Advisor.
(2) The Massachusetts Treasurer's Management Trust (the "Trust") acquired
1,000,000 shares of Company Common Stock in connection with the Company's
initial public offering of such shares, and acquired an additional 77,608
shares through participation in the Company's dividend reinvestment program.
PRIM, a related entity of the Trust, now has beneficial ownership of these
shares.
78
<PAGE> 93
FREIF
The following table sets forth the beneficial ownership of FREIF Common
Stock by its directors and by all current directors and officers as a group, as
of September 30, 1995. At such date, all directors and officers as a group
beneficially owned less than 1% of the outstanding Common Stock of FREIF.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF SHARES
NAME TITLE OF CLASS BENEFICIALLY OWNED
- ------------------------------------------ ----------------------- ------------------
<S> <C> <C>
David P. Goss............................. Common Stock, Series A --
Chief Executive Officer, President and
Director
Frank W.T. LaHaye......................... Common Stock, Series A --
Independent Director
Egon H. Kraus............................. Common Stock, Series A 3,000
Independent Director
Directors and officers as a group......... Common Stock, Series A 3,500
</TABLE>
As of September 30, 1995, one FREIF Series A Shareholder of record was
known to FREIF to own beneficially more than 5% of the outstanding FREIF Common
Stock.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF SHARES % OF
NAME AND ADDRESS TITLE OF CLASS BENEFICIALLY OWNED CLASS(1)
- ------------------------------------------ ----------------------- ------------------ -----
<S> <C> <C> <C>
PRIM...................................... Common Stock, Series A 634,137(2) 14.7%
125 Summer Street
10th Floor
Boston, MA 02110
Franklin Properties, Inc.................. Common Stock, Series B 319,308(1) 7.4%
</TABLE>
- ---------------
(1) FREIF has one class of Common Stock in two series, designated Common Stock
and Series B. The Common Stock and Series B Shares vote together as one
class with each share being entitled to one vote. The 319,308 Series B
Shares (7.4% of the total number of outstanding shares of Common Stock) were
originally issued to Franklin Resources, Inc. the parent company of the
Advisor, in return for capital contributions to FREIF, applied to pay sales
commissions in connection with FREIF's offering of its Common Stock.
Franklin Resources, Inc. transferred these Series B Shares to the Advisor.
(2) Massachusetts Treasurer's Management Trust acquired 600,000 shares of FREIF
Common Stock in connection with FREIF's initial public offering of such
shares, and acquired an additional 34,137 shares through participation in
FREIF's dividend reinvestment program. PRIM, a related entity of the Trust,
now has beneficial ownership of these shares.
ADVANTAGE
The following table sets forth the beneficial ownership of Advantage Common
Stock by the directors, and by all current directors and officers as a group, as
of September 30, 1995. At such date, all directors and officers as a group
beneficially owned less than 1% of the outstanding Common Stock of Advantage.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF SHARES
NAME TITLE OF CLASS BENEFICIALLY OWNED
- ------------------------------------------ ----------------------- ------------------
<S> <C> <C>
David P. Goss............................. Common Stock, Series A --
Chief Executive Officer, President and
Director
E. Samuel Wheeler......................... Common Stock, Series A 100
Independent Director
Lloyd D. Hanford, Jr...................... Common Stock, Series A --
Independent Director
Lawrence C. Werner........................ Common Stock, Series A --
Independent Director
</TABLE>
79
<PAGE> 94
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF SHARES
NAME TITLE OF CLASS BENEFICIALLY OWNED
- ------------------------------------------ ----------------------- ------------------
<S> <C> <C>
Egon H. Kraus............................. Common Stock, Series A --
Independent Director
Directors and officers as a group......... Common Stock, Series A 100
</TABLE>
As of September 30, 1995, one Advantage Series A Shareholder of record was
known by Advantage to own beneficially more than 5% of the outstanding Advantage
Common Stock.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF SHARES % OF
NAME AND ADDRESS TITLE OF CLASS BENEFICIALLY OWNED CLASS(1)
- ------------------------------------------ ----------------------- ------------------ -----
<S> <C> <C> <C>
Franklin Resources, Inc................... Common Stock, Series A 1,404,500 44.8%
777 Mariners Island Blvd.
San Mateo, CA 94403-7777
Franklin Properties, Inc.................. Common Stock, Series B 124,240(1) 4.0%
</TABLE>
- ---------------
(1) Advantage has one class of Common Stock in two series, designated Common
Stock and Series B. The Common Stock and Series B Shares vote together as
one class with each share being entitled to one vote. In August 1994,
Franklin Resources, Inc., the parent company of the Advisor, purchased all
of the Advantage Common Stock held by Massachusetts Teachers' and Employees'
Retirement Systems Trust. The 124,240 Series B Shares (4.0% of the total
number of outstanding shares of Common Stock) were originally issued to
Franklin Resources, Inc. in return for capital contributions to Advantage,
applied to pay a portion of the sales commission in connection with
Advantage's offering of its Common Stock. Franklin Resources, Inc.
transferred these Series B Shares to the Advisor.
80
<PAGE> 95
MARKET PRICE, DIVIDENDS AND HOLDERS
OF THE COMPANY'S AND THE FUNDS' SECURITIES
MARKET PRICE OF THE COMPANY'S AND THE FUNDS' SECURITIES
The Common Stock of the Company, FREIF and Advantage has been listed on the
AMEX since January 14, 1994. The following tables set forth the dividends paid
per share on Company Common Stock, FREIF Common Stock and Advantage Common
Stock, respectively, for the periods indicated below and the reported high and
low sales prices on the AMEX composite tape for the applicable periods.
THE COMPANY
<TABLE>
<CAPTION>
DIVIDENDS
CALENDAR PERIODS HIGH LOW PAID
----------------------------------------------------- ---- --- ---------
<S> <C> <C> <C>
1994:
First Quarter...................................... $53/4 $3 $ .10
Second Quarter..................................... 49/16 3 3/4 .10
Third Quarter...................................... 41/2 3 7/8 .10
Fourth Quarter..................................... 41/8 3 5/8 .11
1995:
First Quarter...................................... 43/8 3 3/4 .11
Second Quarter..................................... 45/8 3 3/4 .11
Third Quarter...................................... 411/16 3 7/8 .11
Fourth Quarter.....................................
</TABLE>
FREIF
<TABLE>
<CAPTION>
DIVIDENDS
CALENDAR PERIODS HIGH LOW PAID
----------------------------------------------------- ---- --- ---------
<S> <C> <C> <C>
1994:
First Quarter...................................... $63/8 $4 1/2 $ .125
Second Quarter..................................... 55/8 4 3/4 .125
Third Quarter...................................... 53/4 4 1/2 .125
Fourth Quarter..................................... 5 4 1/8 .125
1995:
First Quarter...................................... 53/8 4 1/8 .125
Second Quarter..................................... 57/8 4 1/4 .125
Third Quarter...................................... 513/16 5 .125
Fourth Quarter.....................................
</TABLE>
81
<PAGE> 96
ADVANTAGE
<TABLE>
<CAPTION>
DIVIDENDS
CALENDAR PERIODS HIGH LOW PAID
----------------------------------------------------- ---- --- ---------
<S> <C> <C> <C>
1994:
First Quarter...................................... $83/8 $5 1/4 $ .1625
Second Quarter..................................... 71/4 5 3/4 .1625
Third Quarter...................................... 71/4 6 .1625
Fourth Quarter..................................... 61/4 5 5/8 .1625
1995:
First Quarter...................................... 61/8 5 .1625
Second Quarter..................................... 63/8 5 1/8 .1625
Third Quarter...................................... 63/8 5 1/2 .1425
Fourth Quarter.....................................
</TABLE>
- ---------------
(1) Advantage reduced its dividend payable to Series A Shareholders in September
1995.
SECURITY HOLDERS OF THE COMPANY AND THE FUNDS
As of September 30, 1995, the Company, FREIF and Advantage had
approximately 1,996, 1,784, and 762 record holders of their respective Common
Stock. The Advisor is the sole shareholder of the Company's and the Funds'
Series B Shares.
DIVIDENDS DECLARED BY THE COMPANY AND THE FUNDS
Each of the Company and the Funds has a policy, subject to the discretion
of the respective boards of directors, of making quarterly cash dividends to
shareholders aggregating on an annual basis at least 95% of its taxable income.
For the six month period ended June 30, 1995, the Company declared dividends of
approximately $1,184,000 ($.22 per share); FREIF declared dividends of
approximately $1,000,000 ($.25 per share); and Advantage declared dividends of
approximately $980,000 ($.325 per share). For the year ended December 31, 1994,
the Company declared dividends of approximately $2,207,000 ($.41 per share);
FREIF declared dividends of approximately $2,000,000 ($.50 per share); and
Advantage declared dividends of $1,959,000 ($.65 per share). For the year ended
December 31, 1993, the Company declared dividends of approximately $2,154,000
($.40 per share); FREIF declared dividends of $2,000,000 ($.50 per share); and
Advantage declared dividends of $1,959,000 ($.65 per share). For the year ended
December 31, 1992, the Company declared dividends of approximately $2,422,000
($.45 per share); FREIF declared dividends of approximately $2,200,000 ($.55 per
share); and Advantage declared dividends of $2,010,000 ($.65 per share).
82
<PAGE> 97
PRO FORMA FINANCIALS
The following pro forma financial statements of the Company have been
prepared based on the historical financial statements of the Company and the
Funds. There are three sets of pro forma financial statements that reflect three
possible outcomes of the Merger: the merger of both FREIF and Advantage into the
Company, the merger of FREIF only into the Company, and the merger of Advantage
only into the Company. Each of the three pro forma balance sheets of the Company
at June 30, 1995 has been prepared as if the Merger had been consummated on June
30, 1995. The accompanying pro forma statements of operations for the year ended
December 31, 1994 and the six months ended June 30, 1995, have been prepared as
if the Merger had been consummated January 1, 1994. Pro forma financial
information assuming a maximum number of shareholders exercised their rights as
dissenters is summarized in footnote 4 to each set of the pro forma financial
statements. The information summarized in footnote 4 has been prepared under the
same assumptions used for the preparation of the pro forma financial statements,
except as discussed in the footnote.
The pro forma financial information has been presented as a reorganization
of entities under common control carrying over historical costs. Therefore, the
assets and liabilities have been reflected in the financial statements at their
book value of the Company and the Funds.
The pro forma financial statements of the Company should be read in
conjunction with the historical financial statements of the Company and the
Funds included elsewhere in this Joint Proxy Statement/Prospectus. These
statements do not purport to be indicative of the results of operations which
actually would have occurred had the Merger been consummated on January 1, 1994,
or any other date, or which may be expected to occur in the future.
83
<PAGE> 98
FRANKLIN SELECT REAL ESTATE INCOME FUND
(THE COMPANY, FREIF AND ADVANTAGE COMBINED)
PRO FORMA BALANCE SHEET
JUNE 30, 1995
(DOLLARS IN 000'S)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
THE COMPANY
AND FUNDS
COMBINED
HISTORICAL PRO FORMA COMPANY
TOTALS ADJUSTMENTS PRO FORMA
----------- ----------- ---------
<S> <C> <C> <C>
Rental Property:
Land.............................................. $ 30,949 $ -- $ 30,949
Buildings and Improvements........................ 82,994 -- 82,994
Equipment......................................... 63 -- 63
----- --------
114,006 -- 114,006
Less accumulated depreciation..................... 12,929 -- 12,929
----- --------
101,077 -- 101,077
Cash and cash equivalents........................... 5,024 (750)(A) 4,274
Mortgage-backed securities, available for sale...... 7,563 -- 7,563
Deferred rent receivable............................ 2,018 -- 2,018
Other assets, net of accumulated amortization....... 1,840 -- 1,840
----- --------
Total assets.............................. $ 117,522 $(750) $116,772
===== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Note and bonds payable.............................. $ 7,244 $ -- $ 7,244
Tenants' deposits and other liabilities............. 551 -- 551
Dividends payable................................... 1,582 -- 1,582
Advance rents....................................... 84 -- 84
----- --------
Total liabilities......................... 9,461 -- 9,461
----- --------
Stockholders' equity................................ 108,061 (750)(A) 107,311
----- --------
Total liabilities and stockholders'
equity.................................. $ 117,522 $(750) $116,772
===== ========
Book value per share, based on the historical number
of shares outstanding for the Company and the
Funds aggregating 12,396,525 shares and an assumed
14,143,128 shares of the Company as of June 30,
1995.............................................. $ 8.72 $ 7.59
========
</TABLE>
See Notes to Pro Forma Financial Statements.
84
<PAGE> 99
FRANKLIN SELECT REAL ESTATE INCOME FUND
(THE COMPANY, FREIF AND ADVANTAGE COMBINED)
PRO FORMA STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1995
(DOLLARS IN 000'S)
(UNAUDITED)
<TABLE>
<CAPTION>
THE COMPANY
AND FUNDS
COMBINED
HISTORICAL PRO FORMA PRO FORMA
TOTALS ADJUSTMENTS THE COMPANY
----------- ----------- -----------
<S> <C> <C> <C>
Revenue:
Rent................................................ $ 6,679 $ -- $ 6,679
Interest and dividends.............................. 334 -- 334
Other............................................... 8 -- 8
------ ----- ------
Total revenue............................... 7,021 -- 7,021
------ ----- ------
Expenses:
Interest............................................ 322 -- 322
Depreciation and amortization....................... 1,674 -- 1,674
Property operations................................. 1,684 -- 1,684
General and administrative.......................... 232 -- 232
Related party....................................... 512 109(B) 621
------ ----- ------
Total expenses.............................. 4,424 109 4,533
------ ----- ------
Net Income.................................. $ 2,597 $(109) $ 2,488
====== ===== ======
Net income per share, based on a weighted average
number of shares assumed to be 14,143,128 for the
pro forma six months ended June 30, 1995............ $ .18
======
</TABLE>
See Notes to Pro Forma Financial Statements.
85
<PAGE> 100
FRANKLIN SELECT REAL ESTATE INCOME FUND
(THE COMPANY, FREIF AND ADVANTAGE COMBINED)
PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1994
(DOLLARS IN 000'S)
(UNAUDITED)
<TABLE>
<CAPTION>
THE COMPANY
AND FUNDS
COMBINED
HISTORICAL PRO FORMA PRO FORMA
TOTALS ADJUSTMENTS THE COMPANY
----------- ----------- -----------
<S> <C> <C> <C>
Revenue:
Rent................................................ $12,099 $ -- $12,099
Interest and dividends.............................. 867 -- 867
Other............................................... 24 -- 24
------ ----- ------
Total revenue............................... 12,990 -- 12,990
------ ----- ------
Expenses:
Interest............................................ 466 -- 466
Depreciation and amortization....................... 3,124 -- 3,124
Property operations................................. 3,246 -- 3,246
General and administrative.......................... 666 -- 666
Loss on sale of mortgage backed securities.......... 318 -- 318
Related party....................................... 897 264(B) 1,161
------ ----- ------
Total expenses.............................. 8,717 264 8,981
------ ----- ------
Net Income.................................. $ 4,273 $(264) $ 4,009
====== ===== ======
Net income per share, based on a weighted average
number of shares assumed to be 14,143,128 for the
pro forma year ended December, 1994................. $ .28
======
</TABLE>
See Notes to Pro Forma Financial Statements.
86
<PAGE> 101
FRANKLIN SELECT REAL ESTATE INCOME FUND
(THE COMPANY, FREIF AND ADVANTAGE COMBINED)
NOTES TO THE PRO FORMA FINANCIAL STATEMENTS
(DOLLARS IN 000'S)
(UNAUDITED)
1. BASIS OF PRESENTATION:
It is intended that two currently operating real estate investment trusts
advised by Franklin Properties, Inc. (the Advisor), (i) Franklin Real Estate
Income Fund, and (ii) Franklin Advantage Real Estate Income Fund (the Funds),
will merge into Franklin Select Real Estate Income Fund (the Company). Once the
Merger transaction is complete, the Funds will cease to exist and the Company
will carry on as the successor entity.
The pro forma financial statements of the Company, which are unaudited,
have been prepared based on the historical financial statements of the Company
and the Funds. The pro forma balance sheet of the Company at June 30, 1995 has
been prepared as if the Merger had been consummated on June 30, 1995. The pro
forma statements of operations for the year ended December 31, 1994 and for the
six months ended June 30, 1995 have been prepared as if the Merger had been
consummated on January 1, 1994 and January 1, 1995, respectively. 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 cost to the Company and the Funds. In management's opinion, all
adjustments necessary to reflect the effects of the Merger have been made. The
pro forma financial statements should be read in conjunction with the historical
financial statements of the Company and the Funds.
Pro forma financial information assuming a maximum number of shareholders
exercised their rights as dissenters is summarized in footnote 4 to the pro
forma financial statements. This information has been prepared under the same
assumptions used for the preparation of the pro forma financial statements
except as discussed in footnote 4.
The pro forma financial statements assume that the Company has elected and
qualified as a real estate investment trust for income tax reporting purposes
and has distributed all of its taxable income and, therefore, incurred no income
tax expense for the periods presented.
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. Anticipated nonrecurring expenses related to the Merger transaction are
estimated to aggregate $750, which are to be paid from the cash reserves of the
Company and have been reflected as a one time charge against equity in the pro
forma balance sheet at June 30, 1995.
B. Changes in the advisory fee structure of the Funds versus the Company
are reflected as an adjustment to related party expenses.
Fees paid to the Advisor and their pro forma equivalents for the year ended
December 31, 1994 and for the six months ended June 30, 1995 are as follows:
<TABLE>
<CAPTION>
HISTORICAL
------------------------------- THE COMPANY
THE COMPANY FREIF ADVANTAGE TOTAL PRO FORMA
----------- ----- --------- ----- -----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1994:
Acquisition fee.............................. $ 0 $250 $ 480 $ 730 --
Advisory fee................................. $ 148 -- $ 116 $ 264 $ 528
Six Months Ended June 30, 1995:
Advisory fee................................. $ 107 -- $ 68 $ 175 $ 284
</TABLE>
87
<PAGE> 102
FRANKLIN SELECT REAL ESTATE INCOME FUND
(THE COMPANY, FREIF AND ADVANTAGE COMBINED)
NOTES TO THE PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
The pro forma advisory fees have been calculated quarterly based on the
total real estate assets before depreciation and amortization at each
quarter-end during the year ended December 31, 1994 and at the two
quarters-ended June 30, 1995 pursuant to the terms of the proposed agreement
between the Company and the Advisor.
Under the terms of the FREIF advisory agreement such fees were not incurred
as the Fund did not maintain certain required dividend levels.
The Company's fee structure does not include provisions for the payment of
acquisition fees to the Advisor. Such fees incurred by the Funds have been
capitalized to the base of the respective real estate investments for each of
the Funds.
3. ASSUMPTIONS:
Certain assumptions regarding the operations of the Company have been made
in connection with the preparation of the pro forma financial statements. Those
assumptions are as follows:
a. No adjustment has been made in connection with general and
administrative expenses of the Company versus those historically incurred
by the Company or the Funds, other than the advisory fee structure, as it
is management's opinion that a reduction, if any, will be immaterial.
b. Pro forma per share information is based on an assumed shares
outstanding after the merger of 14,143,128 shares. Historical per share
information for the Company and the Funds is based on the weighted average
shares outstanding for the year ended December 31, 1994 and the six months ended
June 30, 1995, on a combined basis, which aggregated 12,396,525 shares.
c. Book value per share calculations at June 30, 1995 are based on net
assets divided by the number of shares outstanding as described in (b) above.
d. Property management fees charged to the Company and the Funds are
assumed to be competitive for property management services rendered in the areas
where the Company's or the Funds' properties are located. Therefore, no
adjustment to the historical property management fees has been reflected in the
pro forma financial statements.
4. EXERCISE OF DISSENTERS RIGHTS:
Amounts related to the Company on a pro forma basis assume 100% acceptance
of the Merger by the existing shareholders of the Company and the Funds.
If it is assumed that (i) 5% of all Series A shareholders, representing
approximately 619,826 shares, exercised their rights to dissent from the Merger,
(ii) the Company repurchased their shares at the respective current trading
price as listed on the American Stock Exchange on November 6, 1995 of $4.125,
$5.50 and $5.250 for Franklin Select Real Estate Income Fund, Franklin Real
Estate Income Fund and Franklin Advantage Real Estate Income Fund, respectively,
the table presented below summarizes the effects of such a repurchase on the
Company on a pro forma basis, then the Company would pay out approximately
$3,001 to dissenters.
88
<PAGE> 103
FRANKLIN SELECT REAL ESTATE INCOME FUND
(THE COMPANY, FREIF AND ADVANTAGE COMBINED)
NOTES TO THE PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
The effect of such a repurchase for the year ended December 31, 1994 and at
June 30, 1995 and for the six months then ended would be as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED JUNE
DECEMBER 31, 1994 30, 1995
PRO FORMA PRO FORMA
COMPANY REPURCHASE COMPANY REPURCHASE
------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Balance Sheet (at end of period):
Cash and cash equivalents..................... $ 4,274 $ 1,273
Total assets.................................. 116,772 113,771
Stockholders' equity.......................... 107,311 104,310
Book value per share.......................... 7.59 7.76
Statement of Operations:
Interest and dividend revenue................. $ 867 $ 717 334 259
Net income.................................... 4,009 3,859 2,488 2,413
Net income per share.......................... .28 .29 .18 .18
</TABLE>
Per share amounts have been calculated based on a weighted average number
of Series A shares outstanding assumed to be 14,143,128 for the Company and
13,435,972 for the Company assuming the repurchase of dissenters' shares.
89
<PAGE> 104
FRANKLIN SELECT REAL ESTATE INCOME FUND
(THE COMPANY AND FREIF COMBINED)
PRO FORMA BALANCE SHEET
JUNE 30, 1995
(DOLLARS IN 000'S)
(UNAUDITED)
<TABLE>
<CAPTION>
THE COMPANY
AND FREIF
COMBINED
HISTORICAL PRO FORMA COMPANY
TOTALS ADJUSTMENTS PRO FORMA
----------- ----------- ---------
<S> <C> <C> <C>
ASSETS
Rental Property:
Land................................................ $20,012 $ -- $20,012
Buildings and Improvements.......................... 62,942 -- 62,942
Equipment........................................... 63 -- 63
------- ----- -------
83,017 -- 83,017
Less accumulated depreciation....................... 11,294 -- 11,294
------- ----- -------
71,723 -- 71,723
Cash and cash equivalents............................. 4,020 (558)(A) 3,462
Mortgage-backed securities, available for sale........ 6,074 -- 6,074
Deferred rent receivable.............................. 1,743 -- 1,743
Other assets, net of accumulated amortization......... 1,313 -- 1,313
------- ----- -------
Total assets................................ $84,873 $(558) $84,315
======= ===== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Note and bonds payable................................ $ 1,959 $ -- $ 1,959
Tenants' deposits and other liabilities............... 451 -- 451
Dividends payable..................................... 1,092 -- 1,092
Advance rents......................................... 16 -- 16
------- ----- -------
Total liabilities........................... 3,518 -- 3,518
------- ----- -------
Stockholders' equity.................................. 81,355 (558)(A) 80,797
------- ----- -------
Total liabilities and stockholders'
equity.................................... $84,873 $(558) $84,315
======= ===== =======
Book value per share, based on the historical number
of shares outstanding for the Company and FREIF
aggregating 9,382,812 shares and an assumed
10,526,673 shares of the Company as of June 30,
1995................................................ $ 8.67 $ 7.68
======= =======
</TABLE>
See Notes to Pro Forma Financial Statements.
90
<PAGE> 105
FRANKLIN SELECT REAL ESTATE INCOME FUND
(THE COMPANY AND FREIF COMBINED)
PRO FORMA STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1995
(DOLLARS IN 000'S)
(UNAUDITED)
<TABLE>
<CAPTION>
THE COMPANY
AND FREIF
COMBINED
HISTORICAL PRO FORMA PRO FORMA
TOTALS ADJUSTMENTS THE COMPANY
----------- ----------- -----------
<S> <C> <C> <C>
Revenue:
Rent................................................ $ 4,549 $ -- $ 4,549
Interest and dividends.............................. 271 -- 271
Other............................................... 8 -- 8
------ ----- ------
Total revenue............................... 4,828 -- 4,828
------ ----- ------
Expenses:
Interest............................................ 104 -- 104
Depreciation and amortization....................... 1,321 -- 1,321
Property operations................................. 1,195 -- 1,195
General and administrative.......................... 180 -- 180
Related party....................................... 331 100(B) 431
------ ----- ------
Total expenses.............................. 3,131 100 3,231
------ ----- ------
Net Income.................................. $ 1,697 $(100) $ 1,597
====== ===== ======
Net income per share, based on a weighted average
number of shares assumed to be 10,526,673 for the
pro forma six months ended June 30, 1995............ $ .15
======
</TABLE>
See Notes to Pro Forma Financial Statements.
91
<PAGE> 106
FRANKLIN SELECT REAL ESTATE INCOME FUND
(THE COMPANY AND FREIF COMBINED)
PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1994
(DOLLARS IN 000'S)
(UNAUDITED)
<TABLE>
<CAPTION>
THE COMPANY
AND FREIF
COMBINED
HISTORICAL PRO FORMA PRO FORMA
TOTALS ADJUSTMENTS THE COMPANY
----------- ----------- -----------
<S> <C> <C> <C>
Revenue:
Rent................................................ $ 8,819 $ -- $ 8,819
Interest and dividends.............................. 453 -- 453
Other............................................... 24 -- 24
------ ----- ------
Total revenue............................... 9,296 -- 9,296
------ ----- ------
Expenses:
Interest............................................ 177 -- 177
Depreciation and amortization....................... 2,591 -- 2,591
Property operations................................. 2,324 -- 2,324
General and administrative.......................... 498 -- 498
Related party....................................... 591 262(B) 853
Loss on sale of mortgage backed securities.......... 81 -- 81
------ ----- ------
Total expenses.............................. 6,262 262 6,524
------ ----- ------
Net Income.................................. $ 3,034 $(262) $ 2,772
====== ===== ======
Net income per share, based on a weighted average
number of shares assumed to be 10,526,673 for the
pro forma year ended December, 1994................. $ .26
======
</TABLE>
92
<PAGE> 107
FRANKLIN SELECT REAL ESTATE INCOME FUND
(THE COMPANY AND FREIF COMBINED)
NOTES TO THE PRO FORMA FINANCIAL STATEMENTS
(DOLLARS IN 000'S)
(UNAUDITED)
1. BASIS OF PRESENTATION:
It is intended that a currently operating real estate investment trust,
Franklin Real Estate Income Fund (the Fund), advised by Franklin Properties,
Inc. (the Advisor), will merge into Franklin Select Real Estate Income Fund (the
Company). Once the Merger transaction is complete, the Fund will cease to exist
and the Company will carry on as the successor entity.
The pro forma financial statements of the Company, which are unaudited,
have been prepared based on the historical financial statements of the Company
and the Fund. The pro forma balance sheet of the Company at June 30, 1995 has
been prepared as if the Merger had been consummated on June 30, 1995. The pro
forma statements of operations for the year ended December 31, 1994 and for the
six months ended June 30, 1995 have been prepared as if the Merger had been
consummated on January 1, 1994 and January 1, 1995, respectively. 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 cost to the Company and the Fund. In management's opinion, all
adjustments necessary to reflect the effects of the Merger have been made. The
pro forma financial statements should be read in conjunction with the historical
financial statements of the Company and the Fund.
Pro forma financial information assuming a maximum number of shareholders
exercised their rights as dissenters is summarized in footnote 4 to the pro
forma financial statements. This information has been prepared under the same
assumptions used for the preparation of the pro forma financial statements
except as discussed in footnote 4.
The pro forma financial statements assume that the Company has elected and
qualified as a real estate investment trust for income tax reporting purposes
and has distributed all of its taxable income and, therefore, incurred no income
tax expense for the periods presented.
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. Anticipated nonrecurring expenses related to the Merger transaction are
estimated to aggregate $558, which are to be paid from the cash reserves of the
Company and have been reflected as a one time charge against equity in the pro
forma balance sheet at June 30, 1995.
B. Changes in the advisory fee structure of the Fund versus the Company are
reflected as an adjustment to related party expenses.
Fees paid to the Advisor and their pro forma equivalents for the year ended
December 31, 1994 and for the six months ended June 30, 1995 are as follows:
<TABLE>
<CAPTION>
HISTORICAL THE COMPANY
THE COMPANY FREIF TOTAL PRO FORMA
----------- ----- ---- -----------
<S> <C> <C> <C> <C>
Year ended December 31, 1994:
Acquisition fee................................. $ 0 $250 $250 --
Advisory fee.................................... $ 148 -- $148 $ 410
Six Months Ended June 30, 1995:
Advisory fee.................................... $ 107 -- $107 $ 207
</TABLE>
93
<PAGE> 108
FRANKLIN SELECT REAL ESTATE INCOME FUND
(THE COMPANY AND FREIF COMBINED)
NOTES TO THE PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
The pro forma advisory fees have been calculated quarterly based on the
total real estate assets before depreciation and amortization at each
quarter-end during the year ended December 31, 1994 and at the two
quarters-ended June 30, 1995 pursuant to the terms of the proposed agreement
between the Company and the Advisor.
The Company's fee structure does not include provisions for the payment of
acquisition fees to the Advisor. Such fees incurred by the Fund have been
capitalized to the base of the respective real estate investments for the Fund.
3. ASSUMPTIONS:
Certain assumptions regarding the operations of the Company have been made
in connection with the preparation of the pro forma financial statements. Those
assumptions are as follows:
a. No adjustment has been made in connection with general and
administrative expenses of the Company versus those historically incurred
by the Company or the Fund, other than the advisory fee structure, as it is
management's opinion that a reduction, if any, will be immaterial.
b. Pro forma per share information is based on an assumed shares
outstanding after the merger of 10,526,673 shares. Historical per share
information for the Company and Fund is based on the weighted average
shares outstanding for the year ended December 31, 1994 and the six months
ended June 30, 1995, on a combined basis, which aggregated 9,382,812
shares.
c. Book value per share calculations at June 30, 1995 are based on net
assets divided by the number of shares outstanding as described in (b)
above.
d. Property management fees charged to the Company and the Fund are
assumed to be competitive for property management services rendered in the
areas where the Company's or the Fund's properties are located. Therefore,
no adjustment to the historical property management fees has been reflected
in the pro forma financial statements.
4. EXERCISE OF DISSENTERS RIGHTS:
Amounts related to the Company on a pro forma basis assume 100% acceptance
of the Merger by the existing shareholders of the Company and the Fund.
If it is assumed that (i) 5% of all Series A shareholders, representing
approximately 469,140 shares, exercised their rights to dissent from the Merger,
(ii) the Company repurchased their shares at the respective current trading
price as listed on the American Stock Exchange on November 6, 1995 of $4.125 and
$5.50 for Franklin Select Real Estate Income Fund and Franklin Real Estate
Income Fund, respectively, the table presented below summarizes the effects of
such a repurchase on the Company on a pro forma basis, then the Company would
pay out approximately $2,210 to dissenters.
94
<PAGE> 109
FRANKLIN SELECT REAL ESTATE INCOME FUND
(THE COMPANY AND FREIF COMBINED)
NOTES TO THE PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
The effect of such a repurchase for the year ended December 31, 1994 and at
June 30, 1995 and for the six months then ended would be as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED JUNE
DECEMBER 31, 1994 30, 1995
---------------------- ----------------------
PRO FORMA PRO FORMA
---------------------- ----------------------
COMPANY REPURCHASE COMPANY REPURCHASE
------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Balance Sheet (at end of period):
Cash and cash equivalents................... $ 3,462 $ 1,252
Total assets................................ 84,315 82,105
Stockholders' equity........................ 80,797 78,857
Book value per share........................ 7.68 7.88
Statement of Operations:
Interest and dividend revenue............... $ 453 $ 342 271 215
Net income.................................. 2,772 2,661 1,597 1,541
Net income per share........................ .26 .27 .15 .15
</TABLE>
Per share amounts have been calculated based on a weighted average number
of Series A shares outstanding assumed to be 10,526,673 for the Company and
10,000,340 for the Company assuming the repurchase of dissenters' shares.
95
<PAGE> 110
FRANKLIN SELECT REAL ESTATE INCOME FUND
(THE COMPANY AND ADVANTAGE COMBINED)
PRO FORMA BALANCE SHEET
JUNE 30, 1995
(DOLLARS IN 000'S)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
THE COMPANY
AND ADVANTAGE
COMBINED
HISTORICAL PRO FORMA COMPANY
TOTALS ADJUSTMENTS PRO FORMA
------------- ----------- ---------
<S> <C> <C> <C>
Rental Property:
Land............................................. $20,623 $ -- $20,623
Buildings and Improvements....................... 53,346 -- 53,346
----- -------
73,969 -- 73,969
Less accumulated depreciation.................... 7,870 -- 7,870
----- -------
66,099 -- 66,099
Cash and cash equivalents.......................... 3,825 (477)(A) 3,348
Mortgage-backed securities, available for sale..... 7,016 -- 7,016
Deferred rent receivable........................... 1,289 -- 1,289
Other assets, net of accumulated amortization...... 1,162 -- 1,162
----- -------
Total assets............................. $79,391 $ 477 $78,914
===== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes and bonds payable............................ $ 5,285 $ -- $ 5,285
Tenants' deposits and other liabilities............ 307 -- 307
Dividends payable.................................. 1,082 -- 1,082
Advance rents...................................... 84 -- 84
----- -------
Total liabilities........................ 6,758 -- 6,758
----- -------
Stockholders' equity............................... 72,633 (477)(A) 72,156
----- -------
Total liabilities and stockholders'
equity................................. $79,391 $(477) $78,914
===== =======
Book value per share, based on the historical
number of shares outstanding for the Company and
Advantage aggregating 8,397,010 shares and an
assumed 8,999,753 shares of the Company as of
June 30, 1995.................................... $ 8.65 $ 8.02
=======
</TABLE>
See Notes to Pro Forma Financial Statements.
96
<PAGE> 111
FRANKLIN SELECT REAL ESTATE INCOME FUND
(THE COMPANY AND ADVANTAGE COMBINED)
PRO FORMA STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1995
(DOLLARS IN 000'S)
(UNAUDITED)
<TABLE>
<CAPTION>
THE COMPANY
AND
ADVANTAGE
COMBINED
HISTORICAL PRO FORMA PRO FORMA
TOTALS ADJUSTMENTS THE COMPANY
----------- ----------- -----------
<S> <C> <C> <C>
Revenue:
Rent................................................ $ 4,418 $-- $ 4,418
Interest and dividends.............................. 298 -- 298
------ ---- ------
Total revenue............................... 4,716 -- 4,716
------ ---- ------
Expenses:
Interest............................................ 218 -- 218
Depreciation and amortization....................... 1,099 -- 1,099
Property operations................................. 1,149 -- 1,149
General and administrative.......................... 145 -- 145
Related party....................................... 404 9(B) 413
------ ---- ------
Total expenses.............................. 3,015 9 3,024
------ ---- ------
Net Income.................................. $ 1,701 $(9) $ 1,692
====== ==== ======
Net income per share, based on a weighted average
number of shares assumed to be 8,999,753 for the pro
forma six months ended June 30, 1995................ $ .19
======
</TABLE>
See Notes to Pro Forma Financial Statements.
97
<PAGE> 112
FRANKLIN SELECT REAL ESTATE INCOME FUND
(THE COMPANY AND ADVANTAGE COMBINED)
PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1994
(DOLLARS IN 000'S)
(UNAUDITED)
<TABLE>
<CAPTION>
FUNDS
COMBINED
HISTORICAL PRO FORMA PRO FORMA
TOTALS ADJUSTMENTS THE COMPANY
-------- ----------- -----------
<S> <C> <C> <C>
Revenue:
Rent................................................... $7,710 $ -- $ 7,710
Interest and dividends................................. 800 -- 800
------ ---- ------
Total revenue.................................. 8,510 -- 8,510
------ ---- ------
Expenses:
Interest............................................... 289 -- 289
Depreciation and amortization.......................... 2,002 -- 2,002
Property operations.................................... 2,132 -- 2,132
General and administrative............................. 446 -- 446
Loss on sale of mortgage backed securities............. 250 -- 250
Related party.......................................... 684 68(B) 752
------ ---- ------
Total expenses................................. 5,803 68 5,871
------ ---- ------
Net Income..................................... $2,707 $ (68) $ 2,639
====== ==== ======
Net income per share, based on a weighted average number
of shares assumed to be 8,999,753 for the pro forma
year ended December, 1994.............................. $ .29
======
</TABLE>
See Notes to Pro Forma Financial Statements.
98
<PAGE> 113
FRANKLIN SELECT REAL ESTATE INCOME FUND
(THE COMPANY AND ADVANTAGE COMBINED)
NOTES TO THE PRO FORMA FINANCIAL STATEMENTS
(DOLLARS IN 000'S)
(UNAUDITED)
1. BASIS OF PRESENTATION:
It is intended that a currently operating real estate investment trust,
Franklin Advantage Real Estate Income Fund (the Fund), advised by Franklin
Properties, Inc. (the Advisor), will merge into Franklin Select Real Estate
Income Fund (the Company). Once the Merger transaction is complete, the Fund
will cease to exist and the Company will carry on as the successor entity.
The pro forma financial statements of the Company, which are unaudited,
have been prepared based on the historical financial statements of the Company
and the Fund. The pro forma balance sheet of the Company at June 30, 1995 has
been prepared as if the Merger had been consummated on June 30, 1995. The pro
forma statements of operations for the year ended December 31, 1994 and for the
six months ended June 30, 1995 have been prepared as if the Merger had been
consummated on January 1, 1994 and January 1, 1995, respectively. 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 cost to the Company and the Fund. In management's opinion, all
adjustments necessary to reflect the effects of the Merger have been made. The
pro forma financial statements should be read in conjunction with the historical
financial statements of the Company and the Fund.
Pro forma financial information assuming a maximum number of shareholders
exercised their rights as dissenters is summarized in footnote 4 to the pro
forma financial statements. This information has been prepared under the same
assumptions used for the preparation of the pro forma financial statements
except as discussed in footnote 4.
The pro forma financial statements assume that the Company has elected and
qualified as a real estate investment trust for income tax reporting purposes
and has distributed all of its taxable income and, therefore, incurred no income
tax expense for the periods presented.
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. Anticipated nonrecurring expenses related to the Merger transaction are
estimated to aggregate $477, which are to be paid from the cash reserves of the
Company and have been reflected as a one time charge against equity in the pro
forma balance sheet at June 30, 1995.
B. Changes in the advisory fee structure of the Fund versus the Company are
reflected as an adjustment to related party expenses.
Fees paid to the Advisor and their pro forma equivalents for the year ended
December 31, 1994 and for the six months ended June 30, 1995 are as follows:
<TABLE>
<CAPTION>
ADVANTAGE
----------------------- THE COMPANY
THE COMPANY ADVANTAGE TOTAL PRO FORMA
----------- --------- ----- -----------
<S> <C> <C> <C> <C>
Year ended December 31, 1994:
Acquisition fee.................................... $ 0 $ 480 $ 480 --
Advisory fee....................................... $ 148 $ 116 $ 264 332
Six Months Ended June 30, 1995:
Advisory fee....................................... $ 107 $ 68 $ 175 184
</TABLE>
99
<PAGE> 114
FRANKLIN SELECT REAL ESTATE INCOME FUND
(THE COMPANY AND ADVANTAGE COMBINED)
NOTES TO THE PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
The pro forma advisory fees have been calculated quarterly based on the
total real estate assets before depreciation and amortization at each
quarter-end during the year ended December 31, 1994 and at the two
quarters-ended June 30, 1995 pursuant to the terms of the proposed agreement
between the Company and the Advisor.
The Company's fee structure does not include provisions for the payment of
acquisition fees to the Advisor. Such fees incurred by the Fund have been
capitalized to the base of the respective real estate investments for the Fund.
3. ASSUMPTIONS:
Certain assumptions regarding the operations of the Company have been made
in connection with the preparation of the pro forma financial statements. Those
assumptions are as follows:
a. No adjustment has been made in connection with general and
administrative expenses of the Company versus those historically incurred
by the Company or the Fund, other than the advisory fee structure, as it is
management's opinion that a reduction, if any, will be immaterial.
b. Per share information is based on an assumed shares outstanding
after the merger of 8,999,753 shares. Per share information for the Fund is
based on the weighted average shares outstanding for the year ended
December 31, 1994 and the six months ended June 30, 1995, on a combined
basis, which aggregated 8,397,010 shares.
c. Book value per share calculations at June 30, 1995 are based on net
assets divided by the number of shares outstanding as described in (b)
above.
d. Property management fees charged to the Company and the Fund are
assumed to be competitive for property management services rendered in the
areas where the Company's or the Fund's properties are located. Therefore,
no adjustment to the historical property management fees has been reflected
in the pro forma financial statements.
4. EXERCISE OF DISSENTERS RIGHTS:
Amounts related to the Company on a pro forma basis assume 100% acceptance
of the Merger by the existing shareholders of the Fund.
If it is assumed that (i) 5% of all shareholders, representing
approximately 419,851 shares, exercised their rights to dissent from the Merger,
(ii) the Company repurchased their shares at the respective current trading
price as listed on the American Stock Exchange on November 6, 1995 of $4.125 and
$5.250 for Franklin Select Real Estate Income Fund and Franklin Advantage Real
Estate Income Fund, respectively, the table presented below summarizes the
effects of such a repurchase on the Company on a pro forma basis, then the
Company would pay out approximately $1,901 to dissenters.
100
<PAGE> 115
FRANKLIN SELECT REAL ESTATE INCOME FUND
(THE COMPANY AND ADVANTAGE COMBINED)
NOTES TO THE PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
The effect of such a repurchase for the year ended December 31, 1994 and at
June 30, 1995 and for the six months then ended would be as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED JUNE
DECEMBER 31, 1994 30, 1995
---------------------- ----------------------
PRO FORMA PRO FORMA
---------------------- ----------------------
COMPANY REPURCHASE COMPANY REPURCHASE
------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Balance Sheet (at end of period):
Cash and cash equivalents................... $ 3,348 $ 1,447
Total assets................................ 78,914 77,013
Stockholders' equity........................ 72,156 70,255
Book value per share........................ 8.02 8.22
Statement of Operations:
Interest and dividend revenue............... $ 800 $ 705 298 250
Net income.................................. 2,639 2,544 1,692 1,644
Net income per share........................ .29 .30 .19 .19
</TABLE>
Per share amounts have been calculated based on a weighted average number
of shares outstanding assumed to be 8,999,753 for the Company and 8,549,765 for
the Company assuming the repurchase of dissenters' shares.
101
<PAGE> 116
SELECTED FINANCIAL INFORMATION OF THE COMPANY
The financial data in this section should be read in conjunction with the
"Pro Forma Financials" and the financial statements and notes thereto. The
historical operating information of the Company as of December 31, 1993 and 1994
and for each of the three years in the period ended December 31, 1994 have been
derived from audited financial statements which are included elsewhere in this
Joint Proxy Statement/Prospectus. The comparable data as of December 31, 1990,
1991 and 1992 and for the years ended December 31, 1990 and 1991 have been
derived from financial statements that are not required to be included in this
Joint Proxy Statement/Prospectus. In the opinion of management, the financial
data as of June 30, 1995 and for the six months ended June 30, 1994 and 1995
include all adjustments necessary to present fairly the information set forth
therein.
HISTORICAL
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------ --------------------
RESTATED RESTATED
1990 1991 1992 1993 1994 1994 1995
---------- ---------- ---------- ---------- ---------- --------- ---------
(DOLLARS IN 000'S EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenue................ $ 5,585 $ 5,695 $ 4,795 $ 5,012 $ 4,816 $ 2,228 $ 2,288
Depreciation and
amortization............... 885 901 995 1,401 1,469 724 746
Property operations
expense.................... 1,464 1,613 1,294 1,352 1,210 668 660
Related party expenses....... 320 362 417 336 378 178 223
General and administrative
expenses................... 91 64 81 215 276 128 93
Net income................... 2,783 2,755 1,507 1,223 1,468 693 801
Total assets................. 50,184 49,414 48,898 47,438 46,904 47,625 46,742
Per share(1):
Net income................. .59 .51 .28 .23 .27 .13 .15
Dividends declared......... .72 .66 .45 .40 .41 .20 .22
Weighted average number of
shares of Series A common
stock outstanding.......... 4,729,711 5,384,358 5,384,219 5,383,767 5,383,439 5,383,767 5,383,297
</TABLE>
- ---------------
(1) Per weighted average number of shares of Series A common stock outstanding.
102
<PAGE> 117
PRO FORMA (THE COMPANY, FREIF AND ADVANTAGE COMBINED)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1994 JUNE 30, 1995
----------------- -------------------
(DOLLARS IN 000'S EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C>
Total revenue............................................. $12,990 $7,021
Depreciation and amortization............................. 3,124 1,674
Property operations expense............................... 3,246 1,684
Related party expenses.................................... 1,161 612
General and administrative expenses....................... 661 232
Net income................................................ 4,009 2,488
Total assets.............................................. 117,123 116,772
Per share(1):
Net income.............................................. .28 .18
Dividends declared...................................... .43 .22
Weighted average number of shares of Series A common stock
outstanding............................................. 14,143,129 14,143,129
</TABLE>
- ---------------
(1) Per weighted average number of shares of Series A common stock outstanding.
See "Summary -- Comparative Per Share Data" for additional per share
information.
103
<PAGE> 118
THE COMPANY'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
Management's discussion and analysis of financial condition and results of
operations should be read in conjunction with the financial statements and notes
thereto.
PRO FORMA FOR THE SIX MONTHS ENDED JUNE 30, 1995
THE COMPANY, FREIF AND ADVANTAGE COMBINED
Pro forma net income for the six month period ended June 30, 1995 of
$2,488,000 reflects the aggregate net income reported by the Company, FREIF and
Advantage for the same period, as adjusted for changes to the advisory fee
described below.
Pro forma rental revenue for the six month period ended June 30, 1995 of
$6,679,000 is composed of the rental revenues for the same period reported by
the Company, FREIF and Advantage of $2,288,000, $2,261,000 and $2,130,000,
respectively. Rental revenues were generated by seven income producing
properties which were owned by the Company, FREIF and Advantage during the same
period. Pro forma interest and dividend income of $334,000 is composed of
$235,000, $36,000 and $63,000 reported for the same period by the Company, FREIF
and Advantage, respectively. Interest and dividend income is predominantly
earned from investments in mortgage backed securities. The securities are used
as temporary investments prior to acquisition of properties.
Pro forma total expenses for the six month period ended June 30, 1995 of
$4,533,000 represent the aggregate expenses for the same period as the Company,
FREIF and Advantage of $1,722,000, $1,409,000 and $1,293,000, respectively, plus
an adjustment of $109,000 to reflect changes to the advisory fee structure. The
expenses are composed of interest (7%), property level operating expenses (37%),
general and administrative expenses (5%), and related party expenses (14%).
Interest expense is produced primarily by Mello-Roos Bonds, a first deed of
trust in Advantage and a first deed of trust in FREIF. General and
administrative expenses are not expected to materially change as a result of the
Merger.
THE COMPANY AND FREIF COMBINED
Pro forma net income for the six month period ended June 30, 1995 of
$1,597,000 reflects the aggregate net income reported by the Company and FREIF
for the same period, as adjusted for changes to the advisory fee described
below.
Pro forma rental revenue for the six month period ended June 30, 1995 of
$4,549,000 is composed of the rental revenues for the same period reported by
the Company and FREIF of $2,288,000 and $2,261,000, respectively. Rental
revenues were generated by five income producing properties which were owned by
the Company and FREIF during the same period. Pro forma interest and dividend
income of $271,000 is composed of $235,000 and $36,000 reported for the same
period by the Company and FREIF, respectively. Interest and dividend income is
predominantly earned from investments in mortgage backed securities. The
securities are used as temporary investments prior to acquisition of properties.
Pro forma total expenses for the six month period ended June 30, 1995 of
$3,231,000 represent the aggregate expenses for the same period as the Company
and FREIF of $1,722,000 and $1,409,000, respectively, plus an adjustment of
$100,000 to reflect changes to the advisory fee structure. The expenses are
composed of interest (3%), property level operating expenses (37%), general and
administrative expenses (6%), and related party expenses (13%). Interest expense
is produced by a first deed of trust in FREIF. General and administrative
expenses are not expected to materially change as a result of the Merger.
104
<PAGE> 119
THE COMPANY AND ADVANTAGE COMBINED
Pro forma net income for the six month period ended June 30, 1995 of
$1,692,000 reflects the aggregate net income reported by the Company and
Advantage for the same period, as adjusted for changes to the advisory fee
described below.
Pro forma rental revenue for the six month period ended June 30, 1995 of
$4,418,000 is composed of the rental revenues for the same period reported by
the Company and Advantage of $2,288,000 and $2,130,000, respectively. Rental
revenues were generated by four income producing properties which were owned by
the Company and Advantage during the same period. Pro forma interest and
dividend income of $298,000 is composed of $235,000 and $63,000 reported for the
same period by the Company and Advantage, respectively. Interest and dividend
income is predominantly earned from investments in mortgage backed securities.
The securities are used as temporary investments prior to acquisition of
properties.
Pro forma total expenses for the six month period ended June 30, 1995 of
$3,024,000 represent the aggregate expenses for the same period as the Company
and Advantage of $1,722,000 and $1,293,000, respectively, plus an adjustment of
$9,000 to reflect changes to the advisory fee structure. The expenses are
composed of interest (7%), property level operating expenses (38%), general and
administrative expenses (5%), and related party expenses (14%). Interest expense
is produced by Mello-Roos Bonds and a first deed of trust in Advantage. General
and administrative expenses are not expected to materially change as a result of
the Merger.
PRO FORMA FOR THE YEAR ENDED DECEMBER 31, 1994
THE COMPANY, FREIF AND ADVANTAGE COMBINED
Pro forma net income for the year ended December 31, 1994 of $4,009,000
reflects the aggregate net income reported by the Company, FREIF and Advantage
for the same period, as adjusted for changes to the advisory fee described
below.
Pro forma rental revenue for the year ended December 31, 1994 of
$12,099,000 is composed of the rental revenues for the same period reported by
the Company, FREIF and Advantage of $4,430,000, $4,389,000 and $3,280,000,
respectively. Rental revenues were generated by seven income producing
properties which were owned by the Company, FREIF and Advantage during the same
period. Pro forma interest and dividend income of $867,000 is composed of
$386,000, $67,000 and $414,000 reported for the same period by the Company,
FREIF and Advantage, respectively. Interest and dividend income is predominantly
earned from investments in mortgage backed securities. The securities are used
as temporary investments prior to acquisition of properties.
Pro forma total expenses for the year ended December 31, 1994 of $8,981,000
represent the aggregate expenses for the same period as the Company, FREIF and
Advantage of $3,348,000, $2,914,000 and $2,455,000, respectively, plus an
adjustment of $264,000 to reflect changes to the advisory fee structure. The
expenses are composed of interest (5%), property level operating expenses (36%),
general and administrative expenses (7%), and related party expenses (13%).
Interest expense is produced primarily by Mello-Roos Bonds, a first deed of
trust in Advantage and a first deed of trust in FREIF. General and
administrative expenses are not expected to materially change as a result of the
Merger.
THE COMPANY AND FREIF COMBINED
Pro forma net income for the year ended December 31, 1994 of $2,772,000
reflects the aggregate net income reported by the Company and FREIF for the same
period, as adjusted for changes to the advisory fee described below.
Pro forma rental revenue for the year ended December 31, 1994 of $8,819,000
is composed of the rental revenues for the same period reported by the Company
and FREIF of $4,430,000 and $4,389,000, respectively. Rental revenues were
generated by five income producing properties which were owned by the Company
and FREIF during the same period. Pro forma interest and dividend income of
$453,000 is
105
<PAGE> 120
composed of $386,000 and $67,000 reported for the same period by the Company and
FREIF, respectively. Interest and dividend income is predominantly earned from
investments in mortgage backed securities. The securities are used as temporary
investments prior to acquisition of properties.
Pro forma total expenses for the year ended December 31, 1994 of $6,524,000
represent the aggregate expenses for the same period as the Company and FREIF of
$3,348,000 and $2,914,000, respectively, plus an adjustment of $262,000 to
reflect changes to the advisory fee structure. The expenses are composed of
interest (3%), property level operating expenses (36%), general and
administrative expenses (8%), and related party expenses (13%). Interest expense
is produced by a first deed of trust in FREIF. General and administrative
expenses are not expected to materially change as a result of the Merger.
THE COMPANY AND ADVANTAGE COMBINED
Pro forma net income for the year ended December 31, 1994 of $2,639,000
reflects the aggregate net income reported by the Company, FREIF and Advantage
for the same period, as adjusted for changes to the advisory fee described
below.
Pro forma rental revenue for the year ended December 31, 1994 of $7,710,000
is composed of the rental revenues for the same period reported by the Company
and Advantage of $4,430,000 and $3,280,000, respectively. Rental revenues were
generated by four income producing properties which were owned by the Company
and FREIF during the same period. Pro forma interest and dividend income of
$800,000 is composed of $386,000 and $414,000 reported for the same period by
the Company and Advantage, respectively. Interest and dividend income is
predominantly earned from investments in mortgage backed securities. The
securities are used as temporary investments prior to acquisition of properties.
Pro forma total expenses for the year ended December 31, 1994 of $5,871,000
represent the aggregate expenses for the same period as the Company and
Advantage of $3,348,000 and $2,455,000, respectively, plus an adjustment of
$68,000 to reflect changes to the advisory fee structure. The expenses are
composed of interest (5%), property level operating expenses (36%), general and
administrative expenses (8%), and related party expenses (13%). Interest expense
is produced by Mello-Roos Bonds and a first deed of trust in Advantage. General
and administrative expenses are not expected to materially change as a result of
the Merger.
106
<PAGE> 121
HISTORICAL
RESULTS OF OPERATIONS
THE COMPANY
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------- -----------------
1992 1993 1994 1994 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN 000'S)
Funds Provided By:
Properties(a)............................... $2,546 $3,033 $3,024 $1,462 $1,527
Interest and Dividend Income................ 739 468 386 176 235
(Loss) on Sale of Securities................ (31) (33) (13) (13) --
Company Expenses............................ (752) (844) (460) (208) (215)
------ ------ ------ ------ ------
Funds from Operations(b)...................... $2,502 $2,624 $2,937 $1,430 $1,547
Reconciliation to Net Income:
Depreciation and Amortization:
Buildings and Improvements............... (863) (866) (868) (435) (435)
Tenant Improvements...................... (85) (447) (506) (244) (264)
Leasing Commission Amortization.......... (28) (70) (88) (39) (47)
Other Amortization....................... (19) (18) (7) (6) --
------ ------ ------ ------ ------
Net Income:................................... $1,507 $1,223 $2,207 $ 693 $ 801
====== ====== ====== ====== ======
Dividends Declared............................ $2,422 $2,154 $2,207 $1,076 $1,184
====== ====== ====== ====== ======
</TABLE>
- ---------------
(a) Property operations are net of property management fees.
(b) As defined by the National Association of Real Estate Investment Trusts. The
Advisor believes that funds from operations is an appropriate supplemental
measure of operating performance. However, funds from operations should not
be considered as a substitute for net income as an indicator of the
Company's operating performance, or for cash flows as a measure of
liquidity.
COMPARISON OF THE SIX MONTH PERIODS ENDED JUNE 30, 1995 AND 1994
Net income for the six month period ended June 30, 1995 increased $108,000,
or 16%, compared to 1994 due to the following factors: an increase in rental
revenue of $60,000; an increase in interest and dividends of $59,000; an
increase in depreciation and amortization of $22,000; a decrease in operating
expenses of $8,000; an increase in related party expenses of $45,000; a decrease
in general and administrative expense of $35,000 and a decrease in loss on sale
of mortgage-backed securities of $13,000. Explanations of the material changes
are as follows:
Rental revenue for the six months period ended June 30, 1995 increased
$60,000, or 3%, primarily due to increased rental revenue at the Shores, as a
result of an increase in average occupancy and rental rates. The average
occupancy rate at the Shores during the six month periods ended June 30, 1995
and 1994 was 98% and 93%, respectively. The occupancy rate at the Data General
Building was 100% for both periods.
Interest and dividend income for the six month period ended June 30, 1995
increased $59,000, or 34%, due to higher yields realized on investments in
mortgage-backed securities.
Total expenses for the six month period ended June 30, 1995, increased by
$11,000, or 1%, from $1,711,000 in 1994 to $1,722,000. The increase in total
expenses is attributable to the following factors: an increase in depreciation
and amortization of $22,000, or 3%; a decrease in operating expenses of $8,000,
or 1%; an increase in related party expenses of $45,000, or 25%; a decrease in
general and administrative expense of $35,000, or 27%; and a decrease in loss on
sale of mortgage-backed securities of $13,000.
107
<PAGE> 122
Depreciation and amortization increased $22,000 for the six month period
ended June 30, 1995, reflecting tenant improvement costs at the Shores related
to new leases commencing in late 1994.
Operating expenses for the six month period ended June 30, 1995 decreased
$8,000, primarily due to a decrease in property tax expense at the Data General
Building.
Related party expense for the six months period ended June 30, 1995
increased $45,000, primarily due to an increase in advisory fees.
General and administrative expense for the six month period ended June 30,
1995 decreased $35,000 due to non-recurring costs associated with listing the
Company Common Stock on the AMEX in January 1994.
COMPARISON OF YEAR ENDED DECEMBER 31, 1994 TO YEAR ENDED DECEMBER 31, 1993
Net income for 1994 increased $245,000, or 20%, compared to 1993 mostly due
to non-recurring expenses reported in 1993, related to the proposed
consolidation. Property operations were substantially unchanged from 1993 when
reported on the accrual basis; however, the Company's cash flow significantly
improved in 1994, as reported in the Statement of Cash Flows. Net cash flow from
operating activities increased to $3,021,000 in 1994 compared to $1,191,000 in
1993 and $2,606,000 in 1992. The improvement in 1994 reflects the Company's
return to a stabilized level of cash flow after two years of operations which
were impacted by tenant lease restructurings, free rent provided to new tenants
and greater leasing commissions paid by the Company. Accounting standards
require that the financial effect of these events be capitalized and amortized
over the remaining terms of the leases. Therefore, large differences can arise
between cash and accrual results. As the cost of these items is amortized, the
opposite effect will occur causing reported rental income to be less than the
cash received by the Company.
Rental income decreased $114,000, or 3%, primarily due to a decrease in
non-cash revenue recognized at the Data General Building. From 1992 to January,
1994, the Company recognized income related to a fee of $850,000 that the
Company received in 1992 from a tenant that terminated their lease before
expiration. The fee was recorded as advance rents and amortized over the
remaining term of the tenant's lease. The amount of related income reported in
the Company's financial statements for 1992, 1993 and 1994 was $268,000,
$537,000 and $45,000, respectively. The fee is now fully amortized. In addition,
the non-cash effect of straight-lining rental income for 1992, 1993 and 1994 was
to increase or (decrease) reported income by $198,000, $499,000 and ($24,000),
respectively. A significant portion of these amounts were caused by free rent
periods provided to new tenants in the years indicated.
Interest and dividend income decreased $82,000, or 18%, due to lower yields
realized on investments in mortgage-backed securities, and to a lower average
investment balance during 1994, reflecting the use of cash reserves in 1992 and
1993 for re-tenanting costs at the Data General Building.
Total expenses decreased in 1994 by $441,000, or 12%, from $3,789,000 in
1993 to $3,348,000. The decrease in total expenses is attributable to the
following factors: an increase in depreciation and amortization of $68,000, or
5%; a decrease in operating expenses of $142,000, or 11%; an increase in related
party expenses of $42,000, or 13%; a decrease in consolidation expense, net, of
$450,000, or 99%; an increase in general and administrative expense of $61,000,
or 28%; and a decrease in loss on the sale of mortgage-backed securities of
$20,000, or 61%.
Depreciation and amortization increased $68,000 in 1994, reflecting tenant
improvement costs at the Shores and the Data General Building related to new
leases commencing late in 1993 and in 1994.
Operating expenses decreased $142,000, primarily due to a partial refund of
prior years property taxes at the Data General Building totalling $209,000. This
benefit was partially offset by higher utility costs at the same property
reflecting full occupancy during the entire year.
Related party expense increased $42,000, primarily due to an increase in
property management fees which are based on cash receipts.
108
<PAGE> 123
Consolidation expense decreased $450,000 on a net basis due to the
termination of the proposed merger in the fourth quarter of 1993.
General and administrative expense increased $61,000 due to nonrecurring
costs associated with listing the Company Common Stock on the AMEX, twelve
month's expense for directors and officers insurance coverage in 1994 compared
to eleven months in 1993, and legal and related costs incurred in connection
with the conversion to an infinite life REIT in 1994.
Loss on sale of mortgage-backed securities decreased $20,000 reflecting a
greater amount of mortgage-backed securities sold in 1993 in order to provide
funds for tenant improvements.
COMPARISON OF YEAR ENDED DECEMBER 31, 1993 TO YEAR ENDED DECEMBER 31, 1992
Net income for 1993 decreased $284,000, or 19%, compared to 1992 due to the
following factors: an increase in rental revenue of $488,000; a decrease in
interest and dividends of $271,000; an increase in depreciation and amortization
of $406,000; an increase in operating expenses of $58,000; a decrease in related
party expenses of $81,000; a decrease in consolidation expense of $18,000; an
increase in general and administrative expense of $134,000; and an increase in
loss on the sale of mortgage-backed securities of $2,000.
Rental revenue increased $488,000, or 12%, primarily due to increased
rental revenue at the Data General Building, as a result of an increase in
average occupancy at the property. The average occupancy rate at the property
during 1993 and 1992 was 91% and 79%, respectively. The occupancy rates at
December 31, 1993, for the Data General Building and the Shores Office Complex
were 100% and 90%, respectively.
Interest and dividend income decreased $271,000, or 37%, due to lower
yields realized on investments in mortgage-backed securities, and to a lower
average investment balance during 1993, reflecting the use of funds for
re-tenanting costs at the Data General Building.
Total expenses increased in 1993 by $501,000, or 15%, from $3,288,000 in
1992 to $3,789,000. The increase in total expenses is attributable to the
following factors: an increase in depreciation and amortization of $406,000, or
41%; an increase in operating expenses of $58,000, or 5%; a decrease in related
party expenses of $81,000, or 19%; a decrease in consolidation expense, net, of
$18,000, or 4%; an increase in general and administrative expense of $134,000,
or 165%; and an increase in loss on the sale of mortgage-backed securities of
$2,000, or 7%.
Depreciation and amortization increased $406,000 in 1993, reflecting tenant
improvement costs at the Data General Building related to new leases commencing
late in 1992 and in 1993, covering 60% of the building's rentable space.
Operating expenses increased $58,000, primarily due to increased utility
expense at the Data General Building as a result of its improved occupancy.
Related party expense decreased $81,000, primarily due to a decrease in
property management fees of $56,000. Property management fees are based on
collected rental revenue; therefore, the 1993 fees were impacted by free rent
provided to a new tenant at the Data General Building. Also contributing to the
decrease in related party expense was the discontinuance of an affiliated
transfer agent and registrar for the Company Common Stock. As of January 1,
1993, this service was assumed by an unaffiliated company, and the expense is
now recorded under general and administrative expense.
Consolidation expense decreased $18,000 on a net basis due to the
termination of the proposed merger.
General and administrative expense increased $134,000 due to the
acquisition of directors and officers insurance coverage in 1993, nonrecurring
costs associated with listing the Company Common Stock on the AMEX, and the
change in the transfer agent previously discussed.
The Company has entered into an Advisory Agreement with the Advisor to
administer the day-to-day operations of the Company. The agreement was amended
on October 1, 1994, as described in Note 2 to the accompanying financial
statements. For the years ended December 31, 1994, 1993 and 1992, the Company
109
<PAGE> 124
recorded $148,000, $126,000 and $136,000, respectively, of advisory fee expense
to the Advisor in accordance with the Advisory Agreement. The Company's
properties are managed by Continental Property Management Co., an affiliate of
the Advisor. For the years ended December 31, 1994, 1993 and 1992, the Company
recorded $196,000, $159,000 and $216,000, respectively, of property management
fee expense to CPMC in accordance with the Property Management Agreement.
The Company's board of directors (including all of its independent
directors) have determined, after review, that the compensation paid to the
Advisor and to CPMC referenced above, as well as the reimbursements made by the
Company to the Advisor reflected in Note 2 to the accompanying financial
statements, are fair and reasonable to the Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of capital for the acquisition and major
renovation of properties has been the proceeds from the initial public offering
of its stock. The Company's funds from operations have been its principal source
of capital for minor property improvements, leasing costs and the payment of
quarterly dividends. At June 30, 1995, the Company's cash reserves, including
mortgage-backed securities, aggregated $8,348,000.
On September 22, 1994, the Shareholders approved a proposal to convert the
Company from a finite life real estate investment trust to an infinite life real
estate investment trust and related changes to the objectives and policies of
the Company and in the compensation to the Advisor. As a result of the
conversion, the Company will have broader, growth-oriented investment and
reinvestment policies than prior to the conversion. The Company is also expected
to have greater potential for portfolio growth and diversification due to its
ability to acquire additional properties with the proceeds from securities
offerings, to issue stock in exchange for properties and to reinvest the net
proceeds from the disposition or refinancing of properties (subject to REIT
distribution requirements).
The Company is currently examining the possibility of raising additional
capital through arranging debt financing on its existing portfolio. Any capital
raised in this manner would be used substantially to acquire additional
properties.
As of June 30, 1995, the Company had no formal borrowing arrangements with
a bank and has no long-term debt. Each of the Company's properties is owned free
and clear of mortgage indebtedness.
Management continues to evaluate other properties for acquisition by the
Company. In the foreseeable future, management believes that the Company's
current sources of capital will continue to be adequate to meet both its
operating requirements and the payment of dividends.
IMPACT OF INFLATION
The Company's management believes that inflation may have a positive effect
on the Company's property portfolio, but this effect generally will not be fully
realized until such properties are sold or exchanged. The Company's policy of
negotiating leases which incorporate operating expense "pass-through" provisions
is intended to protect the Company against increased operating costs resulting
from inflation.
DIVIDENDS
For dividend policies of the Company, see "The Company -- Dividend Policy."
During the years ended December 31, 1994, and 1993, the Company declared
dividends totaling $2,207,000, or $.41 per share, and $2,154,000, or $.40 per
share, respectively. These dividend rates represent approximately 75% and 82% of
the Company's funds from operations for those years.
110
<PAGE> 125
SELECTED FINANCIAL INFORMATION OF FREIF
The financial data in this section should be read in conjunction with the
"Pro Forma Financials" and the financial statements and notes thereto. The
historical operating information of FREIF as of December 31, 1993 and 1994 and
for each of the three years in the period ended December 31, 1994 have been
derived from audited financial statements which are included elsewhere in this
Joint Proxy Statement/Prospectus. The comparable data as of December 31, 1990,
1991 and 1992 and for the years ended December 31, 1990 and 1991 have been
derived from financial statements that are not required to be included in this
Joint Proxy Statement/Prospectus. In the opinion of management, the financial
data as of June 30, 1995 and for the six months ended June 30, 1994 and 1995
include all adjustments necessary to present fairly the information set forth
therein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED
--------------------------------------------------------- JUNE 30,
RESTATED RESTATED ---------------------
1990 1991 1992 1993 1994 1994 1995
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN 000'S EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenue......... $ 4,015 $ 4,245 $ 3,903 $ 4,138 $ 4,480 $ 2,175 $ 2,305
Depreciation and
amortization........ 532 965 959 1,069 1,122 549 575
Property operations
expense............. 561 940 892 909 1,114 470 535
Related party
expenses............ 152 187 222 226 213 99 108
General and
administrative
expenses............ 161 118 133 219 218 148 87
Net income............ 2,609 2,035 1,274 1,431 1,566 768 896
Total assets.......... 39,091 38,175 37,230 36,676 38,230 38,430 38,131
Note payable.......... 0 0 0 0 1,981 2,000 1,959
Per share(1):
Net income.......... .65 .51 .32 .36 .39 .19 .22
Dividends
declared......... .76 .76 .55 .50 .50 .25 .25
Weighted average
number of shares of
Series A common
stock outstanding... 4,000,000 4,000,000 4,000,000 3,999,958 4,000,000 4,000,000 3,999,514
</TABLE>
- ---------------
(1) Per weighted average number of shares of Series A common stock outstanding.
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<PAGE> 126
FREIF'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
Management's discussion and analysis of financial condition and results of
operations should be read in conjunction with the financial statements and notes
thereto.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------- ------------------
1992 1993 1994 1994 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN 000'S)
Funds Provided By:
Constant Properties(a)..................... $2,244 $2,301 $2,435 $1,274 $1,282
Acquired Property(b)....................... 0 0 706 321 368
Interest and Dividend Income............... 600 313 67 33 36
Interest Expense........................... 0 0 (177) (73) (104)
Gain (Loss) on Sale of Securities.......... 0 447 (68) (68) --
Company Expenses........................... (611) (561) (275) (170) (111)
------ ------ ------ ------ ------
Funds from Operations(c)..................... $2,233 $2,500 $2,688 $1,317 $1,471
Reconciliation to Net Income:
Depreciation and Amortization:
Buildings and Improvements.............. (684) (692) (805) (397) (410)
Tenant Improvements..................... (234) (305) (222) (109) (114)
Leasing Commission Amortization......... (40) (71) (93) (43) (50)
Other Amortization...................... (1) (1) (2) -- (1)
------ ------ ------ ------ ------
Net Income................................... $1,274 $1,431 $1,566 $ 768 $ 896
====== ====== ====== ====== ======
Dividends Declared........................... $2,200 $2,000 $2,000 $1,000 $1,000
====== ====== ====== ====== ======
</TABLE>
- ---------------
(a) Represents properties which were owned throughout the entire period January
1, 1992 to December 31, 1994, for comparative purposes. Amounts are net of
property management fees.
(b) Represents the operations, net of property management fees, of the Glen Cove
Center, which was purchased on January 31, 1994.
(c) As defined by the National Association of Real Estate Investment Trusts. The
Advisor believes that funds from operations is an appropriate supplemental
measure of operating performance. However, funds from operations should not
be considered as a substitute for net income as an indicator of FREIF's
operating performance, or for cash flows as a measure of liquidity.
COMPARISON OF THE SIX MONTH PERIODS ENDED JUNE 30, 1995 AND 1994
Net income for the six month period ended June 30, 1995 increased $128,000,
or 17%, as compared to the same period in 1994 due to the following factors: an
increase in rental revenue of $133,000; an increase in interest and dividends of
$3,000; a decrease in other income of $6,000; an increase in interest expense of
$31,000; an increase in depreciation and amortization of $26,000; an increase in
operating expenses of $65,000; an increase in related party expenses of $9,000;
a decrease in general and administrative expense of $61,000, and a decrease in
loss on the sale of mortgage-backed securities of $68,000. Explanations of the
material changes are as follows:
Rental revenue for the six month period ended June 30, 1995 increased
$133,000, or 6%, primarily due to the recognition of rental income from the Glen
Cove Shopping Center acquired in January 1994 and improved occupancy and rental
rates at the Shores. The average occupancy rate of net rentable square feet for
the six month periods ended June 30, 1995 and 1994 at the Shores was 98% and
93%; at the Northport Buildings 98%
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<PAGE> 127
and 97%, and at the Mira Loma Shopping Center 81% and 82%, respectively. Average
occupancy during 1995 at the Glen Cove Center was 97%.
Total expenses increased for the six month period ended June 30, 1995 by
$2,000, or .1%, from $1,407,000 in 1994 to $1,409,000. The increase in total
expenses is attributable to the following factors: an increase in interest
expense of $31,000; an increase in depreciation and amortization of $26,000, or
5%; an increase in operating expenses of $65,000, or 14%; an increase in related
party expense of $9,000, or 9%; a decrease in general and administrative expense
of $61,000, or 41%, and a decrease in loss on sale of mortgage-backed securities
of $68,000 or 100%.
Interest expense increased $31,000 reflecting the issuance of an unsecured
loan payable in January, 1994, related to the acquisition of the Glen Cove
Center. This loan was converted into a secured mortgage note in June, 1994.
Depreciation and amortization increased $26,000 and operating expenses
increased $65,000 reflecting the acquisition of rental property in January, 1994
and increased bad debt expense at one of the Fund's properties.
Related party expense increased $9,000 as a result of an increase in
property management fees due to the increases in rental revenue at the
Partnership's properties.
General and administrative expense decreased $61,000 due to a decrease in
non-recurring consulting fees and legal expenses.
Loss on sale of mortgage-backed securities decreased $68,000 due to the
sale of mortgage-backed securities in January, 1994. The proceeds were used to
invest in rental property.
COMPARISON OF YEAR ENDED DECEMBER 31, 1994 TO YEAR ENDED DECEMBER 31, 1993
Net income for 1994 increased $135,000, or 9%, as compared to 1993
primarily due to the acquisition of the Glen Cove Center in January, 1994, and
due to improved occupancy rates at two of FREIF's properties.
Rental revenue for 1994 increased $1,045,000, or 31%, primarily due to the
recognition of approximately $913,000 of rental income from the Glen Cove
Center, and due to improved occupancy at the Shores Office Complex and Northport
Business Park properties. The average occupancy rate of net rentable square feet
during the years 1994 and 1993 at the Shores Office Complex was 93% and 83%; at
the Northport Buildings 97% and 87%; and at the Mira Loma Shopping Center 81%
and 92%, respectively. Average occupancy during 1994 at the Glen Cove Center was
95%.
Interest and dividend income decreased $246,000, or 79%, primarily due to
the sale of mortgage-backed securities and the investment of the proceeds in the
Glen Cove Center. A loss of $68,000 was recorded in 1994 on the sale of the
securities. In 1993, FREIF sold its GNMA mortgage-backed securities in order to
realize the gain on those investments in the amount of $447,000.
Total expenses increased in 1994 by $207,000, or 8%, from $2,707,000 in
1993 to $2,914,000, mostly due to the acquisition of the Glen Cove Center.
Interest expense increased $177,000 reflecting the issuance of an unsecured
loan payable in January, 1994, related to the acquisition of the Glen Cove
Center. This loan was converted into a secured mortgage note in June 1994.
Depreciation and amortization increased $53,000 and operating expense
increased $205,000 reflecting the acquisition of the Glen Cove Center.
Consolidation expense decreased $282,000 on a net basis in 1994, due to the
termination of the proposed merger in the fourth quarter of 1993.
COMPARISON OF YEAR ENDED DECEMBER 31, 1993 TO YEAR ENDED DECEMBER 31, 1992
Net income for 1993 increased $157,000, or 12%, as compared to 1992 due
primarily to the following factors: an increase in rental revenue of $69,000; a
decrease in interest and dividends of $287,000; an increase
113
<PAGE> 128
in gain on the sale of mortgage-backed securities of $447,000; an increase in
depreciation and amortization of $110,000; a decrease in consolidation expense
of $139,000; and an increase in general and administrative expense of $86,000.
Rental revenue for 1993 increased $69,000, or 2%, primarily due to improved
occupancy rates at FREIF's properties. The average occupancy rate of net
rentable square feet in 1993 and 1992 at Mira Loma was 92% and 90%,
respectively, and at the Northport Buildings it was 87% and 83%, respectively,
offsetting a decrease in the average occupancy rate at the Shores to 83% for
1993 compared to 90% for 1992.
Interest and dividend income decreased $287,000, or 48%, primarily due to
the sale of FREIF's GNMA mortgage-backed securities in January, 1993, and the
subsequent reinvestment of the proceeds in FNMA and FHLMC mortgaged-backed
securities, which earned a lower yield. FREIF sold the mortgage-backed
securities in order to realize the gain on those investments in the amount of
$447,000.
Total expenses increased in 1993 by $78,000, or 3%, from $2,629,000 in 1992
to $2,707,000. The increase in total expenses is attributable to the following
factors: an increase in depreciation and amortization of $110,000, or 12%; an
increase in operating expenses of $17,000, or 2%; an increase in related party
expenses of $4,000, or 2%; a decrease in consolidation expense, net, of
$139,000, or 33%; and an increase in general and administrative expense of
$86,000, or 65%.
Depreciation and amortization increased $110,000 in 1993, reflecting tenant
improvements and leasing commissions, which were incurred late in 1992 and in
1993.
Consolidation expense, net, decreased $139,000 on a net basis due to the
termination of the proposed merger.
General and administrative expense increased $86,000 due to the acquisition
of directors and officers insurance coverage in 1993, and non-recurring costs
associated with listing FREIF Common Stock on the AMEX.
FREIF's board of directors (including all of its independent directors)
have determined, after review, that the compensation paid to CPMC in 1994, as
well as the reimbursements made by FREIF to the Advisor reflected in Note 2 to
the accompanying financial statements are fair and reasonable to FREIF. No
advisory fee was paid to the Advisor in 1992, 1993 or 1994.
LIQUIDITY AND CAPITAL RESOURCES
FREIF's principal source of capital for the acquisition of properties was
the proceeds from the initial public offering of its stock. FREIF completed its
property acquisition phase in 1994 and no further acquisitions are anticipated.
FREIF's funds from operations have been its principal source of capital for
property improvements, leasing costs and the payment of quarterly dividends. At
June 30, 1995, FREIF's cash reserves, including mortgage-backed securities,
aggregated $1,746,000.
As of June 30, 1995, one of FREIF's properties was subject to secured
financing with an outstanding balance of approximately $1,959,000. Otherwise,
FREIF's properties are owned free of any indebtedness. Interest on the note
accrues at a variable rate of 1.5% in excess of the Union Bank Reference Rate.
Monthly installments of principal and interest are due beginning August 1, 1994,
and continuing until maturity of the note on May 1, 1999. Principal installments
are payable in the amount of $3,700 per month. The note may be prepaid in whole
or in part at any time without penalty.
For the foreseeable future, management believes that FREIF's current
sources of capital will continue to be adequate to meet both its operating
requirements and the payment of dividends.
IMPACT OF INFLATION
FREIF's management believes that inflation may have a positive effect on
FREIF's property portfolio, but this effect generally will not be fully realized
until such properties are sold or exchanged. On some leases, FREIF collects
overage rents based on increased sales and increased base rentals as a result of
cost of living
114
<PAGE> 129
adjustments. FREIF's policy of negotiating leases which incorporate operating
expense "pass-through" provisions is intended to protect FREIF against increased
operating costs resulting from inflation.
DIVIDENDS
Dividends are declared quarterly at the discretion of the board of
directors. FREIF's present dividend policy is to at least annually evaluate the
current dividend rate in light of anticipated tenant turnover over the next two
or three years, the estimated level of associated improvements and leasing
commissions, planned capital expenditures, any debt service requirements and
FREIF's other working capital requirements. After balancing these
considerations, and considering FREIF's earnings and cash flow, the level of its
liquid reserves and other relevant factors, FREIF seeks to establish a dividend
rate which:
i) provides a stable dividend which is sustainable despite short term
fluctuations in property cash flows;
ii) maximizes the amount of funds from operations paid out as
dividends consistent with the above listed objective; and
iii) complies with the Internal Revenue Code requirement that a REIT
annually pay out as dividends not less than 95% of its taxable income.
During the years ended December 31, 1994 and 1993, FREIF declared dividends
totaling $2,000,000, or $.50 per share each year, which represents approximately
74% and 80% of FREIF's funds from operations, respectively.
115
<PAGE> 130
SELECTED FINANCIAL INFORMATION OF ADVANTAGE
The financial data in this section should be read in conjunction with the
"Pro Forma Financials" and the financial statements and notes thereto. The
historical operating information of the Company as of December 31, 1993 and 1994
and for each of the three years in the period ended December 31, 1994 have been
derived from audited financial statements which are included elsewhere in this
Joint Proxy Statement/Prospectus. The comparable data as of December 31, 1990,
1991 and 1992 and for the years ended December 31, 1990 and 1991 have been
derived from financial statements that are not required to be included in this
Joint Proxy Statement/Prospectus. In the opinion of management, the financial
data as of June 30, 1995 and for the six months ended June 30, 1994 and 1995
include all adjustments necessary to present fairly the information set forth
therein.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------- ---------------------
1990 1991 1992 1993 1994 1994 1995
---- --------- --------- --------- --------- --------- ---------
(DOLLARS IN 000'S EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenue............. $ 5 $ 1,468 $ 3,724 $ 3,727 $ 3,694 $ 1,742 $ 2,193
Depreciation and
amortization............ 10 19 427 429 533 234 353
Property operations
expenses................ -- -- 880 875 922 386 489
Related party expenses.... -- 14 188 308 306 151 181
General and administrative
expenses................ 11 39 93 156 167 96 52
Loss on sale of mortgage-
backed securities....... -- -- -- -- 237 -- --
Net income (loss)......... (16) 1,396 1,547 1,784 1,239 742 900
Total assets.............. 889 28,365 30,929 30,706 32,739 30,775 32,649
Notes and bonds payable... -- -- 3,075 3,015 5,298 3,015 5,285
Per share(1):
Net income (loss)....... (.59) .57 .50 .59 .41 .25 .30
Dividends declared...... -- .57 .65 .65 .65 .32 .32
Weighted average number of
shares of Series A
common stock
outstanding............. -- 2,469,860 3,079,381 3,013,910 3,013,894 3,013,910 3,013,713
</TABLE>
- ---------------
(1) Per weighted average number of shares of Series A common stock outstanding
for the years ended December 31, 1994, 1993, 1992 and 1991 and per weighted
average number of shares of Series B common stock outstanding of 27,258 for
the period of July 6, 1990 (inception) to December 31, 1990.
116
<PAGE> 131
ADVANTAGE'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
Management s discussion and analysis of financial condition and results of
operations should be read in conjunction with the financial statements and notes
thereto.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------- -----------------
1992 1993 1994 1994 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN 000'S)
Funds Provided By:
Fairway Center(a) $2,095 $2,176 $2,035 $1,041 $1,121
Carmel Mountain Gateway Plaza(a).......... 0 0 152 -- 419
Interest and Dividend Income.............. 593 479 414 230 63
Interest Expense.......................... (176) (263) (289) (133) (218)
Loss on Sale of Securities 0 0 (237) -- --
Company Expenses.......................... (538) (179) (303) (162) (132)
------ ------ ------ ------ ------
Funds from Operations(b).................... $1,974 $2,213 $1,772 $ 976 $1,253
Reconciliation to Net Income:
Depreciation and Amortization:
Buildings and Improvements............. (408) (410) (438) (224) (281)
Tenant Improvements.................... 0 0 (56) -- (42)
Leasing Commission Amortization........ 0 0 (20) -- (20)
Other Amortization..................... (19) (19) (19) (10) (10)
------ ------ ------ ------ ------
Net Income.................................. $1,547 $1,784 $1,239 $ 742 $ 900
====== ====== ====== ====== ======
Dividends Declared.......................... $2,010 $1,959 $1,959 $ 979 $ 980
====== ====== ====== ====== ======
</TABLE>
- ---------------
(a) Amounts represent property operations before depreciation and after property
management fees.
(b) As defined by the National Association of Real Estate Investment Trusts.
Advantage believes that funds from operations is an appropriate supplemental
measure of operating performance. However, funds from operations should not
be considered as a substitute for net income as an indicator of Advantage's
operating performance, or for cash flows as a measure of liquidity.
COMPARISON OF THE SIX MONTH PERIODS ENDED JUNE 30, 1995 AND 1994
Net income for the six month period ended June 30, 1995 increased $158,000
or 21%, compared to the six month period ended June 30, 1994 primarily due to
the acquisition of the Carmel Mountain Shopping Center in November, 1994.
Rental revenue increased $618,000, or 41%, primarily due to the recognition
of rental income from the Carmel Mountain Shopping Center and improved occupancy
rates at Fairway Center. The average occupancy rate of net rentable square feet
for the six month periods ended June 30, 1995 and 1994 at the Fairway Center was
100% and 93%, respectively.
Interest and dividends decreased $166,000, or 73%, primarily due to the use
of funds for the acquisition of the Carmel Mountain Shopping Center.
Total expenses increased for the six-month period ended June 30, 1995 by
$293,000, or 29%, from $1,000,000 in 1994 to $1,293,000. The increase in total
expenses is attributable to the following factors: an
117
<PAGE> 132
increase in interest expense of $85,000, or 64%; an increase in depreciation and
amortization of $119,000, or 51%; an increase in operating expenses of $103,000,
or 27%; an increase in related party expense of $30,000, or 20%; and a decrease
in general and administrative expense of $44,000, or 46%.
Interest expense increased $85,000 reflecting the issuance of a note
payable in October, 1994, related to the acquisition of Carmel Mountain.
Depreciation and amortization expenses increased $119,000 and operating
expenses increased $103,000 reflecting the tenant improvement and lease
commission costs incurred at the Fairway Center during 1994 and the acquisition
of Carmel Mountain Gateway Plaza.
Related party expenses increased $30,000 primarily due to increases in
advisory and property management fees related to Carmel Mountain.
General and administrative expense decreased $44,000, primarily due to a
decrease in non-recurring costs associated with listing Advantage Common Stock
on the AMEX in January, 1994
COMPARISON OF YEAR ENDED DECEMBER 31, 1994 TO YEAR ENDED DECEMBER 31, 1993
Net income for 1994 decreased $545,000, or 31%, compared to 1993 primarily
due to a loss on the sale of securities of $237,000 related to the acquisition
of real estate, an increase in depreciation and amortization of $104,000 and a
recovery of consolidation costs in 1993 that reduced that year s expenses. After
increasing in 1993, net funds provided by the Fairway Center declined 6% in 1994
to a level slightly below that of 1992, reflecting vacancy while Advantage was
reconfiguring 16,000 square feet for the expansion of an existing tenant. There
are no lease expirations scheduled for 1995 or 1996. Explanations of the
material changes are as follows:
Interest and dividends decreased $65,000, or 14%, primarily due to lower
yields realized on investments in mortgage-backed securities and the sale of
mortgage-backed securities and the investment of the proceeds in real estate.
Interest expense increased $26,000 reflecting the issuance of a note
payable in October 1994, related to the acquisition of Carmel Mountain.
Depreciation and amortization expenses increased $104,000 reflecting the
tenant improvement and lease commission costs incurred at the Fairway Center
during 1994 and the acquisition of Carmel Mountain Gateway Plaza in November
1994.
COMPARISON OF YEAR ENDED DECEMBER 31, 1993 TO YEAR ENDED DECEMBER 31, 1992
Net income for 1993 increased $237,000, or 15%, compared to 1992 due
primarily to the following factors: an increase in rental revenue of $117,000; a
decrease in interest and dividends of $114,000; an increase in interest expense
of $87,000; an increase in related party expenses of $120,000; a decrease in
consolidation expense of $501,000; and an increase in general and administrative
expense of $63,000.
Rental revenue increased $117,000, or 4%, primarily due to increased
reimbursements from the tenants at the Fairway Center for certain operating
expenses of the property.
Interest and dividends decreased $114,000, or 19%, primarily due to the
sale of short-term investments in June, 1992. Proceeds from the sale of the
investments were used by Advantage to redeem 158,000 shares of Series A common
stock in the approximate amount of $1,517,000, in order to bring the ownership
of the shares into conformity with Internal Revenue Code provisions.
Total expenses decreased in 1993 by $234,000, or 11%, from $2,177,000 in
1992 to $1,943,000. The decrease in total expenses is attributable to the
following factors: an increase in interest expense of $87,000, or 49%; an
increase in depreciation and amortization of $2,000, or .5%; a decrease in
operating expenses of $5,000, or .6%; an increase in related party expenses of
$120,000, or 64%; a decrease in consolidation expense of $501,000, or 121%; and
an increase in general and administrative expense of $63,000, or 68%.
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Interest expense increased $87,000 reflecting a full year's accrual of
interest for the Fairway Center bonds in 1993 compared to a partial year expense
in 1992. A portion of the 1992 expense was prepaid by the seller of the Fairway
Center at the time of acquisition in 1992.
Related party expense increased $120,000 in 1993 due to the commencement of
the quarterly advisory fee effective with the quarter ended June 30, 1993, and
to an increase in property management fees reflecting greater cash receipts from
the Fairway Center tenants.
The consolidation expense (recovery) of $88,000, on a net basis, in 1993 is
after reimbursement from the Advisor of costs associated with the proposed
consolidation.
General and administrative expense increased $63,000 due to the acquisition
of directors and officers insurance coverage, and costs associated with listing
Advantage's stock on the AMEX.
Advantage has entered into an agreement with the Advisor to administer the
day-to-day operations of Advantage. For the year ended December 31, 1994,
Advantage recorded $116,000 of advisory fee expense to the Advisor in accordance
with the Advisory agreement. Advantage's property is managed by Continental
Property Management Co., an affiliate of the Advisor. For the year ended
December 31, 1994, Advantage recorded $171,000 of property management fee
expense to CPMC in accordance with the Property Management Agreement.
Advantage's board of directors (including all of its independent directors)
have determined, after review, that the compensation paid to the Advisor and to
CPMC in 1994, as well as the reimbursements made by Advantage to the Advisor
reflected in Note 2 to the accompanying financial statements are fair and
reasonable to Advantage.
LIQUIDITY AND CAPITAL RESOURCES
Advantage's principal sources of capital for the acquisition and renovation
of properties and for working capital reserves have been proceeds from the
initial offering of its common stock and from funds from operations after
payment of dividends. At June 30, 1995, Advantage's uninvested capital and
reserves aggregated $2,493,000.
At June 30, 1995, Advantage's properties were owned subject to the
following indebtedness.
<TABLE>
<CAPTION>
OUTSTANDING
BALANCE
-----------
<S> <C>
Fairway Center
Mello Roos Bonds............................................... $ 2,770,000
Seller Carryback Note.......................................... 480,000
Carmel Mountain Gateway Plaza.................................... 2,348,000
</TABLE>
The Mello Roos bonds were issued to pay for certain improvements, primarily
a highway interchange and other road improvements, for the benefit of the
Fairway Center. The bonds are collateralized by the property and include a
$300,000 prepaid reserve which will be applied against the principal balance at
the maturity date. The bonds were issued with various maturity dates and
interest rates. A special tax is levied against the Fairway Center and collected
at the same time as the ad valorem property taxes by the local tax collector.
The annual payment on the bonds is calculated in an amount sufficient to fully
amortize the indebtedness, including the $300,000 prepaid reserve, and other
related charges. The annual payment, net of administrative fees and interest
credit to Advantage on the $300,000 reserve, for the 1994-1995 fiscal year will
amount to approximately $263,000.
The seller carryback note is due in March, 1996. Advantage plans to pay off
the note using its cash reserves.
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Three of Advantage's tenants provide 10% or more of its total revenues. All
three tenants are located at the Fairway Center.
<TABLE>
<CAPTION>
ANNUALIZED
TOTAL BASE RENT % OF TOTAL LEASE
PRINCIPAL BUSINESS SQ. FT. AT 6/30/95 BASE RENT EXPIRATION
-------------------------------------------- ------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Insurance Company........................... 74,515 $1,699,000 42% 10/31/97
Insurance Company........................... 39,220 812,000 20% 04/30/2001
Thrift Institution.......................... 21,173 406,000 10% 04/30/2001
</TABLE>
While there are no scheduled lease expirations for the next two years, an
important concern in the near term is whether the large insurance company tenant
will renew its lease when it expires in 1997. Although Advantage has initiated
preliminary discussions with this tenant, management does not expect that the
tenant will engage in substantive negotiations until 1996. Currently, the annual
rate of this lease is $22.80 per square foot which is above the market rate
estimated to be approximately $19.00 per square foot.
Although it is impossible to predict the condition of Brea's office market
in late 1997, or the outcome of negotiations with the tenant, if the tenant were
to renew its lease at today s market rate, Advantage's base rental income would
decline approximately $358,000, or $.12 per share, including expense
reimbursements. In addition, if the lease were renewed, Advantage would likely
provide the tenant with tenant improvements, which have typically cost between
$4.00 to $6.00 per square foot for other tenants at Fairway, or $300,000 to
$450,000 for the tenant s 75,000 square foot space. On the other hand, if the
tenant were to vacate its space and a single replacement tenant could not be
located, Advantage would have to reconfigure the space for multiple tenants at a
cost which could exceed $2 million.
In the absence of the Merger, Advantage's source of capital for these costs
will vary depending upon the amount of funds required. The most likely sources
are Advantage's cash reserves, debt financing or the sale of 5 acres of land at
the Fairway Center.
Another of Advantage's tenants, Wherehouse Entertainment, Inc. filed for
Chapter 11 Bankruptcy protection during the quarter. To date, Advantage has not
received any formal notice that Wherehouse intends to accept or reject its lease
at the Carmel Mountain Gateway Plaza. The lease covers approximately 12,000
square feet, and provided approximately 7% of Advantage's total revenue during
the six month period ended June 30, 1995. Wherehouse is current in its rental
obligations to Advantage.
In the short-term and in the long-term, management believes that
Advantage's current sources of capital will continue to be adequate to meet both
its operating requirements and the payment of dividends.
IMPACT OF INFLATION
Advantage's management believes that inflation may have a positive effect
on Advantage's property portfolio, but this effect generally will not be fully
realized until such properties are sold or exchanged. Advantage's policy of
negotiating leases which incorporate operating expense "pass-through" provisions
is intended to protect Advantage against increased operating costs resulting
from inflation.
DIVIDENDS
Dividends are declared quarterly at the discretion of the board of
directors. Advantage s present dividend policy is to at least annually evaluate
the current dividend rate in light of anticipated tenant turnover over the next
two or three years, the estimated level of associated improvements and leasing
commissions, planned capital expenditures, any debt service requirements and
Advantage s other working capital requirements. After balancing these
considerations, and considering Advantage s earnings and cash flow, the level of
its liquid reserves and other relevant factors, Advantage seeks to establish a
dividend rate which:
i) provides a stable dividend which is sustainable despite short term
fluctuations in property cash flows;
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<PAGE> 135
ii) maximizes the amount of funds from operations paid out as
dividends consistent with the above listed objective; and
iii) complies with the Internal Revenue Code requirement that a REIT
annually pay out as dividends not less than 95% of its taxable income.
During the years ended December 31, 1994, and 1993, Advantage declared
dividends totaling $1,959,000, or $.65 per share each year. These dividend rates
represent approximately 111% and 89% of Advantage's funds from operations, for
those years.
INCOME TAX CONSIDERATIONS
The following discussion provides a summary of certain federal income tax
considerations material to the Merger and the subsequent ownership of Company
Common Stock. The following summary was prepared by the Company's special
counsel, Steinhart & Falconer, which is of the opinion that the discussion
fairly summarizes the federal income tax considerations that are likely to be
material with respect to the Merger and the subsequent ownership of the Company
Common Stock. This summary is based upon counsel's interpretation of the Code,
the Treasury Regulations promulgated thereunder, published rulings of the
Internal Revenue Service (the "Service"), and court decisions. No assurance can
be given that the conclusions set forth below by special counsel would be
sustained by a court, or that legislative or administrative changes or court
decisions may not be forthcoming which would significantly modify the statements
expressed herein. This discussion does not purport to deal with all aspects of
taxation that may be relevant to each individual Shareholder in light of its
particular circumstances, particularly if such Shareholder is a tax-exempt
organization, a foreign entity, or a person who is not a citizen or resident of
the United States. A copy of special counsel's opinion concerning the federal
income tax considerations relevant to the Merger will be supplied free of charge
to a Shareholder or his or her authorized representative upon written request.
Such request should be addressed to the Advisor at 777 Mariners Island
Boulevard, P.O. Box 7777, San Mateo, California 94403-7777.
Shareholders should not view the following analysis as a substitute for
careful tax planning. Hence, each FREIF or Advantage Shareholder is encouraged
to consult his or her own personal tax advisor regarding the specific tax
consequences of the Merger and subsequent ownership of Company Common Stock.
TAXATION OF THE MERGER
General
The detailed terms and conditions of the Merger are contained in the Merger
Agreement, a copy of which is attached to this Joint Proxy Statement/Prospectus
as Appendix A. The conclusions summarized below are not binding upon the Service
or the courts, and do not preclude the Service from adopting a position contrary
to special counsel's conclusions. No ruling will be requested from the Service
in connection with the Merger. Moreover, the conclusions expressed in this
summary are predicated upon the assumptions that (i) those Shareholders who
exercise their Dissenter's Rights in connection with the Merger hold their
respective stock as a capital asset and (ii) the Merger will satisfy the
"continuity of interest" requirement.
The continuity of interest requirement is a judicially created rule which
requires that the Shareholders of the Funds retain a meaningful continuing
equity interest in the Company after the Merger. If the Shareholders do not
satisfy the continuity of interest requirement, the Merger will not qualify as a
tax-free reorganization. Generally, this requirement is considered satisfied if
the Shareholders exchange at least 50% of their Common Stock in either Fund for
Company Common Stock and plan to retain such stock for five years. A FREIF or
Advantage Series A Shareholder may dispose of Company Common Stock within this
five year period provided the disposition was not pursuant to a plan or
arrangement in place at the time of the Merger. The Advisor has represented that
it has no knowledge of the existence of any such impermissible plan or
arrangement.
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Subject to the foregoing and the representations of the Advisor, Steinhart
& Falconer is of the opinion that the Merger will constitute a tax-free
"reorganization" under Section 368(a)(1)(A) of the Code, and therefore, the
Merger will have the following federal income tax consequences:
(a) No gain or loss will be recognized by the Funds or the Company as a
result of the Merger;
(b) No gain or loss will be recognized by FREIF or Advantage Series A
Shareholders with respect to their receipt of Company Common Stock pursuant to
the Merger;
(c) The aggregate tax basis of Company Common Stock received by each FREIF
or Advantage Series A Shareholder in the Merger will be the same as the
aggregate tax basis of the FREIF or Advantage Common Stock he or she surrenders;
(d) The holding period of Company Common Stock received by FREIF or
Advantage Series A Shareholders will include the period during which they held
their FREIF or Advantage Common Stock;
(e) Each FREIF or Advantage Series A Shareholder who exercises Dissenter's
Rights in the Merger will be treated as receiving a payment from the Company in
redemption of his or her FREIF or Advantage Common Stock and will recognize
capital gain or loss measured by the difference between the cash received and
the tax basis of his or her FREIF or Advantage Common Stock.
The foregoing is not intended to be a comprehensive discussion of all
possible federal income tax consequences of the Merger. No information is
provided by this Joint Proxy Statement/Prospectus with respect to the tax
consequences of the Merger under any state, local or foreign tax law. Should the
Service contend that the Merger fails to meet the requirements of a tax-free
reorganization and a court were to agree, the FREIF or Advantage Series A
Shareholders would recognize gain or loss equal to the difference between the
fair market value of Company Common Stock received and their aggregate basis in
FREIF or Advantage Common Stock surrendered in the Merger. In that event, the
Series A Shareholders' aggregate basis in their Company Common Stock will equal
the fair market value of such stock at the time of its receipt. Finally, the
holding period for the Company Common Stock received would not include the
period during which FREIF or Advantage Series A Shareholders held their stock.
EFFECT OF MERGER ON REIT STATUS OF THE COMPANY
Short Taxable Year
The Merger contemplates that each Fund will merge with and into the Company
and the separate corporate existence of each Fund will thereupon cease. The Code
provides that when a taxpayer is in existence for only a part of what would
otherwise be its entire taxable year, the taxpayer must file a short-year tax
return. Consequently, each Fund will be required to file a short-year tax return
for the period ending on the date the Merger is consummated. Each Fund's taxable
income, if any, will then be based on the income earned during this short
taxable year. Further, as discussed below in "Taxation of the Company: Annual
Distribution Requirements," in order to qualify as a REIT, each Fund is required
to distribute to its Shareholders an amount equal to 95% of "REIT taxable
income." This means that in order to maintain its REIT status, each Fund will be
required to distribute at least 95% of its REIT taxable income earned during the
short taxable year. Any distribution made to satisfy this requirement will most
likely occur immediately prior to the Merger. However, either Fund could elect
to treat all or part of any dividend paid after the short taxable year as made
during the short taxable year if the dividend is declared before the due date of
the return (including extensions) and paid no later than the first regular
dividend after the declaration, but in no case later than 12 months after the
end of the year. Thus, in order to satisfy the 95% distribution requirement, the
Funds may elect to pay dividends after the close of the short taxable year.
Effect of Section 382
Section 382 of the Code is a complex provision which generally has the
effect of imposing an annual limit on certain deductions when a corporation
suffers a "change of ownership" as defined in the statute. This limitation is
imposed for the five years following the change of ownership. For purposes of
Section 382, the
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<PAGE> 137
Merger may be a change of ownership for either or both of the Funds. In the
Company's situation, the effect of Section 382 would be to limit the tax losses
and depreciation deductions attributable to the excess of the Company's basis in
its real estate over the properties' total fair market value on the date of the
Merger. These tax losses and depreciation deductions would be limited to an
amount equal to the value of all the FREIF and Advantage Common Stock
immediately prior to the Merger times the "long-term tax-exempt rate," currently
approximately 6.2%. Because the annual limitation is expected to be greater than
the affected depreciation deductions, it is unlikely that the Company's
depreciation deductions would actually be limited. If the Company did sell one
of the properties acquired from the Funds at a loss within the five-year period,
however, Section 382 could limit the amount of taxable loss the Company would be
entitled to recognize.
TAXATION OF THE COMPANY
After the Merger, the Company will continue to be taxed as a REIT under
Sections 856 through 860 of the Code as long as it meets the requirements for
qualification. The following discussion sets forth the major qualification
requirements for a REIT and the material aspects of the federal income tax
treatment of a REIT and its Shareholders. This discussion is qualified in its
entirety by the applicable Code provisions, rules and regulations promulgated
thereunder, and administrative and judicial interpretations.
In the opinion of special counsel, the Company will satisfy the
requirements for qualification as a REIT, and its proposed method of operation
will enable it to meet the continuing requirements for qualification and
taxation as a REIT under the Code. It must be emphasized that this opinion is
based on various assumptions and is conditioned upon certain representations
made by the Company as to factual matters. Such factual assumptions and
representations are set forth below in this discussion. Further, this opinion is
based upon the factual representations of the Company concerning its business
and properties as set forth in this Joint Proxy Statement/Prospectus. Moreover,
such qualification and taxation as a REIT depends upon the Company's ability to
meet, through actual annual operating results, distribution levels and diversity
of stock ownership, the various qualification tests imposed under the Code
discussed below. These results will not be reviewed by Steinhart & Falconer, and
it will express no opinion with respect to them. Accordingly, no assurance can
be given that the actual results of the Company's operation for any particular
taxable year or years will satisfy such requirements. No ruling has been
requested from the Service as to the qualification of the Company as a REIT.
If the Company qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income taxes on the portion of its net income that
is currently distributed to its Shareholders. This treatment substantially
eliminates the "double taxation" (at the corporate and shareholder levels) which
generally results from an investment in a corporation. Nevertheless, the Company
will be subject to Federal income tax as follows: First, the Company will be
taxed at regular corporate rates on any undistributed REIT taxable income,
including undistributed net capital gains. Second, under certain circumstances,
the Company may be subject to the "alternative minimum tax" on its items of tax
preference. Third, if the Company has (i) net income from the sale or other
disposition of "foreclosure property" which is held primarily for sale to
customers in the ordinary course of business or (ii) other nonqualifying income
from foreclosure property, it will be subject to tax at the highest corporate
rate on such income. Fourth, if the Company has net income from prohibited
transactions (which are, in general, certain sales or other dispositions of
property held primarily for sale to customers in the ordinary course of business
other than foreclosure property), such income will be subject to a 100% tax.
Fifth, if the Company should fail to satisfy the 75% gross income test or the
95% gross income test (as discussed below), and has nonetheless maintained its
qualification as a REIT because certain other requirements have been met, it
will be subject to a 100% tax on the net income attributable to the greater of
the amount by which the Company fails the 75% or 95% test, multiplied by a
fraction intended to reflect the Company's profitability. Sixth, if the Company
should fail to distribute during each calendar year at least the sum of (i) 85%
of its REIT ordinary income for such year, (ii) 95% of its REIT capital gain net
income for such year, and (iii) any undistributed taxable income from prior
periods, the Company would be subject to a 4% excise tax on the excess of such
required distribution over the amounts actually distributed. Finally, if the
Company acquires any asset from a C corporation (i.e., generally a corporation
subject to full corporate-level tax) in a transaction in which the basis of the
asset in the
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Company's hands is determined by reference to the basis of the asset (or any
other property) in the hands of the C corporation, and the Company recognizes
gain on the disposition of such asset during the ten year period beginning on
the date on which such asset was acquired by the Company, then, to the extent of
the excess of the fair market value of such asset over its tax basis, such gain
will be subject to tax at the highest regular corporate rate pursuant to IRS
regulations that have not yet been promulgated.
REQUIREMENTS FOR QUALIFICATION
The Code defines a REIT as a corporation, trust or association (1) which is
managed by one or more trustees or directors; (2) the beneficial ownership of
which is evidenced by transferable shares or certificates; (3) which (but for
Sections 856 through 859 of the Code) would be taxable as a domestic
corporation; (4) which is neither a financial institution nor an insurance
company subject to certain provisions of the Code; (5) the beneficial ownership
of which is held by 100 or more persons; (6) not more than 50% in value of the
outstanding stock of which is owned, during the last half of each year, directly
or indirectly, by five or fewer individuals; and (7) which meets three other
tests described below.
Since the Company will be a corporation organized under the laws of the
state of California, and will be neither a financial institution nor an
insurance company, it should satisfy the first four requirements described
above. Further, the Company believes that, after the Merger, the beneficial
ownership of the Company will be held by more than 100 persons, and not more
than 50% of the Company's stock will be owned by five or fewer individuals.
Finally, as discussed below, special counsel believes the Company should satisfy
the remaining tests to qualify as a REIT.
Income Tests
The Company must satisfy three annual gross income requirements to maintain
its qualification as a REIT. First, at least 75% of the Company's gross income
(excluding gross income from prohibited transactions) for each taxable year must
be derived directly or indirectly from investments relating to real property or
mortgages on real property. Second, at least 95% of the Company's gross income
(excluding gross income from prohibited transactions) for each taxable year must
be derived from such real property investments, and from dividends, interest and
gain from the sale or disposition of stock or securities or from any combination
of the foregoing. Third, short-term gain from the sale or other disposition of
stock or securities, gain from prohibited transactions and gain on the sale or
other disposition of real property held for less than four years (apart from
involuntary conversions and sales of foreclosure property) must represent less
than 30% of the Company's gross income (including gross income from prohibited
transactions) for each taxable year. If the Company fails to meet either the 75%
or 95% test described above, but nevertheless maintains its qualification as a
REIT (i.e., because the failure was due to reasonable cause and not willful
neglect), a 100% tax will be imposed on the greater of the amount by which it
fails either test.
Rents received by the Company will qualify for the 75% of income test
("rents from real property") only if several conditions are met. First, the
amount of rent must not be based in whole or in part on the income or profits of
any person. However, an amount received or accrued generally will not be
excluded from the term "rents from real property" solely by reason of being
based on a fixed percentage or percentages of gross revenue. Second, the Code
provides that rents received from a tenant will not qualify as "rents from real
property" in satisfying the gross income tests if the REIT directly or
constructively owns 10% or more of such tenant (a "Related Party Tenant").
Third, if rent attributable to personal property, leased in connection with a
lease of real property, is greater than 15% of the total rent received under the
lease, then the portion of rent attributable to such personal property will not
qualify as "rents from real property." Finally, for rents received to qualify as
"rents from real property," the REIT generally must not operate or manage the
property or furnish or render services to the tenants of such property, other
than through an independent contractor from whom the REIT derives no revenue.
However, the Company may directly perform certain services that are "usually or
customarily rendered" in connection with the rental of space for occupancy only
and are not otherwise considered rendered to the occupant of the property. The
Company does not and will not charge rent for any property that is based in
whole or in part on the income or profits of any person (except by reason of
being based on a percentage of gross revenue, as described above) and the
Company does not and will not rent
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any property to a Related Party Tenant. Further, the Company will neither manage
any property nor will it derive any revenue or fees from any independent
contractor who manages any property. All the Company's properties will be
managed by Continental or another entity which qualifies as an independent
contractor.
"Interest" on mortgages secured by real estate which qualifies for the 75%
of income test generally does not include any amount received or accrued
(directly or indirectly) if the determination of such amount depends in whole or
in part on the income or profits of any person. However, an amount received or
accrued generally will not be excluded from the term "interest" solely by reason
of being based on a fixed percentage or percentages of receipts or sales. The
Company does not anticipate receiving any interest determined in whole or in
part on the income or profits of any person.
Asset Test
The Company, at the close of each quarter of its taxable year, must also
satisfy four tests relating to the nature of its assets. First, at least 75% of
the value of the Company's total assets must consist of real estate assets,
cash, certain cash items and government securities. Second, not more than 25% of
the Company's total assets may be represented by securities other than those
under the 75% test. Third, not more than 5% of the value of its total assets may
consist of securities of a single issuer (if such securities are not includible
under the 75% test). Finally, the Company may not own more than 10% of any
single issuer's outstanding voting securities, unless the issuer is a qualified
REIT subsidiary. The Company anticipates satisfying each asset test at the end
of each quarter of its taxable year.
Annual Distribution Requirements
To qualify as a REIT, the Company must generally distribute to its
Shareholders an amount equal to 95% of the Company's "REIT taxable income" and
95% of the after-tax income from foreclosure property. This amount, which is
computed without regard to the dividends paid deduction and the Company's net
capital gain, must be paid in the taxable year to which it relates or in the
following taxable year if declared before the Company timely files its tax
return for such year and paid on or before the date of the first regular
dividend distribution after that declaration. To the extent the Company does not
distribute all of its net capital gain or distributes at least 95%, but less
than 100%, of its "REIT taxable income," it will be subject to tax at regular
ordinary and capital gains corporate tax rates. Furthermore, if the Company
should fail to distribute during each calendar year at least the sum of (i) 85%
of its REIT ordinary income for such year, (ii) 95% of its REIT capital gain
income for such year, and (iii) any undistributed taxable income from prior
periods which was not subject to corporate income tax, the Company would be
subject to a 4% excise tax on the excess of such required distribution over the
amounts actually distributed. The Company intends to make timely distributions
sufficient to satisfy the annual distribution requirement applicable to ordinary
income, but generally intends to reinvest capital gains (net of the taxes
required to be paid thereon).
FAILURE TO QUALIFY
If the Company fails to qualify for taxation as a REIT in any taxable year,
and certain relief provisions do not apply, the Company will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to Company Shareholders in any year in
which the Company fails to qualify will not be deductible by the Company nor
will the Company be required to make any distributions. In such event, to the
extent of current and accumulated earnings and profits, all distributions to
Company Shareholders will be taxable as ordinary income, and, subject to certain
limitations of the Code, corporate distributees may be eligible for the
dividends received deduction. Unless entitled to relief under specific statutory
provisions, the Company also will be disqualified from taxation as a REIT for
the four taxable years following the year during which qualification was lost.
It is not possible to state whether in all circumstances the Company would be
entitled to such statutory relief.
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TAXATION OF TAXABLE DOMESTIC SHAREHOLDERS
As long as the Company qualifies as a REIT, distributions made to the
Company's taxable domestic Shareholders out of current or accumulated earnings
and profits (and not designated as capital gain dividends) will be treated as
ordinary income. Moreover, corporate Shareholders will not be entitled to a
dividends received deduction. Capital gain dividends will be taxed as long-term
capital gains (to the extent they do not exceed the Company's actual net capital
gain for the taxable year) regardless of whether or not the Company Shareholder
held the Company Common Stock for the requisite long-term holding period.
However, corporate Company Shareholders may be required to treat up to 20% of
certain capital gain dividends as ordinary income. To the extent the Company's
distributions to its Shareholders exceeds current and accumulated earnings and
profits, the distributions are considered a return of capital. Such
distributions simply reduce the adjusted basis of the Company Shareholders'
aggregate basis in their Company Common Stock and are not taxable to that
extent. To the extent that such distributions cumulatively exceed a
Shareholder's adjusted basis in Company Common Stock, such distributions are
taxable as capital gain, assuming the Company Common Stock is a capital asset in
the Company Shareholder's hands. Such gain will be long-term or short-term
capital gain depending on the Company Shareholder's holding period for his or
her stock. Company Shareholders may not include in their individual income tax
returns any net operating losses or capital losses of the Company.
If the Company pays capital gain dividends, Company Shareholders will treat
those dividends as long-term capital gain. Shareholders who sell their shares at
a loss after owning them for six months or less will be required to treat that
loss as a long-term capital loss to the extent of any prior capital gain
dividends they received with respect to such shares.
BACKUP WITHHOLDING
The Company will report to its Shareholders and the Service the amount of
dividends paid during each calendar year and the amount of tax withheld. Under
the backup withholding rules, a Company Shareholder may be subject to backup
withholding at the rate of 31% with respect to dividends paid unless such
Shareholder (a) is a corporation or comes within certain other exempt categories
or (b) provides a taxpayer identification number, certifies as to no loss of
exemption from backup withholding, and otherwise complies with applicable
requirements of the backup withholding rules. A Company Shareholder who does not
provide the Company with his correct taxpayer identification number may also be
subject to penalties imposed by the Service. Any amount paid as backup
withholding will be creditable against the Company Shareholder's income tax
liability. In addition, the Company may be required to withhold a portion of
capital gain distributions to any Company Shareholder who fails to certify his
non-foreign status to the Company.
TAXATION OF TAX-EXEMPT SHAREHOLDERS
In Revenue Ruling 66-106, 1966-1 C.B. 151, the Service ruled that amounts
distributed by a REIT to a tax-exempt employees' pension trust did not
constitute "unrelated business taxable income" ("UBTI"). Revenue rulings are
interpretive in nature and subject to revocation or modification by the Service.
However, based upon Revenue Ruling 66-106 and the analysis therein, special
counsel believes that distributions by the Company to a Company Shareholder that
is a tax-exempt entity will also not constitute UBTI, provided that the
tax-exempt entity has not financed the acquisition of its shares with
"acquisition indebtedness" within the meaning of the Code and the shares are not
otherwise used in an unrelated trade or business of the tax-exempt entity.
Certain tax-exempt entities are, however, subject to income taxation on their
investment income independently of the UBTI rules. Dividends from the Company
would be taxable income to such taxpayers. Shareholders with questions
concerning the taxability of dividends they may receive should consult their own
tax advisors.
TAXATION OF FOREIGN SHAREHOLDERS
Dividends paid to foreign Company Shareholders attributable to the
Company's operating income and dispositions of real estate investments will
generally be subject to United States income tax and withholding
126
<PAGE> 141
by the Company at a 30% rate, subject to reduction by applicable treaties. (The
applicable withholding rate on dividends classified as capital gain
distributions is 34%.) Potential foreign Company Shareholders are strongly urged
to consult their personal tax advisors regarding the United States tax
consequences of an investment in the Company.
STATE AND LOCAL TAXES
The Company and its Shareholders may be subject to state or local taxation
in various state and local jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of the Company
and its Shareholders may not conform to the federal income tax treatment
described above. Thus, FREIF and Advantage Shareholders should consult their own
tax advisors concerning the state and local tax treatment of an investment in
the Company.
LEGAL OPINIONS
Steinhart & Falconer of San Francisco, California has delivered an opinion
that the Common Stock offered by this Joint Proxy Statement/Prospectus will be
validly issued, fully paid and nonassessable. Steinhart & Falconer has also
delivered an opinion as to certain specific matters set forth in the discussion
under "Income Tax Considerations" and that the discussion under "Income Tax
Considerations" fairly summarizes the federal income tax considerations that are
likely to be material to a Shareholder of each of the Funds and of the Company.
EXPERTS
The financial statements and schedules included in this Joint Proxy
Statement/Prospectus, to the extent and for the periods indicated in their
reports, have been audited by Coopers & Lybrand, L.L.P. independent certified
public accountants, and are included herein in reliance upon the authority of
said firm as experts in giving such reports.
The statements under the Sections "Summary -- Certain Federal Income Tax
Consequences of the Merger" and "Income Tax Considerations" have been prepared
by Steinhart & Falconer, special counsel, and are included herein in reliance on
the authority of such firm experts.
SHAREHOLDER PROPOSALS
Proposals of Shareholders intended to be presented at the Company's next
annual meeting of Shareholders must be received no later than , 1996
at its principal executive office at 777 Mariners Island Boulevard, San Mateo,
CA 94403-7777, to be considered for inclusion in the Company's proxy statement
and form of proxy for the meeting.
If the Merger is consummated, the Funds will cease to exist and thus will
have no further annual meetings. If the Merger is not consummated, proposals of
Shareholders intended to be presented at either Fund's next annual meeting of
Shareholders must be received by such Fund no later than , 1996 at
its principal executive offices, 777 Mariners Island Boulevard, San Mateo, CA
94403-7777, to be considered for inclusion in such Fund's proxy statement and
form of proxy for the meeting.
127
<PAGE> 142
GLOSSARY
"Advisor" means Franklin Properties, Inc., a California corporation, which
is responsible for directing or performing the day-to-day business affairs of
the Company and the Funds.
"Advisory Agreement" means the contract between a Fund or the Company, as
the context requires, and the Advisor, under which the Advisor agrees to render
advice on investments and perform related services in return for compensation.
"Affiliate", means, as to any corporation, partnership, or trust, any
person or entity which holds beneficially, directly or indirectly, 10% or more
of the outstanding capital stock, shares or equity interests of that
corporation, partnership, or trust, or of any person or entity which controls,
is controlled by or is under common control with that corporation, partnership
or trust, or if an officer, retired officer, director, employee or partner of
that corporation, partnership, or trust, or of any person or entity controlling,
controlled by, or under common control with that corporation, partnership or
trust.
"AMEX" means the American Stock Exchange.
"Bear Stearns" means Bear, Stearns & Co. Inc.
"Code" means the Internal Revenue Code of 1986, as amended (Title 26 of the
United States Code).
"Common Stock" means the Common Stock, Series A, issued by each Fund and/or
the Company to their Series A Shareholders, other than the Advisor.
"Company" means Franklin Select Real Estate Income Fund.
"Continental" means Continental Property Management Co.
"Dissenter's Rights" means the right of a Shareholder to require the
Company, FREIF or Advantage, as appropriate, to purchase his or her shares for
cash at their fair market value, provided that certain procedures required by
California General Corporation Law are followed by such Shareholder.
"Expiration Date" means the date which is years from the
effective date of the Merger.
"Franklin Resources" means Franklin Resources, Inc., the Advisor's
corporate parent.
"Fund," and collectively, "Funds," means FREIF and/or Advantage, as
appropriate.
"Fund Common Stock" means the Common Stock, Series A, issued by FREIF and
Advantage.
"Fund Series A Shareholders" means the holders of FREIF and Advantage
Common Stock.
"Merger" means the merger through which FREIF and/or Advantage are proposed
to be merged into the Company.
"Merger Agreement" means the agreement among the Funds and the Company
regarding the Merger.
"Mortgage Loans" means loans secured, directly or indirectly, by real
property, but does not include Mortgage Securities.
"Mortgage Securities" means readily tradeable mortgage-backed securities,
such as GNMAs and FNMAs.
"Property Manager" means Continental.
"REIT" means a real estate investment trust, as defined under the Code.
"Series B Exchange Right" means the option to exchange Series B Shares of
the Funds (received by the Advisor in the Merger) for Company Common Stock to be
issued upon exercise of the Series B Exchange Right.
"Series B Shareholder" means the Advisor for each of the Company, FREIF and
Advantage.
128
<PAGE> 143
"Series B Shares" means the Common Stock, Series B, issued by each Fund
and/or the Company to the Advisor.
"Shareholders" means the holders of both Common Stock and Series B Shares
issued by the Company and/or each Fund.
"Special Meetings" means the special meetings of the Company and each Fund
called for , 1996 at 10:00 a.m. Pacific Standard Time at 777
Mariners' Island Blvd., San Mateo, California, 94403-7777.
129
<PAGE> 144
INDEX OF FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
FRANKLIN SELECT REAL ESTATE INCOME FUND
Report of Independent Accountants.................................................. FS-1
Balance Sheets as of December 31, 1993 and 1994 and June 30, 1995.................. FS-2
Statements of Operations for the years ended December 31, 1992, 1993 and 1994 and
for the six month periods ended June 30, 1994 and 1995.......................... FS-3
Statements of Stockholders' Equity for the years ended December 31, 1992, 1993 and
1994............................................................................ FS-4
Statements of Cash Flows for the years ended December 31, 1992, 1993 and 1994 and
for the six month periods ended June 30, 1994 and 1995.......................... FS-5
Notes to Financial Statements...................................................... FS-6
Real Estate and Accumulated Depreciation........................................... FS-11
FRANKLIN REAL ESTATE INCOME FUND
Report of Independent Accountants.................................................. FS-13
Balance Sheets as of December 31, 1993 and 1994 and June 30, 1995.................. FS-14
Statements of Operations for the years ended December 31, 1992, 1993 and 1994 and
for the six month periods ended June 30, 1994 and 1995.......................... FS-15
Statements of Stockholders' Equity for the years ended December 31, 1992, 1993 and
1994............................................................................ FS-16
Statements of Cash Flows for the years ended December 31, 1992, 1993 and 1994 and
for the six month periods ended June 30, 1994 and 1995.......................... FS-17
Notes to Financial Statements...................................................... FS-18
Real Estate and Accumulated Depreciation........................................... FS-23
FRANKLIN ADVANTAGE REAL ESTATE INCOME FUND
Report of Independent Accountants.................................................. FS-25
Balance Sheets as of December 31, 1993 and 1994 and June 30, 1995.................. FS-26
Statements of Operations for the years ended December 31, 1992, 1993 and 1994 and
for the six month periods ended June 30, 1994 and 1995.......................... FS-27
Statements of Stockholders' Equity for the years ended December 31, 1992, 1993 and
1994............................................................................ FS-28
Statements of Cash Flows for the years ended December 31, 1992, 1993 and 1994 and
for the six month periods ended June 30, 1994 and 1995.......................... FS-29
Notes to Financial Statements...................................................... FS-30
Real Estate and Accumulated Depreciation........................................... FS-36
</TABLE>
Other schedules omitted are not applicable or not required, or the
information is provided in the financial statements or the notes thereto.
130
<PAGE> 145
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Shareholders
Franklin Select Real Estate Income Fund
We have audited the accompanying balance sheets of Franklin Select Real
Estate Income Fund as of December 31, 1993 and 1994, the related statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1994, and the financial statement schedule of Real
Estate and Accumulated Depreciation as of December 31, 1994. These financial
statements and the financial statement schedule are the responsibility of
Franklin Select 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 Select Real Estate
Income Fund as of December 31, 1993 and 1994, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1994, 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 13, 1995
FS-1
<PAGE> 146
FRANKLIN SELECT REAL ESTATE INCOME FUND
BALANCE SHEETS
AS OF DECEMBER 31, 1993 AND 1994 AND
UNAUDITED JUNE 30, 1995
(DOLLARS IN 000'S EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1993 1994 1995
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Rental Property:
Land...................................................... $ 9,686 $ 9,686 $ 9,686
Buildings and improvements................................ 32,964 33,243 33,294
------- ------- -------
42,650 42,929 42,980
Less: accumulated depreciation............................ 4,162 5,536 6,235
------- ------- -------
38,488 37,393 36,745
Cash and cash equivalents................................... 1,763 2,423 2,821
Mortgage-backed securities, available for sale.............. 5,435 5,484 5,527
Deferred rent receivable.................................... 1,046 1,022 1,014
Other assets................................................ 706 582 635
------- ------- -------
Total assets...................................... $47,438 $46,904 $46,742
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Tenants' deposits and other liabilities..................... $ 163 $ 218 $ 207
Advance rents............................................... 45 21 16
Dividends payable........................................... -- 592 592
------- ------- -------
Total liabilities................................. 208 831 815
------- ------- -------
Stockholders' equity:
Common stock, Series A, without par value; stated value
$10 per share; 50,000,000 shares authorized; 5,383,767
and 5,383,439 shares issued and outstanding for 1993
and 1994, respectively, and 5,383,297 (unaudited) at
June 30, 1995.......................................... 48,859 48,858 48,857
Common stock, Series B, without par value; stated value
$10 per share; 1,000,000 shares authorized; 185,866
shares issued and outstanding for 1993 and 1994 and
185,866 (unaudited) at June 30, 1995................... 1,859 1,859 1,859
Unrealized loss of mortgage-backed securities............... -- (417) (179)
Accumulated dividends in excess of net income............... (3,488) (4,227) (4,610)
------- ------- -------
Total stockholders' equity........................ 47,230 46,073 45,927
------- ------- -------
Total liabilities and stockholders' equity........ $47,438 $46,904 $46,742
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
FS-2
<PAGE> 147
FRANKLIN SELECT REAL ESTATE INCOME FUND
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1992,
1993 AND 1994 AND UNAUDITED FOR THE
SIX MONTH PERIODS ENDED JUNE 30, 1994 AND 1995
(DOLLARS IN 000'S EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
1992 1993 1994
------ ------ ------ FOR THE SIX
MONTH PERIODS ENDED JUNE
30,
---------------------------
1994 1995
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Rent.................................... $4,056 $4,544 $4,430 $ 2,228 $ 2,288
Interest and dividends.................. 739 468 386 176 235
------ ------ ------ ------ ------
Total revenue................... 4,795 5,012 4,816 2,404 2,523
------ ------ ------ ------ ------
Expenses:
Depreciation and amortization........... 995 1,401 1,469 724 746
Property operations..................... 1,294 1,352 1,210 668 660
Related party........................... 417 336 378 178 223
Consolidation expense, net.............. 470 452 2 -- --
General and administrative.............. 81 215 276 128 93
Loss on sale of mortgage-backed
securities........................... 31 33 13 13 --
------ ------ ------ ------ ------
Total expenses.................. 3,288 3,789 3,348 1,711 1,722
------ ------ ------ ------ ------
Net income................................ $1,507 $1,223 $1,468 $ 693 $ 801
====== ====== ====== ====== ======
Net income per share, based on the
weighted average shares outstanding of
Series A common stock of 5,384,219
5,383,767 and 5,383,727 for the years
ended December 31, 1992, 1993 and 1994,
respectively, and 5,383,767 (unaudited)
and 5,383,297 (unaudited) for the six
month periods ended June 30, 1994 and
1995, respectively...................... $ .28 $ .23 $ .27 $ .13 $ .15
====== ====== ====== ====== ======
Dividends per share, based on the weighted
average shares outstanding of Series A
common stock of 5,384,219, 5,383,767 and
5,383,727 for the years ended December
31, 1992, 1993 and 1994, respectively,
and 5,383,767 (unaudited) and 5,383,297
(unaudited) for the six month periods
ended June 30, 1994 and 1995,
respectively............................ $ .45 $ .40 $ .41 $ .20 $ .22
====== ====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
FS-3
<PAGE> 148
FRANKLIN SELECT REAL ESTATE INCOME FUND
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED
DECEMBER 31, 1992, 1993 AND 1994
(DOLLARS IN 000'S)
<TABLE>
<CAPTION>
COMMON STOCK
-------------------------------------- UNREALIZED ACCUMULATED
LOSS ON DIVIDENDS
SERIES A SERIES B MORTGAGE- IN
------------------- ---------------- BACKED EXCESS OF
SHARES AMOUNT SHARES AMOUNT SECURITIES NET INCOME TOTAL
--------- ------- ------- ------ ---------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1991.......... 5,384,358 $48,865 185,866 $1,859 $ -- $(1,642) $49,082
Redemption of Series A, common
stock............................. (591) (6) -- -- -- -- (6)
Net Income.......................... -- -- -- -- -- 1,507 1,507
Dividends declared.................. -- -- -- -- -- (2,422) (2,422)
-------- --------
- -
--------- ------ ----- ------- -------
Balance, December 31, 1992.......... 5,383,767 48,859 185,866 1,859 -- (2,557) 48,161
Net Income.......................... -- -- -- -- -- 1,223 1,223
Dividends declared.................. -- -- -- -- -- (2,154) (2,154)
-------- --------
- -
--------- ------ ----- ------- -------
Balance, December 31, 1993.......... 5,383,767 48,859 185,866 1,859 -- (3,488) 47,230
Redemption of Series A, common
stock............................. (328) (1) -- -- -- -- (1)
Unrealized loss on mortgage-backed
securities........................ -- -- -- -- (417) -- (417)
Net Income.......................... -- -- -- -- -- 1,468 1,468
Dividends declared.................. -- -- -- -- -- (2,207) (2,207)
-------- --------
- -
--------- ------ ----- ------- -------
Balance, December 31, 1994.......... 5,383,439 $48,858 185,866 $1,859 $ (417) $(4,227) $46,073
========= ========= ========= ====== ===== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
FS-4
<PAGE> 149
FRANKLIN SELECT REAL ESTATE INCOME FUND
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994 AND
UNAUDITED FOR THE SIX MONTH PERIODS ENDED JUNE 30, 1994 AND 1995
(DOLLARS IN 000'S)
<TABLE>
<CAPTION>
FOR THE SIX
FOR THE YEARS ENDED MONTH PERIODS ENDED JUNE
DECEMBER 31, 30,
--------------------------- -------------------------
1992 1993 1994 1994 1995
------- ------- ------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income............................... $ 1,507 $ 1,223 $ 1,468 $ 693 $ 801
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization......... 995 1,401 1,469 724 746
(Increase) decrease in deferred rent
receivable.......................... (198) (499) 24 (22) 8
(Increase) decrease in other assets... (144) (405) 29 121 (100)
Increase (decrease) in tenants'
deposits and other liabilities...... (136) 8 55 (8) (11)
Increase (decrease) in advance
rents............................... 582 (537) (24) 45 (5)
------- ------- ------- ------- -------
1,099 (32) 1,553 770 638
------- ------- ------- ------- -------
Net cash provided by operating
activities............................... 2,606 1,191 3,021 1,463 1,439
------- ------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Improvements to rental property.......... (1,576) (1,352) (279) (78) (51)
Decrease (increase) in investment in
mortgage-backed securities............ (472) 3,685 (466) (785) 195
------- ------- ------- ------- -------
Net cash provided by (used in) investing
activities............................ (2,048) 2,333 (745) (863) 144
------- ------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption of Series A common stock...... (6) -- (1) -- (1)
Dividends paid........................... (2,463) (2,154) (1,615) (538) (1,184)
------- ------- ------- ------- -------
Net cash used in financing activities...... (2,469) (2,154) (1,616) (538) (1,185)
------- ------- ------- ------- -------
Net increase (decrease) in cash and cash
equivalents.............................. (1,911) 1,370 660 62 398
Cash and cash equivalents, beginning of
period................................... 2,304 393 1,763 1,763 2,423
------- ------- ------- ------- -------
Cash and cash equivalents, end of period... $ 393 $ 1,763 $ 2,423 $ 1,825 $ 2,821
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
FS-5
<PAGE> 150
FRANKLIN SELECT REAL ESTATE INCOME FUND
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR SIX MONTH PERIODS ENDED JUNE 30, 1994 AND 1995 IS UNAUDITED)
NOTE 1 -- ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Business Activity
Franklin Select Real Estate Income Fund (the "Company") is a California
corporation formed on January 5, 1989 for the purpose of investing in
income-producing real property. The Company is a real estate investment trust
("REIT") having elected to qualify as a REIT under the applicable provisions of
the Internal Revenue Code since 1989. Under the Internal Revenue Code and
applicable state income tax law, a qualified REIT is not subject to income tax
if at least 95% of its taxable income is currently distributed to its
stockholders and other REIT tests are met. The Company has distributed at least
95% of its taxable income and intends to distribute substantially all of its
taxable income in the future. Accordingly, no provision is made for income taxes
in these financial statements.
As of December 31, 1994, the Company's real estate portfolio consisted of a
60% undivided interest in the Shores Office Complex, a three-building office
complex located in Redwood City, California, and a fee interest in the Data
General Building located in Manhattan Beach, California.
In 1992, the Company initiated a plan of consolidation with two other
REIT's, Franklin Real Estate Income Fund and Franklin Advantage Real Estate
Income Fund. In 1993, at a special meeting of shareholders, the consolidation
plan was not approved, at which time certain expenses of the planned
consolidation were reimbursed by the Advisor.
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. The Shores Office
Complex (the "Shores") is reflected in these financial statements in accordance
with the Company's 60% ownership interest.
Pursuant to the Company's investment objectives, property purchased is
generally held for extended periods. During the holding period and as the result
of prevailing economic conditions, properties may experience fluctuations in
market value that are temporary in nature. On a periodic basis, but at least
annually, management internally assesses the value of all properties held by the
Company. Such assessments include the consideration of the Company's ability and
intent to hold a property as well as an evaluation of that property's future
rental potential through the holding period. Generally, management's analysis is
performed utilizing a sum of future cash flows methodology which compares the
property's operating cash flows and residual value to the net carrying amount.
The accompanying interim unaudited financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
The unaudited financial statements contain all adjustments (consisting of normal
recurring accruals) which are necessary, in the opinion of management, for a
fair presentation. The statements, which do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements, should be read in conjunction with the Company's financial
statements for the year ended December 31, 1994.
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.
FS-6
<PAGE> 151
FRANKLIN SELECT REAL ESTATE INCOME FUND
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR SIX MONTH PERIODS ENDED JUNE 30, 1994 AND 1995 IS UNAUDITED)
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 years 1992 and 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 stockholder's equity on January 1, 1994, was immaterial.
Amortization
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.
Rental Revenues
Rental revenues are recorded on the straight-line method to reflect
scheduled rent increases and free rent 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 revenues for the years 1992, 1993 and 1994:
<TABLE>
<CAPTION>
PERCENT OF STRAIGHT-LINE
RENTAL REVENUE
--------------------------
PRINCIPAL BUSINESS LEASE EXPIRATION 1992 1993 1994
----------------------------------------- ---------------- ---- ---- ----
<S> <C> <C> <C> <C>
Credit Union............................. 11/30/97 3.4% 25.1% 23.3%
Computer Manufacturer.................... 01/31/99 28.9% 26.6% 24.7%
Defense Contractor....................... 01/31/94 16.3% 0% 0%
</TABLE>
Reclassification
Certain reclassifications were made in the 1992 and 1993 financial
statements to conform to the presentation in the 1994 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. On October 1, 1994, the
Company and the Advisor amended the agreement.
FS-7
<PAGE> 152
FRANKLIN SELECT REAL ESTATE INCOME FUND
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR SIX MONTH PERIODS ENDED JUNE 30, 1994 AND 1995 IS UNAUDITED)
Under the terms of the amended agreement, which is renewable annually, the
Advisor will receive quarterly an annualized fee equal to .5% of the Company's
gross real estate assets, defined generally as the book value of the assets
before depreciation. The fee will be reduced to .4% for gross real estate assets
exceeding $200 million.
Prior to October 1, 1994, the Advisor received quarterly an annualized fee
equal to 1% of invested assets and .4% of mortgage investments. One half of the
fee was subordinate to declaring dividends to Series A common stock shareholders
totaling at least 7% per annum on their adjusted price per share, as defined.
Through December 31, 1992, Franklin Administrative Services, Inc. ("FAS")
acted as the Company's transfer agent and registrar for the Company's Series A
common stock. As of January 1, 1993, an unaffiliated agent assumed
responsibility for these functions.
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, 1994, 1993 and
1992 and for the unaudited six month periods ended June 30, 1994 and 1995:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE SIX MONTH PERIODS
DECEMBER 31,
------------------------------ ENDED JUNE 30,
1992 1993 1994 -------------------------
-------- -------- -------- 1994 1995
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Advisory fee, charged to related party
expense............................... $136,000 $126,000 $148,000 $ 63,000 $ 107,000
Reimbursement for data processing,
accounting and certain other expenses,
charged to related party expense...... 49,000 51,000 34,000 17,000 15,000
Property management fee, charged to
related party expense................. 216,000 159,000 196,000 98,000 101,000
Shareholder services fees, charged to
related party expense................. 16,000 -- -- -- --
Leasing commission, capitalized and
amortized over the term of the related
lease................................. -- -- 30,000 5,000 35,000
Construction supervision fee,
capitalized and amortized over the
life of the related investment or the
term of the
related lease......................... -- -- 15,000 5,000 --
</TABLE>
At December 31, 1993 and 1994, cash equivalents included $5,000 and
$145,000, respectively, and $366,000 (unaudited) at June 30, 1995, which was
invested in Franklin Money Fund, an investment company managed by an affiliate
of the Advisor. Dividends earned from Franklin Money Fund totaled, $22,000,
$7,000 and $9,000 for the years ended December 31, 1992, 1993 and 1994,
respectively, and $3,000 (unaudited) and $3,000 (unaudited) for the six month
periods ended June 30, 1994 and 1995, respectively.
NOTE 3 -- MORTGAGE-BACKED SECURITIES, AVAILABLE FOR SALE
Mortgage-backed securities, available for sale at December 31, 1994, had
coupon rates between 6.0% and 6.8% and maturities between 2018 and 2028.
Amortized cost was $5,901,000, market value was $5,484,000 and gross unrealized
loss was $417,000.
Mortgage-backed securities at December 31, 1993 had an aggregate market
value and amortized cost of $5,444,000 and $5,435,000, respectively. Gross
unrealized gains and losses were $31,000 and $22,000, respectively, resulting in
a net unrealized gain of $9,000.
FS-8
<PAGE> 153
FRANKLIN SELECT REAL ESTATE INCOME FUND
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR SIX MONTH PERIODS ENDED JUNE 30, 1994 AND 1995 IS UNAUDITED)
NOTE 4 -- COMMON STOCK AND INCOME PER SHARE
In connection with the approval of the proposal to convert the Company from
a finite-life real estate investment trust to an infinite-life real estate
investment trust and related changes to the objectives and policies of the
Company and in the compensation to the Advisor (the "Conversion"), the Company
issued to the Advisor an option (the "Option") to exchange its Series B common
stock for Series A common stock on a one-for-one basis. The Option is
exercisable only when the Series A shares achieve a trading price on the stock
exchange equal to or greater than $10.35 per share for at least 20 consecutive
trading days. The rate of exchange and the exercise price will be subject to
change under certain circumstances as provided in the Option. After exercise of
the Option, the Advisor, like any other shareholder, will receive dividends on
the Series A shares.
Prior to the Conversion, no dividends were ever paid on the Series B common
stock. Series A and Series B common stock have the same voting rights. Dividends
on Series A common stock are declared at the discretion of the Board of
Directors.
NOTE 5 -- DIVIDENDS
The allocation of cash dividends per share for individual shareholders'
income tax purposes, as reported on Internal Revenue Service Form 1099-DIV, for
the years ended December 31, 1992, 1993 and 1994 was as follows:
<TABLE>
<CAPTION>
ORDINARY RETURN OF TOTAL
YEAR PAID INCOME CAPITAL PAID
---------------------------------------------- -------- --------- -----
<S> <C> <C> <C>
1992.......................................... $.45 $ -- $.45
1993.......................................... $.04 $ .36 $.40
1994.......................................... $.34 $ .07 $.41
</TABLE>
Through December 31, 1991, the Company had a Dividend Reinvestment Plan
(the "Prior Plan"). On January 21, 1992, the Board of Directors suspended the
operation of the Prior Plan commencing with the quarter ending March 31, 1992.
In December, 1994, the Company implemented a new Dividend Reinvestment and Share
Purchase Plan (the "Plan"), under which a stockholder's cash dividends 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.
NOTE 6 -- RENTAL INCOME
The Company's rental income from commercial property is received
principally from tenants under noncancellable operating leases. The tenant
leases typically provide for guaranteed minimum rent plus contingent rents.
Minimum future rentals on noncancellable tenant operating leases at December 31,
1994 are as follows:
<TABLE>
<S> <C>
1995............................................................ $ 3,841,000
1996............................................................ 3,745,000
1997............................................................ 3,308,000
1998............................................................ 2,284,000
1999............................................................ 1,180,000
Thereafter...................................................... 5,585,000
-----------
$19,943,000
===========
</TABLE>
FS-9
<PAGE> 154
FRANKLIN SELECT REAL ESTATE INCOME FUND
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR SIX MONTH PERIODS ENDED JUNE 30, 1994 AND 1995 IS UNAUDITED)
Minimum future rentals do not include contingent rents which represent
reimbursements of property operating expenses. Contingent rents amounted to
$698,000, $501,000 and $678,000 for the years ended December 31, 1992, 1993 and
1994, respectively.
NOTE 7 -- SUPPLEMENTARY QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1993 1993 1993 1993
---------- ---------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues................................. $1,183,000 $1,156,000 $ 1,319,000 $1,354,000
Net income............................... 297,000 228,000 219,000 429,000
Net income per share..................... .06 .04 .04 .09
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1994 1994 1994 1994
---------- ---------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues................................. $1,195,000 $1,209,000 $ 1,216,000 $1,196,000
Net income............................... 379,000 314,000 262,000 513,000
Net income per share..................... .07 .06 .05 .09
</TABLE>
FS-10
<PAGE> 155
FRANKLIN SELECT REAL ESTATE INCOME FUND
REAL ESTATE AND ACCUMULATED DEPRECIATION
FOR THE YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
<TABLE>
<CAPTION>
COLUMN D
-----------------------
COST CAPITALIZED
COLUMN C SUBSEQUENT TO
------------------------ ACQUISITION
COLUMN A COLUMN B INITIAL COST TO FUND -----------------------
- --------------------- ------------ ------------------------ CARRYING
DESCRIPTION ENCUMBRANCES LAND BUILDINGS IMPROVEMENTS COSTS
- --------------------- ------------ ---------- ----------- ------------ --------
<S> <C> <C> <C> <C> <C>
Office Complex
Redwood City, CA... $ -- $4,314,000 $12,575,000 $1,033,000 $ --
Office Complex
Manhattan Beach,
CA................. -- 5,372,000 16,994,000 2,641,000 --
--- ---------- ----------- ---------- ---
$ -- $9,686,000 $29,569,000 $3,674,000 $ --
=== ========== =========== ========== ===
COLUMN E
- ---------------------------------------
GROSS AMOUNT AT WHICH
CARRIED AT CLOSE OF PERIOD
- ---------------------------------------
BUILDINGS
AND
LAND IMPROVEMENTS TOTAL
- ---------- ------------ -----------
<C> <C> <C>
$4,314,000 $13,608,000 $17,922,000
5,372,000 19,635,000 25,007,000
- ---------- ----------- -----------
$9,686,000 $33,243,000 $42,929,000(1)(2)
========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
COLUMN I
-------------
LIFE ON WHICH
DEPRECIATION
COLUMN F COLUMN G COLUMN H IN LATEST
COLUMN A ----------- ------------ -------- OPERATIONS
- --------------------- ACCUMULATED DATE OF DATE STATEMENT IS
DESCRIPTION DEPRECIATION CONSTRUCTION ACQUIRED COMPUTED
- --------------------- ----------- ------------ -------- -------------
<C> <C> <C> <C> <C>
Office Complex
Redwood City, CA... $2,267,000 82-87 09/89 35
Office Complex
Manhattan Beach,
CA................. 3,269,000 82 12/89 35
----------
$5,536,000 (3)
==========
</TABLE>
FS-11
<PAGE> 156
FRANKLIN SELECT REAL ESTATE INCOME FUND
REAL ESTATE AND ACCUMULATED DEPRECIATION
FOR THE YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
NOTES:
(1) The aggregate cost for federal income tax purposes is $42,929,000.
(2) Reconciliation of Real Estate
<TABLE>
<CAPTION>
1992 1993 1994
----------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning of period.............. $39,722,000 $41,298,000 $42,650,000
Additions during period -- improvements..... 1,576,000 1,352,000 279,000
----------- ----------- -----------
Balance at end of period.................... $41,298,000 $42,650,000 $42,929,000
=========== =========== ===========
</TABLE>
(3) Reconciliation of Accumulated Depreciation
<TABLE>
<CAPTION>
1992 1993 1994
----------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning of period.............. $ 1,901,000 $ 2,849,000 $ 4,162,000
Depreciation expense for the period......... 948,000 1,313,000 1,374,000
----------- ----------- -----------
Balance at end of period.................... $ 2,849,000 $ 4,162,000 $ 5,536,000
========== ========== ==========
</TABLE>
FS-12
<PAGE> 157
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Shareholders
Franklin Real Estate Income Fund
We have audited the accompanying balance sheets of Franklin Real Estate
Income Fund as of December 31, 1993 and 1994, the related statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1994, and the financial statement schedule of Real
Estate and Accumulated Depreciation as of December 31, 1994. 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, 1993 and 1994, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1994, 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 13, 1995
FS-13
<PAGE> 158
FRANKLIN REAL ESTATE INCOME FUND
BALANCE SHEETS
AS OF DECEMBER 31, 1993 AND 1994 AND
UNAUDITED JUNE 30, 1995
(DOLLARS IN 000'S EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- JUNE 30,
1993 1994 1995
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Rental Property:
Land.......................................................... $ 7,826 $10,326 $10,326
Buildings and improvements.................................... 25,127 29,606 29,648
Equipment..................................................... 63 63 63
------- ------- -------
33,016 39,995 40,037
Less: accumulated depreciation................................ 3,508 4,535 5,059
------- ------- -------
29,508.. 35,460 34,978
Cash and cash equivalents....................................... 1,470 973 1,199
Mortgage-backed securities, available for sale.................. 4,404 532 547
Deferred rent receivable........................................ 539 686 729
Other assets.................................................... 755.... 579 678
------- ------- -------
Total assets.......................................... $36,676 $38,230 $38,131
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable................................................... $ -- $ 1,981 $ 1,959
Tenants' deposits and other liabilities......................... 199 247 244
Dividends payable............................................... 500 500 500
------- ------- -------
Total liabilities..................................... 699 2,728 2,703
------- ------- -------
Stockholders' equity:
Common stock, Series A, without par value; stated value $10
per share; 10,000,000 shares authorized; 4,000,000 and
3,999,653 shares issued and outstanding for 1993 and 1994,
respectively, and 3,999,514 (unaudited) at June 30, 1995... 35,704 35,703 35,702
Common stock, Series B, without par value; stated value $10
per share; 500,000 shares authorized; 319,308 shares issued
and outstanding for 1993 and 1994 and 319,308 (unaudited)
at June 30, 1995........................................... 3,193 3,193 3,193
Unrealized loss of mortgage-backed securities................... -- (40) (9)
Accumulated dividends in excess of net income................... (2,920) (3,354) (3,458)
------- ------- -------
Total stockholders' equity............................ 35,977 35,502 35,428
------- ------- -------
Total liabilities and stockholders' equity............ $36,676 $38,230 $38,131
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
FS-14
<PAGE> 159
FRANKLIN REAL ESTATE INCOME FUND
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1992,
1993 AND 1994 AND UNAUDITED FOR THE
SIX MONTH PERIODS ENDED JUNE 30, 1994 AND 1995
(DOLLARS IN 000'S EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE SIX
DECEMBER 31, MONTH PERIODS ENDED
---------------------------- JUNE 30,
1992 1993 1994 ---------------------------
------ ------ ------ 1994 1995
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Rent.................................. $3,275 $3,344 $4,389 $ 2,128 $ 2,261
Interest and dividends................ 560 313 67 33 36
Other................................. 28 34 24 14 8
Gain on sale of mortgage-backed
securities......................... -- 447 -- -- --
------ ------ ------ ------ ------
Total revenue................. 3,903 4,138 4,480 2,175 2,305
------ ------ ------ ------ ------
Expenses:
Interest.............................. -- -- 177 73 104
Depreciation and amortization......... 959 1,069 1,122 549 575
Property operations................... 892 909 1,114 470 535
Related party......................... 222 226 213 99 108
Consolidation expense, net............ 423 284 2 -- --
General and administrative............ 133 219 218 148 87
Loss on sale of mortgage-backed
securities......................... -- -- 68 68 --
------ ------ ------ ------ ------
Total expenses................ 2,629 2,707 2,914 1,407 1,409
------ ------ ------ ------ ------
Net income.............................. $1,274 $1,431 $1,566 $ 768 $ 896
====== ====== ====== ====== ======
Net income per share, based on the
weighted average shares outstanding of
Series A common stock of 4,000,000,
4,000,000 and 3,999,958 for the years
ended December 31, 1992, 1993 and
1994, respectively, and 4,000,000
(unaudited) and 3,999,514 (unaudited)
for the six month periods ended June
30, 1994 and 1995, respectively....... $ .32 $ .36 $ .39 $ .19 $ .22
====== ====== ====== ====== ======
Dividends per share, based on the
weighted average shares outstanding of
Series A common stock of 4,000,000,
4,000,000 and 3,999,958 for the years
ended December 31, 1992, 1993 and
1994, respectively, and 4,000,000
(unaudited) and 3,999,514 (unaudited)
for the six month periods ended June
30, 1994 and 1995, respectively....... $ .55 $ .50 $ .50 $ .25 $ .25
====== ====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
FS-15
<PAGE> 160
FRANKLIN REAL ESTATE INCOME FUND
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED
DECEMBER 31, 1992, 1993 AND 1994
(DOLLARS IN 000'S)
<TABLE>
<CAPTION>
COMMON STOCK
-------------------------------------- UNREALIZED ACCUMULATED
LOSS ON DIVIDENDS
SERIES A SERIES B MORTGAGE- IN EXCESS
------------------- ---------------- BACKED OF NET
SHARES AMOUNT SHARES AMOUNT SECURITIES INCOME TOTAL
--------- ------- ------- ------ ---------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1991.......... 4,000,000 $35,704 319,308 $3,193 $ -- $(1,425) $37,472
Net income.......................... -- -- -- -- -- 1,274 1,274
Dividends declared.................. -- -- -- -- -- (2,200) (2,200)
--------- ------- ------- ------ ---- ------- -------
Balance, December 31, 1992.......... 4,000,000 35,704 319,308 3,193 -- (2,351) 36,546
Net income.......................... -- -- -- -- -- 1,431 1,431
Dividends declared.................. -- -- -- -- -- (2,000) (2,000)
--------- ------- ------- ------ ---- ------- -------
Balance, December 31, 1993.......... 4,000,000 35,704 319,308 3,193 -- (2,920) 35,977
Redemption of Series A,
common stock...................... (347) (1) -- -- -- -- (1)
Unrealized loss on mortgage-backed
securities........................ -- -- -- -- (40) -- (40)
Net income.......................... -- -- -- -- -- 1,566 1,566
Dividends declared.................. -- -- -- -- -- (2,000) (2,000)
--------- ------- ------- ------ ---- ------- -------
Balance, December 31, 1994.......... 3,999,653 $35,703 319,308 $3,193 $(40) $(3,354) $35,502
========= ======= ======= ====== ==== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
FS-16
<PAGE> 161
FRANKLIN REAL ESTATE INCOME FUND
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994 AND
UNAUDITED FOR THE SIX MONTH PERIODS ENDED JUNE 30, 1994 AND 1995
(DOLLARS IN 000'S)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE SIX MONTH PERIODS
DECEMBER 31, ENDED
--------------------------- JUNE 30,
1992 1993 1994 -------------------------
------- ------- ------- 1994 1995
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income............................... $ 1,274 $ 1,431 $ 1,566 $ 768 $ 896
------- ------- ------- ------- -------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization......... 959 1,069 1,122 549 575
(Increase) decrease in deferred rent
receivable.......................... (86) (273) (147) (92) (43)
Decrease in due from advisor.......... -- -- -- 258 --
(Increase) decrease in other assets... (284) (219) 81 (26) (150)
Increase (decrease) in tenants'
deposits and other liabilities...... (26) 15 48 17 (3)
------- ------- ------- ------- -------
563 592 1,104 706 379
------- ------- ------- ------- -------
Net cash provided by operating
activities............................... 1,837 2,023 2,670 1,474 1,275
------- ------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of rental property........... (541) -- (6,700) (6,700) --
Improvements to rental property.......... (414) (503) (279) (55) (42)
Decrease (increase) in investment in
mortgage-backed securities............ 987 1,133 3,832 3,814 16
------- ------- ------- ------- -------
Net cash provided by (used in) investing
activities............................ 32 630 (3,147) (2,941) (26)
------- ------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid........................... (2,193) (2,000) (2,000) (1,000) (1,000)
Borrowings under note payable............ -- -- 2,000 2,000 --
Principal payments on note payable....... -- -- (19) -- (22)
Redemption of Series A common stock...... -- -- (1) -- (1)
------- ------- ------- ------- -------
Net cash used in financing activities...... (2,193) (2,000) (20) 1,000 (1,023)
------- ------- ------- ------- -------
Net increase (decrease) in cash and cash
equivalents.............................. (324) 653 (497) (467) 226
Cash and cash equivalents, beginning of
period................................... 1,141 817 1,470 1,470 973
------- ------- ------- ------- -------
Cash and cash equivalents, end of period... $ 817 $ 1,470 $ 973 $ 1,003 $ 1,199
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
FS-17
<PAGE> 162
FRANKLIN REAL ESTATE INCOME FUND
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR SIX MONTH PERIODS ENDED JUNE 30, 1994 AND 1995 IS UNAUDITED)
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.
As of December 31, 1994, 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.
In 1992, the Company initiated a plan of consolidation with the two other
REIT's, Franklin Select Real Estate Income Fund and Franklin Advantage Real
Estate Income Fund. In 1993, at a special meeting of shareholders, the
consolidation plan was not approved, at which time certain expenses of the
planned consolidation were reimbursed by the Advisor.
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 and as the result
of prevailing economic conditions, properties may experience fluctuations in
market value. On a periodic basis, but at least annually, management internally
assesses the value of all properties held by the Company. Such assessments
include the consideration of the Company's ability and intent to hold a property
as well as an evaluation of that property's future rental potential through the
holding period. Generally, management's analysis is performed utilizing a sum of
future cash flows methodology which compares the property's operating cash flows
and residual value to the net carrying amount.
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 years 1992 and 1993,
prior to the adoption of Statement of Financial Accounting
FS-18
<PAGE> 163
FRANKLIN REAL ESTATE INCOME FUND
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR SIX MONTH PERIODS ENDED JUNE 30, 1994 AND 1995 IS UNAUDITED)
Standards No. 115, the Company valued mortgage-backed securities at amortized
cost. The impact of this change on stockholder's equity on January 1, 1994, was
immaterial.
Amortization
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 1994, 1993 and 1992.
<TABLE>
<CAPTION>
PERCENT OF STRAIGHT-LINE
RENTAL REVENUE
--------------------------
PRINCIPAL BUSINESS LEASE EXPIRATIONS 1992 1993 1994
------------------------------------------ ----------------- ------ ------ ------
<S> <C> <C> <C> <C>
Grocery Store............................. 04/25/2005 9.7% 10.2% 7.6%
Grocery Store............................. 01/31/2010 0% 0% 14.7%
</TABLE>
Reclassification
Certain reclassifications were made in the 1992 and 1993 financial
statements to conform to the presentation in the 1994 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 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.
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
FS-19
<PAGE> 164
FRANKLIN REAL ESTATE INCOME FUND
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR SIX MONTH PERIODS ENDED JUNE 30, 1994 AND 1995 IS UNAUDITED)
the years ended December 31, 1992, 1993 and 1994 and for the unaudited six month
periods ended June 30, 1994 and 1995:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, FOR THE SIX MONTH PERIODS
----------------------------------- ENDED JUNE 30,
1992 1993 1994 ---------------------------
--------- --------- --------- 1994 1995
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Reimbursement for data processing,
accounting and certain other
expenses, charged to related
party expense................... $ 55,000 $ 58,000 $ 56,000 $ 22,000 $ 24,000
Property management fee, charged
to related party expense........ 167,000 168,000 157,000 77,000 84,000
Acquisition Fee, capitalized and
amortized over the life of the
related investment.............. -- -- 250,000 250,000 --
Leasing commission, capitalized
and amortized over the term of
the related lease............... -- -- 25,000 8,000 101,000
Construction supervision fee,
capitalized and amortized over
the life of the related
investment or the term of the
related lease................... -- -- 10,000 3,000 --
</TABLE>
At December 31, 1993 and 1994, cash equivalents included $265,000 and
$31,000, respectively, and $228,000 (unaudited) at June 30, 1995, which was
invested in Franklin Money Fund, an investment company managed by an affiliate
of the Advisor. Dividends earned from Franklin Money Fund totaled $9,000, $5,000
and $6,000 for the years ended December 31, 1992, 1993 and 1994, respectively,
and $4,000 (unaudited) and $2,000 (unaudited) for the six month periods ended
June 30, 1994 and 1995, respectively.
NOTE 3 -- MORTGAGE-BACKED SECURITIES, AVAILABLE FOR SALE
Mortgage-backed securities, available for sale at December 31, 1994,
consisted of a Government National Mortgage certificate with 6% coupon rate,
maturing in 2023. Amortized cost was $572,000 and market value was $532,000,
resulting in a gross unrealized loss of $40,000.
Mortgage-backed securities at December 31, 1993, had an aggregate market
value and amortized cost of $4,388,000 and $4,404,000, respectively. Gross
unrealized gains and loss was $16,000, resulting in a net unrealized loss of
$16,000.
NOTE 4 -- COMMON STOCK, WARRANTS AND INCOME PER SHARE
Series A and Series B common stock have the same voting rights. Dividends
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
dividends are declared at the discretion of the Directors of the Company. To
date, the Board of Directors has not declared any dividends 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
FS-20
<PAGE> 165
FRANKLIN REAL ESTATE INCOME FUND
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR SIX MONTH PERIODS ENDED JUNE 30, 1994 AND 1995 IS UNAUDITED)
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, 1994. Each warrant is scheduled to become exercisable at a
price of $10.00 per share, for a 12-month period commencing on February 1, 1995.
NOTE 5 -- DIVIDENDS
The allocation of cash dividends per share for individual shareholders'
income tax purposes, as reported on Internal Revenue Service Form 1099-DIV, for
the years ended December 31, 1992, 1993 and 1994 was as follows:
<TABLE>
<CAPTION>
ORDINARY RETURN OF CAPITAL TOTAL
YEAR PAID INCOME CAPITAL GAIN PAID
------------------------------------------ -------- --------- ------- -----
<S> <C> <C> <C> <C>
1992...................................... $.47 $ .08 $ -- $.55
1993...................................... $.14 $ .24 $ .12 $.50
1994...................................... $.41 $ .09 $ -- $.50
</TABLE>
Through December 31, 1991, the Company had a Dividend Reinvestment Plan
(the "Prior Plan"). On January 22, 1992, the Board of Directors suspended the
operation of the Prior Plan commencing with the quarter ending March 31, 1992.
In December, 1994, the Company implemented a new Dividend Reinvestment and Share
Purchase Plan (the "Plan"), under which a stockholder's cash dividends 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.
NOTE 6 -- NOTE PAYABLE
At December 31, 1994, the Company had a mortgage note payable of
$1,981,000, collateralized by a deed of trust on the Glen Cove Center. The note
bears interest at a variable rate of 1.5% in excess of the Union Bank Reference
Rate. Prior to December 15, 1994 interest on the note was 2.00% in excess of the
bank's Reference Rate. Principal is payable in monthly installments of $3,700
until maturity on May 1, 1999.
Aggregate principal payments required in future years are as follows:
<TABLE>
<S> <C>
1995............................................................. $ 44,000
1996............................................................. 44,000
1997............................................................. 44,000
1998............................................................. 44,000
1999............................................................. 1,805,000
----------
$1,981,000
==========
</TABLE>
FS-21
<PAGE> 166
FRANKLIN REAL ESTATE INCOME FUND
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR SIX MONTH PERIODS ENDED JUNE 30, 1994 AND 1995 IS UNAUDITED)
NOTE 7 -- RENTAL INCOME
The Company's rental income from commercial property is received
principally from tenants under noncancelable operating leases. The leases
typically provide for guaranteed minimum rent plus contingent rents. Minimum
future rentals on non-cancellable operating leases at December 31, 1994 are as
follows:
<TABLE>
<S> <C>
1995............................................................ $ 3,689,000
1996............................................................ 3,061,000
1997............................................................ 2,392,000
1998............................................................ 2,193,000
1999............................................................ 1,898,000
Thereafter...................................................... 12,145,000
-----------
$25,378,000
===========
</TABLE>
Minimum future rentals do not include contingent rents, which represent
reimbursements of property operating expenses. Contingent rents amounted to
$493,000, $426,000 and $678,000 for the years ended December 31, 1992, 1993 and
1994, respectively.
NOTE 8 -- ACQUISITION OF RENTAL PROPERTY
On January 31, 1994, the Company purchased a fee interest in Glen Cove
Center, a neighborhood shopping center, for a total cost of $6,700,000, which
includes acquisition fees and closing costs. The Company purchased the property
using the Company's cash reserves and an unsecured loan in the amount of
$2,000,000. On June 30, 1994, the unsecured loan in the amount of $2,000,000 was
converted into a note collateralized by the property.
NOTE 9 -- SUPPLEMENTAL DISCLOSURE OF CASH FLOW AND NON-CASH INFORMATION
For the year ended December 31, 1994, the Company paid interest of
$178,000.
NOTE 10 -- SUPPLEMENTARY QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER DECEMBER
1993 1993 30, 1993 31, 1993
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues.................................... $1,337,000 $ 847,000 $ 930,000 $1,024,000
Net income.................................. 651,000 174,000 150,000 456,000
Net income per share........................ .16 .04 .04 .12
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER DECEMBER
1994 1994 30, 1994 31, 1994
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
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
</TABLE>
FS-22
<PAGE> 167
FRANKLIN REAL ESTATE INCOME FUND
REAL ESTATE AND ACCUMULATED DEPRECIATION
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
COLUMN E
-------------------------
COLUMN D
----------------------- GROSS AMOUNT AT WHICH
CARRIED AT CLOSE OF
COLUMN C COST CAPITALIZED
------------------------ SUBSEQUENT TO PERIOD
ACQUISITION -------------------------
COLUMN A COLUMN B INITIAL COST TO FUND ----------------------- BUILDINGS
- ---------------------- ------------ ------------------------ CARRYING AND
DESCRIPTION ENCUMBRANCES LAND BUILDINGS IMPROVEMENTS COSTS LAND IMPROVEMENTS
- ---------------------- ------------ ---------- ------------ ------------ -------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Shopping Center
Reno, Nevada.......... $ -- $2,089,000 $7,006,000 $ 541,000 $ -- $2,089,000 $7,547,000
Office Complex
Redwood City, CA...... -- 2,719,000 7,924,000 681,000 -- 2,719,000 8,605,000
R&D Building
Fremont, CA........... -- 2,874,000 8,708,000 379,000 -- 2,874,000 9,087,000
Car Wash
Reno, Nevada.......... -- 144,000 153,000 -- -- 144,000 153,000
Shopping Center
Vallejo, CA........... 1,981,000 2,500,000 4,200,000 77,000 -- 2,500,000 4,277,000
------------ ---------- ------------ ------------ -------- ---------- ------------
$1,981,000 $10,236,000 $27,991,000 $1,678,000 $ -- $10,326,000 $29,669,000(1)(2)
============= ============ ============ ============ ========= ============ ============
<CAPTION>
COLUMN I
-------------
LIFE ON WHICH
DEPRECIATION
COLUMN F COLUMN G COLUMN H IN LATEST
COLUMN A ----------- ------------ --------- OPERATIONS
- ---------------------- ACCUMULATED DATE OF DATE STATEMENT IS
DESCRIPTION TOTAL DEPRECIATION CONSTRUCTION ACQUIRED COMPUTED
- ---------------------- ---------- ----------- ------------ --------- -------------
<S> <<C> <C> <C> <C> <C>
Shopping Center
Reno, Nevada.......... $9,636,000 $1,437,000 85/88 11/88 35
&
9/92
Office Complex
Redwood City, CA...... 11,324,000 1,440,000 82/87 09/89 35
R&D Building
Fremont, CA........... 11,961,000 1,504,000 85 01/91 35
Car Wash
Reno, Nevada.......... 297,000 43,000 87 03/92 35
Shopping Center
Vallejo, CA........... 6,777,000 111,000 89 01/94 35
---------- -----------
$39,995,000(3) $4,535,000
============ ===========
</TABLE>
FS-23
<PAGE> 168
FRANKLIN REAL ESTATE INCOME FUND
REAL ESTATE AND ACCUMULATED DEPRECIATION
FOR THE YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
NOTES:
(1) The aggregate cost for federal income tax purposes is $39,995,000.
(2) Reconciliation of Real Estate
<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Balance at beginning of period................... $33,016,000 $32,513,000 $31,558,000
Additions during period:
Acquisitions................................... 6,700,000 -- 541,000
Improvements................................... 279,000 503,000 414,000
----------- ----------- -----------
Balance at end of period......................... $39,995,000 $33,016,000 $32,513,000
=========== =========== ===========
</TABLE>
(3) Reconciliation of Accumulated Depreciation
<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Balance at beginning of period................... $3,508,000 $2,511,000 $1,593,000
Depreciation expense for the period.............. 1,027,000 997,000 918,000
---------- -------- --------
Balance at end of period......................... $4,535,000 $3,508,000 $2,511,000
========== ======== ========
</TABLE>
FS-24
<PAGE> 169
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Shareholders
Franklin Advantage Real Estate Income Fund
We have audited the accompanying balance sheets of Franklin Advantage Real
Estate Income Fund as of December 31, 1993 and 1994, the related statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1994, and the financial statement schedule of Real
Estate and Accumulated Depreciation as of December 31, 1994. 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, 1993 and 1994, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1994, 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 13, 1995
FS-25
<PAGE> 170
FRANKLIN ADVANTAGE REAL ESTATE INCOME FUND
BALANCE SHEETS
AS OF DECEMBER 31, 1993 AND 1994 AND
UNAUDITED JUNE 30, 1995
(DOLLARS IN 000'S EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ JUNE 30,
1993 1994 1995
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Rental Property:
Land....................................................... $ 7,430 $10,937 $10,937
Buildings and improvements................................. 14,357 19,972 20,052
------- ------- -------
21,787 30,909 30,989
Less: accumulated depreciation............................. 818 1,312 1,635
------- ------- -------
20,969 29,597 29,354
Cash and cash equivalents.................................... 1,284 804 1,004
Mortgage-backed securities, available for sale............... 7,163 1,494 1,489
Deferred rent receivable..................................... 429 306 275
Other assets................................................. 861 538 527
------- ------- -------
Total assets....................................... $30,706 $32,739 $32,649
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes and bonds payable...................................... $ 3,015 $ 5,298 $ 5,285
Tenants' deposits and other liabilities...................... 106 128 100
Dividents payable............................................ -- 490 490
Advance rents................................................ -- 82 68
------- ------- -------
Total liabilities.................................. 3,121 5,998 5,943
------- ------- -------
Stockholders' equity:
Common stock, Series A, without par value; stated value $10
per share; 50,000,000 shares authorized; 3,013,910 and
3,013,775 shares issued and outstanding for 1993 and
1994, respectively, and 3,013,713 (unaudited) at June
30, 1995................................................ 27,011 27,011 27,010
Common stock, Series B, without par value; stated value $10
per share; 1,000,000 shares authorized; 124,240 shares
issued and outstanding for 1993 and 1994, and 124,240
(unaudited) at June 30, 1995............................ 1,242 1,242 1,242
Unrealized loss of mortgage-backed securities................ -- (124) (78)
Accumulated dividends in excess of net income................ (668) (1,388) (1,468)
------- ------- -------
Total stockholders' equity......................... 27,585 26,741 26,706
------- ------- -------
Total liabilities and stockholders' equity......... $30,706 $32,739 $32,649
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
FS-26
<PAGE> 171
FRANKLIN ADVANTAGE REAL ESTATE INCOME FUND
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994 AND
UNAUDITED FOR THE SIX MONTH PERIODS ENDED JUNE 30, 1994 AND 1995
(DOLLARS IN 000'S EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE SIX MONTH PERIODS
FOR THE YEARS ENDED
DECEMBER 31 ENDED JUNE 30,
-------------------------- --------------------------
1992 1993 1994 1994 1995
------ ------ ------ ----------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Revenue:
Rent..................................... $3,131 $3,248 $3,280 $ 1,512 $ 2,130
Interest and dividends................... 593 479 414 230 63
------ ------ ------ ------ ------
Total revenue......................... 3,724 3,727 3,694 1,742 2,193
------ ------ ------ ------ ------
Expenses:
Interest................................. 176 263 289 133 218
Depreciation and amortization............ 427 429 533 234 353
Property operations...................... 880 875 922 386 489
Related party............................ 188 308 306 151 181
Consolidation expense (recovery), net.... 413 (88) 1 -- --
General and administrative............... 93 156 167 96 52
Loss on sale of mortgage-backed
securities............................ -- -- 237 -- --
------ ------ ------ ------ ------
Total expenses........................ 2,177 1,943 2,455 1,000 1,293
------ ------ ------ ------ ------
Net income................................. 1,547 1,784 1,239 742 900
====== ====== ====== ====== ======
Net income per share, based on the weighted
average shares outstanding of Series A
common stock of 3,079,381, 3,013,910 and
3,013,894 for the years ended December
31, 1992, 1993 and 1994, respectively,
and 3,013,910 (unaudited) and 3,013,713
(unaudited) for the six month periods
ended June 30, 1994 and 1995,
respectively............................. $ .50 $ .59 $ .41 $ .25 $ .30
====== ====== ====== ====== ======
Dividends per share, based on the weighted
average shares outstanding of Series A
common stock of 3,079,381, 3,013,910 and
3,013,894 for the years ended December
31, 1992, 1993 and 1994, respectively,
and 3,013,910 (unaudited) and 3,013,713
(unaudited) for the six month periods
ended June 30, 1994 and 1995,
respectively............................. $ .65 $ .65 $ .65 $ .32 $ .32
====== ====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
FS-27
<PAGE> 172
FRANKLIN ADVANTAGE REAL ESTATE INCOME FUND
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED
DECEMBER 31, 1992, 1993 AND 1994
(DOLLARS IN 000'S)
<TABLE>
<CAPTION>
COMMON STOCK
---------------------------------------- UNREALIZED
LOSS ON ACCUMULATED
SERIES A SERIES B MORTGAGE- DIVIDENDS IN
------------------- ----------------- BACKED EXCESS OF
SHARES AMOUNT SHARES AMOUNT SECURITIES NET INCOME TOTAL
-------- ------- ------- ------ ---------- ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1991..................... 3,025,339 $27,216 114,422 $1,144 $ -- $ (30) $28,330
Proceeds from sale of Series A, common stock... 146,571 1,466 -- -- -- -- 1,466
Redemption of Series A, common stock........... (158,000) (1,517) -- -- -- -- 1,517
Underwriting commissions....................... -- (117) -- -- -- -- (117)
Offering costs................................. -- (37) -- -- -- -- (37)
Proceeds from sales of Series B, common
stock........................................ -- -- 9,818 98 -- -- 98
Net income..................................... -- -- -- -- -- 1,547 1,547
Dividends declared............................. -- -- -- -- -- (2,010) (2,010)
------- --------
--- ---
------- ------- ------ -------
Balance, December 31, 1992..................... 3,013,910 27,011 124,240 1,242 -- (493) 27,760
Net income..................................... -- -- -- -- -- 1,784 1,784
Dividends declared............................. -- -- -- -- -- (1,959) (1,959)
------- --------
--- ---
------- ------- ------ -------
Balance, December 31, 1993..................... 3,013,910 27,011 124,240 1,242 -- (668) 27,585
Redemption of Series A, common stock........... (135) -- -- -- -- -- --
Net income..................................... -- -- -- -- -- 1,239 1,239
Dividends declared............................. -- -- -- -- -- (1,959) (1,959)
Unrealized loss on mortgage-backed
securities................................... -- -- -- -- (124) -- (124)
------- --------
--- ---
------- ------- ------ -------
Balance, December 31, 1994..................... 3,013,775 $27,011 124,240 $1,242 $ (124) $ (1,388) $26,741
======= ======= ====== ========== =========== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
FS-28
<PAGE> 173
FRANKLIN ADVANTAGE REAL ESTATE INCOME FUND
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994 AND
UNAUDITED FOR THE SIX MONTH PERIODS ENDED JUNE 30, 1994 AND 1995
(DOLLARS IN 000'S)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
------------------------------
1992 1993 1994
-------- ------- ------- FOR THE SIX MONTH
PERIODS ENDED JUNE 30,
------------------------
1994 1995
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income............................ $ 1,547 $ 1,784 $ 1,239 $ 742 $ 900
-------- ------- ------- ------ ------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization......... 427 429 553 234 353
(Increase) decrease in deferred rent
receivable......................... (482) 53 123 66 31
Decrease in Due from Advisor.......... -- -- -- 600 --
(Increase) decrease in other assets... (260) (571) 284 (161) (19)
Increase (decrease) in tenants'
deposits and other liabilities..... 86 12 22 88 (28)
Increase (decrease) in advance
rents.............................. -- -- 82 -- (14)
-------- ------- ------- ------ ------
(229) (77) 1,044 827 323
-------- ------- ------- ------ ------
Net cash provided by operating
activities............................ 1,318 1,707 2,283 1,569 1,223
-------- ------- ------- ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of rental property........ (18,573) -- (6,210) -- --
Improvements to rental property....... (58) (26) (562) (401) (80)
Deposits on property.................. 17,459 -- -- -- --
Decrease (increase) in investment in
mortgage-back securities........... (8,527) 1,364 5,545 (427) 51
-------- ------- ------- ------ ------
Net cash provided by (used in)
investing activities............... (9,699) 1,338 (1,227) (828) (29)
-------- ------- ------- ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payment on notes and bonds
payable............................ (55) (60) (67) -- (13)
Proceeds from sale of common stock.... 1,564 -- -- -- --
Dividends paid........................ (2,010) (1,959) (1,469) (489) (980)
Offering costs paid................... (52) -- -- -- --
Common Stock redeemed................. (1,517) -- -- -- (1)
Underwriting commissions paid......... (129) -- -- -- --
-------- ------- ------- ------ ------
Net cash used in financing activities... (2,199) (2,019) (1,536) (489) (994)
-------- ------- ------- ------ ------
Net increase (decrease) in cash and cash
equivalents........................... (10,580) 1,026 (480) 252 200
Cash and cash equivalents, beginning of
period................................ 10,838 258 1,284 1,284 804
-------- ------- ------- ------ ------
Cash and cash equivalents, end of
period................................ $ 258 $ 1,284 $ 804 $ 1,536 $ 1,004
======== ======= ======= ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
FS-29
<PAGE> 174
FRANKLIN ADVANTAGE REAL ESTATE INCOME FUND
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR SIX MONTH PERIODS ENDED JUNE 30, 1994 AND 1995 IS UNAUDITED)
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.
As of December 31, 1994, 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.
In 1992, the Company initiated a plan of consolidation with two other
REIT's, Franklin Real Estate Income Fund and Franklin Select Real Estate Income
Fund. In 1993, at a special meeting of shareholders, the consolidation plan was
not approved, at which time certain expenses of the planned consolidation were
reimbursed by the Advisor.
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 and as the result
of prevailing economic conditions, properties may experience fluctuations in
market value. On a periodic basis, but at least annually, management internally
assesses the value of all properties held by the Company. Such assessments
include the consideration of the Company's ability and intent to hold a property
as well as an evaluation of that property's future rental potential through the
holding period. Generally, management's analysis is performed utilizing a sum of
future cash flows methodology which compares the property's operating cash flows
and residual value to the net carrying amount.
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 years 1992 and 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 stockholder's equity on January 1, 1994, was immaterial.
FS-30
<PAGE> 175
FRANKLIN ADVANTAGE REAL ESTATE INCOME FUND
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR SIX MONTH PERIODS ENDED JUNE 30, 1994 AND 1995 IS
UNAUDITED) -- (CONTINUED)
Amortization
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.
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 1994, 1993 and 1992.
<TABLE>
<CAPTION>
PERCENT OF
STRAIGHT-LINE RENTAL
REVENUE
-----------------------
PRINCIPAL BUSINESS LEASE EXPIRATIONS 1992 1993 1994
------------------------------------ ----------------- ----- ----- -----
<S> <C> <C> <C> <C>
Insurance Company................... 10/31/97 57.9% 57.8% 44.9%
Insurance Company................... 04/30/2001 18.2% 18.2% 29.6%
</TABLE>
Reclassification
Certain reclassifications were made in the 1992 and 1993 financial
statements to conform to the presentation in the 1994 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 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.
Through December 31, 1992, Franklin Administrative Services, Inc. ("FAS")
acted as the Company's transfer agent and registrar for the Company's Series A
common stock. As of January 1, 1993, an unaffiliated agent assumed
responsibility as the transfer agent and registrar of the Company's Series A
common stock.
FS-31
<PAGE> 176
FRANKLIN ADVANTAGE REAL ESTATE INCOME FUND
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR SIX MONTH PERIODS ENDED JUNE 30, 1994 AND 1995 IS
UNAUDITED) -- (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 the years ended December 31, 1992, 1993 and
1994:
<TABLE>
<CAPTION>
FOR THE SIX MONTH PERIODS
FOR THE YEARS ENDED DECEMBER 31, ENDED JUNE 30,
--------------------------------- --------------------------
1992 1993 1994 1994 1995
-------- -------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Advisory fees, charged to related
party expense....................... $ -- $ 86,000 $ 116,000 $57,000 $ 68,000
Reimbursement for certain organization
and offering expenses, capitalized
to organization costs............... 37,000 -- -- -- --
Reimbursement for underwriting commis-
sions on the sale of Series A common
stock, substantially all of which
was re-allowed to unaffiliated
brokers, charged to stockholders'
equity.............................. 117,000 -- -- -- --
Reimbursement for data processing, ac-
counting and certain other expenses,
charged to related party expense.... 24,000 25,000 19,000 10,000 13,000
Property management fees, charged to
related party expense............... 156,000 197,000 171,000 84,000 100,000
Stockholder services fees, charged to
related party expense............... 8,000 -- -- -- --
Property acquisition fees, capitalized
and amortized over the life of the
related investment.................. 1,073,000 -- 480,000 -- --
Leasing commissions, capitalized and
amortized over the term of the
related lease....................... -- -- 44,000 -- 1,000
Construction supervision fee,
capitalized and amortized over the
life of the related investment or
the term of the related lease....... -- -- 22,000 -- 3,000
</TABLE>
At December 31, 1993 and 1994, cash equivalents included $41,000 and
$79,000, respectively, and $301,000 (unaudited) at June 30, 1995, invested in
Franklin Money Fund which is an investment company managed by an affiliate of
the Advisor. Dividends earned from Franklin Money Fund totaled $334,000, $7,000
and $6,000 for the years ended December 31, 1992, 1993 and 1994, respectively,
and $3,000 (unaudited) and $2,000 (unaudited) for the six month periods ended
June 30, 1994 and 1995, respectively.
NOTE 3 -- MORTGAGE-BACKED SECURITIES, AVAILABLE FOR SALE
Mortgage-backed securities, available for sale at December 31, 1994, had
coupon rates of 6.24% and 6.5%, maturing in 2017 and 2022, respectively.
Amortized cost was $1,618,000, market value was $1,494,000, resulting in a gross
unrealized loss of $124,000.
Mortgage-backed securities at December 31, 1993 had an aggregate market
value and amortized cost of $7,158,000 and $7,163,000, respectively. Gross
unrealized gains and losses were $216,000 and $221,000, respectively.
FS-32
<PAGE> 177
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR SIX-MONTH PERIODS ENDED JUNE 30, 1994 AND 1995 IS
UNAUDITED) -- (CONTINUED)
NOTE 4 -- NOTES AND BONDS PAYABLE
Notes and bonds payable at December 31, 1993 and 1994 are comprised of the
following:
<TABLE>
<CAPTION>
1993 1994
--------- ---------
<S> <C> <C>
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, 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 indebtedness.............. 2,835,000 2,770,000
Prepaid reserve to be applied to the repayment of the outstanding
principal balance of the bonds at their last maturity date........ (300,000) (300,000)
CARMEL MOUNTAIN
Note payable, collateralized by a deed of trust. The note bears
interest at a variable rate of 1.5% in excess of the Union Bank
Reference Rate. Principal installments are payable in the amount
of $2,098 per month through December 01, 1995; then $2,300 per
month through December 01, 1996; then $2,522 per month through
December 01, 1997; then $2,766 per month through December 01,
1998; then $3,033 per month until maturity in October, 1999....... -- 2,348,000
---------- ----------
$3,015,000 $5,298,000
========== ==========
</TABLE>
Aggregate principal payments required in future years are as follows:
<TABLE>
<S> <C>
1995....................................................... $ 90,000
1996....................................................... 578,000
1997....................................................... 105,000
1998....................................................... 118,000
1999....................................................... 2,322,000
Thereafter................................................. 2,085,000
----------
$5,298,000
==========
</TABLE>
NOTE 5 -- COMMON STOCK AND INCOME PER SHARE
Series A and Series B common stock have the same voting rights. Dividends
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 dividends are declared at the discretion of the Directors of the
Company. To date, the Board of Directors has not declared any dividends 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.
FS-33
<PAGE> 178
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR SIX-MONTH PERIODS ENDED JUNE 30, 1994 AND 1995 IS
UNAUDITED) -- (CONTINUED)
NOTE 6 -- DIVIDENDS
The allocation of cash dividends per share for individual shareholders'
income tax purposes, as reported on Internal Revenue Service Form 1099-DIV, for
the years ended December 31, 1992, 1993 and 1994 was as follows:
<TABLE>
<CAPTION>
ORDINARY RETURN OF TOTAL
YEAR PAID INCOME CAPITAL PAID
----------------------------------------------- -------- ---------- -----
<S> <C> <C> <C>
1992........................................... $.50 $.15 $.65
1993........................................... $.49 $.16 $.65
1994........................................... $.51 $.14 $.65
</TABLE>
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,
1994 are as follows:
<TABLE>
<S> <C>
1995...................................................... $5,084,000
1996...................................................... 4,761,000
1997...................................................... 4,300,000
1998...................................................... 2,834,000
1999...................................................... 2,315,000
Thereafter................................................ 9,419,000
-----------
$28,713,000
===========
</TABLE>
Minimum future rentals do not include contingent rents, which represent
reimbursements of property operating expenses. Contingent rents amounted to
$126,000 and $96,000 for the years ended December 31, 1993 and 1994
respectively.
NOTE 8 -- SUPPLEMENTAL SCHEDULE OF CASH FLOW AND NON-CASH INVESTING AND
FINANCING ACTIVITIES
For the years ended December 31, 1992, 1993 and 1994 interest paid amounted
to $234,000, $271,000 and $266,000 respectively.
In conjunction with the acquisition of the Carmel Mountain Gateway Plaza in
November 1994, the Company recorded a $2,350,000 note payable collateralized by
the property.
In conjunction with the acquisition of the Fairway Center in 1992, the
Company recorded a $480,000 note payable collateralized by the property. In
addition, approximately $2,650,000 was recorded in 1992 increasing the basis of
the property and establishing the net liability payable with regard to the bonds
payable.
FS-34
<PAGE> 179
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR SIX-MONTH PERIODS ENDED JUNE 30, 1994 AND 1995 IS
UNAUDITED) -- (CONTINUED)
NOTE 9 -- SUPPLEMENTARY QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1993 1993 1993 1993
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
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>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1994 1994 1994 1994
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
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
</TABLE>
FS-35
<PAGE> 180
FRANKLIN ADVANTAGE REAL ESTATE INCOME FUND
REAL ESTATE AND ACCUMULATED DEPRECIATION
FOR THE YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
<TABLE>
<CAPTION>
COLUMN D COLUMN E
COLUMN C ----------------------- --------------------------------------
-----------------------
COST CAPITALIZED
GROSS AMOUNT AT WHICH
INITIAL COST TO FUND SUBSEQUENT TO CARRIED AT CLOSE OF PERIOD
----------------------- ACQUISITION --------------------------------------
COLUMN A COLUMN B ----------------------- BUILDINGS
- -------------------- ------------ CARRYING AND
DESCRIPTION ENCUMBRANCES LAND BUILDINGS IMPROVEMENTS COSTS LAND IMPROVEMENTS TOTAL
- -------------------- ------------ ---------- ---------- ------------ -------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Office Bldg.
Brea, CA............ $2,950,000 $ 7,430,00 $14,273,000 $646,000 $ -- $7,430,000 $14,919,000 $22,349,000
Retail Center
San Diego, CA..... 2,348,000 3,507,000 5,053,000 -- -- 3,507,000 5,053,000 8,560,000
---------- ---------- ---------- -------- ------ ---------- ------------ ----------
$5,298,000 $10,937,000 $19,326,000 $646,000 $ -- $10,937,000 $19,972,000 $30,909,000(1)(2)
========== ========== ========== ======== ====== ========== ============ ==========
<CAPTION>
COLUMN I
-------------
LIFE ON WHICH
DEPRECIATION
COLUMN F COLUMN G COLUMN H IN LATEST
COLUMN A ----------- ------------ -------- OPERATIONS
- -------------------- ACCUMULATED DATE OF DATE STATEMENT IS
DESCRIPTION DEPRECIATION CONSTRUCTION ACQUIRED COMPUTED
- -------------------- ----------- ------------ -------- -------------
<S> <<C> <C> <C> <C>
Office Bldg.
Brea, CA............ $1,288,000 87 01/92 35
Retail Center
San Diego, CA..... 24,000 94 11/94 35
-----------
$1,312,000(3)
===========
</TABLE>
FS-36
<PAGE> 181
FRANKLIN ADVANTAGE REAL ESTATE INCOME FUND
REAL ESTATE AND ACCUMULATED DEPRECIATION
FOR THE YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
NOTES:
(1) The aggregate cost for federal income tax purposes is $30,909,000.
(2) Reconciliation of Real Estate
<TABLE>
<CAPTION>
1992 1993 1994
---------- ---------- ----------
<S> <C> <C> <C>
Balance at beginning of period................... $ -- $21,761,000 $21,787,000
Additions during period:
Acquisitions................................... 21,703,000 -- 8,560,000
Additions during period -- improvements.......... 58,000 26,000 562,000
----------- ----------- -----------
Balance at end of period......................... $21,761,000 $21,787,000 $30,909,000
=========== =========== ===========
</TABLE>
(3) Reconciliation of Accumulated Depreciation
<TABLE>
<CAPTION>
1992 1993 1994
-------- -------- ---------
<S> <C> <C> <C>
Balance at beginning of period......................... $ -- $408,000 $ 818,000
Depreciation expense for the period.................... 408,000 410,000 494,000
---------- -------- --------
Balance at end of period............................... $408,000 $818,000 $1,312,000
========== ======== ========
</TABLE>
FS-37
<PAGE> 182
APPENDIX A
FORM OF
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.
<PAGE> 183
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE ONE DEFINITIONS....................................................... A-1
ARTICLE TWO THE MERGER........................................................ A-2
2.1 Basic Transaction................................................. A-2
2.2 Effective Time.................................................... A-2
2.3 Closing Date...................................................... A-3
2.4 Articles of Incorporation......................................... A-3
2.5 Bylaws............................................................ A-3
2.6 Directors and Officers............................................ A-3
ARTICLE THREE CONVERSION OF SHARES.............................................. A-3
3.1 Conversion of Series A Common Stock............................... A-3
3.2 Conversion of Series B Common Stock............................... A-3
3.3 Dissenting Shares................................................. A-3
3.4 Adjustment of the Conversion Factors.............................. A-4
3.5 Fractional Shares................................................. A-4
3.6 Exchange Procedures............................................... A-4
3.7 Closing of Stock Transfer Books................................... A-4
ARTICLE FOUR REPRESENTATIONS AND WARRANTIES OF FREIF........................... A-4
4.1 Organization...................................................... A-4
4.2 Capital Structure................................................. A-4
4.3 Authorization of Transaction...................................... A-4
4.4 Compliance with Law............................................... A-5
4.5 Filings With the SEC.............................................. A-5
4.6 Financial Statements.............................................. A-5
4.7 Subsequent Events................................................. A-5
4.8 Broker's Fees..................................................... A-5
4.9 Disclosure........................................................ A-5
4.10 Properties........................................................ A-5
4.11 Real Property..................................................... A-6
4.12 Accounts Receivable............................................... A-6
4.13 Taxes............................................................. A-6
4.14 Undisclosed Liabilities........................................... A-6
4.15 Litigation........................................................ A-7
4.16 Real Estate Investment Trust ("REIT") Status...................... A-7
ARTICLE FIVE REPRESENTATIONS AND WARRANTIES OF ADVANTAGE....................... A-7
5.1 Organization...................................................... A-7
5.2 Capital Structure................................................. A-7
5.3 Authorization of Transaction...................................... A-7
5.4 Compliance with Law............................................... A-7
5.5 Filings With the SEC.............................................. A-8
5.6 Financial Statements.............................................. A-8
5.7 Subsequent Events................................................. A-8
5.8 Broker's Fees..................................................... A-8
5.9 Disclosure........................................................ A-8
5.10 Properties........................................................ A-8
5.11 Real Property..................................................... A-8
</TABLE>
i
<PAGE> 184
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
5.12 Accounts Receivable............................................... A-9
5.13 Taxes............................................................. A-9
5.14 Undisclosed Liabilities........................................... A-9
5.15 Litigation........................................................ A-9
5.16 REIT Status....................................................... A-9
ARTICLE SIX REPRESENTATIONS AND WARRANTIES OF THE COMPANY..................... A-9
6.1 Organization...................................................... A-9
6.2 Capital Structure................................................. A-9
6.3 Authorization of Transaction...................................... A-10
6.4 Compliance with Law............................................... A-10
6.5 Filings With the SEC.............................................. A-10
6.6 Financial Statements.............................................. A-10
6.7 Subsequent Events................................................. A-10
6.8 Broker's Fees..................................................... A-10
6.9 Disclosure........................................................ A-10
6.10 Properties........................................................ A-10
6.11 Real Property..................................................... A-11
6.12 Accounts Receivable............................................... A-11
6.13 Taxes............................................................. A-11
6.14 Undisclosed Liabilities........................................... A-11
6.15 Litigation........................................................ A-12
6.16 REIT Status....................................................... A-12
ARTICLE SEVEN REPRESENTATIONS AND WARRANTIES OF THE ADVISOR..................... A-12
7.1 Organization...................................................... A-12
7.2 Authorization of Transaction...................................... A-12
7.3 Representations of Company and Funds.............................. A-12
ARTICLE EIGHT COVENANTS......................................................... A-12
8.1 General........................................................... A-12
8.2 Notices and Consents.............................................. A-13
8.3 Regulatory Matters and Approvals.................................. A-13
8.4 Fairness Opinion and Comfort Letter............................... A-13
8.5 Listing Company Shares............................................ A-13
8.6 Operation of Business............................................. A-13
8.7 Notice of Developments............................................ A-14
8.8 Expenses.......................................................... A-14
ARTICLE NINE CONDITIONS TO OBLIGATIONS TO CLOSE................................ A-14
9.1 Conditions........................................................ A-14
9.2 Waiver............................................................ A-15
ARTICLE TEN TERMINATION....................................................... A-15
10.1 Termination of Agreement.......................................... A-15
10.2 Effect of Termination or Withdrawal............................... A-16
ARTICLE ELEVEN MISCELLANEOUS..................................................... A-16
11.1 Survival.......................................................... A-16
11.2 Press Releases and Announcements.................................. A-16
11.3 Entire Agreement.................................................. A-16
11.4 Counterparts...................................................... A-16
</TABLE>
ii
<PAGE> 185
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
11.5 Headings.......................................................... A-16
11.6 Notices........................................................... A-16
11.7 Governing Law..................................................... A-17
11.8 Amendment and Waivers............................................. A-17
11.9 Incorporation of Exhibits and Schedules........................... A-17
11.10 Severability...................................................... A-17
</TABLE>
EXHIBIT A -- Agreement of Merger
EXHIBIT B -- Restated Bylaws of the Company
EXHIBIT C -- Amended and Restated Series B Stock Exchange Agreement
iii
<PAGE> 186
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") is made as of November
, 1995 among FRANKLIN SELECT REAL ESTATE INCOME FUND, a California corporation
(the "Company"), FRANKLIN REAL ESTATE INCOME FUND, a California corporation
("FREIF"), FRANKLIN ADVANTAGE REAL ESTATE INCOME FUND, a California corporation
("Advantage"), and FRANKLIN PROPERTIES, INC., a California corporation (the
"Advisor"). FREIF and Advantage are hereinafter referred to individually as a
"Fund" and collectively as "Funds."
This Agreement contemplates the tax-free merger of FREIF and/or Advantage
into the Company pursuant to a plan of reorganization which satisfies the
requirements of Section 368(a)(1)(A) of the Code. The shareholders of Class A
Common Stock of each Participating Fund will receive Company Common Stock (as
defined hereafter) in exchange for their shares of such stock in such Fund. The
shareholder of Class B Common Stock of each Participating Fund will receive
Class B Shares of the Company in exchange for its shares of such stock in such
Fund.
NOW, THEREFORE, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties, and
covenants herein contained, the parties agree as follows:
ARTICLE ONE
DEFINITIONS
In this Agreement, unless the context otherwise requires:
"Agreement of Merger" has the meaning set forth in Section 2.1 herein.
"Class B Common Stock" means the class of shares of stock of either Fund
designated as Series B Common Stock in such Fund's articles of incorporation.
"Code" means the Internal Revenue Code of 1986, as amended.
"Conversion Factor" has the meaning set forth in Section 3.1 herein.
"Company Common Stock" means the class of shares of stock of the Company
designated as Series A Common Stock in the Company's articles of incorporation.
"Counsel" means the law firm of Steinhart & Falconer.
"Dissenting Shareholder" means the record holder of Dissenting Shares as
defined in Section 1300(c) of the California General Corporation Law.
"Dissenting Shares" mean shares which are described in Section 1300(b) of
the California General Corporation Law, provided that no share of the Company or
any Participating Fund shall be a Dissenting Share unless at least five percent
(5%) of the outstanding shares of the Company or such Fund, as appropriate,
eligible to vote on the Merger dissent.
"Effective Time" has the meaning set forth in Section 2.2 herein.
"Environmental Litigation" has the meaning set forth in Section 4.11(b)
herein.
"Environmental Regulations" has the meaning set forth in Section 4.11(b)
herein.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Agent" has the meaning set forth in Section 3.8 herein.
"Fairness Opinion" has the meaning set forth in Section 8.4.
"Financial Statements" means the financial statements, including balance
sheets, statements of operations, shareholders' equity, and cash flow, included
in the Company's or each Fund's Public Reports.
"Hazardous Substances" means any substance regulated or prohibited by any
law or designated by any governmental agency to be hazardous, toxic,
radioactive, regulated medical waste or otherwise a danger to health or the
environment.
A-1
<PAGE> 187
"Joint Proxy Statement/Prospectus" means that joint proxy
statement/prospectus relating to the issuance of shares in the Company in
connection with the Merger of the Funds into the Company in the form in which it
is included in the Registration Statement when such Registration Statement is
filed with the SEC.
"Legal Proceeding" has the meaning set forth in Section 4.15 herein.
"Liens" has the meaning set forth in Section 4.10 herein.
"Merger" has the meaning set forth in Section 2.1 herein.
"Participating Fund" means a Fund that has received Requisite Shareholder
Approval, and has not terminated or withdrawn from this Agreement.
"Public Reports" means all filings required to be made with the SEC under
the Securities Act and Exchange Act.
"Registration Statement" means the registration statement filed by the
Company pursuant to the Securities Act and rules and regulations thereunder.
"REIT" has the meaning set forth in Section 4.16 herein.
"Requisite Shareholder Approval" means satisfaction of all of the
requirements of the California General Corporation Law for shareholder approval
of this Agreement and the Merger and the approval of the holders of a majority
of the outstanding shares of the Company or each Fund, as appropriate.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Series A Common Stock" means the class of shares of stock of either Fund
designated as Series A Common Stock in such Fund's articles of incorporation.
"Series B Shares" means the class of shares of stock of the Company
designated as Series B Common Stock in the Company's articles of incorporation.
"Surviving Corporation" has the meaning set forth in Section 2.1 herein.
"Taxes" has the meaning set forth in Section 4.13 herein.
ARTICLE TWO
THE MERGER
2.1 Basic Transaction. On and subject to the terms and conditions of this
Agreement and the Agreement of Merger dated the date hereof and attached hereto
as Exhibit A (the "Agreement of Merger"), each Participating Fund will merge
with and into the Company (the "Merger") at the Effective Time. The Agreement of
Merger shall be executed by the Company and the Funds concurrently with the
execution of this Agreement. The Company shall be the corporation surviving the
Merger (the "Surviving Corporation"). Upon the consummation of the Merger, each
Participating Fund shall merge with and into the Company and the separate
corporate existence of such Fund shall thereupon cease. The Company shall
succeed to each Participating Fund's rights, assets, liabilities, and
obligations in accordance with the California General Corporation Law. The
shareholders of each Participating Fund who are not Dissenting Shareholders with
respect to such Fund shall thereupon become shareholders in the Company by
conversion of shares of each Fund pursuant to Article Three hereof without any
further action on their part.
2.2 Effective Time. Subject to the provisions of this Agreement and the
Agreement of Merger, and after receipt of a Tax Clearance Certificate for each
Participating Fund from the California Franchise Tax Board, the Agreement of
Merger, together with the required related officers' certificates, shall be
filed in accordance with Chapter 11 of the California General Corporation Law.
The Merger shall become effective upon the filing of the Agreement of Merger and
such certificates with the California Secretary of State (the "Effective Time").
A-2
<PAGE> 188
2.3 Closing Date. Consummation of the Merger shall be effected as soon as
practicable following the satisfaction or waiver of all conditions established
in this Agreement, but in no event later than , 1996 or such other
date as the parties may agree. The closing shall be held at 10:00 a.m., at the
offices of Counsel, at 333 Market Street, Suite 3200, San Francisco, California,
94105, or at such other date, time and place as the parties may agree.
2.4 Articles of Incorporation. If the Company receives the requisite
Shareholder Approval of this Agreement and the Merger, the articles of
incorporation of the Company in effect at the Effective Time shall become the
articles of incorporation of the Surviving Corporation except that Article First
will be amended to read as follows:
"The name of this corporation is: FRANKLIN SELECT REALTY TRUST."
Article Fourth (d)(i) of the articles of incorporation will be amended to read
as follows:
"(i) Dividends. Holders of the Common Stock, Series A shall be
entitled to receive dividends, when and as declared by the board of
directors out of any assets at the time legally available therefor.
No dividends shall be paid or other distributions made with respect to the
Common Stock, Series B during any fiscal year of this corporation, other
than distributions of net proceeds from the sale, financing or refinancing
of real property of the corporation distributed in accordance with
paragraph (d)(ii) below and dividends payable solely in Common Stock,
Series B."
Such articles of incorporation, from and after the Effective Time, may be
amended from time to time as provided by law and may be separately certified by
the California Secretary of State as the articles of incorporation of the
Surviving Corporation.
2.5 Bylaws. If the Company receives the Required Shareholder Approval of
this Agreement and the Merger, the bylaws of the Company will be amended and
restated as set forth in Exhibit B attached hereto.
2.6 Directors and Officers. If the Company receives the Required
Shareholder Approval of this Agreement and the Merger, the directors and
officers of the Company at the Effective Time will remain the directors and
officers of the Surviving Corporation, retaining their respective positions and
terms of office until their successors have been duly elected or appointed and
qualified or until their earlier death, resignation or removal in accordance
with the Company's articles of incorporation or bylaws.
ARTICLE THREE
CONVERSION OF SHARES
3.1 Conversion of Series A Common Stock. At the Effective Time, each share
of Series A Common Stock of each Participating Fund, other than Dissenting
Shares, shall be converted into the number of shares of Company Common Stock set
forth below (the "Conversion Factor"):
<TABLE>
<S> <C>
FREIF.................................................. 1.286 Shares
Advantage.............................................. 1.2 Shares
</TABLE>
3.2 Conversion of Series B Common Stock. At the Effective Time, each share
of Series B Common Stock of each Participating Fund shall be converted into the
number of Series B Shares of the Company set forth below:
<TABLE>
<S> <C>
FREIF.................................................. 1.286 Shares
Advantage.............................................. 1.2 Shares
</TABLE>
The Company and each holder of Series B Common Stock of a Participating
Fund or Series B Shares of the Company shall enter into the Amended and Restated
Series B Stock Exchange Agreement (the "Amended and Restated Series B Stock
Exchange Agreement") in the form of Exhibit C hereto, effective as of the
Effective Time.
3.3 Dissenting Shares. Notwithstanding anything in this Agreement to the
contrary, a Dissenting Shareholder who holds any Dissenting Shares of the
Company or any Fund outstanding immediately prior to
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the Effective Time, and who has made and perfected a demand for payment of the
value of the shares pursuant to Sections 1300-1312 of the California General
Corporation Law ("Payment"), and who has not effectively withdrawn, failed to
perfect or otherwise forfeited or lost the right to such Payment, shall have, by
virtue of the Merger and without further action on the Dissenting Shareholder's
part, the right to receive and be paid the Payment and no further rights other
than those provided under Sections 1300-1312 of the California General
Corporation Law; subject, however, to Section 9.1(ii).
3.4 Adjustment of the Conversion Factors. The Conversion Factors set forth
in Sections 3.1 and 3.2 above are subject to equitable adjustment prior to the
effective date of the Registration Statement to reflect any stock split, stock
dividend, reverse stock split, or similar recapitalization.
3.5 Fractional Shares. No fractional shares of Company Common Stock or
Series B Shares shall be issued in connection with the Merger. Any fractional
share which a shareholder of a Participating Fund would be entitled to receive
pursuant to Sections 3.1 and 3.2 above shall be rounded up to the next whole
share, and such shareholder shall receive such whole share without the payment
of any additional consideration.
3.6 Exchange Procedures. Promptly after the Effective Time, the Company
shall cause Chemical Trust Company of California (the "Exchange Agent") to mail
to each shareholder of record of each Participating Fund immediately prior to
the Effective Time who has uncertified shares an initial transaction statement
("ITS") signed by the Company and containing the following information: (i)
number of shares of Company Common Stock or Series B Shares to be issued to such
shareholder in the Merger; (ii) name of the registered owner of the shares;
(iii) the taxpayer identification number; and (iv) all other information
necessary to comply with the requirements for issuing an ITS under Article Eight
of the California Uniform Commercial Code. With respect to certificated shares
of the Funds, the Company shall cause the Exchange Agent to mail instructions to
the shareholders of record of such shares immediately prior to the Effective
Time for use in effecting the surrender of such certificates in exchange for
either an ITS or one or more certificates for Company Common Stock or Series B
Shares, as the case may be. Unless requested in writing by the shareholder, no
certificates representing shares of Company Common Stock or Series B Shares will
be issued. Any surrendered certificates shall forthwith be cancelled.
3.7 Closing of Stock Transfer Books. At the Effective Time, the stock
transfer books of each Participating Fund shall be closed, and thereafter no
transfers of such Fund's common stock shall be made or consummated.
ARTICLE FOUR
REPRESENTATIONS AND WARRANTIES OF FREIF
Except as disclosed or reflected in the Joint Proxy Statement/Prospectus,
FREIF represents and warrants to the Company, Advantage and the Advisor as
follows:
4.1 Organization. FREIF is duly organized, validly existing, and in good
standing under the laws of the State of California, and has the corporate power
to own all of its properties and assets and to carry on its business as it is
now being conducted.
4.2 Capital Structure. FREIF's authorized capital stock consists of (i)
10,000,000 shares of Series A Common Stock, without par value, of which
3,999,514 shares are issued and outstanding and (ii) 500,000 shares of Series B
Common Stock, without par value, of which 319,308 shares are issued and
outstanding. All issued and outstanding shares have been validly issued in full
compliance with all federal and state securities laws, are fully paid and
nonassessable. There are no outstanding subscriptions, options, warrants,
convertible securities, or other agreements or commitments obligating FREIF to
issue or transfer from treasury any additional shares of its capital stock of
any class, except warrants covering the exercise of 2,861,420 additional shares
of Series A Common Stock exercisable at $10.00 per share and expiring February
1, 1996, and pursuant to the Amended and Restated Series B Stock Exchange
Agreement.
4.3 Authorization of Transaction. FREIF has full power and authority to
execute and deliver this Agreement and the Agreement of Merger and to perform
its obligations hereunder and thereunder, subject to
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receipt of the Requisite Shareholder Approval of this Agreement and the
Agreement of Merger. This Agreement constitutes the valid and legally binding
obligation of FREIF, enforceable against FREIF in accordance with its terms. To
the best knowledge of FREIF, and other than in connection with the provisions of
the Securities Act, the Exchange Act, the California General Corporation Law,
and state securities laws, FREIF does not need to give any notice to, make any
filings with, or obtain any authorization, consent or approval from any
governmental agency for the parties to consummate the transaction contemplated
in this Agreement.
4.4 Compliance with Law. To the best knowledge of FREIF, neither the
execution or delivery of this Agreement and the Agreement of Merger, nor the
consummation of the transactions contemplated hereby and thereby, will (i)
violate any statute, regulation, rule, judgment, order, decree, stipulation,
injunction, charge, or other restriction of any governmental agency, or court to
which FREIF is subject or any provision of its articles of incorporation or
bylaws or (ii) conflict with, result in breach of, constitute a default under,
result in the acceleration of, create in any party the right to accelerate,
terminate, modify, or cancel or require any notice under any contract, lease,
sublease, license, franchise, permit, indenture, agreement, or mortgage for
borrowed money, instrument of indebtedness, security interest or other
obligation to which FREIF is a party or by which it is bound or to which any of
its assets is subject.
4.5 Filings With the SEC. FREIF has filed all Public Reports with the SEC.
All Public Reports complied at the time of such filing with the Securities Act
and the Exchange Act in all material respects. None of the Public Reports, as of
their respective dates, contained any untrue statement of a material fact or
failed to state a fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
4.6 Financial Statements. FREIF has filed Quarterly Reports on Form 10-Q
for the fiscal quarter ended June 30, 1995 and an Annual Report on Form 10-K for
the fiscal year ended December 31, 1994. The Financial Statements included in or
incorporated by reference into these Public Reports have been prepared in
accordance with generally accepted accounting principals applied on a consistent
basis and present fairly the financial condition of FREIF as of the dates
indicated, and its results of operations, cash flows and changes in shareholder
equity for the periods contained therein.
4.7 Subsequent Events. Since the fiscal quarter ending June 30, 1995,
there has not been any material adverse change in the financial condition or
results of operations of FREIF, or in its overall business or prospects, or in
the tax or other regulatory provisions which govern FREIF.
4.8 Broker's Fees. With the exception of the fees paid or payable to Bear,
Stearns & Co., Inc., FREIF does not have any liability or obligation to pay fees
or commissions to any broker, finder, or agent with respect to the transactions
contemplated by this Agreement.
4.9 Disclosure. The Joint Proxy Statement/Prospectus complies with the
Securities Act and the Exchange Act in all material respects, and does not
contain any untrue statement of a material fact or fail to state a material fact
necessary to make the statements made therein, in light of the circumstances
under which they will be made, not misleading; provided, however, that FREIF
makes no representation or warranty with respect to any information that any
other party to the Merger may supply for use in the Joint Proxy
Statement/Prospectus.
4.10 Properties. FREIF's Financial Statements reflect all of the real and
personal property used by FREIF in its business or otherwise held by FREIF.
Except as disclosed in the Joint Proxy Statement/Prospectus, FREIF has good and
marketable title to all assets and properties reflected in its Financial
Statements and thereafter acquired, free and clear of any imperfections of
title, lien, claim, encumbrance, restriction, charge or equity of any nature
whatsoever (hereinafter referred to collectively as "Liens"), except for the
lien of current taxes not yet delinquent and except for Liens which,
individually or in the aggregate, are not material to the operations and
business conducted at the encumbered property. All of the fixed assets and
properties reflected in FREIF's Financial Statements or thereafter acquired are
in satisfactory condition and repair.
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<PAGE> 191
4.11 Real Property.
(a) FREIF has provided the parties with a full and complete list of all
real property it owns or leases. All property leased by FREIF is held under
valid, subsisting and enforceable leases. None of the real property owned or
leased by FREIF or the operations of FREIF thereon violate in any material
respect any applicable building code, zoning requirement or classification, or
pollution control ordinance or statute relating to the property or to such
operations, and such non-violation is not dependent, in any instance, on
so-called non-conforming use exemptions. No notice from any governmental or
public safety authority of any uncorrected condition, unpaid assessment, charge
or fine relating to the real property owned or leased by FREIF or the conduct of
business thereon or notice of any pending or contemplated condemnation or change
in zoning has been received by FREIF. FREIF has performed all of the obligations
required to be performed by it to date under leases of which FREIF is a party
and is not in default thereunder, and there has not occurred any event that
(whether with or without the passage of time or the giving of notice or both)
would constitute such a default, except for any obligations or defaults which,
either individually or in the aggregate, would not have a material adverse
effect on the condition, financial or otherwise, or the earnings, business
affairs or business prospects of FREIF.
(b) FREIF has conducted its business in accordance with all applicable
laws, regulations, orders and other requirements of governmental authorities
relating to Hazardous Substances and the use, storage, treatment, disposal,
transport, generation, release and exposure of others to Hazardous Substances
(hereinafter referred to collectively as "Environmental Regulations"). FREIF has
not received any notice of any investigation, claim or proceeding against it
relating to Hazardous Substances and is not aware of any fact or circumstance
which could involve it in any environmental litigation, proceeding,
investigation or claim which would impose any environmental liability upon FREIF
(hereinafter referred to collectively as "Environmental Litigation"). Between
the date hereof and Closing Date, there shall not have occurred any failure by
FREIF to comply with applicable Environmental Regulations, and there shall not
have occurred any Environmental Litigation.
(c) Except for those Hazardous Substances used, stored, or disposed of in
compliance with Environmental Regulations, there are no Hazardous Substances in,
under or about the air, soil, sediment, surface water or groundwater on, under
or around any properties at any time owned or leased by FREIF and FREIF has not
disposed of any Hazardous Substances on or about such property, except for any
Hazardous Substances which either individually or in the aggregate would not
have a material adverse effect on the conditions, financial or otherwise, or the
earnings, business affairs or business prospects of FREIF.
4.12 Accounts Receivable. All of the accounts receivable of FREIF shown on
its Financial Statements as of and for the period ended June 30, 1995 arose in
the ordinary and usual course of its business. The values at which accounts
receivable are carried thereon reflect the accounts receivable valuation policy
of FREIF which is consistent with past practice and in accordance with generally
accepted accounting principles applied on a consistent basis.
4.13 Taxes. FREIF has duly filed with the appropriate United States,
state, local and foreign governmental agencies all tax returns and reports
required to be filed (subject to permitted extensions applicable to such
filings), which returns are accurate and complete, and has paid or accrued in
full all taxes, duties, charges, withholding obligations and other governmental
liabilities as well as any interest, penalties, assessments or deficiencies
material to the business of FREIF, if any, due to, or claimed to be due by, any
governmental authority (hereinafter referred to collectively as "Taxes").
FREIF's Financial Statements as of and for the period ended June 30, 1995 fully
accrue all current and deferred Taxes. FREIF is not a party to any pending
action or proceeding, nor, to its best knowledge, is any such action or
proceeding threatened by any governmental authority for the assessment or
collection of Taxes. Since June 30, 1995, no liability for Taxes has been
incurred other than in the ordinary course of business. There are no liens for
Taxes except for liens for property taxes not yet delinquent.
4.14 Undisclosed Liabilities. There are no liabilities of FREIF material
to the business of FREIF (whether absolute, accrued or contingent, and whether
or not determined or determinable) other than
A-6
<PAGE> 192
(i) liabilities disclosed in its Financial Statements as of and for the period
ended June 30, 1995, and (ii) liabilities incurred in the ordinary course of
business and consistent with past practice since June 30, 1995.
4.15 Litigation. There is not pending, or, to the best knowledge of FREIF,
threatened, any suit, action, arbitration, or legal, administrative, or other
proceeding, or governmental investigation (hereinafter referred to collectively
as "Legal Proceeding") against or affecting FREIF, its business, assets, or
financial condition which if decided adversely to FREIF, would individually or
in the aggregate have a material adverse effect on the financial condition or
earnings of FREIF. FREIF has furnished or made available to the other parties
copies of all relevant court papers and documents relating to all Legal
Proceedings. FREIF is not in default with respect to any order, writ,
injunction, or decree of any federal, state, local, or foreign court,
department, agency, or instrumentality. FREIF is not presently engaged in any
legal action to recover any material amount of monies due to any damages
sustained by FREIF.
4.16 Real Estate Investment Trust ("REIT") Status. To the best knowledge
of FREIF, it satisfies all requirements under the Code and California tax law
for status as a REIT, and has taken no action, or failed to take action, which
would jeopardize its REIT status.
ARTICLE FIVE
REPRESENTATIONS AND WARRANTIES OF ADVANTAGE
Except as disclosed or reflected in the Joint Proxy Statement/Prospectus,
Advantage represents and warrants to the Company, FREIF, and the Advisor as
follows:
5.1 Organization. Advantage is duly organized, validly existing, and in
good standing under the laws of the State of California, and has the corporate
power to own all of its properties and assets and to carry on its business as it
is now being conducted.
5.2 Capital Structure. Advantage's authorized capital stock consists of
(i) 50,000,000 shares of Series A Common Stock, without par value, of which
3,013,713 shares are issued and outstanding and (ii) 1,000,000 shares of Series
B Common Stock, without par value, of which 124,240 shares are issued and
outstanding. All issued and outstanding shares have been validly issued in full
compliance with all federal and state securities laws, are fully paid and
nonassessable. There are no outstanding subscriptions, options, warrants,
convertible securities, or other agreements or commitments obligating Advantage
to issue or transfer from treasury any additional shares of its capital stock of
any class, except pursuant to the Amended and Restated Series B Stock Exchange
Agreement.
5.3 Authorization of Transaction. Advantage has full power and authority
to execute and deliver this Agreement and the Agreement of Merger and to perform
its obligations hereunder and thereunder, subject to receipt of the Requisite
Shareholder Approval of this Agreement and the Agreement of Merger. This
Agreement constitutes the valid and legally binding obligation of Advantage,
enforceable against Advantage in accordance with its terms. To the best
knowledge of Advantage, and other than in connection with the provisions of the
Securities Act, the Exchange Act, the California General Corporation Law, and
state securities laws, Advantage does not need to give any notice to, make any
filings with, or obtain any authorization, consent or approval from any
governmental agency for the parties to consummate the transaction contemplated
in this Agreement.
5.4 Compliance with Law. To the best knowledge of Advantage, neither the
execution or delivery of this Agreement and the Agreement of Merger, nor the
consummation of the transactions contemplated hereby and thereby, will (i)
violate any statute, regulation, rule, judgment, order, decree, stipulation,
injunction, charge, or other restriction of any governmental agency, or court to
which Advantage is subject or any provision of its articles of incorporation or
bylaws or (ii) conflict with, result in breach of, constitute a default under,
result in the acceleration of, create in any party the right to accelerate,
terminate, modify, or cancel, or require any notice under any contract, lease,
sublease, license, franchise, permit, indenture, agreement, or mortgage for
borrowed money, instrument of indebtedness, security interest or other
obligation to which Advantage is a party or by which it is bound or to which any
of its assets is subject.
A-7
<PAGE> 193
5.5 Filings With the SEC. Advantage has filed all Public Reports with the
SEC. All Public Reports complied at the time of such filing with the Securities
Act and the Exchange Act in all material respects. None of the Public Reports,
as of their respective dates, contained any untrue statement of a material fact
or failed to state a fact necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading.
5.6 Financial Statements. Advantage has filed Quarterly Reports on Form
10-Q for the fiscal quarter ended June 30, 1995 and an Annual Report on Form
10-K for the fiscal year ended December 31, 1994. The Financial Statements
included in or incorporated by reference into these Public Reports have been
prepared in accordance with generally accepted accounting principles applied on
a consistent basis and present fairly the financial condition of Advantage as of
the dates indicated, and its results of operations, cash flows and changes in
shareholder equity for the periods contained therein.
5.7 Subsequent Events. Since the fiscal quarter ending June 30, 1995,
there has not been any material adverse change in the financial condition or
results of operations of Advantage, or in its overall business or prospects, or
in the tax or other regulatory provisions which govern Advantage.
5.8 Broker's Fees. With the exception of the fees paid or payable to Bear,
Stearns & Co., Inc., Advantage does not have any liability or obligation to pay
fees or commissions to any broker, finder, or agent with respect to the
transaction contemplated by this Agreement.
5.9 Disclosure. The Joint Proxy Statement/Prospectus complies with the
Securities Act and the Exchange Act in all material respects, and does not
contain any untrue statement of a material fact or fail to state a material fact
necessary to make the statements made therein, in light of the circumstances
under which they will be made, not misleading; provided, however, that Advantage
makes no representation or warranty with respect to any information that any
other party to the Merger may supply for use in the Joint Proxy
Statement/Prospectus.
5.10 Properties. Advantage's Financial Statements reflect all of the real
and personal property used by Advantage in its business or otherwise held by
Advantage. Except as disclosed in the Joint Proxy Statement/Prospectus,
Advantage has good and marketable title to all assets and properties reflected
in its Financial Statements and thereafter acquired, free and clear of any
Liens, except for the lien of current taxes not yet delinquent and except for
Liens which, individually or in the aggregate, are not material to the
operations and business conduct at the encumbered property. All of the fixed
assets and properties reflected in Advantage's Financial Statements or
thereafter acquired are in satisfactory condition and repair.
5.11 Real Property.
(a) Advantage has provided the parties with a full and complete list of all
real property it owns or leases. All property leased by Advantage is held under
valid, subsisting and enforceable leases. None of the real property owned or
leased by Advantage or the operations of Advantage thereon violate in any
material respect any applicable building code, zoning requirement or
classification, or pollution control ordinance or statute relating to the
property or to such operations, and such non-violation is not dependent, in any
instance, on so-called nonconforming use exemptions. No notice from any
governmental or public safety authority of any uncorrected condition, unpaid
assessment, charge or fine relating to the real property owned or based by
Advantage or the conduct of business thereon or notice of any pending or
contemplated condemnation or change in zoning has been received by Advantage.
Advantage has performed all of the obligations required to be performed by it to
date under leases of which Advantage is a party and is not in default
thereunder, and there has not occurred any event that (whether with or without
the passage of time or the giving of notice or both) would constitute such a
default, except for any obligations or defaults which, either individually or in
the aggregate, would not have a material adverse effect on the condition,
financial or otherwise, or the earnings, business affairs or business prospects
of Advantage.
(b) Advantage has conducted its business in accordance with all
Environmental Regulations. Advantage has not received any notice of any
investigation, claim or proceeding against it relating to Hazardous Substances
and is not aware of any fact or circumstance which could involve it in any
Environmental Litigation. Between the date hereof and Closing Date, there shall
not have occurred any failure by Advantage
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<PAGE> 194
to comply with applicable Environmental Regulations, and there shall not have
occurred any Environmental Litigation.
(c) Except for those Hazardous Substances used, stored, or disposed of in
compliance with Environmental Regulations, there are no Hazardous Substances in,
under or about the air, soil, sediment, surface water or groundwater on, under
or around any properties at any time owned or leased by Advantage and Advantage
has not disposed of any Hazardous Substances on or about such property except
for any Hazardous Substances which either individually or in the aggregate would
not have a material adverse effect on the conditions, financial or otherwise, or
the earnings, business affairs or business prospects of the Advantage.
5.12 Accounts Receivable. All of the accounts receivable of Advantage
shown on its Financial Statements as of and for the period ended June 30, 1995
arose in the ordinary and usual course of its business. The values at which
accounts receivable are carried thereon reflect the accounts receivable
valuation policy of Advantage which is consistent with past practice and in
accordance with generally accepted accounting principals applied on a consistent
basis.
5.13 Taxes. Advantage has duly filed with the appropriate United States,
state, local and foreign governmental agencies all tax returns and reports
required to be filed (subject to permitted extensions applicable to such
filings), which returns are accurate and complete, and has paid or accrued in
full all Taxes, if any, due to, or claimed to be due by, any governmental
authority. Advantage's Financial Statements as of and for the period ended June
30, 1995 fully accrue all current and deferred Taxes. Advantage is not a party
to any pending action or proceeding, nor, to its best knowledge, is any such
action or proceeding threatened by any governmental authority for the assessment
or collection of Taxes. Since June 30, 1995 no liability for Taxes has been
incurred other than in the ordinary course of business. There are no liens for
Taxes except for liens for property taxes not yet delinquent.
5.14 Undisclosed Liabilities. There are no liabilities of Advantage
material to the business of Advantage (whether absolute, accrued or contingent,
and whether or not determined or determinable) other than (i) liabilities
disclosed in its Financial Statements as of and for the period ended June 30,
1995 and (ii) liabilities incurred in the ordinary course of business and
consistent with past practice since June 30, 1995.
5.15 Litigation. There is not pending, or, to the best knowledge of
Advantage, threatened, any Legal Proceeding against or affecting Advantage, its
business, assets, or financial condition which if decided adversely to
Advantage, would individually or in the aggregate have a material adverse effect
on the financial condition or earnings of Advantage. Advantage has furnished or
made available to the other parties copies of all relevant court papers and
documents relating to all Legal Proceedings. Advantage is not in default with
respect to any order, writ, injunction, or decree of any federal, state, local,
or foreign court, department, agency, or instrumentality. Advantage is not
presently engaged in any legal action to recover any material amount of monies
due to any damages sustained by Advantage.
5.16 REIT Status. To the best knowledge of Advantage, it satisfies all
requirements under the Code and California tax law for status as a REIT, and has
taken no action, or failed to take action, which would jeopardize its REIT
status.
ARTICLE SIX
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as disclosed or reflected in the Joint Proxy Statement/Prospectus,
the Company represents and warrants to FREIF, Advantage and the Advisor as
follows:
6.1 Organization. The Company is duly organized, validly existing, and in
good standing under the laws of the State of California, and has the corporate
power to own all of its properties and assets and to carry on its business as it
is now being conducted.
6.2 Capital Structure. The Company's authorized capital stock consists of
(i) 50,000,000 shares of Series A Common Stock, without par value, of which
5,383,297 shares are issued and outstanding and
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(ii) 1,000,000 shares of Series B Common Stock, without par value, of which
185,866 shares are issued and outstanding. All issued and outstanding shares
have been validly issued in full compliance with all federal and state
securities laws, are fully paid and nonassessable. There are no outstanding
subscriptions, options, warrants, convertible securities, or other agreements or
commitments obligating the Company to issue or transfer from treasury any
additional shares of its capital stock of any class, except pursuant to the
Amended and Restated Series B Stock Exchange Agreement.
6.3 Authorization of Transaction. The Company has full power and authority
to execute and deliver this Agreement and the Agreement of Merger and to perform
its obligations hereunder and thereunder, subject to receipt of the Requisite
Shareholder Approval of this Agreement and the Agreement of Merger. This
Agreement constitutes the valid and legally binding obligation of the Company,
enforceable against the Company in accordance with its terms. To the best
knowledge of the Company, and other than in connection with the provisions of
the Securities Act, the Exchange Act, the California General Corporation Law,
and state securities laws, the Company does not need to give any notice to, make
any filings with, or obtain any authorization, consent or approval from any
governmental agency for the parties to consummate the transaction contemplated
in this Agreement.
6.4 Compliance with Law. To the best knowledge of the Company, neither the
execution or delivery of this Agreement and the Agreement of Merger, nor the
consummation of the transactions contemplated hereby and thereby, will (i)
violate any statute, regulation, rule, judgment, order, decree, stipulation,
injunction, charge, or other restriction of any governmental agency, or court to
which the Company is subject or any provision of its articles of incorporation
or bylaws or (ii) conflict with, result in breach of, constitute a default
under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or require any notice under any
contract, lease, sublease, license, franchise, permit, indenture, agreement, or
mortgage for borrowed money, instrument of indebtedness, security interest or
other obligation to which the Company is a party or by which it is bound or to
which any of its assets is subject.
6.5 Filings With the SEC. The Company has filed all Public Reports with
the SEC. All Public Reports complied at the time of such filing with the
Securities Act and the Exchange Act in all material respects. None of the Public
Reports, as of their respective dates, contained any untrue statement of a
material fact or failed to state a fact necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
6.6 Financial Statements. The Company has filed Quarterly Reports on Form
10-Q for the fiscal quarter ended June 30, 1995, and an Annual Report on Form
10-K for the fiscal year ended December 31, 1994. The Financial Statements
included in or incorporated by reference into these Public Reports have been
prepared in accordance with generally accepted accounting principles applied on
a consistent basis and present fairly the financial condition of the Company as
of the dates indicated, and its results of operations, cash flows and changes in
shareholder equity for the periods contained therein.
6.7 Subsequent Events. Since the fiscal quarter ending June 30, 1995,
there has not been any material adverse change in the financial condition or
results of operations of the Company, or in its overall business or prospects,
or in the tax or other regulatory provisions which govern the Company.
6.8 Broker's Fees. With the exception of the fees paid or payable to Bear,
Stearns & Co., Inc., the Company does not have any liability or obligation to
pay fees or commissions to any broker, finder, or agent with respect to the
transaction contemplated by this Agreement.
6.9 Disclosure. The Joint Proxy Statement/Prospectus complies with the
Securities Act and the Exchange Act in all material respects, and does not
contain any untrue statement of material fact or fail to state a material fact
necessary to make the statements made therein, in light of the circumstances
under which they will be made, not misleading, provided, however, that the
Company makes no representation or warranty with respect to any information that
any other party to the Merger will supply for use in the Joint Proxy
Statement/Prospectus.
6.10 Properties. The Company's Financial Statements reflect all of the
real and personal property used by the Company in its business or otherwise held
by the Company. Except as disclosed in the Joint Proxy
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Statement/Prospectus, the Company has good and marketable title to all assets
and properties reflected in its Financial Statements and thereafter acquired,
free and clear of any Liens, except for the lien of current taxes not yet
delinquent and except for Liens which, individually or in the aggregate, are not
material to the operations and business conducted at the encumbered property.
All of the fixed assets and properties reflected in the Company's Financial
Statements or thereafter acquired are in satisfactory condition and repair.
6.11 Real Property.
(a) The Company has provided the parties with a full and complete list of
all real property it owns or leases. All property leased by the Company is held
under valid, subsisting and enforceable leases. None of the real property owned
or leased by the Company or the operations of the Company thereon violate in any
material respect any applicable building code, zoning requirement or
classification, or pollution control ordinance or statute relating to the
property or to such operations, and such non-violation is not dependent, in any
instance, on so-called non-conforming use exemptions. No notice from any
governmental or public safety authority of any uncorrected condition, unpaid
assessment, charge or fine relating to the real property owned or leased by the
Company or the conduct of business thereon or notice of any pending or
contemplated condemnation or change in zoning has been received by the Company.
The Company has performed all of the obligations required to be performed by it
to date under leases of which the Company is a party and is not in default
thereunder, and there has not occurred any event that (whether with or without
the passage of time or the giving of notice or both) would constitute such a
default, except for any obligations or defaults which, either individually or in
the aggregate, would not have a material adverse effect on the condition,
financial or otherwise, or the earnings, business affairs or business prospects
of the Company.
(b) The Company has conducted its business in accordance with all
Environmental Regulations. The Company has not received any notice of any
investigation, claim or proceeding against it relating to Hazardous Substances
and is not aware of any fact or circumstance which could involve it in any
Environmental Litigation. Between the date hereof and Closing Date, there shall
not have occurred any failure by the Company to comply with applicable
Environmental Regulations, and there shall not have occurred any Environmental
Litigation.
(c) Except for those Hazardous Substances used, stored, or disposed of in
compliance with Environmental Regulations, there are no Hazardous Substances in,
under or about the air, soil, sediment, surface water or groundwater on, under
or around any properties at any time owned or leased by the Company and the
Company has not disposed of any Hazardous Substances on or about such property,
except for any Hazardous Substances which either individually or in the
aggregate would not have a material adverse effect on the conditions, financial
or otherwise, or the earnings, business affairs or business prospects of the
Company.
6.12 Accounts Receivable. All of the accounts receivable of the Company
shown on its Financial Statements as of and for the period ended June 30, 1995
arose in the ordinary and usual course of its business. The values at which
accounts receivable are carried thereon reflect the accounts receivable
valuation policy of the Company which is consistent with past practice and in
accordance with generally accepted accounting principals applied on a consistent
basis.
6.13 Taxes. The Company has duly filed with the appropriate United States,
state, local and foreign governmental agencies all tax returns and reports
required to be filed (subject to permitted extensions applicable to such
filings), which returns are accurate and complete, and has paid or accrued in
full all Taxes, if any, due to, or claimed to be due by, any governmental
authority. The Company's Financial Statements as of and for the period ended
June 30, 1995 fully accrue all current and deferred Taxes. The Company is not a
party to any pending action or proceeding, nor, to its best knowledge, is any
such action or proceeding threatened by any governmental authority for the
assessment or collection of Taxes. Since June 30, 1995, no liability for Taxes
has been incurred other than in the ordinary course of business. There are no
liens for Taxes except for liens for property taxes not yet delinquent.
6.14 Undisclosed Liabilities. There are no liabilities of the Company
material to the business of the Company (whether absolute, accrued or
contingent, and whether or not determined or determinable) other than (i)
liabilities disclosed in its Public Reports as of and for the period ended June
30, 1995, including those
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reflected in its Financial Statements, and (ii) liabilities incurred in the
ordinary course of business and consistent with past practice since June 30,
1995.
6.15 Litigation. There is not pending, or, to the best knowledge of the
Company, threatened, any Legal Proceeding against or affecting the Company, its
business, assets, or financial condition which if decided adversely to the
Company, would individually or in the aggregate have a material adverse effect
on the financial condition or earnings of the Company. The Company has furnished
or made available to the other parties copies of all relevant court papers and
documents relating to all Legal Proceedings. The Company is not in default with
respect to any order, writ, injunction, or decree of any federal, state, local,
or foreign court, department, agency, or instrumentality. The Company is not
presently engaged in any legal action to recover any material amount of monies
due to any damages sustained by the Company.
6.16 REIT Status. To the best knowledge of the Company, it satisfies all
requirements under the Code and California tax law for status as a REIT, and has
taken no action, or failed to take action, which would jeopardize its REIT
status.
ARTICLE SEVEN
REPRESENTATIONS AND WARRANTIES OF THE ADVISOR
Except as disclosed or reflected in the Joint Proxy Statement/Prospectus,
the Advisor represents and warrants to the Company, FREIF and Advantage, as
follows:
7.1 Organization. The Advisor is duly organized, validly existing, and in
good standing under the laws of the State of California, and has the corporate
power to own all of its properties and assets and to carry on its business as it
is now being conducted.
7.2 Authorization of Transaction. Advisor has full power and authority to
execute and deliver this Agreement and the Agreement of Merger and to perform
its obligations hereunder and thereunder. This Agreement constitutes the valid
and legally binding obligation of Advisor, enforceable against Advisor in
accordance with its terms. To the best knowledge of Advisor, and other than in
connection with the Securities Act, the Exchange Act, the California General
Corporation Law, and state securities laws, Advisor does not need to give any
notice to, make any filings with, or obtain any authorization, consent or
approval from any governmental agency for the parties to consummate the
transaction contemplated in this Agreement.
7.3 Representations of Company and Funds. To the best knowledge of the
Advisor, the representations and warranties made herein by FREIF, Advantage, and
the Company are true and correct in all material respects. To the best knowledge
of the Advisor, the Joint Proxy Statement/Prospectus does not contain any untrue
statement of a material fact or fails to state a fact necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
7.4 Information. The information, documents, and schedules provided by the
Advisor to the special committees of the independent directors of the Company,
FREIF and Advantage and those provided to Bear Stearns & Co., Inc., were derived
in good faith and, to the best knowledge of the Advisor, did not contain any
untrue statement of a material fact or fail to state a fact necessary to make
the Statements therein, in light of the circumstances under which they were made
not misleading.
ARTICLE EIGHT
COVENANTS
The parties agree as follows with respect to the period from and after the
execution of this Agreement.
8.1 General. Each party will use its best efforts to take all action and
to do all things necessary, proper, or advisable to consummate and make
effective the transactions contemplated by this Agreement and the Agreement of
Merger; provided, however, that the boards of directors of the Company and the
Funds shall be free to take any action or refrain from taking any action
reasonably necessary in the discharge of their fiduciary duties.
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8.2 Notices and Consents. The Company and each Fund will give any notices
to third parties, and will, subject to the proviso contained in Section 8.1, use
its best efforts to obtain the consents and approvals required in Section
9.1(ii).
8.3 Regulatory Matters and Approvals.
(i) Securities Laws. The Company and the Funds will file with the SEC
the Joint Proxy Statement/Prospectus under the Exchange Act relating to the
special meetings of the shareholders. The Company will file with the SEC a
Registration Statement under the Securities Act, and take all actions
necessary under state securities laws, relating to the offering and
issuance of the Company's shares.
(ii) California General Corporation Law. The Company and each Fund
will call special meetings of their respective shareholders (the "Special
Meetings") to be held as soon as practicable following the mailing of the
final Joint Proxy Statement/Prospectus for the Company or such Fund so that
their respective shareholders may consider and vote upon the adoption of
the Merger in accordance with California General Corporation Law. In
conjunction with calling the Special Meetings, the Company and the Funds
will mail the final Joint Proxy Statement/Prospectus to their respective
shareholders.
(iii) Other Governmental Matters. Each party will take any additional
action that may be necessary, proper, or advisable in connection with any
other notices to, filings with, and authorizations, consents, and approvals
of governmental agencies.
8.4 Fairness Opinion and Accountant's Letter. The Company and each Fund
will deliver to their respective boards of directors on or before the final
Joint Proxy Statement/Prospectus is mailed to their respective shareholders (i)
an opinion of Bear, Stearns & Co., Inc. as to the fairness of the Merger to the
Company's and each Fund's shareholders from a financial point of view (the
"Fairness Opinion") and (ii) a letter from the Company's and each Fund's
independent auditors, Coopers & Lybrand LLP, with respect to certain issues (the
"Accountant's Letter") both of which shall be satisfactory to the boards of
directors of the Company and the Funds in substance and in form.
8.5 Listing Company Shares. The Company will cause the Company Common
Stock that will be issued in the Merger to be approved for listing on the
American Stock Exchange, subject to official notice of issuance, prior to the
Effective Time.
8.6 Operation of Business. Unless otherwise agreed upon by the parties
hereto, between the date of this Agreement and the Effective Time, the Company
and the Funds will not engage in any practice, take any action, embark on any
course of inaction, or enter into any transaction outside the ordinary course of
business. For purposes of this Section 8.6, the purchase and financing of real
estate, directly or through interests in real estate partnerships or other real
estate entities, but not the sale of real estate, shall be deemed to be within
the ordinary course of business. Without limiting the generality of the
foregoing except as expressly contemplated hereby or otherwise agreed upon by
the parties hereto:
(i) none of the Company or the Funds will authorize or effect any
change in its articles of incorporation or bylaws;
(ii) none of the Company, outside the ordinary course of business, or
the Funds will grant any options, warrants, or other rights to purchase its
capital stock, issue, sell or otherwise dispose of any of its capital
stock, redeem, purchase or otherwise acquire any of its capital stock,
effect a split, reclassification or other change in or of any of its
capital stock, or declare or pay a dividend in shares of its capital stock;
(iii) none of the Company or the Funds will create, incur, assume, or
guarantee any indebtedness outside the ordinary course of business;
(iv) none of the Company or the Funds will grant any security interest
in any of its assets outside the ordinary course of business;
(v) none of the Company or the Funds will make any capital investment
in, make any loan to, or acquire the securities or assets of any other
person outside the ordinary course of business;
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(vi) none of the Company or the Funds will make any changes in the
employment terms of any of its directors, officers, and employees outside
the ordinary course of business;
(vii) the Company and each Fund will maintain all of their properties
in good repair and condition, and maintain insurance policies in respect of
its business and properties consistent with past practice;
(viii) the Company and each Fund will take all necessary action to
insure that they maintain their status as REITS for federal tax purposes;
and
(ix) the Company and each Fund may declare, set aside, or pay any
dividend or make any distribution in respect of its capital stock which is
consistent with past practices, and in any event, shall declare and pay any
dividends or distributions which are necessary to maintain their status as
REITS under the Code.
8.7 Notice of Developments. Each party will give prompt notice to the
other parties of any material development (i) affecting its assets, liabilities,
business, financial condition, results of operations, or future prospects, or
(ii) affecting its ability to consummate the transactions contemplated by this
Agreement and the Agreement of Merger.
8.8 Expenses. Regardless of whether the Requisite Shareholder Approvals
are received by the Company and/or a Fund, Transaction Costs will be borne by
the Funds and the Company, and allocated proportionately based on the following:
(1) in the case of the Company the number of shares of Company Common Stock
outstanding on November 1, 1995, and (2) in the case of each Fund, the number of
shares of Company Common Stock which would have been issued to holders of Series
A Common Stock of each Fund if the Merger had occurred on November 1, 1995 based
on the Conversion Factors set forth in Section 3.1 of this Agreement.
"Transaction costs" means Solicitation Costs and all costs other than
solicitation costs, including costs of printing and mailing the final Joint
Proxy Statement/Prospectus, legal fees for the preparation of the preliminary
and Joint Proxy Statement/Prospectus and other legal fees related to the Merger,
financial advisory and investment banking fees, accounting fees, expenses of the
independent committees, appraisal fees and all other preparatory fees relating
to the Merger. "Solicitation costs" include direct marketing expenses such as
telephone calls, broker-dealer fact sheets, and legal and other fees (including
proxy solicitation fees) directly related to the solicitation of proxies.
ARTICLE NINE
CONDITIONS TO OBLIGATIONS TO CLOSE
9.1 Conditions. Each party's obligation to consummate the Merger is
subject to the satisfaction, on or before the Closing Date, of the following
conditions:
(i) this Agreement and the Agreement of Merger shall have received the
Requisite Shareholder Approval from the shareholders of the Company and a
Participating Fund;
(ii) if the number of Dissenting Shares of common stock of the Company
or a Participating Fund shall equal or exceed 5% of the aggregate number of
outstanding shares of common stock thereof, the board of directors of the
Company or such Fund may elect not to participate in the merger by delivery
of written notice of election not to proceed;
(iii) the receipt of any necessary authorizations, consents and
approvals, including those required from lenders, governmental authorities
or regulatory bodies and any third party authorizations, consents and
approvals that the Company may reasonably require in connection with the
matters pertaining to the Merger, except any authorizations, consents and
approvals the failure to make or obtain any or all of which (a) is not
reasonably likely to have a material adverse effect on the condition,
financial or otherwise, or the earnings, business affairs or business
prospects of the Company or (b) would not prevent, materially delay or
materially burden the transactions contemplated by this Agreement. For the
purposes of this section, the condition, earnings, business affairs and
business prospects of the Company
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<PAGE> 200
shall refer to such matters as they would exist after and assuming the
consummation of the Merger. Such authorizations, consents and approvals
shall remain in effect at the Closing Date;
(iv) the representations and warranties of each party set forth in
this Agreement shall be true and correct in all material respects as of the
Closing Date;
(v) the Company and each Participating Fund shall have performed and
complied with all of its covenants hereunder in all material respects
through the Closing Date;
(vi) there shall not be any judgment, order, decree, stipulation,
injunction, or charge in effect preventing the consummation of any of the
transactions contemplated by this Agreement;
(vii) all dividend distributions required under Section 857(a) of the
Code shall have made been made by the Company and each Participating Fund
to their respective shareholders for the short taxable year ending at the
Effective Time, or, alternatively, the Company or such Fund will have
declared the dividend prior to the Effective Time and complied with the
requirements of Section 858(a) of the Code for making the shareholder
distribution after the Effective Time without losing its qualification as a
REIT;
(viii) the Company and Participating Fund shall have provided a
certificate to the effect that each of the conditions specified paragraphs
(i) though (vii) above is satisfied in all material respects;
(ix) the Registration Statement of which the Joint Proxy
Statement/Prospectus is a part shall have become effective under the
Securities Act, no stop order suspending the effectiveness of the
Registration Statement or preventing or suspending the use of the Joint
Proxy Statement/Prospectus shall be in effect, and no proceeding for any
such purpose shall have been initiated or threatened by the SEC;
(x) the Company Common Stock that will be issued in the Merger shall
have been approved for listing on the American Stock Exchange, subject to
official notice of issuance;
(xi) all actions to be taken by each party in connection with the
transactions contemplated hereby and all certificates, opinions,
instruments, and other documents required to effect the transactions
contemplated hereby will be satisfactory in form and substance to all
parties;
(xii) Counsel shall have provided an opinion relating to the tax
consequences of the Merger to the effect that none of the Company, the
Participating Funds or any Series A shareholders of the Company or such
Fund (other than Dissenting Shareholders) will recognize gain or loss as a
result of the Merger and the Merger will not adversely affect the
qualification of the Participating Funds or the Company as real estate
investment trusts within the meaning of Section 856 of the Internal Revenue
Code; and
(xiii) Counsel shall have provided an opinion relating to certain
corporate and securities matters with respect to the Merger in a form
reasonably acceptable to the parties.
(xiv) None of the Participating Funds nor the Company shall have
determined that the Merger has become impractical or imprudent.
(xv) Bear, Stearns & Co., Inc. shall not have withdrawn or modified
its Fairness Opinion.
9.2 Waiver. The parties may mutually agree to waive any condition
specified above provided such waiver is in writing and executed prior to the
Effective Time.
ARTICLE TEN
TERMINATION
10.1 Termination of Agreement. Any party may terminate or withdraw from
this Agreement with the prior authorization of its board of directors as
provided below:
(i) the parties may terminate this Agreement by mutual written consent
at any time prior to or after the approval of the Merger by the
shareholders of the Company and either Fund;
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(ii) any party may withdraw from this Agreement by giving written
notice to the other parties any time prior to the Effective Time in the
event any of the other parties is in material breach of any representation,
warrants or covenant contained in this Agreement;
(iii) any party may withdraw from this Agreement by giving written
notice to the other parties at any time prior to the Effective Time in the
event the Fairness Opinion is withdrawn or modified;
(iv) any party may withdraw from this Agreement by giving written
notice any time after the Special Meetings in the event this Agreement and
the Merger fail to receive the Requisite Shareholder Approval;
(v) any party may withdraw from this Agreement if any action has been
threatened or instituted to restrain or modify the Merger which in the good
faith judgment of the board of directors of such party, acting on advice of
counsel, has a reasonable probability of success; and
(vi) any party may withdraw from this Agreement if the Merger shall
not have been consummated by , 19 , or at such other date,
time and place as the parties may agree.
10.2 Effect of Termination or Withdrawal. If any party terminates this
Agreement or the Company or both Funds withdraw from this Agreement, as provided
above, all obligations of the parties hereunder shall terminate and this
Agreement shall forthwith become wholly void and of no effect, without liability
of any party to any other party (except for any liability of any party then in
breach). If only one Fund withdraws from this Agreement, it shall remain in full
force and effect as to the Company and the remaining Fund.
ARTICLE ELEVEN
MISCELLANEOUS
11.1 Survival. None of the representations, warranties, and covenants of
the parties shall survive the Effective Time.
11.2 Press Releases and Announcements. No party shall issue any press
release or announcement relating to the subject matter of this Agreement without
the prior approval of the other parties; provided, however, that any party may
make any public disclosure it believes in good faith is required by law or
regulation, in which case the disclosing party shall advise the other parties
prior to making the disclosure.
11.3 Entire Agreement. This Agreement, including the documents referred to
herein, constitutes the entire agreement among the parties and supersedes any
prior understandings, agreements, or representations by or among the parties,
written or oral, that may have in any way related to the subject matter hereof.
11.4 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same document.
11.5 Headings. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
11.6 Notices. All notices, demands, claims, and other communications
hereunder will be in writing and addressed to the intended recipient as set
forth below:
<TABLE>
<S> <C>
If to the Company: 777 Mariners Boulevard
San Mateo, CA 94403-7777
If to FREIF: 777 Mariners Boulevard
San Mateo, CA 94403-7777
If to Advantage: 777 Mariners Boulevard
San Mateo, CA 94403-7777
If to the Advisor: 777 Mariners Boulevard
San Mateo, CA 94403-7777
</TABLE>
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Any party may give any notice, request, demand, or other communication by using
ordinary or certified mail, personal delivery, courier, messenger, telecopy, or
fax provided it is actually received by the person for whom it is intended.
11.7 Governing Law. This Agreement shall be governed by and construed in
accordance with the internal laws, and not the laws of conflicts, of the State
of California.
11.8 Amendment and Waivers. The parties may mutually amend any provision
of this Agreement at any time prior to the Effective Time with the prior
authorization with their respective board of directors; provided, however, that
any amendment adopted subsequent to shareholder approval will be subject to the
restrictions contained in the California General Corporation Law. No amendment
of any provision of this Agreement shall be valid unless it is in writing and
signed by all parties. No waiver by any party of any default, misrepresentation,
or breach or warranty or covenant hereunder shall be deemed to extend to any
prior or subsequent default, misrepresentation, or breach of warranty or
covenant hereunder.
11.9 Incorporation of Exhibits and Schedules. The exhibits and schedules
identified in this Agreement are incorporated herein by reference and made a
part hereof.
11.10 Severability. Any term or provision of this Agreement that is
invalid or unenforceable in any situation in any jurisdiction shall not affect
the validity or enforceability of the remaining terms and provisions hereof in
such jurisdiction.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
date first written above.
FRANKLIN SELECT REAL ESTATE INCOME
FUND, a California corporation
By:
------------------------------------
Its:
------------------------------------
FRANKLIN REAL ESTATE INCOME FUND, a
California corporation
By:
------------------------------------
Its:
------------------------------------
FRANKLIN ADVANTAGE REAL ESTATE
INCOME FUND, a California corporation
By:
------------------------------------
Its:
------------------------------------
FRANKLIN PROPERTIES, INC., a
California corporation
By:
------------------------------------
Its:
------------------------------------
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<PAGE> 203
EXHIBIT A
AGREEMENT OF MERGER
AMONG
FRANKLIN SELECT REAL ESTATE INCOME FUND,
FRANKLIN REAL ESTATE INCOME FUND,
FRANKLIN ADVANTAGE REAL ESTATE INCOME FUND,
AND
FRANKLIN PROPERTIES, INC.
This Agreement of Merger (this "Agreement of Merger") is entered into among
FRANKLIN SELECT REAL ESTATE INCOME FUND, a California corporation (the
"Company"), FRANKLIN REAL ESTATE INCOME FUND, a California corporation
("FREIF"), FRANKLIN ADVANTAGE REAL ESTATE INCOME FUND, a California corporation
("Advantage"), and FRANKLIN PROPERTIES, INC., a California corporation (the
"Advisor"). FREIF and Advantage are hereinafter referred to individually as a
"Fund" and collectively as "Funds."
1. The Company was organized on January 5, 1989 and has 5,383,439 shares of
its Series A Common Stock and 185,866 of its Series B Shares outstanding.
2. FREIF was organized on August 7, 1987 and has 3,999,653 shares of its
Series A Common Stock and 319,308 shares of its Series B Common Stock
outstanding.
3. Advantage was organized on June 8, 1990 and has 3,013,775 shares of its
Series A Common Stock and 124,240 shares of its Series B Common Stock
outstanding.
4. Each Fund whose shareholders have approved the merger shall merge with
and into the Company and the separate corporate existence of such Fund shall
cease. The Company shall then succeed, without any other transfer, to all the
rights and property of such Fund and shall be subject to all the debts and
liabilities thereof in the same manner as if the Company had itself incurred
them. All rights of creditors and all liens upon the property of such Fund shall
be preserved unimpaired.
5. Upon the merger, each share of Series A Common Stock of each Fund whose
shareholders have approved the merger shall be converted into the following
number of shares of Series A Common Stock of the Company: FREIF, 1.286 shares;
and Advantage, 1.2 shares.
6. Upon the merger, if FREIF shareholders have approved it, each share of
Series B Common Stock of FREIF shall be converted into 1.286 Series B Shares of
the Company, and if Advantage shareholders have approved it, each share of
Series B Common Stock of Advantage shall be converted into 1.2 Series B Shares
of the Company.
7. The outstanding shares of the Company shall remain outstanding and are
not affected by the merger.
8. If, between the date of this Agreement of Merger and the effective time
of the merger, the outstanding shares of any of the Company or the Funds shall
have changed into a different number of shares by reason of a stock split, stock
dividend, reverse stock split, or similar recapitalization, the number of shares
of the Company issuable upon the merger shall be adjusted accordingly.
9. Article First of the articles of incorporation of the Company shall be
amended by the merger to change the name of the Company to "Franklin Select
Realty Trust."
10. Article Fourth (d)(i) of the articles of incorporation of the Company
shall be amended by the merger to read as follows:
"(i) Dividends. Holders of the Common Stock, Series A shall be
entitled to receive dividends, when and as declared by the board of
directors out of any assets at the time legally available therefor. No
dividends shall be paid or other distributions made with respect to the
Common Stock, Series B during any fiscal year of this corporation, other
than distributions of net proceeds from the sale, financing or
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refinancing of real property of the corporation distributed in accordance
with paragraph (d)(ii) below and dividends payable solely in Common Stock,
Series B."
11. The conversion of shares as provided by this Agreement of Merger shall
occur automatically upon the effective time without action by the holders
thereof.
12. Any fractional share of Company stock held by a shareholder after the
conversion of shares described above shall be rounded up to the next whole share
without the payment of any additional consideration by such shareholder.
13. The effective time of the merger is the date upon which a copy of this
Agreement of Merger is filed with the California Secretary of State.
IN WITNESS WHEREOF, the parties have executed this Agreement of Merger.
FRANKLIN SELECT REAL ESTATE INCOME
FUND, a California corporation
By:
------------------------------------
Its:
------------------------------------
FRANKLIN REAL ESTATE INCOME FUND, a
California corporation
By:
------------------------------------
Its:
------------------------------------
FRANKLIN ADVANTAGE REAL ESTATE
INCOME FUND, a California corporation
By:
------------------------------------
Its:
------------------------------------
FRANKLIN PROPERTIES, INC., a
California corporation
By:
------------------------------------
Its:
------------------------------------
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<PAGE> 205
EXHIBIT B
RESTATED BYLAWS OF THE COMPANY
B-1
<PAGE> 206
AMENDED AND RESTATED
BYLAWS
OF
FRANKLIN SELECT REALTY TRUST
ARTICLE I
THE COMPANY; DEFINITIONS
1.1 Name. The name of the corporation is FRANKLIN SELECT REALTY TRUST and
is referred to in these Bylaws as the "Company." As far as practicable and
except as otherwise provided in the Organization Documents, the Directors shall
direct the management of the business and the conduct of the affairs of the
Company, execute all documents and sue or be sued in the name of the Company. If
the Directors determine that the use of that name is not practicable, legal or
convenient, they may use such other designation or may adopt another name under
which the Company may hold property or conduct all or part of its activities.
If Franklin Properties, Inc., or any parent, subsidiary, Affiliate or
successor of such corporation shall cease, for any reason, to render to the
Company the services of Advisor pursuant to the agreement referred to in Article
VII and any renewal or extension of said agreement, then the Directors shall,
upon request of Franklin Resources, Inc., or its successor, promptly cause the
Articles of Incorporation and these Bylaws to be amended to change the name of
the Company to one which does not include any reference to "Franklin" or any
approximation or abbreviation of that name.
1.2 Nature of Company. The Company is a corporation organized under the
laws of the State of California. It is intended that the Company shall carry on
business as a "real estate investment trust" ("REIT").
1.3 Definitions. Whenever used in these Bylaws, the terms defined in this
Section 1.3 shall, unless the context otherwise requires, have the respective
meanings specified in this Section 1.3. In these Bylaws, words in the singular
number include the plural and in the plural number include the singular.
(a) Advisor. Franklin Properties, Inc. or any other Person appointed
or employed by or who contracted with the Company under the provisions of
Article VII, and who is responsible for directing or performing the
day-to-day business affairs of the Company.
(b) Affiliate. As to any Person, (i) any other Person directly or
indirectly controlling, controlled by or under common control with such
Person, (ii) any other Person owning or controlling 10% or more of the
outstanding voting securities or beneficial interests of such Person, (iii)
any officer, director, trustee or general partner of such Person and (iv)
if such other Person is an officer, director, trustee or partner of another
entity, then the entity for which that Person acts in any such capacity.
(c) Annual Meeting of Shareholders. As set forth in Section 3.2.
(d) Annual Report. As set forth in Section 10.6.
(e) Appraisal. The value as of the date of the appraisal of real
property in its existing state or in a state to be created as determined by
the Directors, the Advisor or by a disinterested person, having no economic
interest in the real property, who is a member in good standing of a
nationally recognized society of appraisers or who in the sole judgment of
the Directors is properly qualified to make such a determination. The
Directors may in good faith rely on a previous Appraisal made on behalf of
another Person, provided, (i) it meets the standards of this definition and
was made in connection with an investment in which the Company acquires the
entire or a participating interest, and (ii) it was prepared not earlier
than two years prior to the acquisition by the Company of its interest in
the real property. In appraising properties, appraisers may take into
consideration each of the specific terms and conditions of a purchase,
including any leaseback or other guarantee arrangement. The Appraisal may
not necessarily represent the cash value of the property but may consider
the value of the income stream from such property plus the discounted value
of the fee interest and other terms of the purchase. Such Appraisal
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shall be obtained from an independent qualified appraiser if a majority of
the Independent Directors so decides or if the transaction is with the
Advisor, Directors or any of their Affiliates, and such Appraisal shall be
maintained in the Company's records for a minimum of five (5) years and
shall be available for inspection and duplication by any Shareholder.
(f) Asset Coverage. The ratio which the value of the total assets of
the Company, less all liabilities and indebtedness (other than unsecured
borrowings) bears to the aggregate amount of all unsecured borrowings of
the Company.
(g) Average Invested Assets. The average of the aggregate book value
of the assets of the Company invested, directly or indirectly, in equity
interests in and loans secured by real estate, before reserves for
depreciation or bad debts or other similar non-cash reserves computed by
taking the average of such values at the end of each month during any
period.
(h) Bylaws. These Bylaws, including all amendments, restatements, or
modifications.
(i) Directors. As of any particular time, the Directors of the
Company holding office at such time.
(j) Independent Director. A Director of the Company who is not
affiliated, directly or indirectly, with the Advisor whether by ownership
of, ownership interest in, employment by, any material business or
professional relationship with or service as an officer or director of the
Advisor, or an affiliated business entity of the Advisor (other than as an
independent director of another real estate investment trust advised by the
Advisor or as an "independent director" (as required by the Investment
Company Act of 1940, as amended) of any mutual fund advised by an affiliate
of the Advisor), and who performs no other services for the Company. An
indirect relationship shall include circumstances in which a member of the
immediate family of a Director has one of the foregoing relationships with
the Advisor or the Company.
(k) Net Assets. The total assets of the Company (other than
intangible assets) at cost before deducting depreciation or other non-cash
reserves less total liabilities, calculated at least quarterly on a basis
consistently applied.
(l) Net Income. The total revenues of the Company for any period,
computed on the basis of its results of operations for that period, after
deduction of all expenses other than additions to reserves for depreciation
or bad debts or other similar non-cash reserves.
(m) Offering and Organization Expenses. Those expenses incurred in
connection with and in preparing the Series A Shares of the Company for
registration and subsequently offering and distributing the Series A Shares
to the public, excluding sales commissions of broker-dealers in connection
with the distribution of the Series A Shares paid out of the proceeds from
the issuance of the Series B Shares.
(n) Operating Expenses. The aggregate annual expenses of every
character regarded as Operating Expenses in accordance with generally
accepted accounting principles, as determined by independent accountants
selected by the directors, including regular compensation payable to the
Advisor, excluding, however, the following: (i) the cost of money borrowed
by the Company; (ii) taxes on income and taxes and assessments on real
property and all other taxes applicable to the Company; (iii) expenses of
acquiring, financing, refinancing, disposing of, maintaining, managing and
owning real estate equity interests or other property (including the costs
of legal services, brokerage and sales commissions, maintenance, repair and
improvement of property); (iv) insurance as required by the Directors
(including directors' and officers' liability insurance); (v) expenses of
organizing, revising, amending, converting, or terminating the Company;
(vi) expenses connected with payments of dividends or interest or
distributions in cash or any other form made or caused to be made by the
Directors to holders of Securities of the Company; (vii) all expenses
connected with communications to holders of Securities of the Company and
the other bookkeeping and clerical work necessary in maintaining relations
with holders of Securities of the Company, including the cost of printing
and mailing certificates for Securities and proxy solicitation materials
and reports to holders of Securities of the Company; (viii) transfer
agent's, registrar's, dividend disbursing agent's, dividend reinvestment
plan agent's and indenture trustee's
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fees and charges; (ix) other legal, accounting and auditing fees and
expenses; and (x) non-cash expenditures (including depreciation,
amortization and bad debt reserve).
(o) Organization Documents. The Articles of Incorporation of the
Company and these Bylaws.
(p) Person. An individual, corporation, partnership, joint venture,
association, company, trust, bank or other entity, or government and any
agency and political subdivision of a government.
(q) REIT. A real estate investment trust, as defined in Sections
856-860 of the Internal Revenue Code of 1986, as amended.
(r) REIT Provisions of the Internal Revenue Code. Part II, Subchapter
M of Chapter 1, of the Internal Revenue Code of 1986, as amended, or
successor statutes, and regulations and rulings promulgated thereunder.
(s) Securities. Any stock, shares, voting trust certificates, bonds,
debentures, notes or other evidences of indebtedness, secured or unsecured,
convertible, subordinated or otherwise or in general any instruments
commonly known as "securities" or any certificates of interest, shares or
participations in temporary or interim certificates for, receipts for,
guarantees of, or warrants, options or rights to subscribe to, purchase or
acquire any of the foregoing.
(t) Shares. All of the shares of the common stock of Company, which
shall be all of one class called "Common Stock," and which shall include
all of the Series A Shares and all of the Series B Shares, as designated in
the Company's Articles of Incorporation.
(u) Series A Shares. The shares of Common Stock, Series A, of the
Company.
(v) Series B Shares. The shares of Common Stock, Series B, of the
Company.
(w) Shareholders. As of any particular date, all holders of record of
outstanding Shares at such time.
(x) Unimproved Real Property. Property which has the following three
characteristics: (1) an equity interest in property which was not acquired
for the purpose of producing rental or other operating income, (2) has no
development or construction in process on such land, and (3) no development
or construction on such land is planned in good faith to commence on such
land within one year.
(y) Working Capital Reserves. Cash reserves of the Company as needed
for normal operations, repairs, maintenance, and other contingencies.
ARTICLE II
OFFICES
2.1 Principal Office. The principal executive office of the Company is
hereby fixed and located at 777 Mariners Island Boulevard, City of San Mateo,
State of California. The Board of Directors is hereby granted full power and
authority to change the principal office from one location to another within or
without that County.
2.2 Other Offices. Other offices may at any time be established by the
Board of Directors at any place or places they deem appropriate.
ARTICLE III
MEETINGS OF SHAREHOLDERS
3.1 Place of Meetings. All annual and all other meetings of Shareholders
shall be held at the principal office of the Company, or at any other place
within or without the State of California which may be designated by the Board
of Directors.
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3.2 Annual Meetings. The Annual Meetings of Shareholders shall be held on
such date as is fixed by the Directors; provided, however, that such date shall
not be less than 30 days after the Board of Directors shall have caused to be
sent to the Shareholders an Annual Report as provided in Section 10.6 of these
Bylaws and that if the date fixed by the Directors falls upon a legal holiday,
then any annual meeting of Shareholders shall be held at the same time and place
on the next day which is not a legal holiday. At Annual Meetings, Directors
shall be elected, reports of the affairs of the Company shall be considered, and
any other business may be transacted which is within the powers of the
Shareholders.
3.3 Special Meetings. Special meetings of the Shareholders may be called
at any time for any purpose or purposes whatsoever by the President, by a
majority of the Board of Directors, by a majority of Independent Directors, by
the Chairman of the Board or by one or more Shareholders holding not less than
ten percent (10%) of the eligible votes. If a meeting is called by any Person or
Persons other than the Board of Directors, the Chairman of the Board or the
President, a request shall be made in writing, specifying the time of the
meeting and the general nature of the business proposed to be transacted, and
shall be delivered personally or sent by registered mail or by telegraphic or
other facsimile transmission to the Chairman of the Board, the President, or the
Secretary of the Company. The officer receiving the request shall cause notice
to be promptly given to the Shareholders entitled to vote, in accordance with
the provisions of Section 3.4.
3.4 Notice: Affidavit of Notice. Notice of meetings of the Shareholders of
the Company shall be given in writing to each Shareholder entitled to vote
thereat, either personally or by first-class mail, or, if the Company has 500 or
more Shareholders, by third-class mail, or other means of written communication,
charges prepaid, addressed to the Shareholder at his address appearing on the
books of the Company or given by the Shareholder to the Company for the purpose
of notice. Notice of any such meeting of Shareholders shall be sent to each
Shareholder entitled thereto not less than ten (10) nor more than sixty (60)
days before the meeting; provided however, that within ten (10) business days
after receipt by the Company, in person, or by registered mail, of a written
request for a meeting by the Shareholders holding not less than ten percent
(10%) of the outstanding Shares entitled to vote at such meeting, the Company
shall provide written notice of such meeting to all Shareholders, and such
meeting shall be held not less than twenty (20) nor more than sixty (60) days
after the Company's receipt of such written Shareholder request; and, provided
further, that if such notice is not given within ten (10) business days after
receipt of the request, the Person or Persons requesting the meeting may give
the notice. The ten (10) business day time period may be extended for a
reasonable time period as determined by the Board of Directors to allow the
Board to solicit proxies in connection with the giving of notice of any such
meeting. Nothing contained in this Section 3.4 shall be construed as limiting,
fixing or affecting the time when a meeting of Shareholders called by action of
the Board of Directors may be held. All notices given pursuant to this Section
shall state the place, date and hour of the meeting and, (1) in the case of
special meetings, the general nature of the business to be transacted, and no
other business may be transacted, or (2) in the case of annual meetings, those
matters which the Board of Directors, at the time of the mailing of the notice,
intends to present for action by the Shareholders, and (3) in the case of any
meeting at which directors are to be elected, the names of the nominees intended
at the time of the mailing of the notice to be presented by management for
election. An affidavit of the mailing or other means of giving any notice of any
Shareholders' meeting shall be executed by the Secretary, Assistant Secretary or
any transfer agent of the Company giving the notice, and shall be filed and
maintained in the minute book of the Company.
3.5 Record Date for Shareholder Notice, Voting and Giving Consents. For
purposes of determining the Shareholders entitled to notice of any meeting or to
vote or entitled to give consent to corporation action with a meeting, the Board
of Directors may fix, in advance, a record date, which shall not be more than
sixty (60) days nor less than ten (10) days before the date of any meeting nor
more than sixty (60) days before any action without a meeting, and in this event
only Shareholders of record on the date so fixed are entitled to notice and to
vote or to give consents, as the case may be, notwithstanding any transfer of
any Shares on the books of the Company after the record date, except as
otherwise provided in the California General Corporation Law.
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If the Board of Directors does not so fix a record date:
(a) The record date for determining Shareholders entitled to notice of or
to vote at a meeting of Shareholders shall be at the close of business on the
business day next preceding the day on which notice is given or, if notice is
waived, at the close of business on the business day next preceding the date on
which the meeting is held.
(b) The record date for determining Shareholders entitled to give consent
to corporate action in writing without a meeting, (i) when no prior action by
the Board has been taken, shall be the day on which the first written consent is
given, or (ii) when prior action of the Board has been taken, shall be at the
close of business on the day on which the Board adopts the resolution relating
to that action, or the sixtieth (60th) day before the date of an action not
initiated by the Board, whichever is later.
3.6 Adjourned Meeting Notice. Any Shareholders' meeting, annual or
special, whether or not a quorum is present, may be adjourned from time to time
by the vote of the majority of the Shares, the holders of which are either
present in person or represented by proxy, but in the absence of a quorum no
other business may be transacted at the meeting.
When any Shareholders' meeting, either annual or special, is adjourned for
more than forty-five (45) days or if after the adjournment a new record date is
filed for the adjourned meeting, notice of the adjourned meeting shall be given
as in the case of a special meeting. In all other cases, it shall not be
necessary to give any notice of an adjournment or of the business to be
transacted at an adjourned meeting other than by announcement at the meeting at
which the adjournment is taken.
3.7 Voting at Meetings of Shareholders. Subject to the provisions of
Sections 702 through 704, inclusive, of the California Corporations Code, and
subject to the right of the Board of Directors to provide otherwise, only
persons in whose name Shares entitled to vote standing on the stock records of
the Company on the record date shall be entitled to the notice of and to vote at
the meeting, notwithstanding any transfer of any Shares on the books of the
Company after the record date.
The vote may be viva voce or by ballot; provided, however, that all
elections for Directors must be by ballot upon demand made by any Shareholder at
any election and before the voting begins. Except as provided in this Section
3.7, each outstanding Share shall be entitled to one vote on each matter
submitted to a vote of Shareholders. Every Shareholder entitled to vote at any
election for Directors shall have the right to cumulate his votes and give one
candidate a number of votes equal to the number of Directors to be elected,
multiplied by the number of votes to which his Shares are entitled, or to
distribute his votes on the same principle among as many candidates as he shall
think fit; provided that the names of the candidate or candidates for whom the
Shareholder votes have been placed in nomination prior to the voting and that at
least one Shareholder has given notice prior to the voting of an intention to
cumulate votes. The candidates receiving the highest number of votes up to the
number of Directors to be elected shall be elected.
3.8 Quorum. The presence in person or by proxy of a majority of the Shares
entitled to vote at any meeting shall constitute a quorum for the transaction of
business. Except as provided in the next sentence, the affirmative vote of a
majority of the Shares represented and voting at a duly held meeting at which a
quorum is present shall be an act of the Shareholders, unless a vote of a
greater number is required by the Articles of Incorporation, these Bylaws or by
the California Corporations Code. The Shareholders present at a duly called or
held meeting at which a quorum is present may continue to do business until
adjournment, notwithstanding the withdrawal of enough Shareholders to leave less
than a quorum, if any action taken (other than adjournment) is approved by at
least a majority of the Shares required to constitute a quorum.
3.9 Waiver of Notice or Consent of Absent Shareholders. The transactions
of any meeting of Shareholders, either annual or special, however called and
noticed, shall be as valid as though had at a meeting duly held after regular
call and notice if a quorum is present either in person or by proxy and if,
either before or after the meeting, each of the Shareholders entitled to vote,
not present in person or by proxy, signs a written waiver of notice or a consent
to the holding of the meeting or an approval of the minutes. All waivers,
consents or approvals shall be filed with the corporate records or made a part
of the minutes of the meeting.
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3.10 Action Without Meeting. Except as elsewhere provided in this Section
3.10, any action which may be taken at any annual or special meeting of
Shareholders may be taken without a meeting and without prior notice, if a
consent in writing, setting forth the action so taken, shall be signed by the
holders of outstanding Shares having not less than the minimum number of votes
that would be necessary to authorize or take such action at a meeting at which
all Shares entitled to vote were present and voted. However, Directors may not
be elected by written consent except by unanimous written consent of all Shares
entitled to vote for the election of Directors.
Any Shareholder giving a written consent, or the Shareholder's proxyholder,
or a transferee of the Shares or a personal representative of the Shareholder or
its respective proxyholder, may revoke the consent by a writing received by the
Company prior to the time that written consents of the number of Shares required
to authorize the proposed action have been filed with the Secretary of the
Company, but may not do so thereafter. The revocation is effective upon its
receipt by the Secretary of the Company.
Unless the consents of all Shareholders entitled to vote have been
solicited in writing:
(a) Notice of any Shareholder approval without a meeting by less than
unanimous written consent regarding certain transactions relating to conflicts
of interest of officers or Directors, indemnification of Company agents,
reorganizations, and plans of distribution on liquidation, only to the extent
that those four subjects are treated in California Corporations Code Sections
310, 317, 1201 and 2007 shall be given at least ten (10) days before the
consummation of the action authorized by that approval, and
(b) Prompt notice shall be given of the taking of any other corporate
action approved by Shareholders without a meeting by less than unanimous written
consent, to those Shareholders entitled to vote who have not consented in
writing. This notice shall conform to the requirements of Section 3.4(a).
Any form of written consent distributed to ten (10) or more Shareholders
must afford the Person whose consent is thereby solicited an opportunity to
specify a choice among approval, disapproval or abstention as to each matter or
group of related matters presented, other than elections of Directors or
officers.
3.11 Proxies. Every person entitled to vote or execute consents shall have
the right to do so either in person or by one or more agents authorized by a
written proxy executed by such person or his duly authorized agent and filed
with the Secretary of the Company, provided that no such proxy shall be valid
after the expiration of eleven (11) months from the date of its execution,
unless the person executing it specifies in the proxy the length of time for
which the proxy is to continue in force.
A proxy shall be deemed signed if the Shareholder's name is placed on the
proxy (whether by manual signature, typewriting, telegraphic transmission or
otherwise) by the Shareholder or the Shareholder's attorney in fact. A validly
executed proxy which does not state that it is irrevocable shall continue in
full force and effect unless revoked by the Person executing it before the vote
pursuant to that proxy by (1) a writing delivered to the Company stating that
the proxy is revoked, (2) execution of a subsequent proxy, (3) attendance at the
meeting and voting in person (but only as to any items on which the Shareholder
chooses to vote in person), or (4) transfer of the Shares represented by the
proxy to a transferee who becomes a Shareholder of record prior to the record
date established for the vote. A validly executed proxy otherwise may be revoked
by written notice of the death or incapacity of the maker of that proxy received
by the Company before the vote pursuant to that proxy is counted. The
revocability of a proxy that states on its face that it is irrevocable shall be
governed by the provisions of Section 705(e) and 705(f) of the Corporations Code
of California.
Any proxy distributed to ten (10) or more Shareholders must afford the
Person voting an opportunity to specify a choice among approval, disapproval or
abstention as to each matter or group of related matters, other than election of
Directors or officers.
3.12 Inspectors of Election. Before any meeting of Shareholders, the Board
of Directors may appoint any Persons other than nominees for office to act as
inspectors of election at the meeting or its adjournment. If no inspectors of
election are so appointed, the Chairman of the meeting may, and on the request
of any Shareholder or a Shareholder's proxy shall, appoint inspectors of
election at the meeting. The number of
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inspectors shall be either one (1) or three (3). If inspectors are appointed at
a meeting on the request of one or more Shareholders or proxies, the holders of
a majority of Shares or their proxies present at the meeting shall determine
whether one (1) or three (3) inspectors are to be appointed. If any Person
appointed as inspector fails to appear or fails or refuses to act, the Chairman
of the meeting may, and upon the request of any Shareholder or a Shareholder's
proxy shall, appoint a Person to fill that vacancy.
These inspectors shall:
(a) Determine the number of Shares outstanding and the voting power of
each, the shares represented at the meeting, the existence of a quorum, and the
authenticity, validity and effect of proxies;
(b) Receive votes, ballots or consents;
(c) Hear and determine all challenges and questions in any way arising in
connection with the right to vote;
(d) Count and tabulate all votes or consents;
(e) Determine when the polls shall close;
(f) Determine the result; and
(g) Do any other acts that may be proper to conduct the election or vote
with fairness to all Shareholders.
ARTICLE IV
DIRECTORS
4.1 Powers. Subject to limitations of the Articles of Incorporation, of
the Bylaws and of the California Corporations Code relating to action required
to be authorized or approved by the Shareholders, or by the outstanding Shares,
and subject to the duties of Directors as prescribed by the Bylaws, all
corporate powers shall be exercised by or under the authority of, and the
business and affairs of the Company shall be controlled by, the Board of
Directors. The Board of Directors may delegate the management of the day-to-day
operation of the business of the Company to the Advisor, provided that the
business and affairs of the Company shall be managed and all corporate powers
shall be exercised under the ultimate direction of the Board of Directors. The
Board of Directors shall establish written policies on investments and borrowing
and shall monitor the administrative procedures, investment, operations and
performance of the Company and the Advisor, to assure that such policies are
carried out.
Each individual Director, including each Independent Director, may engage
in other business activities of the type conducted by the Company and are not
required to present to the Company any investment opportunities presented to
them, even though the investment opportunities may be within the Company's
investment policies.
In the event that it shall become necessary to engage the services of a
successor Advisor to Franklin Properties, Inc., the Board of Directors shall
affirmatively determine that such successor Advisor possesses sufficient
qualifications to perform the functions required of the Advisor and to justify
the compensation provided for in such successor Advisor's contract with the
Company.
4.2 Number, Tenure and Qualifications. The authorized number of Directors
of the Board of Directors shall be not less than five (5) nor more than nine (9)
as shall be determined from time to time by resolution of the Board of
Directors.
Directors shall hold office until the next Annual Meeting of Shareholders
and until their respective successors are elected. If any such annual meeting is
not held, or the Directors are not elected, the Directors may be elected at any
special meeting of Shareholders held for that purpose.
Each individual Director, including each Independent Director, shall have
at least three (3) years of relevant experience demonstrating the knowledge and
experience required to successfully acquire and manage
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the type of assets being acquired by the Company, and as set forth in Section
4.14, at least one (1) Independent Director shall have relevant real estate
experience. Directors need not be Shareholders.
4.3 Vacancies. Vacancies in the Board of Directors may be filled by a
majority of the remaining Directors, though less than a quorum, or by a sole
remaining Director, except that a vacancy created by the removal of a Director
by the vote or written consent of the Shareholders or by court order may be
filled only by the vote of a majority of the Shares entitled to vote represented
at a duly held meeting at which a quorum is present, or by the written consent
of holders of a majority of the outstanding Shares entitled to vote. Each
Director so elected shall hold office until his successor is elected at an
annual or a special meeting of the Shareholders.
A vacancy or vacancies in the Board of Directors shall be deemed to exist
in case of the death, resignation or removal of any Director or if the
authorized number of Directors be increased or if the Shareholders fail, at any
annual or special meeting of Shareholders at which any Director or Directors are
elected, to elect the full authorized number of Directors to be voted for at
that meeting.
Any Director may resign effective on giving written notice to the Chairman
of the Board, the President, the Secretary or the Board of Directors. The
Shareholders may elect a Director or Directors at any time to fill any vacancy
or vacancies not filled by the Directors. Any election by, written consent to
fill a vacancy shall require the consent of a majority of the outstanding Shares
entitled to vote.
If the Board of Directors accepts the resignation of a Director tendered to
take effect at a future time, the Board or the Shareholders shall have the power
to elect a successor to take office when the resignation is to become effective;
provided, however, that any remaining Independent Directors shall nominate
replacements for vacancies among the Independent Director positions.
No reduction of the authorized number of Directors shall have the effect of
removing any Director prior to the expiration of his term of office.
If the number of vacancies occurring during a year is sufficiently large
that a majority of the Directors in office has not been elected by the
Shareholders, the holders of five percent (5%) or more of the outstanding Shares
entitled to vote may call a special meeting of Shareholders to elect the entire
Board of Directors.
4.4 Place of Meeting. Regular meetings of the Board of Directors shall be
held at any place within or without the State of California which has been
designated from time to time by the Chairman of the Board or by written consent
of all members of the Board. In the absence of a designation, regular meetings
shall be held at the principal office of the Company. Special meetings of the
Board may be held either at a place so designated or at the principal office.
Members of the Board may participate in a meeting through use of conference
telephone or similar communication equipment, so long as all members
participating in such meeting can hear one another. Participation in a meeting
by telephone or communication equipment shall constitute presence in person at
the meeting.
4.5 Organization Meeting. Immediately following each annual meeting of
Shareholders, the Board of Directors shall hold a regular meeting for the
purpose of organization, election of officers and the transaction of other
business. Notice of that meeting is hereby dispensed with.
4.6 Special Meetings. Special meetings of the Board of Directors for any
purpose or purposes shall be called at any time by the Chairman of the Board or
the President or Vice President or the Secretary or any two Directors.
Written notice of the time and place of special meetings shall be delivered
personally to the Directors or sent to each Director by mail or by other form of
written communication, charges prepaid, addressed to him at his address as it
appears upon the records of the Company or, if it is not so shown or is not
readily ascertainable, at the place in which the meetings of Directors are
regularly held. In case the notice is mailed, it shall be deposited in the
United States mail in the place in which the principal office of the Company is
located at least four (4) days prior to the time of the meeting. In case the
notice is delivered personally, telegraphed or by electronic means, it shall be
so delivered, deposited with the telegraph company or
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communicated at least forty-eight (48) hours prior to the time of the meeting.
Mailing, telegraphing or delivery, as above provided, shall be due, legal and
personal notice to the Director.
4.7 Adjournment. A majority of the Directors present, whether or not a
quorum is present, may adjourn any Directors' meeting to another time and place.
4.8 Notice of Adjournment. If a meeting is adjourned for more than
twenty-four (24) hours, notice of any adjournment to another time or place shall
be given prior to the time of the adjourned meeting to the Directors who were
not present at the time of adjournment.
4.9 Entry of Notice. Whenever any Director has been absent from any
special meeting of the Board of Directors, an entry in the minutes to the effect
that notice has been duly given shall be conclusive and incontrovertible
evidence that due notice of the special meeting was given to that Director as
required by law and the Bylaws of the Company.
4.10 Waiver of Notice. The transactions of any meeting of the Board of
Directors, however called and noticed, or wherever held, shall be as valid as
though had at a meeting duly held after regular call and notice if a quorum is
present and if, either before or after the meeting, each of the Directors not
present signs a written waiver of notice of or consent to holding the meeting or
an approval of the minutes. All waivers, consents or approvals shall be filed
with the corporate records or made a part of the minutes of the meeting.
4.11 Quorum. A majority of the authorized number of Directors shall be
necessary to constitute a quorum for the transaction of business, except to
adjourn as provided below or to fill a vacancy. Every act or decision done or
made by a majority of the Directors at a meeting duly held at which a quorum is
present shall be regarded as an act of the Board of Directors unless a greater
number be required by law or by the Articles of Incorporation or these Bylaws.
However, a meeting at which a quorum is initially present may continue to
transact business notwithstanding the withdrawal of Directors, if any action
taken is approved by at least a majority of the required quorum for the meeting.
4.12 Fees and Compensation. The Directors shall be entitled to receive
such reasonable compensation for their services as Directors as the Directors
may fix or determine from time to time by resolution of the Board of Directors;
provided, however, that Directors and officers of the Company who are affiliated
with the Advisory Company shall not receive compensation from the Company for
their services as Directors or officers of the Company. The Directors, either
directly or indirectly, shall also be entitled to receive remuneration for
services rendered to the Company in any other capacity. Those services may
include, without limitation, services as an officer of the Company, legal,
accounting or other professional services, or, services as a broker, transfer
agent or underwriter, whether performed by a Director or any person affiliated
with a Director.
4.13 Action Without Meeting. Any action required or permitted to be taken
by the Board of Directors under the California General Corporation Law and these
By-laws may be taken without a meeting if all members of the Board individually
or collectively consent in writing to such action. The consent or consents shall
be filed with the minutes of the meetings of the Board. Any certificate or other
document filed under the provision of the California General Corporation Law
which relates to action so taken shall state that the action was taken by
unanimous written consent of the Board of Directors without a meeting.
4.14 Independent Directors. After the effective date of the Company's
Registration Statement relating to the initial public offering of shares of
Common Stock, Series A, a majority of the Directors of the Company, and a
majority of the members of any Company committee, will at all times be
Independent Directors, except during the 60 days following the departure of an
Independent Director. Successor Independent Directors will be nominated by any
remaining Independent Directors. At least one (1) of the Independent Directors
shall have had three (3) years of actual direct experience in acquiring or
managing the type of real estate to be acquired by the Company for his or her
account or as an agent. Notwithstanding any other provision of these Bylaws, the
Independent Directors, in addition to their other duties, to the extent that
they may legally do so, shall:
(a) Monitor the relationship of the Company with the Advisor. In this
regard, the Independent Directors as a group, in addition to all Directors
as a group, will monitor the Advisor's performance of the
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Advisory Agreement and will determine at least annually that the Advisor's
compensation is reasonable in relation to the nature and quality of
services performed. This determination will be based on (i) the size of the
advisory fee in relationship to the size, composition and profitability of
the invested assets; (ii) the investment opportunities generated by the
Advisor; (iii) advisory fees paid to other advisors by other real estate
investment trusts and to advisors performing similar services by investors
other than real estate investment trusts; (iv) additional revenues realized
by the Advisor and its Affiliates through their relationship with the
Company, including loan administration, underwriting or broker commissions,
servicing, engineering, inspection and other fees, whether paid by the
Company or by others with whom the Company does business; (v) the quality
and extent of service and advice furnished by the Advisor; (vi) the
performance of the investment portfolio of the Company, including income,
conservation or appreciation of capital, frequency of problem investments
and competence in dealing with distress situations; (vii) quality of the
portfolio of the Company in relationship to the investments generated by
the Advisor for its own account; and (viii) all other factors the
Independent Directors may deem relevant. The Independent Directors will
also determine that the Advisor's compensation is within the limits
prescribed by Section 7.6 and 7.7.
The Independent Directors shall approve all transactions between the
Company and the Advisor or any Affiliates of the Company or the Advisor.
The material terms and circumstances of all such approved transactions
shall be fully disclosed in the Annual Report of the Company as required by
Section 10.6, and the Independent Directors shall examine and comment in
the Annual Report on the fairness of such transactions.
(b) Review at least annually the Company's investment policies to
determine that they remain in the best interests of the Shareholders. The
findings of the Independent Directors shall be set forth in the minutes of
meetings of the Board of Directors. Such investment policies may be altered
from time to time by the Board of Directors with the consent of a majority
of the Independent Directors and without approval of the Shareholders upon
a determination that such a change is in the best interests of the Company
and the Shareholders.
(c) Take reasonable steps to ensure that the Annual Report is sent to
Shareholders and that the Annual Meeting is conducted pursuant to Article
III.
(d) Approve the standards for selection of qualified independent real
estate appraisers to determine the fair market value of all property to be
acquired by the Company, whose Appraisal shall be the basis of the
consideration to be paid by the Company for such property.
(e) Determine at least annually that the total fees and expenses of
the Company are reasonable in light of its net assets and net income, the
investment experience of the Company, and the fees and expenses of
comparable advisors in real estate, in this regard, the Independent
Directors will have the fiduciary responsibility of limiting Operating
Expenses to amounts that do not exceed the limitation set forth in Section
7.5, unless they conclude that a higher level of expense is justified based
on unusual, nonrecurring or other factors which they deem sufficient.
(f) The Independent Directors shall review at least quarterly the
aggregate borrowings, secured and unsecured, of the Company to determine
that the relation of such borrowings to net assets does not exceed the
limitations set forth in Section 8.1(h) and (i) of Article VIII of these
Bylaws.
(g) Approve the acquisition of any property in exchange for Securities
of the Company.
(h) For all purposes, a transaction which is subject to approval by
the Independent Directors shall be set forth in the minutes and shall be
approved if the Independent Directors voting to approve the transaction in
any vote of the Directors, constitute an absolute majority of all
Independent Directors serving at such time.
4.15 Removal of Director for Cause. The Board of Directors may declare
vacant the office of a Director who has been declared of unsound mind by an
order of court, or who has pled guilty or nolo contendere to or been convicted
of a felony involving moral turpitude.
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4.16 Removal of Director Without Cause. Any or all Directors may be
removed without cause if such removal is approved by the affirmative vote of a
majority of the outstanding Shares entitled to vote at an election of Directors;
provided, however, that unless the entire Board is removed, no individual
Director may be removed when the votes cast against removal, or not consenting
in writing to such removal, would be sufficient to elect such Director if voted
cumulatively at an election at which the same total number of votes cast were
cast (or, if such action is taken by written consent, all shares entitled to
vote were voted) and the entire number of Directors authorized at the time of
the Director's most recent election were then being elected. Any reduction of
the authorized number of Directors shall not operate to remove any Director
prior to the expiration of such Director's term of office.
4.17 Committees. The Board of Directors may, by resolution adopted by a
majority of the authorized number of Directors, designate one or more
committees, each consisting of three (3) or more Directors, a majority of whom
shall be Independent Directors, to serve at the pleasure of the Board of
Directors. The Board of Directors may designate one or more Directors as
alternate members of any Committee, who may replace any absent member at any
meeting of the Committee. The appointment of members or alternate members of a
Committee requires the vote of a majority of the authorized number of Directors.
Any such Committee, to the extent provided in the resolution of the Board of
Directors, shall have all the authority of the Board of Directors in the
management of the business and affairs of the Company, except that no Committee
shall have authority to take any action with respect to (a) the approval of any
action requiring Shareholders' approval or approval of the outstanding Shares,
(b) the filling of vacancies on the Board or any Committee, (c) the fixing of
compensation of Directors for serving on the Board or a Committee, (d) the
adoption, amendment or repeal of Bylaws, (e) the amendment or repeal of any
resolution of the Board that by its express terms is not so amendable or
repealable, (f) a distribution to Shareholders, except at a rate or in a
periodic amount or within a price range determined by the Board, and (g) the
appointment of other Committees of the Board or the members thereof.
4.18 Fiduciary Relationship. The Directors of the Company have a fiduciary
relationship to the Shareholders as provided by applicable California law.
ARTICLE V
OFFICERS
5.1 Officers. The officers of the Company shall be as determined by the
Board of Directors and may include a Chairman of the Board, President,
Secretary, Chief Financial Officer (Treasurer) and such other officers with such
titles and duties as may be appointed in accordance with the provisions of
Section 5.3 of this Article. Any number of offices may be held by the same
person.
5.2 Election. The officers of the Company, except such officers as may be
appointed in accordance with the provisions of Section 5.3 or Section 5.5 of
this Article, shall be chosen annually by the Board of Directors to serve at the
pleasure of the Board of Directors, and each shall hold his office until he
shall resign or shall be removed or otherwise disqualified to serve or his
successor shall be elected and qualified. All officers serve at the will of the
Board of Directors and nothing in these Bylaws shall give any officer any
expectation or vesting of employment.
5.3 Subordinate Officers. The Board of Directors may appoint other
officers as the business of the Company may require, each of whom shall hold
office for the period, have the authority and perform the duties as are provided
in the Bylaws or as the Board of Directors may from time to time determine.
5.4 Removal and Resignation. Any officer may be removed, either with or
without cause, by a majority of the Directors at the time in office, at any
regular or special meeting of the Board or, except in the case of an officer
chosen by the Board of Directors, by any officer upon whom such power of removal
may be conferred by the Board of Directors.
Any officer may resign at any time by giving written notice to the Board of
Directors or to the Chairman, the President or to the Secretary of the Company.
A resignation shall take effect at the date of the receipt of
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the notice or any later time specified in the notice; and, unless otherwise
specified, the acceptance of the resignation shall not be necessary to make it
effective.
5.5 Vacancies. A vacancy in any office because of death, resignation,
removal, disqualification or any other cause shall be filled in the manner
prescribed in the Bylaws for regular appointments to such office.
5.6 Chairman of the Board. The Chairman of the Board, if one is
designated, shall be the Chief Executive Officer of the Company, and, if
present, preside at all meetings of the Board of Directors and Shareholders and
exercise and perform all other powers and duties as may from time to time be
assigned to him by the Board of Directors or prescribed by the Bylaws.
5.7 President. The President shall, subject to the Board of Directors and
the supervisory powers of the Chairman of the Board, have general supervision,
direction and control of the business of the Company. He shall preside at
meetings of the Shareholders or at meetings of the Board of Directors if the
Chairman is absent. He shall have general powers and duties of management,
together with any other powers and duties as may be prescribed by the Board of
Directors. If no Chairman of the Board is designated, the President shall be the
Chief Executive Officer of the Company.
5.8 Vice Presidents. In the absence or disability of the President, the
Vice Presidents in order of their rank as filed by the Board of Directors or, if
not ranked, the Vice President designated by the Board of Directors, shall
perform all the duties of the President and, when so acting, shall have all the
powers of and be subject to, all the restrictions upon the President. The Vice
Presidents shall have any other powers and shall perform other duties as from
time to time may be prescribed for them respectively by the Board of Directors
or the Bylaws.
5.9 Secretary. The Secretary shall keep, or cause to be kept, a book of
minutes at the principal office, or any other place as the Board of Directors
may order, of all meetings of Directors and Shareholders, with the time and
place of holding, whether regular or special and, if special, how authorized,
the notice thereof given, the names of those present at Directors' meetings, the
number of Shares present or represented at Shareholders' meetings and the
proceedings of meetings.
The Secretary shall keep, or cause to be kept, at the principal office or
at the office of the Company's transfer agent, a Share register or a duplicate
Share register showing the names of the Shareholders and their addresses, the
number and classes of Shares held by each (whether in certificate or unissued
certificate form), the number and the date of certificates issued, if any, and
the number and date of cancellation of every certificate surrendered for
cancellation.
The Secretary shall give, or cause to be given, notice of all the meetings
of the Shareholders and of the Board of Directors required by the Bylaws or by
law to be given, shall keep the seal of the Company in safe custody and shall
have such other powers and shall perform such other duties as may be prescribed
by the Board of Directors or the Bylaws.
5.10 Assistant Secretaries. In the absence or disability of the Secretary,
the Assistant Secretaries in order of their rank as filed by the Board of
Directors or, if not ranked, the Assistant Secretary designated by the Board of
Directors, shall perform all the duties of the Secretary and, when so acting,
shall have all the powers of and be subject to, all the restrictions upon the
Secretary. The Assistant Secretaries shall have any other powers and shall
perform other duties as from time to time may be prescribed for them
respectively by the Board of Directors or the Bylaws.
5.11 Chief Financial Officer. The Chief Financial Officer may also be
designated by the alternate title of "Treasurer." The Chief Financial Officer
shall have custody of all moneys and securities of the Company and shall keep
regular books of account. Such officer shall disburse the funds of the Company
in payment of the just demands against the Company, or as may be ordered by the
Board of Directors, taking proper vouchers for such disbursements, and shall
render to the Board of Directors from time to time as may be required of such
officer, an account of all transactions as Chief Financial Officer and of the
financial condition of the Company. Such officer shall perform all duties
incident to such office or which are properly required by
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the President or by the Board of Directors. A bond shall be obtained for such
officer only if required by the Board of Directors.
5.12 Assistant Chief Financial Officers. The Assistant Chief Financial
Officer (Assistant Treasurer) or the Assistant Chief Financial Officers
(Assistant Treasurers), in the order of their seniority, shall, in the absence
or disability of the Chief Financial Officer, or in the event of such officer's
refusal to act, perform the duties and exercise the powers of the Chief
Financial Officer, and shall have such powers and discharge such duties as may
be assigned from time to time by the President or by the Board of Directors.
ARTICLE VI
SHARES OF STOCK
6.1 Registered Ownership Share Certificates and Shares in "Uncertificated"
Form. Certificates shall be issued and transferred in accordance with these
Bylaws, but need not be issued if the Shareholder elects to have his Shares
maintained in "uncertificated" form or if the Shareholder is an Individual
Retirement Account or a Keogh Plan account. The Persons in whose names
certificates or Shares in "uncertificated" form are registered on the records of
the Company shall be deemed the absolute owners of the Shares represented
thereby for all purposes of the Company; but nothing in these Bylaws shall be
deemed to preclude the Directors or officers, or their agents or
representatives, from inquiring as to the actual ownership of Shares. The Shares
are non-assessable. Until a transfer is duly effected on the records of the
Company, the Directors shall not be affected by any notice of transfer, either
actual or constructive. The receipt by the Person in whose name any Shares are
registered on the records of the Company or of the duly authorized agent of that
Person, or if the Shares are so registered in the names of more than one Person,
the receipt of any one of those Persons, or of the duly authorized agent of that
Person, shall be a sufficient discharge for all dividends or distributions
payable or deliverable in respect of the Shares and from all liability to see
the application of those funds. The certificates of Shares of the capital stock
of the Company, if any, shall be in a form consistent with the Articles of
Incorporation and the laws of the State of California as shall be approved by
the Board of Directors. All certificates shall be signed by the Chairman of the
Board or the President or a Vice President and by the Treasurer or an Assistant
Financial Officer or the Secretary or any Assistant Secretary, certifying the
number of Shares and the class or series of Shares owned by the Shareholder. Any
or all of the signatures on the certificate may be facsimile.
6.2 Transfer of Shares. Subject to the provisions of law and of Sections
6.3, 6.4 and 6.5, Shares shall be transferable on the records of the Company
only by the record holder or by his agent thereunto duly authorized in writing
upon delivery to the Directors or a transfer agent of the certificate or
certificates (unless held in "uncertificated" form, in which case an executed
stock power duly guaranteed must be delivered), properly endorsed or accompanied
by duly executed instruments of transfer and accompanied by all necessary
documentary stamps together with evidence of the genuineness of each
endorsement, execution or authorization and of other matters as may reasonably
be required by the Directors or transfer agent. Upon delivery, the transfer
shall be recorded in the records of the Company and a new certificate, if
requested, for the Shares so transferred shall be issued to the transferee and
in case of a transfer of only a part of the Shares represented by any
certificate or account, a new certificate or statement of account for the
balance shall be issued to the transferor. Any Person becoming entitled to any
Shares in consequence of the death of a Shareholder or otherwise by operation of
law shall be recorded as the holder of such Shares and shall receive a new
certificate, if requested, but only upon delivery to the Directors or a transfer
agent of instruments and other evidence required by the Directors or the
transfer agent to demonstrate that entitlement, the existing certificate (or
appropriate instrument of transfer if held in "uncertificated" form) for the
Shares and any necessary releases from applicable governmental authorities.
Nothing in these Bylaws shall impose upon the Directors or a transfer agent any
duty or limit their rights to inquire into adverse claims.
Notwithstanding the foregoing, under no circumstances may any Series B
Shares be transferred or sold (except by operation of law) within one year from
the completion of the Company's initial public offering.
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6.3 Disclosures by Holders of Series A Shares: Redemption of Series A
Shares. The Holders of Series A Shares shall upon demand disclose to the
Directors in writing such information with respect to direct and indirect
ownership of their Series A Shares as the Directors deem necessary to comply
with the provisions of the Internal Revenue Code and applicable regulations as
amended or to comply with the requirements of any other taxing authority. If the
Directors shall at any time and in good faith be of the opinion that direct or
indirect ownership of Series A Shares of the Company has or may become
concentrated to an extent which would prevent the Company from qualifying as a
REIT under the REIT provisions of the Internal Revenue Code, the Directors shall
have the power by lot or other means deemed equitable by them to prevent the
transfer of and/or call for redemption a number of the Series A Shares
sufficient in the opinion of the Directors to maintain or bring the direct or
indirect ownership of Series A Shares into conformity with the requirements for
a REIT. The redemption price shall be (i) the last reported sale price of the
Series A Shares on the last business day prior to the redemption date on the
principal national securities exchange on which the Series A Shares, are listed
or admitted to trading, or (ii) if the Series A Shares are not so listed or
admitted to trading, the average of the highest bid and lowest asked prices on
such last business day as reported by the NASDAQ, National Quotation Bureau
Incorporated or a similar organization selected by the Company for that purpose,
or (iii) otherwise, as determined in good faith by the Directors. The holders of
any Series A Shares so called for redemption shall be entitled to payment of
such redemption price within a reasonable time not to exceed sixty (60) days of
the date fixed for redemption. From and after the date filed for redemption by
the Directors, the holder of any Series A Shares so called for redemption shall
cease to be entitled to dividends, distributions, voting rights and other
benefits with respect to the Series A Shares, excepting only to the right to
payment of the redemption price fixed as described above. For the purpose of
this Section 6.3, the term "individual" shall be construed as provided in
Section 542(a)(2) of the Internal Revenue Code of 1986, as amended, or any
successor provisions and "ownership" of Series A Shares shall be determined as
provided in Section 544 of the Internal Revenue Code of 1986, as amended, or any
successor provision.
6.4 Right to Refuse to Transfer of Series A Shares. Whenever it is deemed
by them to be reasonably necessary to protect the tax status of the Company, the
Directors may require statements or affidavits from any holder of Series A
Shares or proposed transferee of Series A Shares, setting forth the number of
Series A Shares already owned by him and any related person specified in the
form prescribed by the Directors for that purpose. If, in the opinion of the
Directors, which shall be conclusive upon any proposed transferor or proposed
transferee of Series A Shares, any proposed transfer or exercise would
jeopardize the status of the Company as a REIT under the Internal Revenue Code
of 1986, as amended, the Directors may refuse to permit the transfer or
exercise. Any attempted transfer or exercise as to which the Directors have
refused their permission shall be void and of no effect to transfer any legal or
beneficial interest in the Series A Shares. All contracts for the sale or other
transfer or exercise of Series A Shares shall be subject to this provision.
6.5 Limitation on Acquisition of Shares.
(a) Subject to the provisions of Section 6.5(b), no person may own in
excess of 9.9% of the total outstanding Shares, and no Shares shall be
transferred (or issued) to any Person if, following the transfer, the Person's
direct or indirect ownership of Shares would exceed this limit. For the purpose
of this Section 6.5, ownership of Shares shall be computed in accordance with
Internal Revenue Code Sections 542(a) and 544.
(b) If Shares are purportedly acquired by any Person in violation of this
Section 6.5, the acquisition shall be valid only to the extent it does not
result in a violation of this Section 6.5, and the acquisition shall be null and
void with respect to the excess ("Excess Shares"). Excess Shares shall be deemed
to have been acquired and to be held on behalf of the Company, and, as the
equivalent of treasury shares for that purpose, shall not be considered to be
outstanding for quorum or voting purposes, and shall not be entitled to receive
dividends, interest or any other distribution.
(c) This Section 6.5 shall apply to the acquisition of Shares only after
conclusion of the Company's initial public offering of its Series A Shares and
by means other than through the Company's Dividend Reinvestment Plan and a
Shareholder will not be required to dispose of Excess Shares acquired prior to
the conclusion of that offering. So long as any person holds more than 7.0% of
the outstanding Shares, a lower
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percentage limit may be established by the Directors to the extent necessary to
assure, to the extent possible, that no five persons own more than 50% of the
outstanding Shares.
(d) The Company shall, if deemed necessary or desirable to implement the
provisions of this Section 6.5, include on the face or back of each Share
certificate issued by the Company an appropriate legend referring the holder of
the certificate to the restrictions contained in this Section 6.5 and stating
that the complete test of these Bylaws is on file with the Secretary of the
Company at the Company's offices.
(e) Nothing in these Bylaws shall limit the ability of the Directors to
impose, or to seek judicial or other imposition of additional restrictions if
deemed necessary or advisable to protect the Company and the interests of its
Shareholders by preservation of the Company's status as a qualified REIT.
(f) If any provision of this Section 6.5 is determined to be invalid, in
whole or in part, by any federal or state court having jurisdiction, the
validity of the remaining provisions shall not be affected and the provision
shall be affected only to the extent necessary to comply with the determination
of the court.
(g) For purposes of this Section 6.5, "Shares" means the Shares of the
Company as defined in these Bylaws, and includes any Shares issuable upon
conversion, surrender or exercise of any other Securities of the Company.
6.6 Lost or Destroyed Certificates. The holder of any Shares shall
immediately notify the Company of any loss or destruction of the Share
certificate, and the Company may issue a new certificate in the place of any
certificate alleged to have been lost or destroyed upon approval of the Board of
Directors. The Board may, in its discretion, as a condition to authorizing the
issue of such new certificate, require the owner of the lost or destroyed
certificate, or his legal representatives, to make proof satisfactory to the
Board of Directors of the loss or destruction and to give the Company a bond or
other security, in such amount and with such surety or sureties, as the Board of
Directors may determine as indemnity against any claim that may be made against
the Company on account of the certificate alleged to have been lost or
destroyed.
6.7 Dividend Record Date and Closing Stock Books. The Board of Directors
may fix a date in the future as a record date for the determination of the
Shareholders entitled to receive any dividend or distribution or any allotment
of rights or to exercise rights with respect to any change, conversion or
exchange of Shares. The record date so filed shall not be more than sixty (60)
days nor less than ten (10) days prior to the date of the event for the purposes
of which it is filed, except for dividends paid prior to the termination of the
initial offering of the Series A Shares. When a record date is so filed, only
Shareholders of record on that day shall be entitled to receive the dividend,
distribution or allotment of rights or to exercise the rights, as the case may
be, notwithstanding any transfer of any Shares on the books of the Company after
the record date.
ARTICLE VII
EMPLOYMENT OF ADVISOR AND LIMITATION ON EXPENSES
7.1 Employment of Advisor. The Directors are responsible for the general
policies of the Company and for general supervision of the business of the
Company conducted by all officers, agents, employees, advisors, managers or
independent contractors of the Company as may be necessary to insure that the
business conforms to the provisions of these Bylaws. However, the Directors
shall not be required personally to conduct all the business of the Company, and
consistent with their ultimate responsibility as stated above, the Directors
shall have the power to appoint, employ or contract with any Person (including
one or more of themselves or any corporation, partnership, or company in which
one or more of them may be directors, officers, stockholders, partners or
directors) as the Directors may deem necessary or proper for the transaction of
the business of the Company. The Directors may employ or contract with such a
Person (the "Advisor") and the Directors may grant or delegate authority to the
Advisor as the Directors may in their sole discretion deem necessary or
desirable without regard to whether that authority is normally granted or
delegated by Directors.
The Directors (subject to the provisions of this Article VII) shall have
the power to determine the terms and compensation of the Advisor or any other
Person whom they may employ or with whom they may
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contract; provided, however, that any determination to employ or contract with
any Director or any Person of which a Director is an Affiliate, shall be valid
only if made, approved or ratified by the Independent Directors. The Directors
may exercise broad discretion in allowing the Advisor to administer and regulate
the operations of the Company, to act as agent for the Company, to execute
documents on behalf of the Company, and to make executive decisions which
conform to general policies and general principles previously established by the
Directors.
7.2 Term. The Directors shall not enter into any advisory contract with
the Advisor unless the contract has a term of no more than one (1) year and
provides for annual renewal or extension thereafter; provided, however, that the
initial term of the Advisory Agreement shall be for a period ending December 31,
1991. The Directors shall not enter into a similar contract with any Person of
which a Director is an Affiliate unless the contract provides for renewal or
extension by the Independent Directors. The advisory contract with the Advisor
may be terminated without penalty by the Advisor upon 120 days' written notice
or by the Company without cause or penalty by action of the Directors, the
Independent Directors or by action of a majority of the Shareholders of the
Company upon sixty (60) days' written notice, in a manner to be set forth in the
advisory contract with the Advisor. The advisory contract shall also require the
Advisor to cooperate with the Company to provide an orderly management
transition after any termination.
7.3 Other Activities of Advisor. The Advisor shall not be required to
administer the investment activities of the Company as its sole and exclusive
function and may have other business interests and may engage in other
activities similar or in addition to those relating to the Company, including
the performance of services and advice to other persons (including other real
estate investment companies) and the management of other investments (including
investments of the Advisor and its Affiliates). The Directors may request the
Advisor to engage in other activities which complement the Company's
investments, and the Advisor may receive compensation or commissions for those
activities from the Company or other Persons.
The Advisor shall be required to use its best efforts to present a
continuing and suitable investment program to the Company which is consistent
with the investment policies and objectives of the Company, but neither the
Advisor nor any Affiliate of the Advisor (subject to any applicable provision of
Sections 9.4 and 9.5 herein) shall be obligated to present any particular
investment opportunity to the Company even if the opportunity is of character
which, if presented to the Company, could be taken by the Company, and, subject
to the foregoing, shall be protected in taking for its own account or
recommending to others the particular investment opportunity.
Upon request of any Director, the Advisor and any Person who controls, is
controlled by, or is under common control with the Advisor, shall from time to
time promptly furnish the Directors with information on a confidential basis as
to any investments within the Company's investment policies made by the Advisor
or the other Person for its own account.
7.4 Limitation on Organization, Offering and Acquisition Expenses. The
Offering and Organization Expenses (plus sales commissions, if any) paid in
connection with the Company's formation or the offering of its Series A Shares
or other Securities shall in each case be reasonable and in no event exceed an
amount equal to 15% of the gross proceeds raised in any such offering.
7.5 Limitation on Operating Expenses. The Operating Expenses of the
Company for any fiscal year shall not exceed the greater of (a) 2% of its
Average Invested Assets or (b) 25% of the Net Income of the Company, unless the
Independent Directors conclude that a higher level of expense is justified, as
provided for in Section 4.14(e) and the California Commissioner of Corporations
concurs therein, provided however, that such expenses (including subitems iv
through ix of Section 1.3(n)) shall not exceed the foregoing limitation unless
the Independent Directors conclude that a higher level of expenses is justified
as provided for in Section 4.14(e).
Within 60 days after the end of any fiscal quarter of the Company for which
Operating Expenses (for the 12 months then ended) exceed the limitations set
forth herein, there shall be sent to the Shareholders a written disclosure of
such fact together with an explanation of the factors the Independent Directors
considered in arriving at the conclusion that the higher Operating Expenses were
justified. In the event the
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Independent Directors do not determine such excess expenses were justified, the
Advisor shall reimburse the Company at the end of the 12-month period the amount
by which the aggregate annual Operating Expenses paid or incurred by the Company
exceeded the limitations herein provided.
7.6 Reserved.
7.7 Reserved.
ARTICLE VIII
RESTRICTIONS ON INVESTMENTS AND ACTIVITIES
8.1 Restrictions. Notwithstanding any other provision of these Bylaws, the
Company shall not:
(a) invest in commodities or commodity future contracts;
(b) invest in contracts for the sale of real estate;
(c) engage in any short sale;
(d) make real estate investments in Unimproved Real Property or
indebtedness secured by a deed of trust or mortgage loans on Unimproved
Real Property in excess of 10% of the total assets of the Company;
(e) issue equity Securities on a deferred payment basis or other
similar arrangement;
(f) issue debt Securities in the absence of adequate cash flow to
cover debt service;
(g) issue equity Securities which are non-voting or assessable;
(h) incur any indebtedness, secured or unsecured, which would result
in an aggregate amount of indebtedness in excess of 300% of Net Assets;
(i) borrow on an unsecured basis if such borrowing will result in
Asset Coverage of less than 300%;
(j) make or invest in mortgage loans, including construction loans, on
any one property if the aggregate amount of all mortgage loans outstanding
on the property, including loans of the Company, would exceed an amount
equal to 85% of the appraised value of the property as determined by an
Appraisal unless substantial justification exists because of the presence
of other underwriting criteria; provided, however, that the Company shall
not make or invest in mortgage loans that are subordinate to any mortgage
or equity interest of the Advisor, Directors or any of their Affiliates;
and provided further, that any such Appraisal shall be retained in the
Company's records for a period of five (5) years and shall be available for
inspection and copying by any shareholder;
(k) issue "redeemable securities," as defined in Section 2(a)(32) of
the Investment Company Act of 1940;
(l) invest in any equity Security of any non-governmental issuer,
including the Shares of other REITs or limited partnerships for a period in
excess of 18 months, provided that any such investment in an entity
affiliated with the Advisor, Directors or Affiliates thereof shall comply
with the requirements of Section 9.5.
(m) engage in trading, as compared with investment activities, or
engage in the business of underwriting or agency distribution of Securities
issued by others;
(n) hold property primarily for sale to customers in the ordinary
course of the trade or business of the Company, but this prohibition shall
not be construed to deprive the Company of the power to sell any property
which it owns at any time;
(o) grant warrants or options to purchase voting shares of beneficial
interest of the Company unless such warrants or options (i) are issued
ratably to the holders of all voting shares of beneficial interest or (ii)
are issued as part of a financing arrangement; provided that any warrants
or options issued are at an
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exercise price greater than or equal to the fair market value of the voting
shares of the Company on the date of the grant and for consideration
(including services) that in the judgment of a majority of the Independent
Directors has a market value at least equal to the value of the warrant or
option on the date of grant, and the warrants and options granted to the
Advisor, Directors or Affiliates thereof are granted on the same terms as
such warrants and options are sold to the general public and do not exceed
an amount equal to 10% of the outstanding Shares on the date of grant of
such warrants and options;
(p) invest in or make mortgage loans unless an Appraisal is obtained
concerning the underlying property and, in addition to the Appraisal, the
Company shall obtain a mortgagee's or owner's title insurance policy or
commitment as to the priority of the mortgage or the condition of the
title;
(q) invest in indebtedness, including construction loans (herein
called "junior debt") secured by a mortgage on real property which is
subordinate to the lien of other indebtedness (herein called "senior
debt"), except where the amount of such junior debt, plus the outstanding
amount of the senior debt, does not exceed 85% of the appraised value of
such property as determined by Appraisal, if after giving effect thereto,
the value of all such investments of the Company (as shown on the books of
the Company in accordance with generally accepted accounting principles
after all reasonable reserves but before provision for depreciation) would
not then exceed 25% of the Company's tangible assets, provided that the
value of all investments in junior debt of the Company which does not meet
the aforementioned requirements would be limited to 10% of the Company's
tangible assets (which would be included within the 25% limitation);
(r) acquire Securities in any company holding investments or engaging
in activities prohibited by the Internal Revenue Code of 1986, as amended,
or the California statutes governing the activities of REITs; or
(s) invest in real estate contracts of sale or land sale contracts
unless such contracts are in recordable form and are appropriately recorded
in the chain of title.
The foregoing limitations shall not limit the manner in which any required
investment by the Advisor or its Affiliates in the Company is made or preclude
the Company from structuring an investment in real property to minimize
Shareholder liability and facilitate the investment policies of the Company
under Article VIII.
ARTICLE IX
LIABILITY OF DIRECTORS,
SHAREHOLDERS AND OFFICERS AND OTHER MATTERS
9.1 Exculpation of Directors, Officers and Others. The Directors are
required to perform their duties with respect to the Company's business in good
faith, in a manner believed by the Directors to be in the best interests of the
Company and with the care, including reasonable inquiry, as an ordinary prudent
Person in a like position would use under similar circumstances. A Director who
performs his duties in accordance with the foregoing standards shall not be
liable to any person for failure to discharge his obligations as a Director.
Notwithstanding the additional responsibilities of Independent Directors, an
Independent Director shall not have any greater liability than that of a
Director who is not independent.
Moreover, the Company's officers, employees and other agents are also
required to act in good faith, in a manner believed by them to be in the best
interest of the Company, and with the care, including reasonable inquiry, as an
ordinary prudent Person in a like position would use under similar
circumstances, in handling its affairs. An officer, employee or other agent who
performs his duties in accordance with the foregoing standards shall not be
liable to any person for failure to discharge his obligations as an officer,
employee or agent.
9.2 Express Exculpatory Clauses and Instruments. In all agreements,
obligations, instruments, and actions in regard to the affairs of this Company,
this Company and not its Directors, Shareholders, officers, employees or agents
shall be the principal and the Company shall be entitled as such to enforce the
same, collect damages, and take all other action. All agreements, obligations,
instruments, and actions shall be made, executed, incurred, or taken by or in
the name and on behalf of this Company.
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9.3 Indemnification and Reimbursement of Corporate Agents.
(a) The Company shall indemnify each of its agents against expenses,
judgments, fines, settlements and other amounts, actually and reasonably
incurred by such Person by reason of such Person's having been made or having
threatened to be made a party to a proceeding in excess of the indemnification
otherwise permitted by the provisions of Section 317 of the California
Corporations Code subject to the limits on such excess indemnification set forth
in Section 204 of the California Corporations Code, and the Company shall
advance the expenses reasonably expected to be incurred by such agent in
defending any such proceeding upon receipt of the undertaking required by
subdivision (f) of said Section 317. The terms "agent," "proceeding" and
"expenses" made in this Section 9.3 shall have the same meaning as such terms in
said Section 317, except that directors who are not Independent Directors and
the Advisor may only be indemnified as follows:
1. The Board has determined, in good faith, that the course of conduct
which caused the loss or liability was in the best interests of the
Company, and
2. Such liability or loss was not the result of negligence or
misconduct by the Director.
Indemnification will not be allowed for any liability imposed by judgment
and costs associated therewith, including attorneys' fees, arising from or out
of a violation of state or federal securities laws associated with the offer and
sale of the Company's shares. Indemnification will be allowed for settlements
and related expenses of lawsuits alleging securities law violations, and for
expenses incurred in successfully defending such lawsuits, provided that a court
either:
(i) Approves the settlement and finds that indemnification of the
settlement and related costs should be made, or
(ii) Approves indemnification of litigation costs if a successful
defense is made.
Any rights of indemnification and reimbursement shall be satisfied
only out of Company property.
(b) The rights accruing to any Person under these provisions shall not
exclude any other right to which he may be lawfully entitled, nor shall anything
in these Bylaws restrict the right of the Company to indemnify or reimburse the
Person in any proper case even though not specifically provided for in these
Bylaws, nor shall anything in these Bylaws restrict the Person's right to
contribution as may be available under applicable law.
(c) The Company shall have power to purchase and maintain insurance on
behalf of any Person entitled to indemnity under these provisions against any
liability asserted against him and incurred by him in any capacity or arising
out of his status. The Company, however, shall not purchase and maintain
insurance for liabilities for which indemnification is not permitted under these
provisions.
(d) No claim for indemnification under this Section 9.3 by any Person for
liabilities arising under the Securities Act of 1933 or under state securities
laws may be permitted by the Company. Notwithstanding the foregoing, a claim for
indemnification will be permitted for settlements and related expenses in
connection with defending a civil or criminal action, suit or proceeding arising
under the Securities Act of 1933 or under state securities laws provided that a
court of competent jurisdiction approves the settlement and finds that
indemnification is not against public policy or approves indemnification of
litigation costs if a successful defense is made.
9.4 Right of Directors, Officers and Others to Own Shares or Other Property
and to Engage in Other Business. Any Director, officer, employee or agent of
the Company may acquire, own, hold and dispose of shares in the Company, for his
individual account, and may exercise all rights of a Shareholder to the same
extent and in the same manner as if he were not a Director, officer, employee or
agent of the Company. Any Director, officer, employee or agent of the Company
may have personal business interests and may engage in personal business
activities, which interests and activities may include the acquisition,
syndication, holding, management, operation or disposition, for his own account
or for the account of others, of interests in real property (including, but not
limited to, real property investments presented to and rejected by the Company
or the Advisor), interests in mortgages, or interests in Persons engaged in the
real estate business, including Persons authorized as investments pursuant to
Section 7.3 hereof. Subject to the provisions of Article VII, any
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Director, officer, employee or agent may be interested as Director, officer,
director, stockholder, partner, member, advisor or employee, or otherwise have a
direct or indirect interest in any Person who may be engaged to render advice or
services to the Company, and may receive compensation from that Person as well
as compensation as Director, officer, or agent of the Company. None of these
activities shall be deemed to conflict with his duties and powers as Director or
officer.
9.5 Transactions With Affiliates. The Company shall not:
(a) Engage in transactions with the Advisor, any Director, officer or
Affiliates thereof, except to the extent that each such transaction has, after
disclosure of such affiliation, been approved or ratified by the affirmative
vote of a majority of the Directors (including a majority of Independent
Directors) not affiliated with the person who is party to the transaction and
not otherwise interested in such transaction and:
(i) the transaction is fair and reasonable to the Company and its
Shareholders,
(ii) the terms of such transaction are at least as favorable as the
terms of any comparable transactions made on an arm's length basis and
known to the Directors; and
(iii) payments to the Advisor, its Affiliates or Directors for
services rendered in a capacity other than that as Advisor or as Directors
may only be made upon a determination that (A) the compensation is not in
excess of the compensation paid for any comparable services, and (B) the
compensation is not greater than the charges for comparable services
available from others who are competent and not affiliated with any of the
parties involved.
(b) Purchase property from the Advisor, any Director, or Affiliates
thereof, unless a majority of Directors (including a majority of Independent
Directors) not otherwise interested in such transaction approve the transaction
as being fair and reasonable to the Company and at a price to the Company no
greater than the cost of the asset to such Advisor, Director or Affiliate
thereof, or, if the price to the Company is in excess of such cost, that
substantial justification for such excess exists and such excess is not
unreasonable. In no event shall the cost of such asset to the Company exceed its
current appraised value.
(c) Sell property to the Advisor, any Director or Affiliates thereof.
(d) Borrow money from the Advisor, any Director, or affiliates thereof,
unless a majority of Directors (including a majority of Independent Directors)
not otherwise interested in such transaction approves the transaction as being
fair, competitive, and commercially reasonable and no less favorable to the
Company than loans between unaffiliated lenders and borrowers under the same
circumstances.
(e) Invest in joint ventures with the Advisor, any Director, or Affiliates
thereof, unless a majority of Directors (including a majority of Independent
Directors) not otherwise interested in such transactions, approves the
transaction as being fair and reasonable to the Company and shall be on
substantially the same terms and conditions as those received by the other joint
venturers.
(f) Make loans to the Advisor, any Director or Affiliates thereof.
9.6 Restriction of Duties and Liabilities. The duties and liabilities of
Shareholders, Directors and officers shall in no event be greater than the
duties and liabilities of shareholders, directors and officers of a California
corporation. The Shareholders, Directors and officers shall in no event have any
greater duties or liabilities than those imposed by applicable law as shall be
in effect from time to time.
9.7 Persons Dealing with Directors or Officers. Any act of the Directors
or officers purporting to be done in their capacity as such shall, as to any
Persons dealing in good faith with the Directors or officers, be conclusively
deemed to be within the purposes of this Company and within the powers of the
Directors and officers.
The Directors may authorize any officer or officers or agent or agents to
enter into any contract or execute any instrument in the name and on behalf of
the Company and/or Directors.
No Person dealing in good faith with the Directors or any of them or with
the authorized officers, employees, agents or representatives of the Company,
shall be bound to see to the application of any funds or
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property passing into their hands or control. The receipt of the Directors, or
any of them, or of authorized officers, employees, agents, or representatives of
the Company, for moneys or other consideration, shall be binding upon the
Company.
9.8 Reliance. The Directors and officers may consult with counsel and the
advice or opinion of that counsel shall be full and complete personal protection
to all of the Directors and officers in respect of any action taken or suffered
by them in good faith and in reliance on and in accordance with such advice or
opinion. In discharging their duties, Directors and officers, when acting in
good faith, may rely upon financial statements of the Company represented to
them to be correct by the Chairman or the officer of the Company having charge
of its books of account, or stated in a written report by an independent
certified public accountant fairly to present the financial position of the
Company. The Directors may rely, and shall be personally protected in acting,
upon any instrument or other document believed by them to be genuine.
9.9 Income Tax Status. Without limitation of any rights of
indemnification, or non-liability of the Directors, the Directors by these
Bylaws make no commitment or representation that the Company will qualify for
the dividends paid deduction permitted by the Internal Revenue Code of 1986, as
amended, and the Rules and Regulations pertaining to real estate investment
trusts under the Internal Revenue Code of 1986, as amended, and any failure to
so qualify at any time shall not render the Directors liable to the Shareholders
or to any other person or in any manner operate to annul the Company.
ARTICLE X
MISCELLANEOUS
10.1 Inspection of Bylaws. The Company shall keep at its principal office
in this state for the transaction of business, the original or a copy of these
Bylaws as amended, certified by the Secretary, which shall be open to inspection
by Shareholders at any reasonable time during office hours.
10.2 Inspection of Corporate Records. Shareholders of the Company, or any
holders of a voting trust certificate, shall have the right to inspect the
accounting books and records of the Company, and the minutes of proceedings of
the Shareholders and the Board and committees of the Board as provided by
Chapter 16 of the California Corporations Code, which Chapter provides, among
other things, that any shareholder or shareholders together holding at least 5%
of the aggregate outstanding voting shares of the Company have the absolute
right to inspect and copy the Company's Shareholder records or to demand the
same from the Company's transfer agent, upon specified notice. In addition, such
Chapter provides that any Shareholder or voting trust certificate holder shall
have the absolute right upon written demand at any time during normal business
hours, to inspect the Company's shareholder records, accounting records, and
minute books for any purpose reasonably related to such person's interest as a
Shareholder.
10.3 Checks, Drafts, Etc. All checks, drafts or other orders for payment
of money, notes or other evidences of indebtedness, issued in the name of or
payable to the Company, shall be signed or endorsed by the person or persons and
in the manner as from time to time shall be determined by resolution of the
Board of Directors.
10.4 Contracts, Etc., How Executed. The Board of Directors, except as
provided elsewhere in the Bylaws, may authorize any officer or officers or agent
or agents to enter into any contract or execute any instrument in the name of
and on behalf of the Company. That authority may be general or confined to
specific instances. Unless so authorized by the Board of Directors, no officer,
agent or employee shall have any power or authority to bind the Company by any
contract or engagement or to pledge its credit to render it liable for any
purpose or to any amount.
10.5 Representation of Shares of Other Corporations. The Chairman or the
President or, in the event of their absence or inability to serve, any Vice
President and the Secretary or Assistant Secretary of this Company are
authorized to vote, represent and exercise, on behalf of the Company, all rights
incidental to any and all shares of any other company standing in the name of
the Company. The authority granted to the officers to vote or represent on
behalf of the Company any and all Shares held by the Company in any other
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company may be exercised by any authorized person in person or by proxy or power
of attorney duly executed by the officers.
10.6 Annual Report. The Board of Directors of the Company shall cause to
be sent to the Shareholders, not later than one hundred twenty (120) days after
the close of the fiscal or calendar year, and not less than thirty (30) days
before the date of the Company's Annual Meeting of Shareholders as provided in
Section 3.2 of these Bylaws, an Annual Report in the form deemed appropriate by
the Board of Directors, including without limitation, any explanation of excess
borrowing and excess expenses as set forth in Sections 4.14 and 7.5. The reports
shall also disclose the ratio of the cost of raising capital to the capital
raised during the year and the aggregate amount of the advisory fees and other
fees paid during the year to the Advisor and its Affiliates, including fees or
charges paid to the Advisor and Affiliates by a third party. The Annual Report
also shall include as required by Section 4.14 full disclosure of all material
terms, factors and circumstances surrounding any and all transactions involving
the Company and the Directors, Advisor and/or Affiliates thereof occurring
during the year, and the Independent Directors shall examine and comment in the
report as to the fairness of any such transactions. The Annual Report shall
include a statement of assets and liabilities and a statement of income and
expense of the Company prepared in accordance with Generally Accepted Accounting
Principles. The financial statements shall be accompanied by the report of an
independent certified public accountant. A manually signed copy of the
accountant's report shall be filed with the Directors.
10.7 Other Reports. The Chairman of the Board or the President shall
prepare or cause to be prepared annually a full and correct statement of the
affairs of the Company, including a balance sheet and a financial statement of
operations for the preceding fiscal year, which shall be certified by
independent certified public accountants and distributed to stockholders within
120 days after the close of the Company's fiscal year and at least 30 days prior
to the Annual Meeting of Shareholders. The Directors shall furnish the
Shareholders at least annually with a statement in writing advising as to the
source of dividends or distributions so distributed. If the source has not been
determined, the communication shall so state and the statement as to the source
shall be sent to the Shareholders not later than sixty (60) days after the close
of the fiscal year in which the distribution was made.
10.8 Statements re Shares Owned in "Uncertificated" Form. Within two (2)
business days after the transfer of Shares owned in uncertificated form, the
Company shall send a statement to the former registered owner and to the new
registered owner containing the information described in this Section 10.8. In
addition, the Company shall send such a statement at periodic intervals no less
frequent than annually and at any time upon the reasonable request of the
registered owner (if statements are not sent as a matter of routine at least
quarterly). A statement sent pursuant to this Section 10.8 shall contain the
following information:
(a) A description of the issue of which the Shares are a part;
(b) The name and address and any taxpayer identification number of the
registered owner;
(c) The number of Shares registered in the name of the registered owner in
uncertificated form on the date of the statement;
(d) The name and address and any taxpayer identification number of any
registered pledgee and the number of Shares subject to the pledge;
(e) A notation of any liens and restrictions of the Company and any adverse
claims to which the Shares are or may be subject or a statement that there are
none of those liens, restrictions, or adverse claims;
(f) Anything else required by subdivision (b) of Section 416 of the
Corporations Code.
10.9 Provisions of the Company in Conflict with Law or Regulation.
(a) The provisions of these Bylaws are severable, and if the Directors
shall determine, with the advice of counsel, that any one or more of these
provisions (the "Conflicting Provisions") are in conflict with the REIT
Provisions of the Internal Revenue Code of 1986, as amended, or with other
applicable laws and regulations, the Conflicting Provisions shall be deemed
never to have constituted a part of these Bylaws, and the Directors
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shall be able to amend or revise the Bylaws to the extent necessary to bring the
provisions of these Bylaws into conformity with the REIT provisions of the
Internal Revenue Code of 1986, as amended, or any other applicable law or
regulation; provided, however, that this determination by the Directors shall
not affect or impair any of the remaining provisions of these Bylaws or render
invalid or improper any action taken or omitted (including but not limited to
the election of Directors) prior to the determination. A certification signed by
a majority of the Directors setting forth any such determination and reciting
that it was duly adopted by the Directors, or a copy of these Bylaws, with the
Conflicting Provisions removed pursuant to the determination, signed by a
majority of the Directors, shall be conclusive evidence of such determination
when lodged in the records of the Company. The Directors shall not be liable for
failure to make any determination under this Section 10.9.
(b) If any provisions of these Bylaws shall be held invalid or
unenforceable, the invalidity or unenforceability shall attach only to that
provision and shall not in any manner affect or render invalid or unenforceable
any other provision, and these Bylaws shall be carried out as if the invalid or
unenforceable provision were not present.
10.10 Fiscal Year. The Company's first fiscal year will end on the last
day of the month in which the minimum offering is subscribed and funds are
released from escrow. Thereafter, the Company's fiscal year shall end on
December 31 of each year.
10.11 Voluntary Dissolution. The Company may elect to wind up and dissolve
by the vote of Shareholders entitled to exercise a majority of the voting power
of the Company.
10.12 Distributions. The payment of distributions on Shares shall be at
the discretion of the Directors and shall depend upon the earnings, cash flow
and general financial condition of the Company, and such other factors as the
Directors deem appropriate.
ARTICLE XI
AMENDMENTS TO BYLAWS
11.1 Amendments. Bylaws may be adopted, amended, or repealed by the vote
or the written consent of Shareholders entitled to exercise a majority of the
voting power of the Company; provided however, that these Bylaws or any
provision hereof which would affect any rights with respect to any outstanding
class of securities of the Company, by reducing the amount payable upon the
liquidation of the Company, or by diminishing or eliminating any voting rights
pertaining thereto, may not be amended unless approved by the vote or written
consent of the holders of two-thirds of the outstanding securities of such
class. The Board of Directors may propose any such amendment to the
Shareholders, but the Board of Directors may not amend the Bylaws, except to the
extent expressly provided in Section 10.9.
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EXHIBIT C
AMENDED AND RESTATED SERIES B STOCK EXCHANGE AGREEMENT
THIS AGREEMENT is entered into as of the day of , 199 , by
and between Franklin Properties, Inc. ("Advisor") with reference to Shares of
common stock of Franklin Select Realty Trust (the "Company"), with reference to
the following:
This Agreement is made in connection with the merger of Franklin Real
Estate Income Fund ("FREIF") and/or Franklin Advantage Real Estate Income Fund
("Advantage") into the Company (the "Merger") pursuant to the Merger Agreement
of even date herewith (the "Merger Agreement").
Prior to the Merger, 185,866 shares of Series B Common Stock of the Company
were outstanding ("Original Series B Common Stock"). As a part of the Merger,
319,308 shares of Series B Common Stock of FREIF were exchanged for 287,498
shares of Series B Common Stock of the Company (Series B Common Stock of the
Company issued in exchange for Series B Common Stock of FREIF is referred to
hereafter as "FREIF Series B Common Stock"). As a part of the Merger, 124,240
shares of Series B Common Stock of Advantage were exchanged for 149,088 shares
of Series B Common Stock of the Company (Series B Common Stock of the Company
issued in exchange for Series B Common Stock of Advantage is referred to
hereafter as "Advantage Series B Common Stock").
In consideration of the mutual promises, covenants and conditions set forth
herein, the parties hereto mutually agree as follows:
1. Grant of Exchange Right. Pursuant to the terms and conditions hereof,
the Company hereby grants to Advisor the right and option (the "Option") to
exchange shares of Series B Common Stock of the Company ("Series B Common
Stock") for shares of Series A Common Stock of the Company ("Series A Common
Stock"), as follows (the "Exchange Right"):
(a) Initially one share of Series B Common Stock shall be exchangeable
for one share of Series A Common Stock (the "Exchange Rate"). The initial
Exchange Rate shall be subject to adjustment as further provided below. For
purposes of this Agreement, references to the "then effective Exchange
Rate" shall mean the initial Exchange Rate or, when, as and if adjusted at
any time or from time to time in accordance with the provisions of this
Agreement, the Exchange Rate after the last such adjustment.
(b) The Exchange Right shall be exercisable with respect to the
Original Series B Common Stock at the then effective Exchange Rate on the
last trading day of the first period of 20 consecutive trading days during
which on each trading day the last reported sale price of a share of the
Series A Common Stock on the American Stock Exchange or such other exchange
upon which the Series A Common Stock is then listed (the "Exchange") was
not less than Ten Dollars and Thirty-five Cents ($10.35) (the "Company
Target Price"). Such date on which the Series B Common Stock shall be
exercisable shall be the "Company Exchange Date."
(c) The Exchange Right shall be exercisable with respect to the then
effective Exchange Rate on the last trading day of the first period of 20
consecutive trading days during which on each trading day the last reported
sale price of a share of the Series A Common Stock on the
Exchange was not less than Eleven Dollars and Thirty-three Cents
($11.33) (the "FREIF Target Price"). Such date on which the Series B Common
Stock shall be exercisable shall be the "FRIEF Exchange Date."
(d) The Exchange Right shall be exercisable with respect to the then
effective Exchange Rate on the last trading day of the first period of 20
consecutive trading days during which on each trading day the last reported
sale price of the Series A Common Stock on the Exchange was no less than
Eight Dollars and Forty-two Cents ($8.42) the "Advantage Target Price").
Such date on which the Advantage Series B Common Stock shall be exercisable
shall be the "Advantage Exchange Date."
(e) Each of the Company Target Price, the FREIF Target Price and the
Advantage Target Price is herein referred to as a "Target Price" and is
subject to adjustment as further provided below. Each of the
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Company Exchange Date, FREIF Exchange Date, and Advantage Exchange Date is
herein referred to as an "Exchange Date".
(f) If the shares of Series A Common Stock are not listed on a
national securities exchange or included in the National Association of
Securities Dealers Automated Quotation National Market System, the trading
price shall be determined by reference to the mean between the average per
share closing bid prices and the average per share closing asked prices, in
each case for the relevant 20-day trading period or, if there have been no
sales on a national securities exchange or the shares are not included in
the National Association of Securities Dealers Automated Quotation National
Market System and, during such relevant 20-day trading period, there are
not any published bid and asked quotations with respect to shares of Series
A Common Stock, the trading price shall be calculated by reference to the
fair market value of the shares of Series A Common Stock which fair market
value shall be determined, in good faith, by the Board of Directors.
(g) No fractional shares of Series A Common Stock shall be issued upon
conversion of any shares of Series B Common Stock. Any fractional shares to
which any holder of Series B Common Stock would be entitled upon conversion
shall be rounded up to the nearest whole share.
2. Adjustments. (a) For purposes of this Agreement, the following
definitions apply:
(i) "Options for Common Stock" shall mean rights, options, or warrants
to subscribe for, purchase or otherwise acquire shares of Series A Common
Stock.
(ii) "Convertible Securities" shall mean any evidences of
indebtedness, shares (other than shares of Series B Common Stock) or other
securities convertible into or exchangeable for shares of Series A Common
Stock.
(iii) "Options for Convertible Securities" shall mean rights, options
or warrants to subscribe for, purchase or otherwise acquire Convertible
Securities.
(iv) "Options" shall mean Options for Series A Common Stock or Options
for Convertible Securities.
(v) "Deemed Issue Date" shall mean the date that additional shares of
Series A Common Stock are deemed issued as provided herein.
(b) In the event this corporation at any time or from time to time after
the date hereof shall issue any Options or Convertible Securities to the holders
of the shares of Series A Common Stock or fix a record date for the
determination of such holders to receive any Options or Convertible Securities,
the additional shares of Series A Common Stock equal to the maximum number of
shares (as set forth in the instrument relating thereto without regard to any
provisions contained therein designated to protect against dilution) of Series A
Common Stock issuable upon the exercise of such Options for Series A Common
Stock or, in the case of Convertible Securities and Options for Convertible
Securities, the conversion of exchange of such Convertible Securities, shall be
deemed issued as of the time such Options or Convertible Securities are issued
or, in case such a record date shall have been fixed, as of the close of
business on such record date, and the Target Price and Exchange Rate shall be
adjusted as provided below.
(c) In the event this corporation shall be deemed to have issued shares of
Series A Common Stock pursuant to subparagraph (b) for a consideration per share
(determined as provided in paragraphs (e) and (f) of this Agreement) that is
less than the weighted (based on the number of shares traded) average of the
last reported sale price (the "Market Price") of a share of Series A Common
Stock on an Exchange for the twenty consecutive trading days ending on the
trading day immediately prior to a Deemed Issue Date, then and in such event (i)
the Target Price shall be reduced, concurrently with such deemed issue, to an
amount (calculated to the nearest cent) determined by multiplying such Target
Price by a fraction, the numerator of which shall be the number of shares of
Series A Common Stock outstanding immediately prior to the Deemed Issue Date
plus the number of shares of Series A Common Stock which the aggregate
consideration deemed to have been paid for the total number of such additional
shares would purchase at the Market Price in effect immediately prior to the
Deemed Issue Date and the denominator of which shall be the number of shares of
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Series A Common Stock outstanding immediately prior to such Deemed Issue Date
plus the number of such shares of Series A Common Stock deemed to have been
issued and (ii) the Exchange Rate per share shall be increased to an amount
equal to the quotient of (A) the Target Price immediately prior to the Deemed
Issue Date, divided by (B) the Target Price immediately after the Deemed Issue
Date. If the shares of Series A Common Stock are not listed on an Exchange, the
trading price shall be determined consistent with the provisions of paragraph
(e). For the purpose of the above calculation, the number of shares of Series A
Common Stock outstanding immediately prior to the Deemed Issue Date shall be
calculated on a fully diluted basis, as if all shares of the Series B Common
Stock and all Convertible Securities had been fully converted into shares of
Series A Common Stock immediately prior to such issuance and any outstanding
Options had been fully exercised immediately prior to such issuance (and the
resulting securities fully converted into shares of Series A Common Stock, if so
convertible) as of such date, but not including in such calculation any
additional shares of Series A Common Stock issuable with respect to shares of
Series B Common Stock, Convertible Securities or outstanding Options, solely as
a result of the adjustment of the Exchange Rate (or other conversion ratios)
resulting from the issuance or deemed issuance of additional shares of Common
Stock causing such adjustment.
(d) in any such case in which such additional shares of Series A Common
Stock are deemed issued:
(i) no further adjustments in the Target Price or the Exchange Rate
shall be made upon the subsequent issue of Convertible Securities or shares
of Series A Common Stock upon the exercise of such Options or conversion or
exchange of such Convertible Securities;
(ii) if such Options or Convertible Securities by their terms provide,
with the passage of time or otherwise, for any increase or decrease in the
consideration payable to this corporation, or decrease or increase in the
number of shares of Series A Common Stock issuable, upon the exercise,
conversion or exchange thereof, the Target Price and Exchange Rate as
computed upon the original issue thereof (or upon the occurrence of a
record date with respect thereto), and any subsequent adjustments based
thereon, shall, upon any such increase or decrease becoming effective, be
recomputed to reflect such increase or decrease insofar as it affects such
Options or the rights of conversion or exchange under such Convertible
Securities;
(iii) upon the expiration of any such Options or any rights of
conversion or exchange under any such Convertible Securities which shall
not have been exercised, the Target Price and Exchange Rate as computed
upon the original issue thereof (or upon the occurrence of a record date
with respect thereto), and any subsequent adjustments based thereon, shall,
upon such expiration, be recomputed as if:
(A) in the case of Convertible Securities or Options for Common
Stock the only additional shares of Series A Common Stock issued were
the shares of Series A Common Stock, if any, actually issued upon the
exercise of such Options for Common Stock or the conversion or exchange
of such Convertible Securities and the only consideration received
therefor was the sum of (1) the consideration actually received by this
corporation for the issue of all such Options for Common Stock, whether
or not exercised, plus (2) the consideration actually received by this
corporation upon such exercise of such Options for Common Stock, or for
the issue of all such Convertible Securities which were actually
converted or exchanged, plus (3) the additional consideration, if any,
actually received by this corporation upon such conversion or exchange;
and
(B) in the case of Options for Convertible Securities, only the
Convertible Securities, if any, actually issued upon the exercise
thereof were issued at the time of issue of such Options for Convertible
Securities and the consideration received by this corporation for the
additional shares of Series A Common Stock deemed to have then been
issued was the sum of (1) the consideration actually received by this
corporation for the issue of all such Options for Convertible
Securities, whether or not exercised, plus (2) the consideration deemed
to have been received by this corporation (determined pursuant to this
subparagraph (d) upon the issue of the Convertible Securities with
respect to which such Options for Convertible Securities were actually
exercised;
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(e) For purposes of subparagraphs (c), (d) and (f), the amount of the
consideration received by this corporation for the issuance of any Options or
Convertible Securities or any shares of Series A Common Stock upon the exercise
or conversion thereof shall be determined as follows:
(i) insofar as it consists of cash, the aggregate amount of cash
received by this corporation, excluding any amounts paid or payable for
accrued interest or accrued dividends;
(ii) insofar as it consists of property other than cash, the fair
market value thereof at the time of such issue, as determined in good faith
by the Board of Directors; and
(iii) if shares of Series A Common Stock are issued together with
other shares or securities or other property of this corporation ("Other
Items") for consideration which is not separately allocated, such
allocation shall be determined in good faith by the Board of Directors.
(f) For purposes of subparagraph (c), the consideration received by this
corporation for the shares of Series A Common Stock which may be issued for
Options for Common Stock or upon the conversion or exchange of Convertible
Securities or upon conversion or exchange of Convertible Securities issued upon
the exercise of Options for Convertible Securities, shall be equal to the
quotient of:
(i) the total amount, if any, received or receivable by this
corporation as consideration for the issuance of such shares of Series A
Common Stock, such Options or Convertible Securities, plus the minimum
aggregate amount of additional consideration (as set forth in the
instruments relating thereto, without regard to any provision contained
therein designed to protect against dilution) payable to this corporation
upon the exercise of such Options for Common Stock or the conversion or
exchange of such Convertible Securities, or, in the case of Options for
Convertible Securities, the exercise of such Options for Convertible
Securities and the conversion or exchange of such Convertible Securities
issued upon such exercise, divided by
(ii) an amount equal to the maximum number of shares of Series A
Common Stock (as set forth in the instruments relating thereto, without
regard to any provision contained therein designed to protect against the
dilution) issuable upon the exercise of such Options for Common Stock, the
conversion or exchange of such Convertible Securities, or, in the case of
Options for Convertible Securities, upon the conversion or exchange of the
Convertible Securities issued upon such exercise, as the case may be.
(g) If this corporation either shall distribute (a) without consideration
to the holders of shares of Series A Common Stock any (i) note, debenture, bond,
or other evidence of indebtedness (collectively, an "Indebtedness") of this
corporation, (ii) any security of this corporation, other than an Indebtedness,
an Option or Convertible Security or (iii) any other property other than cash
and on or prior to the date a record is taken to determine the holders entitled
to receive such distribution, the Board of Directors shall not have determined
in good faith by resolution that such distribution is in lieu of a cash dividend
on such shares of Series A Common Stock or (b) cash which constitutes proceeds
from the sale of real estate assets or financing or refinancing of any such
assets ("Cash Proceeds"), then on the date of such distribution, the Target
Price shall be decreased by an amount equal to the quotient of (A) the aggregate
principal amount of such Indebtedness, the aggregate fair market value as
determined in good faith by the Board of Directors of such other securities or
property or the aggregate Cash Proceeds, as the case may be, divided by (B) the
number of shares of Series A Common Stock then outstanding.
(h) If the outstanding shares of Series A Common Stock shall be subdivided
(by stock split, stock dividend, reclassification or otherwise) into a greater
number of shares of Series A Common Stock, concurrently with the effectiveness
of such subdivision, the Exchange Rate then in effect shall be proportionately
increased and the Target Price then in effect shall be proportionately
decreased. In the event the outstanding shares of Series A Common Stock shall be
combined or consolidated, by reclassification or otherwise, into a lesser number
of shares of Series A Common Stock, concurrently with the effectiveness of such
combination or consolidation, the Exchange Rate then in effect shall be
proportionately decreased and the Target Price then in effect shall be
proportionately increased.
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(i) If any outstanding shares of Series B Common Stock shall be subdivided
(by stock split, reclassification or otherwise) into a greater number of shares
of Series B Common Stock, concurrently with the effectiveness of such
subdivision, the applicable Exchange Rate then in effect shall be
proportionately decreased. In the event any outstanding shares of Series B
Common Stock shall be combined or consolidated, by reclassification or
otherwise, into a lesser number of shares of Series B Common Stock, concurrently
with the effectiveness of such combination or consolidation, the applicable
Exchange Rate then in effect shall be proportionately increased.
(j) If the shares of Series A Common Stock issuable upon conversion of any
shares of Series B Common Stock shall be changed into the same or a different
number of shares of any other class or classes of stock or other securities or
property (collectively, "Other Securities"), whether by reorganization,
reclassification or otherwise (other than a subdivision or combination of shares
provided for above), the then effective Exchange Rate for the Series B Common
Stock, concurrently with the effectiveness of such reorganization or
reclassification, shall be proportionately adjusted such that the shares of
Series B Common Stock shall be convertible into, in lieu of the number of shares
of Series A Common Stock which the holders thereof would otherwise have been
entitled to receive upon such conversion, Other Securities equivalent to the
number of shares of Series A Common Stock that would have been issuable to the
holders of Series B Common Stock if their shares of Series B Common Stock had
been converted immediately before such change; and, in any such case,
appropriate adjustment (as determined by the Board of Directors) shall be made
in the application of the provisions herein set forth with respect to the rights
and interest thereafter of the holders of Series B Common Stock, to the end that
the provisions set forth herein (including provisions with respect to changes in
and other adjustments of the Exchange Rate) shall thereafter be applicable, as
nearly as reasonably may be, in relation to any Other Securities thereafter
deliverable upon the conversion of the Series B Common Stock.
(k) No adjustment shall be made to the Exchange Rate or the Target Price as
set forth herein unless the amount of such adjustment exceeds 1/4% of the
theretofore then effective Exchange Rate or Target Price, as the case may be;
provided that, the amount of any such adjustment which is not made shall be
carried forward such that on the date that the cumulative amount of all
adjustments not reflected in the Target Price and the Exchange Rate exceeds or
equals 1/4% of the theretofore then effective Exchange Rate or Target Price, as
the case may be, the Target Price and the Exchange Rate shall be adjusted by
such cumulative amount.
(l) Upon the occurrence of each adjustment of the Exchange Rate or the
Target Price pursuant to this Agreement, this corporation at its expense
promptly shall compute such adjustment in accordance with the terms hereof and
furnish to each holder of Series B Common Stock a certificate setting forth such
adjustment and showing in detail the facts upon which such adjustment is based.
This corporation, upon the written request at any time of any holder of Series B
Common Stock, shall furnish or cause to be furnished to such holder a like
certificate setting forth (a) such adjustments, (b) the Exchange Rate and Target
Price at the time in effect, and (c) the amount, if any, of Other Securities
which at the time would be received upon the conversion of Series B Common
Stock.
(m) This corporation, by amendment of its Articles of Incorporation or
through any reorganization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other voluntary action, will not
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed hereunder by this corporation but will at all times in
good faith assist in the carrying out of all the provisions of this paragraph
and in the taking of all such action as may be necessary or appropriate in order
to protect the Exchange Rights of the holders of the Series B Common Stock
against impairment; provided, however, that nothing in this subparagraph shall
limit the right of the shareholders of this corporation to dissolve this
corporation pursuant to Agreement 1900 of the California Corporations Code.
3. Exercise of Option. This Option shall be exercised by Advisor by
delivery to the Secretary of the Company on or after the applicable Exchange
Date of written notice of exercise setting forth the number and type of Series B
Common Stock that it will exchange. Any conversion of Series B Common Stock
shall be deemed to have been made immediately prior to the close of business on
the applicable Exchange Date, and the person or persons entitled to receive the
shares of Series A Common Stock issuable upon such conversion
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shall be treated for all purposes as the record holder or holders of such shares
of Series A Common Stock on such Exchange Date.
4. Legends. The shares of Series A Common Stock shall bear the following
legend (in addition to any legends which may be required in the opinion of the
Company's counsel by the blue sky laws of any state):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 (THE "ACT"). THESE SECURITIES MAY NOT BE SOLD
OR OTHERWISE DISPOSED OF, IN WHOLE OR IN PART, UNLESS THE SECURITIES ARE AT THE
TIME REGISTERED UNDER THE ACT OR THE SALE OR OTHER TRANSFER OR DISPOSITION
THEREOF IS MADE PURSUANT TO AN EXEMPTION FROM REGISTRATION PROVIDED BY THE ACT
OR RULES AND REGULATIONS THEREUNDER.
5. Survival. The representations warranties, covenants and agreements made
herein shall survive, exercise of the Exchange Rights and shall toll applicable
statutes of limitations for a period of two (2) years thereafter.
6. Entire Agreement. This Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matters thereof and
neither party shall be liable or bound to the other in any manner by any
warranties, representations or covenants except as specifically set forth herein
or therein. The terms and conditions of this Agreement shall inure to the
benefit of and be binding upon the respective successors and assigns of the
parties hereto except to the extent that assignment rights are specifically
limited herein.
7. Governing Law. This Agreement shall be governed by and construed under
the laws of the State of California.
8. Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed an original, but which together shall constitute one and
the same agreement.
9. Titles and Subtitles. The title and subtitles of this Agreement are for
convenience and are not to be considered in construing this Agreement.
10. Notices. Any notice required or permitted hereunder shall be given in
writing by personal delivery or by deposit in the United States mail, by
registered or certified mail, addressed to:
<TABLE>
<CAPTION>
THE COMPANY ADVISOR
- ----------- -------
<S> <C>
Franklin Select Realty Trust Franklin Properties, Inc.
777 Mariners Island Blvd. 777 Mariners Island Blvd.
San Mateo, CA 94403-7777 San Mateo, CA 94403-7777
</TABLE>
11. Severability. If one or more provisions of this Agreement are held to
be unenforceable under applicable law, such provisions shall be severed from
this Agreement as if such provisions were not included and the balance of this
Agreement shall be enforceable in accordance with its terms.
12. Amendment. Any provision of this Agreement may be amended, waived or
modified only upon the written consent of the parties.
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APPENDIX B
BEAR STEARNS' FAIRNESS OPINION
<PAGE> 236
IN WITNESS WHEREOF, the Company and Advisor have caused this Agreement to
be executed by their proper officers thereunto duly authorized as of the
day of , 19 .
THE COMPANY
By:
---------------------------------
Name
--------------------------------
Title
-------------------------------
ADVISOR
-----------------------------
By:
---------------------------------
Name
--------------------------------
Title
-------------------------------
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APPENDIX B
BEAR STEARNS' FAIRNESS OPINION
<PAGE> 238
APPENDIX C
SEC. 1300. REORGANIZATION OR SHORT-FORM MERGER; DISSENTING SHARES; CORPORATE
PURCHASE AT FAIR MARKET VALUE; DEFINITIONS
(a) If the approval of the outstanding shares (Section 152) of a
corporation is required for a reorganization under subdivisions (a) and (b) or
subdivision (e) or (f) of Section 1201, each shareholder of the corporation
entitled to vote on the transaction and each shareholder of a subsidiary
corporation in a short-form merger may, by complying with this chapter, require
the corporation in which the shareholder holds shares to purchase for cash at
their fair market value the shares owned by the shareholder which are dissenting
shares as defined in subdivision (b). The fair market value shall be determined
as of the day before the first announcement of the terms of the proposed
reorganization or short-form merger, excluding any appreciation or depreciation
in consequence of the proposed action, but adjusted for any stock split, reverse
stock split, or share dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or
short-form merger either (A) listed on any national securities exchange
certified by the Commissioner of Corporations under subdivision (o) of
Section 25100 or (B) listed on the list of OTC margin stocks issued by the
Board of Governors of the Federal Reserve System, and the notice of meeting
of shareholders to act upon the reorganization summarizes this section and
Sections 1301, 1302, 1303 and 1304; provided, however, that this provision
does not apply to any shares with respect to which there exists any
restriction on transfer imposed by the corporation or by any law or
regulation; and provided, further, that this provision does not apply to
any class of shares described in subparagraph (A) or (B) if demands for
payment are filed with respect to 5 percent or more of the outstanding
shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted
in favor of the reorganization or, (B) if described in subparagraph (A) or
(B) of paragraph (1) (without regard to the provisos in that paragraph),
were voted against the reorganization, or which were held of record on the
effective date of a short-form merger; provided, however, that subparagraph
(A) rather than subparagraph (B) of this paragraph applies in any case
where the approval required by Section 1201 is sought by written consent
rather than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the
recordholder of dissenting shares and includes a transferee of record.
SEC. 1301. NOTICE TO HOLDERS OF DISSENTING SHARES IN REORGANIZATIONS; DEMAND
FOR PURCHASE; TIME; CONTENTS
(a) If, in the case of a reorganization, any shareholders of a corporation
have a right under Section 1300, subject to compliance with paragraphs (3) and
(4) of subdivision (b) thereof, to require the corporation to purchase their
shares for cash, such corporation shall mail to each such shareholder a notice
of the approval of the reorganization by its outstanding shares (Section 152)
within 10 days after the date of such approval, accompanied by a copy of
Sections 1300, 1302, 1303, 1304 and this section, a statement of the price
determined by the corporation to represent the fair market value of the
dissenting shares, and a brief description of the procedure to be followed if
the shareholder desires to exercise the shareholder's right under such sections.
The statement of price constitutes an offer by the corporation to purchase at
the price stated any dissenting shares as defined in subdivision (b) of Section
1300, unless they lose their status as dissenting shares under Section 1309.
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(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of
record by the shareholder which the shareholder demands that the corporation
purchase and shall contain a statement of what such shareholder claims to be the
fair market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market value
constitutes an offer by the shareholder to sell the shares at such price.
SEC. 1302. SUBMISSION OF SHARE CERTIFICATES FOR ENDORSEMENT; UNCERTIFICATED
SECURITIES
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder, the shareholder shall submit to the corporation at
its principal office or at the office of any transfer agent thereof, (a) if the
shares are certificated securities, the shareholder's certificates representing
any shares which the shareholder demands that the corporation purchase, to be
stamped or endorsed with a statement that the shares are dissenting shares or to
be exchanged for certificates of appropriate denomination so stamped or endorsed
or (b) if the shares are uncertificated securities, written notice of the number
of shares which the shareholder demands that the corporation purchase. Upon
subsequent transfers of the dissenting shares on the books of the corporation,
the new certificates, initial transaction statement, and other written
statements issued therefor shall bear a like statement, together with the name
of the original dissenting holder of the shares.
SEC. 1303. PAYMENT OF AGREED PRICE WITH INTEREST; AGREEMENT FIXING FAIR MARKET
VALUE; FILING; TIME OF PAYMENT
(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the fair
market value of any dissenting shares as between the corporation and the holders
thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount thereof
has been agreed or within 30 days after any statutory or contractual conditions
to the reorganization are satisfied, whichever is later, and in the case of
certificated securities, subject to surrender of the certificates therefor,
unless provided otherwise by agreement.
SEC. 1304. ACTION TO DETERMINE WHETHER SHARES ARE DISSENTING SHARES OR FAIR
MARKET VALUE; LIMITATION; JOINDER; CONSOLIDATION; DETERMINATION OF
ISSUES; APPOINTMENT OF APPRAISERS
(a) If the corporation denies that the shares are dissenting shares, or the
corporation and the shareholder fail to agree upon the fair market value of the
shares, then the shareholder demanding purchase of such shares as dissenting
shares or any interested corporation, within six months after the date on which
notice of the approval by the outstanding shares (Section 152) or notice
pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, but
not thereafter, may file a complaint in the superior court of the proper county
praying the court to determine whether the shares are dissenting shares or the
fair market value of the dissenting shares or both or may intervene in any
action pending on such a complaint.
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(b) Two or more dissenting shareholders may join as plaintiffs or be joined
as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues. If
the status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
SEC. 1305. REPORT OF APPRAISERS; CONFIRMATION; DETERMINATION BY COURT;
JUDGMENT; PAYMENT; APPEAL; COSTS
(a) If the court appoints an appraiser or appraisers, they shall proceed
forthwith to determine the fair market value per share. Within the time fixed by
the court, the appraisers, or a majority of them, shall make and file a report
in the office of the clerk of the court. Thereupon, on the motion of any party,
the report shall be submitted to the court and considered on such evidence as
the court considers relevant. If the court finds the report reasonable, the
court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a
report within 10 days from the date of their appointment or within such further
time as may be allowed by the court or the report is not confirmed by the court,
the court shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market value
of each dissenting share multiplied by the number of dissenting shares which any
dissenting shareholder who is a party, or who has intervened, is entitled to
require the corporation to purchase, with interest thereon at the legal rate
from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for the
shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than 125
percent of the price offered by the corporation under subdivision (a) of Section
1301).
SEC. 1306. PREVENTION OF IMMEDIATE PAYMENT; STATUS AS CREDITORS; INTEREST
To the extent that the provisions of Chapter 5 prevent the payment to any
holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.
SEC. 1307. DIVIDENDS ON DISSENTING SHARES
Cash dividends declared and paid by the corporation upon the dissenting
shares after the date of approval of the reorganization by the outstanding
shares (Section 152) and prior to payment for the shares by the corporation
shall be credited against the total amount to be paid by the corporation
therefor.
SEC. 1308. RIGHTS OF DISSENTING SHAREHOLDERS PENDING VALUATION; WITHDRAWAL OF
DEMAND FOR PAYMENT
Except as expressly limited in this chapter, holders of dissenting shares
continue to have all the rights and privileges incident to their shares, until
the fair market value of their shares is agreed upon or determined. A dissenting
shareholder may not withdraw a demand for payment unless the corporation
consents thereto.
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SEC. 1309. TERMINATION OF DISSENTING SHARE AND SHAREHOLDER STATUS
Dissenting shares lose their status as dissenting shares and the holders
thereof cease to be dissenting shareholders and cease to be entitled to require
the corporation to purchase their shares upon the happening of any of the
following:
(a) The corporation abandons the reorganization. Upon abandonment of
the reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter
all necessary expenses incurred in such proceedings and reasonable
attorneys' fees.
(b) The shares are transferred prior to their submission for
endorsement in accordance with Section 1302 or are surrendered for
conversion into shares of another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon
the status of the shares as dissenting shares or upon the purchase price of
the shares, and neither files a complaint or intervenes in a pending action
as provided in Section 1304, within six months after the date on which
notice of the approval by the outstanding shares or notice pursuant to
subdivision (i) of Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
SEC. 1310. SUSPENSION OF RIGHT TO COMPENSATION OR VALUATION PROCEEDINGS;
LITIGATION OF SHAREHOLDERS' APPROVAL
If litigation is instituted to test the sufficiency or regularity of the
votes of the shareholders in authorizing a reorganization, any proceedings under
Sections 1304 and 1305 shall be suspended until final determination of such
litigation.
SEC. 1311. EXEMPT SHARES
This chapter, except Section 1312, does not apply to classes of shares
whose terms and provisions specifically set forth the amount to be paid in
respect to such shares in the event of a reorganization or merger.
SEC. 1312. RIGHT OF DISSENTING SHAREHOLDER TO ATTACK, SET ASIDE OR RESCIND
MERGER OR REORGANIZATION; RESTRAINING ORDER OR INJUNCTION;
CONDITIONS
(a) No shareholder of a corporation who has a right under this chapter to
demand payment of cash for the shares held by the shareholder shall have any
right at law or in equity to attack the validity of the reorganization or
short-form merger, or to have the reorganization or short-form merger set aside
or rescinded, except in an action to test whether the number of shares required
to authorize or approve the reorganization have been legally voted in favor
thereof; but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event of
a reorganization or short-form merger is entitled to payment in accordance with
those terms and provisions or, if the principal terms of the reorganization are
approved pursuant to subdivision (b) of Section 1202, is entitled to payment in
accordance with the terms and provisions of the approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash for
such shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or short-form
merger or to have the reorganization or short-form merger set aside or
rescinded, the shareholder shall not thereafter have any right to demand payment
of cash for the shareholder's shares pursuant to this chapter. The court in any
action attacking the validity of the reorganization or short-form merger or to
have the reorganization or short-form merger set aside or rescinded shall not
restrain or enjoin the consummation of the transaction except upon 10 days'
prior notice to the corporation and upon a
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determination by the court that clearly no other remedy will adequately protect
the complaining shareholder or the class of shareholders of which such
shareholder is a member.
(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable as
to the shareholders of any party so controlled.
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APPENDIX D
PROPOSED AMENDMENTS TO ARTICLES
OF INCORPORATION
OF
FRANKLIN SELECT REAL ESTATE INCOME FUND
Article First shall be amended to read as follows:
"The name of this corporation is: FRANKLIN SELECT REALTY TRUST."
Article Fourth (d)(i) shall be amended to read as follows:
"(i) Dividends. Holders of the Common Stock, Series A shall be
entitled to receive dividends, when and as declared by the board of
directors out of any assets at the time legally available therefor. No
dividends shall be paid or other distributions made with respect to the
Common Stock, Series B during any fiscal year of this corporation (other
than distributions of net proceeds from the sale, financing or refinancing
of real property of the corporation distributed in accordance with
paragraph (d)(ii) below and dividends payable solely in Common Stock,
Series B)."
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APPENDIX E
AMENDED AND RESTATED
BYLAWS
OF
FRANKLIN SELECT REALTY TRUST
ARTICLE I
THE COMPANY; DEFINITIONS
1.1 Name. The name of the corporation is FRANKLIN SELECT REALTY TRUST and
is referred to in these Bylaws as the "Company." As far as practicable and
except as otherwise provided in the Organization Documents, the Directors shall
direct the management of the business and the conduct of the affairs of the
Company, execute all documents and sue or be sued in the name of the Company. If
the Directors determine that the use of that name is not practicable, legal or
convenient, they may use such other designation or may adopt another name under
which the Company may hold property or conduct all or part of its activities.
If Franklin Properties, Inc., or any parent, subsidiary, Affiliate or
successor of such corporation shall cease, for any reason, to render to the
Company the services of Advisor pursuant to the agreement referred to in Article
VII and any renewal or extension of said agreement, then the Directors shall,
upon request of Franklin Resources, Inc., or its successor, promptly cause the
Articles of Incorporation and these Bylaws to be amended to change the name of
the Company to one which does not include any reference to "Franklin" or any
approximation or abbreviation of that name.
1.2 Nature of Company. The Company is a corporation organized under the
laws of the State of California. It is intended that the Company shall carry on
business as a "real estate investment trust" ("REIT").
1.3 Definitions. Whenever used in these Bylaws, the terms defined in this
Section 1.3 shall, unless the context otherwise requires, have the respective
meanings specified in this Section 1.3. In these Bylaws, words in the singular
number include the plural and in the plural number include the singular.
(a) Advisor. Franklin Properties, Inc. or any other Person appointed
or employed by or who contracted with the Company under the provisions of
Article VII, and who is responsible for directing or performing the
day-to-day business affairs of the Company.
(b) Affiliate. As to any Person, (i) any other Person directly or
indirectly controlling, controlled by or under common control with such
Person, (ii) any other Person owning or controlling 10% or more of the
outstanding voting securities or beneficial interests of such Person, (iii)
any officer, director, trustee or general partner of such Person and (iv)
if such other Person is an officer, director, trustee or partner of another
entity, then the entity for which that Person acts in any such capacity.
(c) Annual Meeting of Shareholders. As set forth in Section 3.2.
(d) Annual Report. As set forth in Section 10.6.
(e) Appraisal. The value as of the date of the appraisal of real
property in its existing state or in a state to be created as determined by
the Directors, the Advisor or by a disinterested person, having no economic
interest in the real property, who is a member in good standing of a
nationally recognized society of appraisers or who in the sole judgment of
the Directors is properly qualified to make such a determination. The
Directors may in good faith rely on a previous Appraisal made on behalf of
another Person, provided, (i) it meets the standards of this definition and
was made in connection with an investment in which the Company acquires the
entire or a participating interest, and (ii) it was prepared not earlier
than two years prior to the acquisition by the Company of its interest in
the real property. In appraising properties, appraisers may take into
consideration each of the specific terms and conditions of a purchase,
including any leaseback or other guarantee arrangement. The Appraisal may
not necessarily represent the cash value of the property but may consider
the value of the income stream from such
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property plus the discounted value of the fee interest and other terms of
the purchase. Such Appraisal shall be obtained from an independent
qualified appraiser if a majority of the Independent Directors so decides
or if the transaction is with the Advisor, Directors or any of their
Affiliates, and such Appraisal shall be maintained in the Company's records
for a minimum of five (5) years and shall be available for inspection and
duplication by any Shareholder.
(f) Asset Coverage. The ratio which the value of the total assets of
the Company, less all liabilities and indebtedness (other than unsecured
borrowings) bears to the aggregate amount of all unsecured borrowings of
the Company.
(g) Average Invested Assets. The average of the aggregate book value
of the assets of the Company invested, directly or indirectly, in equity
interests in and loans secured by real estate, before reserves for
depreciation or bad debts or other similar non-cash reserves computed by
taking the average of such values at the end of each month during any
period.
(h) Bylaws. These Bylaws, including all amendments, restatements, or
modifications.
(i) Directors. As of any particular time, the Directors of the
Company holding office at such time.
(j) Independent Director. A Director of the Company who is not
affiliated, directly or indirectly, with the Advisor whether by ownership
of, ownership interest in, employment by, any material business or
professional relationship with or service as an officer or director of the
Advisor, or an affiliated business entity of the Advisor (other than as an
independent director of another real estate investment trust advised by the
Advisor or as an "independent director" (as required by the Investment
Company Act of 1940, as amended) of any mutual fund advised by an affiliate
of the Advisor), and who performs no other services for the Company. An
indirect relationship shall include circumstances in which a member of the
immediate family of a Director has one of the foregoing relationships with
the Advisor or the Company.
(k) Net Assets. The total assets of the Company (other than
intangible assets) at cost before deducting depreciation or other non-cash
reserves less total liabilities, calculated at least quarterly on a basis
consistently applied.
(l) Net Income. The total revenues of the Company for any period,
computed on the basis of its results of operations for that period, after
deduction of all expenses other than additions to reserves for depreciation
or bad debts or other similar non-cash reserves.
(m) Offering and Organization Expenses. Those expenses incurred in
connection with and in preparing the Series A Shares of the Company for
registration and subsequently offering and distributing the Series A Shares
to the public, excluding sales commissions of broker-dealers in connection
with the distribution of the Series A Shares paid out of the proceeds from
the issuance of the Series B Shares.
(n) Operating Expenses. The aggregate annual expenses of every
character regarded as Operating Expenses in accordance with generally
accepted accounting principles, as determined by independent accountants
selected by the directors, including regular compensation payable to the
Advisor, excluding, however, the following: (i) the cost of money borrowed
by the Company; (ii) taxes on income and taxes and assessments on real
property and all other taxes applicable to the Company; (iii) expenses of
acquiring, financing, refinancing, disposing of, maintaining, managing and
owning real estate equity interests or other property (including the costs
of legal services, brokerage and sales commissions, maintenance, repair and
improvement of property); (iv) insurance as required by the Directors
(including directors' and officers' liability insurance); (v) expenses of
organizing, revising, amending, converting, or terminating the Company;
(vi) expenses connected with payments of dividends or interest or
distributions in cash or any other form made or caused to be made by the
Directors to holders of Securities of the Company; (vii) all expenses
connected with communications to holders of Securities of the Company and
the other bookkeeping and clerical work necessary in maintaining relations
with holders of Securities of the Company, including the cost of printing
and mailing certificates for Securities and proxy solicitation materials
and reports to holders of Securities of the Company; (viii) transfer
agent's, registrar's, dividend disbursing agent's, dividend reinvestment
plan agent's and indenture trustee's
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fees and charges; (ix) other legal, accounting and auditing fees and
expenses; and (x) non-cash expenditures (including depreciation,
amortization and bad debt reserve).
(o) Organization Documents. The Articles of Incorporation of the
Company and these Bylaws.
(p) Person. An individual, corporation, partnership, joint venture,
association, company, trust, bank or other entity, or government and any
agency and political subdivision of a government.
(q) REIT. A real estate investment trust, as defined in Sections
856-860 of the Internal Revenue Code of 1986, as amended.
(r) REIT Provisions of the Internal Revenue Code. Part II, Subchapter
M of Chapter 1, of the Internal Revenue Code of 1986, as amended, or
successor statutes, and regulations and rulings promulgated thereunder.
(s) Securities. Any stock, shares, voting trust certificates, bonds,
debentures, notes or other evidences of indebtedness, secured or unsecured,
convertible, subordinated or otherwise or in general any instruments
commonly known as "securities" or any certificates of interest, shares or
participations in temporary or interim certificates for, receipts for,
guarantees of, or warrants, options or rights to subscribe to, purchase or
acquire any of the foregoing.
(t) Shares. All of the shares of the common stock of Company, which
shall be all of one class called "Common Stock," and which shall include
all of the Series A Shares and all of the Series B Shares, as designated in
the Company's Articles of Incorporation.
(u) Series A Shares. The shares of Common Stock, Series A, of the
Company.
(v) Series B Shares. The shares of Common Stock, Series B, of the
Company.
(w) Shareholders. As of any particular date, all holders of record of
outstanding Shares at such time.
(x) Unimproved Real Property. Property which has the following three
characteristics: (1) an equity interest in property which was not acquired
for the purpose of producing rental or other operating income, (2) has no
development or construction in process on such land, and (3) no development
or construction on such land is planned in good faith to commence on such
land within one year.
(y) Working Capital Reserves. Cash reserves of the Company as needed
for normal operations, repairs, maintenance, and other contingencies.
ARTICLE II
OFFICES
2.1 Principal Office. The principal executive office of the Company is
hereby fixed and located at 777 Mariners Island Boulevard, City of San Mateo,
State of California. The Board of Directors is hereby granted full power and
authority to change the principal office from one location to another within or
without that County.
2.2 Other Offices. Other offices may at any time be established by the
Board of Directors at any place or places they deem appropriate.
ARTICLE III
MEETINGS OF SHAREHOLDERS
3.1 Place of Meetings. All annual and all other meetings of Shareholders
shall be held at the principal office of the Company, or at any other place
within or without the State of California which may be designated by the Board
of Directors.
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3.2 Annual Meetings. The Annual Meetings of Shareholders shall be held on
such date as is fixed by the Directors; provided, however, that such date shall
not be less than 30 days after the Board of Directors shall have caused to be
sent to the Shareholders an Annual Report as provided in Section 10.6 of these
Bylaws and that if the date fixed by the Directors falls upon a legal holiday,
then any annual meeting of Shareholders shall be held at the same time and place
on the next day which is not a legal holiday. At Annual Meetings, Directors
shall be elected, reports of the affairs of the Company shall be considered, and
any other business may be transacted which is within the powers of the
Shareholders.
3.3 Special Meetings. Special meetings of the Shareholders may be called
at any time for any purpose or purposes whatsoever by the President, by a
majority of the Board of Directors, by a majority of Independent Directors, by
the Chairman of the Board or by one or more Shareholders holding not less than
ten percent (10%) of the eligible votes. If a meeting is called by any Person or
Persons other than the Board of Directors, the Chairman of the Board or the
President, a request shall be made in writing, specifying the time of the
meeting and the general nature of the business proposed to be transacted, and
shall be delivered personally or sent by registered mail or by telegraphic or
other facsimile transmission to the Chairman of the Board, the President, or the
Secretary of the Company. The officer receiving the request shall cause notice
to be promptly given to the Shareholders entitled to vote, in accordance with
the provisions of Section 3.4.
3.4 Notice: Affidavit of Notice. Notice of meetings of the Shareholders of
the Company shall be given in writing to each Shareholder entitled to vote
thereat, either personally or by first-class mail, or, if the Company has 500 or
more Shareholders, by third-class mail, or other means of written communication,
charges prepaid, addressed to the Shareholder at his address appearing on the
books of the Company or given by the Shareholder to the Company for the purpose
of notice. Notice of any such meeting of Shareholders shall be sent to each
Shareholder entitled thereto not less than ten (10) nor more than sixty (60)
days before the meeting; provided however, that within ten (10) business days
after receipt by the Company, in person, or by registered mail, of a written
request for a meeting by the Shareholders holding not less than ten percent
(10%) of the outstanding Shares entitled to vote at such meeting, the Company
shall provide written notice of such meeting to all Shareholders, and such
meeting shall be held not less than twenty (20) nor more than sixty (60) days
after the Company's receipt of such written Shareholder request; and, provided
further, that if such notice is not given within ten (10) business days after
receipt of the request, the Person or Persons requesting the meeting may give
the notice. The ten (10) business day time period may be extended for a
reasonable time period as determined by the Board of Directors to allow the
Board to solicit proxies in connection with the giving of notice of any such
meeting. Nothing contained in this Section 3.4 shall be construed as limiting,
fixing or affecting the time when a meeting of Shareholders called by action of
the Board of Directors may be held. All notices given pursuant to this Section
shall state the place, date and hour of the meeting and, (1) in the case of
special meetings, the general nature of the business to be transacted, and no
other business may be transacted, or (2) in the case of annual meetings, those
matters which the Board of Directors, at the time of the mailing of the notice,
intends to present for action by the Shareholders, and (3) in the case of any
meeting at which directors are to be elected, the names of the nominees intended
at the time of the mailing of the notice to be presented by management for
election. An affidavit of the mailing or other means of giving any notice of any
Shareholders' meeting shall be executed by the Secretary, Assistant Secretary or
any transfer agent of the Company giving the notice, and shall be filed and
maintained in the minute book of the Company.
3.5 Record Date for Shareholder Notice, Voting and Giving Consents. For
purposes of determining the Shareholders entitled to notice of any meeting or to
vote or entitled to give consent to corporation action with a meeting, the Board
of Directors may fix, in advance, a record date, which shall not be more than
sixty (60) days nor less than ten (10) days before the date of any meeting nor
more than sixty (60) days before any action without a meeting, and in this event
only Shareholders of record on the date so fixed are entitled to notice and to
vote or to give consents, as the case may be, notwithstanding any transfer of
any Shares on the books of the Company after the record date, except as
otherwise provided in the California General Corporation Law.
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If the Board of Directors does not so fix a record date:
(a) The record date for determining Shareholders entitled to notice of or
to vote at a meeting of Shareholders shall be at the close of business on the
business day next preceding the day on which notice is given or, if notice is
waived, at the close of business on the business day next preceding the date on
which the meeting is held.
(b) The record date for determining Shareholders entitled to give consent
to corporate action in writing without a meeting, (i) when no prior action by
the Board has been taken, shall be the day on which the first written consent is
given, or (ii) when prior action of the Board has been taken, shall be at the
close of business on the day on which the Board adopts the resolution relating
to that action, or the sixtieth (60th) day before the date of an action not
initiated by the Board, whichever is later.
3.6 Adjourned Meeting Notice. Any Shareholders' meeting, annual or
special, whether or not a quorum is present, may be adjourned from time to time
by the vote of the majority of the Shares, the holders of which are either
present in person or represented by proxy, but in the absence of a quorum no
other business may be transacted at the meeting.
When any Shareholders' meeting, either annual or special, is adjourned for
more than forty-five (45) days or if after the adjournment a new record date is
filed for the adjourned meeting, notice of the adjourned meeting shall be given
as in the case of a special meeting. In all other cases, it shall not be
necessary to give any notice of an adjournment or of the business to be
transacted at an adjourned meeting other than by announcement at the meeting at
which the adjournment is taken.
3.7 Voting at Meetings of Shareholders. Subject to the provisions of
Sections 702 through 704, inclusive, of the California Corporations Code, and
subject to the right of the Board of Directors to provide otherwise, only
persons in whose name Shares entitled to vote standing on the stock records of
the Company on the record date shall be entitled to the notice of and to vote at
the meeting, notwithstanding any transfer of any Shares on the books of the
Company after the record date.
The vote may be viva voce or by ballot; provided, however, that all
elections for Directors must be by ballot upon demand made by any Shareholder at
any election and before the voting begins. Except as provided in this Section
3.7, each outstanding Share shall be entitled to one vote on each matter
submitted to a vote of Shareholders. Every Shareholder entitled to vote at any
election for Directors shall have the right to cumulate his votes and give one
candidate a number of votes equal to the number of Directors to be elected,
multiplied by the number of votes to which his Shares are entitled, or to
distribute his votes on the same principle among as many candidates as he shall
think fit; provided that the names of the candidate or candidates for whom the
Shareholder votes have been placed in nomination prior to the voting and that at
least one Shareholder has given notice prior to the voting of an intention to
cumulate votes. The candidates receiving the highest number of votes up to the
number of Directors to be elected shall be elected.
3.8 Quorum. The presence in person or by proxy of a majority of the Shares
entitled to vote at any meeting shall constitute a quorum for the transaction of
business. Except as provided in the next sentence, the affirmative vote of a
majority of the Shares represented and voting at a duly held meeting at which a
quorum is present shall be an act of the Shareholders, unless a vote of a
greater number is required by the Articles of Incorporation, these Bylaws or by
the California Corporations Code. The Shareholders present at a duly called or
held meeting at which a quorum is present may continue to do business until
adjournment, notwithstanding the withdrawal of enough Shareholders to leave less
than a quorum, if any action taken (other than adjournment) is approved by at
least a majority of the Shares required to constitute a quorum.
3.9 Waiver of Notice or Consent of Absent Shareholders. The transactions
of any meeting of Shareholders, either annual or special, however called and
noticed, shall be as valid as though had at a meeting duly held after regular
call and notice if a quorum is present either in person or by proxy and if,
either before or after the meeting, each of the Shareholders entitled to vote,
not present in person or by proxy, signs a written waiver of notice or a consent
to the holding of the meeting or an approval of the minutes. All waivers,
consents or approvals shall be filed with the corporate records or made a part
of the minutes of the meeting.
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3.10 Action Without Meeting. Except as elsewhere provided in this Section
3.10, any action which may be taken at any annual or special meeting of
Shareholders may be taken without a meeting and without prior notice, if a
consent in writing, setting forth the action so taken, shall be signed by the
holders of outstanding Shares having not less than the minimum number of votes
that would be necessary to authorize or take such action at a meeting at which
all Shares entitled to vote were present and voted. However, Directors may not
be elected by written consent except by unanimous written consent of all Shares
entitled to vote for the election of Directors.
Any Shareholder giving a written consent, or the Shareholder's proxyholder,
or a transferee of the Shares or a personal representative of the Shareholder or
its respective proxyholder, may revoke the consent by a writing received by the
Company prior to the time that written consents of the number of Shares required
to authorize the proposed action have been filed with the Secretary of the
Company, but may not do so thereafter. The revocation is effective upon its
receipt by the Secretary of the Company.
Unless the consents of all Shareholders entitled to vote have been
solicited in writing:
(a) Notice of any Shareholder approval without a meeting by less than
unanimous written consent regarding certain transactions relating to conflicts
of interest of officers or Directors, indemnification of Company agents,
reorganizations, and plans of distribution on liquidation, only to the extent
that those four subjects are treated in California Corporations Code Sections
310, 317, 1201 and 2007 shall be given at least ten (10) days before the
consummation of the action authorized by that approval, and
(b) Prompt notice shall be given of the taking of any other corporate
action approved by Shareholders without a meeting by less than unanimous written
consent, to those Shareholders entitled to vote who have not consented in
writing. This notice shall conform to the requirements of Section 3.4(a).
Any form of written consent distributed to ten (10) or more Shareholders
must afford the Person whose consent is thereby solicited an opportunity to
specify a choice among approval, disapproval or abstention as to each matter or
group of related matters presented, other than elections of Directors or
officers.
3.11 Proxies. Every person entitled to vote or execute consents shall have
the right to do so either in person or by one or more agents authorized by a
written proxy executed by such person or his duly authorized agent and filed
with the Secretary of the Company, provided that no such proxy shall be valid
after the expiration of eleven (11) months from the date of its execution,
unless the person executing it specifies in the proxy the length of time for
which the proxy is to continue in force.
A proxy shall be deemed signed if the Shareholder's name is placed on the
proxy (whether by manual signature, typewriting, telegraphic transmission or
otherwise) by the Shareholder or the Shareholder's attorney in fact. A validly
executed proxy which does not state that it is irrevocable shall continue in
full force and effect unless revoked by the Person executing it before the vote
pursuant to that proxy by (1) a writing delivered to the Company stating that
the proxy is revoked, (2) execution of a subsequent proxy, (3) attendance at the
meeting and voting in person (but only as to any items on which the Shareholder
chooses to vote in person), or (4) transfer of the Shares represented by the
proxy to a transferee who becomes a Shareholder of record prior to the record
date established for the vote. A validly executed proxy otherwise may be revoked
by written notice of the death or incapacity of the maker of that proxy received
by the Company before the vote pursuant to that proxy is counted. The
revocability of a proxy that states on its face that it is irrevocable shall be
governed by the provisions of Section 705(e) and 705(f) of the Corporations Code
of California.
Any proxy distributed to ten (10) or more Shareholders must afford the
Person voting an opportunity to specify a choice among approval, disapproval or
abstention as to each matter or group of related matters, other than election of
Directors or officers.
3.12 Inspectors of Election. Before any meeting of Shareholders, the Board
of Directors may appoint any Persons other than nominees for office to act as
inspectors of election at the meeting or its adjournment. If no inspectors of
election are so appointed, the Chairman of the meeting may, and on the request
of any Shareholder or a Shareholder's proxy shall, appoint inspectors of
election at the meeting. The number of
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inspectors shall be either one (1) or three (3). If inspectors are appointed at
a meeting on the request of one or more Shareholders or proxies, the holders of
a majority of Shares or their proxies present at the meeting shall determine
whether one (1) or three (3) inspectors are to be appointed. If any Person
appointed as inspector fails to appear or fails or refuses to act, the Chairman
of the meeting may, and upon the request of any Shareholder or a Shareholder's
proxy shall, appoint a Person to fill that vacancy.
These inspectors shall:
(a) Determine the number of Shares outstanding and the voting power of
each, the shares represented at the meeting, the existence of a quorum, and the
authenticity, validity and effect of proxies;
(b) Receive votes, ballots or consents;
(c) Hear and determine all challenges and questions in any way arising in
connection with the right to vote;
(d) Count and tabulate all votes or consents;
(e) Determine when the polls shall close;
(f) Determine the result; and
(g) Do any other acts that may be proper to conduct the election or vote
with fairness to all Shareholders.
ARTICLE IV
DIRECTORS
4.1 Powers. Subject to limitations of the Articles of Incorporation, of
the Bylaws and of the California Corporations Code relating to action required
to be authorized or approved by the Shareholders, or by the outstanding Shares,
and subject to the duties of Directors as prescribed by the Bylaws, all
corporate powers shall be exercised by or under the authority of, and the
business and affairs of the Company shall be controlled by, the Board of
Directors. The Board of Directors may delegate the management of the day-to-day
operation of the business of the Company to the Advisor, provided that the
business and affairs of the Company shall be managed and all corporate powers
shall be exercised under the ultimate direction of the Board of Directors. The
Board of Directors shall establish written policies on investments and borrowing
and shall monitor the administrative procedures, investment, operations and
performance of the Company and the Advisor, to assure that such policies are
carried out.
Each individual Director, including each Independent Director, may engage
in other business activities of the type conducted by the Company and are not
required to present to the Company any investment opportunities presented to
them, even though the investment opportunities may be within the Company's
investment policies.
In the event that it shall become necessary to engage the services of a
successor Advisor to Franklin Properties, Inc., the Board of Directors shall
affirmatively determine that such successor Advisor possesses sufficient
qualifications to perform the functions required of the Advisor and to justify
the compensation provided for in such successor Advisor's contract with the
Company.
4.2 Number, Tenure and Qualifications. The authorized number of Directors
of the Board of Directors shall be not less than five (5) nor more than nine (9)
as shall be determined from time to time by resolution of the Board of
Directors.
Directors shall hold office until the next Annual Meeting of Shareholders
and until their respective successors are elected. If any such annual meeting is
not held, or the Directors are not elected, the Directors may be elected at any
special meeting of Shareholders held for that purpose.
Each individual Director, including each Independent Director, shall have
at least three (3) years of relevant experience demonstrating the knowledge and
experience required to successfully acquire and manage
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the type of assets being acquired by the Company, and as set forth in Section
4.14, at least one (1) Independent Director shall have relevant real estate
experience. Directors need not be Shareholders.
4.3 Vacancies. Vacancies in the Board of Directors may be filled by a
majority of the remaining Directors, though less than a quorum, or by a sole
remaining Director, except that a vacancy created by the removal of a Director
by the vote or written consent of the Shareholders or by court order may be
filled only by the vote of a majority of the Shares entitled to vote represented
at a duly held meeting at which a quorum is present, or by the written consent
of holders of a majority of the outstanding Shares entitled to vote. Each
Director so elected shall hold office until his successor is elected at an
annual or a special meeting of the Shareholders.
A vacancy or vacancies in the Board of Directors shall be deemed to exist
in case of the death, resignation or removal of any Director or if the
authorized number of Directors be increased or if the Shareholders fail, at any
annual or special meeting of Shareholders at which any Director or Directors are
elected, to elect the full authorized number of Directors to be voted for at
that meeting.
Any Director may resign effective on giving written notice to the Chairman
of the Board, the President, the Secretary or the Board of Directors. The
Shareholders may elect a Director or Directors at any time to fill any vacancy
or vacancies not filled by the Directors. Any election by, written consent to
fill a vacancy shall require the consent of a majority of the outstanding Shares
entitled to vote.
If the Board of Directors accepts the resignation of a Director tendered to
take effect at a future time, the Board or the Shareholders shall have the power
to elect a successor to take office when the resignation is to become effective;
provided, however, that any remaining Independent Directors shall nominate
replacements for vacancies among the Independent Director positions.
No reduction of the authorized number of Directors shall have the effect of
removing any Director prior to the expiration of his term of office.
If the number of vacancies occurring during a year is sufficiently large
that a majority of the Directors in office has not been elected by the
Shareholders, the holders of five percent (5%) or more of the outstanding Shares
entitled to vote may call a special meeting of Shareholders to elect the entire
Board of Directors.
4.4 Place of Meeting. Regular meetings of the Board of Directors shall be
held at any place within or without the State of California which has been
designated from time to time by the Chairman of the Board or by written consent
of all members of the Board. In the absence of a designation, regular meetings
shall be held at the principal office of the Company. Special meetings of the
Board may be held either at a place so designated or at the principal office.
Members of the Board may participate in a meeting through use of conference
telephone or similar communication equipment, so long as all members
participating in such meeting can hear one another. Participation in a meeting
by telephone or communication equipment shall constitute presence in person at
the meeting.
4.5 Organization Meeting. Immediately following each annual meeting of
Shareholders, the Board of Directors shall hold a regular meeting for the
purpose of organization, election of officers and the transaction of other
business. Notice of that meeting is hereby dispensed with.
4.6 Special Meetings. Special meetings of the Board of Directors for any
purpose or purposes shall be called at any time by the Chairman of the Board or
the President or Vice President or the Secretary or any two Directors.
Written notice of the time and place of special meetings shall be delivered
personally to the Directors or sent to each Director by mail or by other form of
written communication, charges prepaid, addressed to him at his address as it
appears upon the records of the Company or, if it is not so shown or is not
readily ascertainable, at the place in which the meetings of Directors are
regularly held. In case the notice is mailed, it shall be deposited in the
United States mail in the place in which the principal office of the Company is
located at least four (4) days prior to the time of the meeting. In case the
notice is delivered personally, telegraphed or by electronic means, it shall be
so delivered, deposited with the telegraph company or
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communicated at least forty-eight (48) hours prior to the time of the meeting.
Mailing, telegraphing or delivery, as above provided, shall be due, legal and
personal notice to the Director.
4.7 Adjournment. A majority of the Directors present, whether or not a
quorum is present, may adjourn any Directors' meeting to another time and place.
4.8 Notice of Adjournment. If a meeting is adjourned for more than
twenty-four (24) hours, notice of any adjournment to another time or place shall
be given prior to the time of the adjourned meeting to the Directors who were
not present at the time of adjournment.
4.9 Entry of Notice. Whenever any Director has been absent from any
special meeting of the Board of Directors, an entry in the minutes to the effect
that notice has been duly given shall be conclusive and incontrovertible
evidence that due notice of the special meeting was given to that Director as
required by law and the Bylaws of the Company.
4.10 Waiver of Notice. The transactions of any meeting of the Board of
Directors, however called and noticed, or wherever held, shall be as valid as
though had at a meeting duly held after regular call and notice if a quorum is
present and if, either before or after the meeting, each of the Directors not
present signs a written waiver of notice of or consent to holding the meeting or
an approval of the minutes. All waivers, consents or approvals shall be filed
with the corporate records or made a part of the minutes of the meeting.
4.11 Quorum. A majority of the authorized number of Directors shall be
necessary to constitute a quorum for the transaction of business, except to
adjourn as provided below or to fill a vacancy. Every act or decision done or
made by a majority of the Directors at a meeting duly held at which a quorum is
present shall be regarded as an act of the Board of Directors unless a greater
number be required by law or by the Articles of Incorporation or these Bylaws.
However, a meeting at which a quorum is initially present may continue to
transact business notwithstanding the withdrawal of Directors, if any action
taken is approved by at least a majority of the required quorum for the meeting.
4.12 Fees and Compensation. The Directors shall be entitled to receive
such reasonable compensation for their services as Directors as the Directors
may fix or determine from time to time by resolution of the Board of Directors;
provided, however, that Directors and officers of the Company who are affiliated
with the Advisory Company shall not receive compensation from the Company for
their services as Directors or officers of the Company. The Directors, either
directly or indirectly, shall also be entitled to receive remuneration for
services rendered to the Company in any other capacity. Those services may
include, without limitation, services as an officer of the Company, legal,
accounting or other professional services, or, services as a broker, transfer
agent or underwriter, whether performed by a Director or any person affiliated
with a Director.
4.13 Action Without Meeting. Any action required or permitted to be taken
by the Board of Directors under the California General Corporation Law and these
By-laws may be taken without a meeting if all members of the Board individually
or collectively consent in writing to such action. The consent or consents shall
be filed with the minutes of the meetings of the Board. Any certificate or other
document filed under the provision of the California General Corporation Law
which relates to action so taken shall state that the action was taken by
unanimous written consent of the Board of Directors without a meeting.
4.14 Independent Directors. After the effective date of the Company's
Registration Statement relating to the initial public offering of shares of
Common Stock, Series A, a majority of the Directors of the Company, and a
majority of the members of any Company committee, will at all times be
Independent Directors, except during the 60 days following the departure of an
Independent Director. Successor Independent Directors will be nominated by any
remaining Independent Directors. At least one (1) of the Independent Directors
shall have had three (3) years of actual direct experience in acquiring or
managing the type of real estate to be acquired by the Company for his or her
account or as an agent. Notwithstanding any other provision of these Bylaws, the
Independent Directors, in addition to their other duties, to the extent that
they may legally do so, shall:
(a) Monitor the relationship of the Company with the Advisor. In this
regard, the Independent Directors as a group, in addition to all Directors
as a group, will monitor the Advisor's performance of the
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Advisory Agreement and will determine at least annually that the Advisor's
compensation is reasonable in relation to the nature and quality of
services performed. This determination will be based on (i) the size of the
advisory fee in relationship to the size, composition and profitability of
the invested assets; (ii) the investment opportunities generated by the
Advisor; (iii) advisory fees paid to other advisors by other real estate
investment trusts and to advisors performing similar services by investors
other than real estate investment trusts; (iv) additional revenues realized
by the Advisor and its Affiliates through their relationship with the
Company, including loan administration, underwriting or broker commissions,
servicing, engineering, inspection and other fees, whether paid by the
Company or by others with whom the Company does business; (v) the quality
and extent of service and advice furnished by the Advisor; (vi) the
performance of the investment portfolio of the Company, including income,
conservation or appreciation of capital, frequency of problem investments
and competence in dealing with distress situations; (vii) quality of the
portfolio of the Company in relationship to the investments generated by
the Advisor for its own account; and (viii) all other factors the
Independent Directors may deem relevant. The Independent Directors will
also determine that the Advisor's compensation is within the limits
prescribed by Section 7.6 and 7.7.
The Independent Directors shall approve all transactions between the
Company and the Advisor or any Affiliates of the Company or the Advisor.
The material terms and circumstances of all such approved transactions
shall be fully disclosed in the Annual Report of the Company as required by
Section 10.6, and the Independent Directors shall examine and comment in
the Annual Report on the fairness of such transactions.
(b) Review at least annually the Company's investment policies to
determine that they remain in the best interests of the Shareholders. The
findings of the Independent Directors shall be set forth in the minutes of
meetings of the Board of Directors. Such investment policies may be altered
from time to time by the Board of Directors with the consent of a majority
of the Independent Directors and without approval of the Shareholders upon
a determination that such a change is in the best interests of the Company
and the Shareholders.
(c) Take reasonable steps to ensure that the Annual Report is sent to
Shareholders and that the Annual Meeting is conducted pursuant to Article
III.
(d) Approve the standards for selection of qualified independent real
estate appraisers to determine the fair market value of all property to be
acquired by the Company, whose Appraisal shall be the basis of the
consideration to be paid by the Company for such property.
(e) Determine at least annually that the total fees and expenses of
the Company are reasonable in light of its net assets and net income, the
investment experience of the Company, and the fees and expenses of
comparable advisors in real estate, in this regard, the Independent
Directors will have the fiduciary responsibility of limiting Operating
Expenses to amounts that do not exceed the limitation set forth in Section
7.5, unless they conclude that a higher level of expense is justified based
on unusual, nonrecurring or other factors which they deem sufficient.
(f) The Independent Directors shall review at least quarterly the
aggregate borrowings, secured and unsecured, of the Company to determine
that the relation of such borrowings to net assets does not exceed the
limitations set forth in Section 8.1(h) and (i) of Article VIII of these
Bylaws.
(g) Approve the acquisition of any property in exchange for Securities
of the Company.
(h) For all purposes, a transaction which is subject to approval by
the Independent Directors shall be set forth in the minutes and shall be
approved if the Independent Directors voting to approve the transaction in
any vote of the Directors, constitute an absolute majority of all
Independent Directors serving at such time.
4.15 Removal of Director for Cause. The Board of Directors may declare
vacant the office of a Director who has been declared of unsound mind by an
order of court, or who has pled guilty or nolo contendere to or been convicted
of a felony involving moral turpitude.
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4.16 Removal of Director Without Cause. Any or all Directors may be
removed without cause if such removal is approved by the affirmative vote of a
majority of the outstanding Shares entitled to vote at an election of Directors;
provided, however, that unless the entire Board is removed, no individual
Director may be removed when the votes cast against removal, or not consenting
in writing to such removal, would be sufficient to elect such Director if voted
cumulatively at an election at which the same total number of votes cast were
cast (or, if such action is taken by written consent, all shares entitled to
vote were voted) and the entire number of Directors authorized at the time of
the Director's most recent election were then being elected. Any reduction of
the authorized number of Directors shall not operate to remove any Director
prior to the expiration of such Director's term of office.
4.17 Committees. The Board of Directors may, by resolution adopted by a
majority of the authorized number of Directors, designate one or more
committees, each consisting of three (3) or more Directors, a majority of whom
shall be Independent Directors, to serve at the pleasure of the Board of
Directors. The Board of Directors may designate one or more Directors as
alternate members of any Committee, who may replace any absent member at any
meeting of the Committee. The appointment of members or alternate members of a
Committee requires the vote of a majority of the authorized number of Directors.
Any such Committee, to the extent provided in the resolution of the Board of
Directors, shall have all the authority of the Board of Directors in the
management of the business and affairs of the Company, except that no Committee
shall have authority to take any action with respect to (a) the approval of any
action requiring Shareholders' approval or approval of the outstanding Shares,
(b) the filling of vacancies on the Board or any Committee, (c) the fixing of
compensation of Directors for serving on the Board or a Committee, (d) the
adoption, amendment or repeal of Bylaws, (e) the amendment or repeal of any
resolution of the Board that by its express terms is not so amendable or
repealable, (f) a distribution to Shareholders, except at a rate or in a
periodic amount or within a price range determined by the Board, and (g) the
appointment of other Committees of the Board or the members thereof.
4.18 Fiduciary Relationship. The Directors of the Company have a fiduciary
relationship to the Shareholders as provided by applicable California law.
ARTICLE V
OFFICERS
5.1 Officers. The officers of the Company shall be as determined by the
Board of Directors and may include a Chairman of the Board, President,
Secretary, Chief Financial Officer (Treasurer) and such other officers with such
titles and duties as may be appointed in accordance with the provisions of
Section 5.3 of this Article. Any number of offices may be held by the same
person.
5.2 Election. The officers of the Company, except such officers as may be
appointed in accordance with the provisions of Section 5.3 or Section 5.5 of
this Article, shall be chosen annually by the Board of Directors to serve at the
pleasure of the Board of Directors, and each shall hold his office until he
shall resign or shall be removed or otherwise disqualified to serve or his
successor shall be elected and qualified. All officers serve at the will of the
Board of Directors and nothing in these Bylaws shall give any officer any
expectation or vesting of employment.
5.3 Subordinate Officers. The Board of Directors may appoint other
officers as the business of the Company may require, each of whom shall hold
office for the period, have the authority and perform the duties as are provided
in the Bylaws or as the Board of Directors may from time to time determine.
5.4 Removal and Resignation. Any officer may be removed, either with or
without cause, by a majority of the Directors at the time in office, at any
regular or special meeting of the Board or, except in the case of an officer
chosen by the Board of Directors, by any officer upon whom such power of removal
may be conferred by the Board of Directors.
Any officer may resign at any time by giving written notice to the Board of
Directors or to the Chairman, the President or to the Secretary of the Company.
A resignation shall take effect at the date of the receipt of
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the notice or any later time specified in the notice; and, unless otherwise
specified, the acceptance of the resignation shall not be necessary to make it
effective.
5.5 Vacancies. A vacancy in any office because of death, resignation,
removal, disqualification or any other cause shall be filled in the manner
prescribed in the Bylaws for regular appointments to such office.
5.6 Chairman of the Board. The Chairman of the Board, if one is
designated, shall be the Chief Executive Officer of the Company, and, if
present, preside at all meetings of the Board of Directors and Shareholders and
exercise and perform all other powers and duties as may from time to time be
assigned to him by the Board of Directors or prescribed by the Bylaws.
5.7 President. The President shall, subject to the Board of Directors and
the supervisory powers of the Chairman of the Board, have general supervision,
direction and control of the business of the Company. He shall preside at
meetings of the Shareholders or at meetings of the Board of Directors if the
Chairman is absent. He shall have general powers and duties of management,
together with any other powers and duties as may be prescribed by the Board of
Directors. If no Chairman of the Board is designated, the President shall be the
Chief Executive Officer of the Company.
5.8 Vice Presidents. In the absence or disability of the President, the
Vice Presidents in order of their rank as filed by the Board of Directors or, if
not ranked, the Vice President designated by the Board of Directors, shall
perform all the duties of the President and, when so acting, shall have all the
powers of and be subject to, all the restrictions upon the President. The Vice
Presidents shall have any other powers and shall perform other duties as from
time to time may be prescribed for them respectively by the Board of Directors
or the Bylaws.
5.9 Secretary. The Secretary shall keep, or cause to be kept, a book of
minutes at the principal office, or any other place as the Board of Directors
may order, of all meetings of Directors and Shareholders, with the time and
place of holding, whether regular or special and, if special, how authorized,
the notice thereof given, the names of those present at Directors' meetings, the
number of Shares present or represented at Shareholders' meetings and the
proceedings of meetings.
The Secretary shall keep, or cause to be kept, at the principal office or
at the office of the Company's transfer agent, a Share register or a duplicate
Share register showing the names of the Shareholders and their addresses, the
number and classes of Shares held by each (whether in certificate or unissued
certificate form), the number and the date of certificates issued, if any, and
the number and date of cancellation of every certificate surrendered for
cancellation.
The Secretary shall give, or cause to be given, notice of all the meetings
of the Shareholders and of the Board of Directors required by the Bylaws or by
law to be given, shall keep the seal of the Company in safe custody and shall
have such other powers and shall perform such other duties as may be prescribed
by the Board of Directors or the Bylaws.
5.10 Assistant Secretaries. In the absence or disability of the Secretary,
the Assistant Secretaries in order of their rank as filed by the Board of
Directors or, if not ranked, the Assistant Secretary designated by the Board of
Directors, shall perform all the duties of the Secretary and, when so acting,
shall have all the powers of and be subject to, all the restrictions upon the
Secretary. The Assistant Secretaries shall have any other powers and shall
perform other duties as from time to time may be prescribed for them
respectively by the Board of Directors or the Bylaws.
5.11 Chief Financial Officer. The Chief Financial Officer may also be
designated by the alternate title of "Treasurer." The Chief Financial Officer
shall have custody of all moneys and securities of the Company and shall keep
regular books of account. Such officer shall disburse the funds of the Company
in payment of the just demands against the Company, or as may be ordered by the
Board of Directors, taking proper vouchers for such disbursements, and shall
render to the Board of Directors from time to time as may be required of such
officer, an account of all transactions as Chief Financial Officer and of the
financial condition of the Company. Such officer shall perform all duties
incident to such office or which are properly required by
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the President or by the Board of Directors. A bond shall be obtained for such
officer only if required by the Board of Directors.
5.12 Assistant Chief Financial Officers. The Assistant Chief Financial
Officer (Assistant Treasurer) or the Assistant Chief Financial Officers
(Assistant Treasurers), in the order of their seniority, shall, in the absence
or disability of the Chief Financial Officer, or in the event of such officer's
refusal to act, perform the duties and exercise the powers of the Chief
Financial Officer, and shall have such powers and discharge such duties as may
be assigned from time to time by the President or by the Board of Directors.
ARTICLE VI
SHARES OF STOCK
6.1 Registered Ownership Share Certificates and Shares in "Uncertificated"
Form. Certificates shall be issued and transferred in accordance with these
Bylaws, but need not be issued if the Shareholder elects to have his Shares
maintained in "uncertificated" form or if the Shareholder is an Individual
Retirement Account or a Keogh Plan account. The Persons in whose names
certificates or Shares in "uncertificated" form are registered on the records of
the Company shall be deemed the absolute owners of the Shares represented
thereby for all purposes of the Company; but nothing in these Bylaws shall be
deemed to preclude the Directors or officers, or their agents or
representatives, from inquiring as to the actual ownership of Shares. The Shares
are non-assessable. Until a transfer is duly effected on the records of the
Company, the Directors shall not be affected by any notice of transfer, either
actual or constructive. The receipt by the Person in whose name any Shares are
registered on the records of the Company or of the duly authorized agent of that
Person, or if the Shares are so registered in the names of more than one Person,
the receipt of any one of those Persons, or of the duly authorized agent of that
Person, shall be a sufficient discharge for all dividends or distributions
payable or deliverable in respect of the Shares and from all liability to see
the application of those funds. The certificates of Shares of the capital stock
of the Company, if any, shall be in a form consistent with the Articles of
Incorporation and the laws of the State of California as shall be approved by
the Board of Directors. All certificates shall be signed by the Chairman of the
Board or the President or a Vice President and by the Treasurer or an Assistant
Financial Officer or the Secretary or any Assistant Secretary, certifying the
number of Shares and the class or series of Shares owned by the Shareholder. Any
or all of the signatures on the certificate may be facsimile.
6.2 Transfer of Shares. Subject to the provisions of law and of Sections
6.3, 6.4 and 6.5, Shares shall be transferable on the records of the Company
only by the record holder or by his agent thereunto duly authorized in writing
upon delivery to the Directors or a transfer agent of the certificate or
certificates (unless held in "uncertificated" form, in which case an executed
stock power duly guaranteed must be delivered), properly endorsed or accompanied
by duly executed instruments of transfer and accompanied by all necessary
documentary stamps together with evidence of the genuineness of each
endorsement, execution or authorization and of other matters as may reasonably
be required by the Directors or transfer agent. Upon delivery, the transfer
shall be recorded in the records of the Company and a new certificate, if
requested, for the Shares so transferred shall be issued to the transferee and
in case of a transfer of only a part of the Shares represented by any
certificate or account, a new certificate or statement of account for the
balance shall be issued to the transferor. Any Person becoming entitled to any
Shares in consequence of the death of a Shareholder or otherwise by operation of
law shall be recorded as the holder of such Shares and shall receive a new
certificate, if requested, but only upon delivery to the Directors or a transfer
agent of instruments and other evidence required by the Directors or the
transfer agent to demonstrate that entitlement, the existing certificate (or
appropriate instrument of transfer if held in "uncertificated" form) for the
Shares and any necessary releases from applicable governmental authorities.
Nothing in these Bylaws shall impose upon the Directors or a transfer agent any
duty or limit their rights to inquire into adverse claims.
Notwithstanding the foregoing, under no circumstances may any Series B
Shares be transferred or sold (except by operation of law) within one year from
the completion of the Company's initial public offering.
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6.3 Disclosures by Holders of Series A Shares: Redemption of Series A
Shares. The Holders of Series A Shares shall upon demand disclose to the
Directors in writing such information with respect to direct and indirect
ownership of their Series A Shares as the Directors deem necessary to comply
with the provisions of the Internal Revenue Code and applicable regulations as
amended or to comply with the requirements of any other taxing authority. If the
Directors shall at any time and in good faith be of the opinion that direct or
indirect ownership of Series A Shares of the Company has or may become
concentrated to an extent which would prevent the Company from qualifying as a
REIT under the REIT provisions of the Internal Revenue Code, the Directors shall
have the power by lot or other means deemed equitable by them to prevent the
transfer of and/or call for redemption a number of the Series A Shares
sufficient in the opinion of the Directors to maintain or bring the direct or
indirect ownership of Series A Shares into conformity with the requirements for
a REIT. The redemption price shall be (i) the last reported sale price of the
Series A Shares on the last business day prior to the redemption date on the
principal national securities exchange on which the Series A Shares, are listed
or admitted to trading, or (ii) if the Series A Shares are not so listed or
admitted to trading, the average of the highest bid and lowest asked prices on
such last business day as reported by the NASDAQ, National Quotation Bureau
Incorporated or a similar organization selected by the Company for that purpose,
or (iii) otherwise, as determined in good faith by the Directors. The holders of
any Series A Shares so called for redemption shall be entitled to payment of
such redemption price within a reasonable time not to exceed sixty (60) days of
the date fixed for redemption. From and after the date filed for redemption by
the Directors, the holder of any Series A Shares so called for redemption shall
cease to be entitled to dividends, distributions, voting rights and other
benefits with respect to the Series A Shares, excepting only to the right to
payment of the redemption price fixed as described above. For the purpose of
this Section 6.3, the term "individual" shall be construed as provided in
Section 542(a)(2) of the Internal Revenue Code of 1986, as amended, or any
successor provisions and "ownership" of Series A Shares shall be determined as
provided in Section 544 of the Internal Revenue Code of 1986, as amended, or any
successor provision.
6.4 Right to Refuse to Transfer of Series A Shares. Whenever it is deemed
by them to be reasonably necessary to protect the tax status of the Company, the
Directors may require statements or affidavits from any holder of Series A
Shares or proposed transferee of Series A Shares, setting forth the number of
Series A Shares already owned by him and any related person specified in the
form prescribed by the Directors for that purpose. If, in the opinion of the
Directors, which shall be conclusive upon any proposed transferor or proposed
transferee of Series A Shares, any proposed transfer or exercise would
jeopardize the status of the Company as a REIT under the Internal Revenue Code
of 1986, as amended, the Directors may refuse to permit the transfer or
exercise. Any attempted transfer or exercise as to which the Directors have
refused their permission shall be void and of no effect to transfer any legal or
beneficial interest in the Series A Shares. All contracts for the sale or other
transfer or exercise of Series A Shares shall be subject to this provision.
6.5 Limitation on Acquisition of Shares.
(a) Subject to the provisions of Section 6.5(b), no person may own in
excess of 9.9% of the total outstanding Shares, and no Shares shall be
transferred (or issued) to any Person if, following the transfer, the Person's
direct or indirect ownership of Shares would exceed this limit. For the purpose
of this Section 6.5, ownership of Shares shall be computed in accordance with
Internal Revenue Code Sections 542(a) and 544.
(b) If Shares are purportedly acquired by any Person in violation of this
Section 6.5, the acquisition shall be valid only to the extent it does not
result in a violation of this Section 6.5, and the acquisition shall be null and
void with respect to the excess ("Excess Shares"). Excess Shares shall be deemed
to have been acquired and to be held on behalf of the Company, and, as the
equivalent of treasury shares for that purpose, shall not be considered to be
outstanding for quorum or voting purposes, and shall not be entitled to receive
dividends, interest or any other distribution.
(c) This Section 6.5 shall apply to the acquisition of Shares only after
conclusion of the Company's initial public offering of its Series A Shares and
by means other than through the Company's Dividend Reinvestment Plan and a
Shareholder will not be required to dispose of Excess Shares acquired prior to
the conclusion of that offering. So long as any person holds more than 7.0% of
the outstanding Shares, a lower
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percentage limit may be established by the Directors to the extent necessary to
assure, to the extent possible, that no five persons own more than 50% of the
outstanding Shares.
(d) The Company shall, if deemed necessary or desirable to implement the
provisions of this Section 6.5, include on the face or back of each Share
certificate issued by the Company an appropriate legend referring the holder of
the certificate to the restrictions contained in this Section 6.5 and stating
that the complete test of these Bylaws is on file with the Secretary of the
Company at the Company's offices.
(e) Nothing in these Bylaws shall limit the ability of the Directors to
impose, or to seek judicial or other imposition of additional restrictions if
deemed necessary or advisable to protect the Company and the interests of its
Shareholders by preservation of the Company's status as a qualified REIT.
(f) If any provision of this Section 6.5 is determined to be invalid, in
whole or in part, by any federal or state court having jurisdiction, the
validity of the remaining provisions shall not be affected and the provision
shall be affected only to the extent necessary to comply with the determination
of the court.
(g) For purposes of this Section 6.5, "Shares" means the Shares of the
Company as defined in these Bylaws, and includes any Shares issuable upon
conversion, surrender or exercise of any other Securities of the Company.
6.6 Lost or Destroyed Certificates. The holder of any Shares shall
immediately notify the Company of any loss or destruction of the Share
certificate, and the Company may issue a new certificate in the place of any
certificate alleged to have been lost or destroyed upon approval of the Board of
Directors. The Board may, in its discretion, as a condition to authorizing the
issue of such new certificate, require the owner of the lost or destroyed
certificate, or his legal representatives, to make proof satisfactory to the
Board of Directors of the loss or destruction and to give the Company a bond or
other security, in such amount and with such surety or sureties, as the Board of
Directors may determine as indemnity against any claim that may be made against
the Company on account of the certificate alleged to have been lost or
destroyed.
6.7 Dividend Record Date and Closing Stock Books. The Board of Directors
may fix a date in the future as a record date for the determination of the
Shareholders entitled to receive any dividend or distribution or any allotment
of rights or to exercise rights with respect to any change, conversion or
exchange of Shares. The record date so filed shall not be more than sixty (60)
days nor less than ten (10) days prior to the date of the event for the purposes
of which it is filed, except for dividends paid prior to the termination of the
initial offering of the Series A Shares. When a record date is so filed, only
Shareholders of record on that day shall be entitled to receive the dividend,
distribution or allotment of rights or to exercise the rights, as the case may
be, notwithstanding any transfer of any Shares on the books of the Company after
the record date.
ARTICLE VII
EMPLOYMENT OF ADVISOR AND LIMITATION ON EXPENSES
7.1 Employment of Advisor. The Directors are responsible for the general
policies of the Company and for general supervision of the business of the
Company conducted by all officers, agents, employees, advisors, managers or
independent contractors of the Company as may be necessary to insure that the
business conforms to the provisions of these Bylaws. However, the Directors
shall not be required personally to conduct all the business of the Company, and
consistent with their ultimate responsibility as stated above, the Directors
shall have the power to appoint, employ or contract with any Person (including
one or more of themselves or any corporation, partnership, or company in which
one or more of them may be directors, officers, stockholders, partners or
directors) as the Directors may deem necessary or proper for the transaction of
the business of the Company. The Directors may employ or contract with such a
Person (the "Advisor") and the Directors may grant or delegate authority to the
Advisor as the Directors may in their sole discretion deem necessary or
desirable without regard to whether that authority is normally granted or
delegated by Directors.
The Directors (subject to the provisions of this Article VII) shall have
the power to determine the terms and compensation of the Advisor or any other
Person whom they may employ or with whom they may
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contract; provided, however, that any determination to employ or contract with
any Director or any Person of which a Director is an Affiliate, shall be valid
only if made, approved or ratified by the Independent Directors. The Directors
may exercise broad discretion in allowing the Advisor to administer and regulate
the operations of the Company, to act as agent for the Company, to execute
documents on behalf of the Company, and to make executive decisions which
conform to general policies and general principles previously established by the
Directors.
7.2 Term. The Directors shall not enter into any advisory contract with
the Advisor unless the contract has a term of no more than one (1) year and
provides for annual renewal or extension thereafter; provided, however, that the
initial term of the Advisory Agreement shall be for a period ending December 31,
1991. The Directors shall not enter into a similar contract with any Person of
which a Director is an Affiliate unless the contract provides for renewal or
extension by the Independent Directors. The advisory contract with the Advisor
may be terminated without penalty by the Advisor upon 120 days' written notice
or by the Company without cause or penalty by action of the Directors, the
Independent Directors or by action of a majority of the Shareholders of the
Company upon sixty (60) days' written notice, in a manner to be set forth in the
advisory contract with the Advisor. The advisory contract shall also require the
Advisor to cooperate with the Company to provide an orderly management
transition after any termination.
7.3 Other Activities of Advisor. The Advisor shall not be required to
administer the investment activities of the Company as its sole and exclusive
function and may have other business interests and may engage in other
activities similar or in addition to those relating to the Company, including
the performance of services and advice to other persons (including other real
estate investment companies) and the management of other investments (including
investments of the Advisor and its Affiliates). The Directors may request the
Advisor to engage in other activities which complement the Company's
investments, and the Advisor may receive compensation or commissions for those
activities from the Company or other Persons.
The Advisor shall be required to use its best efforts to present a
continuing and suitable investment program to the Company which is consistent
with the investment policies and objectives of the Company, but neither the
Advisor nor any Affiliate of the Advisor (subject to any applicable provision of
Sections 9.4 and 9.5 herein) shall be obligated to present any particular
investment opportunity to the Company even if the opportunity is of character
which, if presented to the Company, could be taken by the Company, and, subject
to the foregoing, shall be protected in taking for its own account or
recommending to others the particular investment opportunity.
Upon request of any Director, the Advisor and any Person who controls, is
controlled by, or is under common control with the Advisor, shall from time to
time promptly furnish the Directors with information on a confidential basis as
to any investments within the Company's investment policies made by the Advisor
or the other Person for its own account.
7.4 Limitation on Organization, Offering and Acquisition Expenses. The
Offering and Organization Expenses (plus sales commissions, if any) paid in
connection with the Company's formation or the offering of its Series A Shares
or other Securities shall in each case be reasonable and in no event exceed an
amount equal to 15% of the gross proceeds raised in any such offering.
7.5 Limitation on Operating Expenses. The Operating Expenses of the
Company for any fiscal year shall not exceed the greater of (a) 2% of its
Average Invested Assets or (b) 25% of the Net Income of the Company, unless the
Independent Directors conclude that a higher level of expense is justified, as
provided for in Section 4.14(e) and the California Commissioner of Corporations
concurs therein, provided however, that such expenses (including subitems iv
through ix of Section 1.3(n)) shall not exceed the foregoing limitation unless
the Independent Directors conclude that a higher level of expenses is justified
as provided for in Section 4.14(e).
Within 60 days after the end of any fiscal quarter of the Company for which
Operating Expenses (for the 12 months then ended) exceed the limitations set
forth herein, there shall be sent to the Shareholders a written disclosure of
such fact together with an explanation of the factors the Independent Directors
considered in arriving at the conclusion that the higher Operating Expenses were
justified. In the event the
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Independent Directors do not determine such excess expenses were justified, the
Advisor shall reimburse the Company at the end of the 12-month period the amount
by which the aggregate annual Operating Expenses paid or incurred by the Company
exceeded the limitations herein provided.
7.6 Reserved.
7.7 Reserved.
ARTICLE VIII
RESTRICTIONS ON INVESTMENTS AND ACTIVITIES
8.1 Restrictions. Notwithstanding any other provision of these Bylaws, the
Company shall not:
(a) invest in commodities or commodity future contracts;
(b) invest in contracts for the sale of real estate;
(c) engage in any short sale;
(d) make real estate investments in Unimproved Real Property or
indebtedness secured by a deed of trust or mortgage loans on Unimproved
Real Property in excess of 10% of the total assets of the Company;
(e) issue equity Securities on a deferred payment basis or other
similar arrangement;
(f) issue debt Securities in the absence of adequate cash flow to
cover debt service;
(g) issue equity Securities which are non-voting or assessable;
(h) incur any indebtedness, secured or unsecured, which would result
in an aggregate amount of indebtedness in excess of 300% of Net Assets;
(i) borrow on an unsecured basis if such borrowing will result in
Asset Coverage of less than 300%;
(j) make or invest in mortgage loans, including construction loans, on
any one property if the aggregate amount of all mortgage loans outstanding
on the property, including loans of the Company, would exceed an amount
equal to 85% of the appraised value of the property as determined by an
Appraisal unless substantial justification exists because of the presence
of other underwriting criteria; provided, however, that the Company shall
not make or invest in mortgage loans that are subordinate to any mortgage
or equity interest of the Advisor, Directors or any of their Affiliates;
and provided further, that any such Appraisal shall be retained in the
Company's records for a period of five (5) years and shall be available for
inspection and copying by any shareholder;
(k) issue "redeemable securities," as defined in Section 2(a)(32) of
the Investment Company Act of 1940;
(l) invest in any equity Security of any non-governmental issuer,
including the Shares of other REITs or limited partnerships for a period in
excess of 18 months, provided that any such investment in an entity
affiliated with the Advisor, Directors or Affiliates thereof shall comply
with the requirements of Section 9.5.
(m) engage in trading, as compared with investment activities, or
engage in the business of underwriting or agency distribution of Securities
issued by others;
(n) hold property primarily for sale to customers in the ordinary
course of the trade or business of the Company, but this prohibition shall
not be construed to deprive the Company of the power to sell any property
which it owns at any time;
(o) grant warrants or options to purchase voting shares of beneficial
interest of the Company unless such warrants or options (i) are issued
ratably to the holders of all voting shares of beneficial interest or (ii)
are issued as part of a financing arrangement; provided that any warrants
or options issued are at an
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exercise price greater than or equal to the fair market value of the voting
shares of the Company on the date of the grant and for consideration
(including services) that in the judgment of a majority of the Independent
Directors has a market value at least equal to the value of the warrant or
option on the date of grant, and the warrants and options granted to the
Advisor, Directors or Affiliates thereof are granted on the same terms as
such warrants and options are sold to the general public and do not exceed
an amount equal to 10% of the outstanding Shares on the date of grant of
such warrants and options;
(p) invest in or make mortgage loans unless an Appraisal is obtained
concerning the underlying property and, in addition to the Appraisal, the
Company shall obtain a mortgagee's or owner's title insurance policy or
commitment as to the priority of the mortgage or the condition of the
title;
(q) invest in indebtedness, including construction loans (herein
called "junior debt") secured by a mortgage on real property which is
subordinate to the lien of other indebtedness (herein called "senior
debt"), except where the amount of such junior debt, plus the outstanding
amount of the senior debt, does not exceed 85% of the appraised value of
such property as determined by Appraisal, if after giving effect thereto,
the value of all such investments of the Company (as shown on the books of
the Company in accordance with generally accepted accounting principles
after all reasonable reserves but before provision for depreciation) would
not then exceed 25% of the Company's tangible assets, provided that the
value of all investments in junior debt of the Company which does not meet
the aforementioned requirements would be limited to 10% of the Company's
tangible assets (which would be included within the 25% limitation);
(r) acquire Securities in any company holding investments or engaging
in activities prohibited by the Internal Revenue Code of 1986, as amended,
or the California statutes governing the activities of REITs; or
(s) invest in real estate contracts of sale or land sale contracts
unless such contracts are in recordable form and are appropriately recorded
in the chain of title.
The foregoing limitations shall not limit the manner in which any required
investment by the Advisor or its Affiliates in the Company is made or preclude
the Company from structuring an investment in real property to minimize
Shareholder liability and facilitate the investment policies of the Company
under Article VIII.
ARTICLE IX
LIABILITY OF DIRECTORS,
SHAREHOLDERS AND OFFICERS AND OTHER MATTERS
9.1 Exculpation of Directors, Officers and Others. The Directors are
required to perform their duties with respect to the Company's business in good
faith, in a manner believed by the Directors to be in the best interests of the
Company and with the care, including reasonable inquiry, as an ordinary prudent
Person in a like position would use under similar circumstances. A Director who
performs his duties in accordance with the foregoing standards shall not be
liable to any person for failure to discharge his obligations as a Director.
Notwithstanding the additional responsibilities of Independent Directors, an
Independent Director shall not have any greater liability than that of a
Director who is not independent.
Moreover, the Company's officers, employees and other agents are also
required to act in good faith, in a manner believed by them to be in the best
interest of the Company, and with the care, including reasonable inquiry, as an
ordinary prudent Person in a like position would use under similar
circumstances, in handling its affairs. An officer, employee or other agent who
performs his duties in accordance with the foregoing standards shall not be
liable to any person for failure to discharge his obligations as an officer,
employee or agent.
9.2 Express Exculpatory Clauses and Instruments. In all agreements,
obligations, instruments, and actions in regard to the affairs of this Company,
this Company and not its Directors, Shareholders, officers, employees or agents
shall be the principal and the Company shall be entitled as such to enforce the
same, collect damages, and take all other action. All agreements, obligations,
instruments, and actions shall be made, executed, incurred, or taken by or in
the name and on behalf of this Company.
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9.3 Indemnification and Reimbursement of Corporate Agents.
(a) The Company shall indemnify each of its agents against expenses,
judgments, fines, settlements and other amounts, actually and reasonably
incurred by such Person by reason of such Person's having been made or having
threatened to be made a party to a proceeding in excess of the indemnification
otherwise permitted by the provisions of Section 317 of the California
Corporations Code subject to the limits on such excess indemnification set forth
in Section 204 of the California Corporations Code, and the Company shall
advance the expenses reasonably expected to be incurred by such agent in
defending any such proceeding upon receipt of the undertaking required by
subdivision (f) of said Section 317. The terms "agent," "proceeding" and
"expenses" made in this Section 9.3 shall have the same meaning as such terms in
said Section 317, except that directors who are not Independent Directors and
the Advisor may only be indemnified as follows:
1. The Board has determined, in good faith, that the course of conduct
which caused the loss or liability was in the best interests of the
Company, and
2. Such liability or loss was not the result of negligence or
misconduct by the Director.
Indemnification will not be allowed for any liability imposed by judgment
and costs associated therewith, including attorneys' fees, arising from or out
of a violation of state or federal securities laws associated with the offer and
sale of the Company's shares. Indemnification will be allowed for settlements
and related expenses of lawsuits alleging securities law violations, and for
expenses incurred in successfully defending such lawsuits, provided that a court
either:
(i) Approves the settlement and finds that indemnification of the
settlement and related costs should be made, or
(ii) Approves indemnification of litigation costs if a successful
defense is made.
Any rights of indemnification and reimbursement shall be satisfied
only out of Company property.
(b) The rights accruing to any Person under these provisions shall not
exclude any other right to which he may be lawfully entitled, nor shall anything
in these Bylaws restrict the right of the Company to indemnify or reimburse the
Person in any proper case even though not specifically provided for in these
Bylaws, nor shall anything in these Bylaws restrict the Person's right to
contribution as may be available under applicable law.
(c) The Company shall have power to purchase and maintain insurance on
behalf of any Person entitled to indemnity under these provisions against any
liability asserted against him and incurred by him in any capacity or arising
out of his status. The Company, however, shall not purchase and maintain
insurance for liabilities for which indemnification is not permitted under these
provisions.
(d) No claim for indemnification under this Section 9.3 by any Person for
liabilities arising under the Securities Act of 1933 or under state securities
laws may be permitted by the Company. Notwithstanding the foregoing, a claim for
indemnification will be permitted for settlements and related expenses in
connection with defending a civil or criminal action, suit or proceeding arising
under the Securities Act of 1933 or under state securities laws provided that a
court of competent jurisdiction approves the settlement and finds that
indemnification is not against public policy or approves indemnification of
litigation costs if a successful defense is made.
9.4 Right of Directors, Officers and Others to Own Shares or Other Property
and to Engage in Other Business. Any Director, officer, employee or agent of
the Company may acquire, own, hold and dispose of shares in the Company, for his
individual account, and may exercise all rights of a Shareholder to the same
extent and in the same manner as if he were not a Director, officer, employee or
agent of the Company. Any Director, officer, employee or agent of the Company
may have personal business interests and may engage in personal business
activities, which interests and activities may include the acquisition,
syndication, holding, management, operation or disposition, for his own account
or for the account of others, of interests in real property (including, but not
limited to, real property investments presented to and rejected by the Company
or the Advisor), interests in mortgages, or interests in Persons engaged in the
real estate business, including Persons authorized as investments pursuant to
Section 7.3 hereof. Subject to the provisions of Article VII, any
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Director, officer, employee or agent may be interested as Director, officer,
director, stockholder, partner, member, advisor or employee, or otherwise have a
direct or indirect interest in any Person who may be engaged to render advice or
services to the Company, and may receive compensation from that Person as well
as compensation as Director, officer, or agent of the Company. None of these
activities shall be deemed to conflict with his duties and powers as Director or
officer.
9.5 Transactions With Affiliates. The Company shall not:
(a) Engage in transactions with the Advisor, any Director, officer or
Affiliates thereof, except to the extent that each such transaction has, after
disclosure of such affiliation, been approved or ratified by the affirmative
vote of a majority of the Directors (including a majority of Independent
Directors) not affiliated with the person who is party to the transaction and
not otherwise interested in such transaction and:
(i) the transaction is fair and reasonable to the Company and its
Shareholders,
(ii) the terms of such transaction are at least as favorable as the
terms of any comparable transactions made on an arm's length basis and
known to the Directors; and
(iii) payments to the Advisor, its Affiliates or Directors for
services rendered in a capacity other than that as Advisor or as Directors
may only be made upon a determination that (A) the compensation is not in
excess of the compensation paid for any comparable services, and (B) the
compensation is not greater than the charges for comparable services
available from others who are competent and not affiliated with any of the
parties involved.
(b) Purchase property from the Advisor, any Director, or Affiliates
thereof, unless a majority of Directors (including a majority of Independent
Directors) not otherwise interested in such transaction approve the transaction
as being fair and reasonable to the Company and at a price to the Company no
greater than the cost of the asset to such Advisor, Director or Affiliate
thereof, or, if the price to the Company is in excess of such cost, that
substantial justification for such excess exists and such excess is not
unreasonable. In no event shall the cost of such asset to the Company exceed its
current appraised value.
(c) Sell property to the Advisor, any Director or Affiliates thereof.
(d) Borrow money from the Advisor, any Director, or affiliates thereof,
unless a majority of Directors (including a majority of Independent Directors)
not otherwise interested in such transaction approves the transaction as being
fair, competitive, and commercially reasonable and no less favorable to the
Company than loans between unaffiliated lenders and borrowers under the same
circumstances.
(e) Invest in joint ventures with the Advisor, any Director, or Affiliates
thereof, unless a majority of Directors (including a majority of Independent
Directors) not otherwise interested in such transactions, approves the
transaction as being fair and reasonable to the Company and shall be on
substantially the same terms and conditions as those received by the other joint
venturers.
(f) Make loans to the Advisor, any Director or Affiliates thereof.
9.6 Restriction of Duties and Liabilities. The duties and liabilities of
Shareholders, Directors and officers shall in no event be greater than the
duties and liabilities of shareholders, directors and officers of a California
corporation. The Shareholders, Directors and officers shall in no event have any
greater duties or liabilities than those imposed by applicable law as shall be
in effect from time to time.
9.7 Persons Dealing with Directors or Officers. Any act of the Directors
or officers purporting to be done in their capacity as such shall, as to any
Persons dealing in good faith with the Directors or officers, be conclusively
deemed to be within the purposes of this Company and within the powers of the
Directors and officers.
The Directors may authorize any officer or officers or agent or agents to
enter into any contract or execute any instrument in the name and on behalf of
the Company and/or Directors.
No Person dealing in good faith with the Directors or any of them or with
the authorized officers, employees, agents or representatives of the Company,
shall be bound to see to the application of any funds or
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property passing into their hands or control. The receipt of the Directors, or
any of them, or of authorized officers, employees, agents, or representatives of
the Company, for moneys or other consideration, shall be binding upon the
Company.
9.8 Reliance. The Directors and officers may consult with counsel and the
advice or opinion of that counsel shall be full and complete personal protection
to all of the Directors and officers in respect of any action taken or suffered
by them in good faith and in reliance on and in accordance with such advice or
opinion. In discharging their duties, Directors and officers, when acting in
good faith, may rely upon financial statements of the Company represented to
them to be correct by the Chairman or the officer of the Company having charge
of its books of account, or stated in a written report by an independent
certified public accountant fairly to present the financial position of the
Company. The Directors may rely, and shall be personally protected in acting,
upon any instrument or other document believed by them to be genuine.
9.9 Income Tax Status. Without limitation of any rights of
indemnification, or non-liability of the Directors, the Directors by these
Bylaws make no commitment or representation that the Company will qualify for
the dividends paid deduction permitted by the Internal Revenue Code of 1986, as
amended, and the Rules and Regulations pertaining to real estate investment
trusts under the Internal Revenue Code of 1986, as amended, and any failure to
so qualify at any time shall not render the Directors liable to the Shareholders
or to any other person or in any manner operate to annul the Company.
ARTICLE X
MISCELLANEOUS
10.1 Inspection of Bylaws. The Company shall keep at its principal office
in this state for the transaction of business, the original or a copy of these
Bylaws as amended, certified by the Secretary, which shall be open to inspection
by Shareholders at any reasonable time during office hours.
10.2 Inspection of Corporate Records. Shareholders of the Company, or any
holders of a voting trust certificate, shall have the right to inspect the
accounting books and records of the Company, and the minutes of proceedings of
the Shareholders and the Board and committees of the Board as provided by
Chapter 16 of the California Corporations Code, which Chapter provides, among
other things, that any shareholder or shareholders together holding at least 5%
of the aggregate outstanding voting shares of the Company have the absolute
right to inspect and copy the Company's Shareholder records or to demand the
same from the Company's transfer agent, upon specified notice. In addition, such
Chapter provides that any Shareholder or voting trust certificate holder shall
have the absolute right upon written demand at any time during normal business
hours, to inspect the Company's shareholder records, accounting records, and
minute books for any purpose reasonably related to such person's interest as a
Shareholder.
10.3 Checks, Drafts, Etc. All checks, drafts or other orders for payment
of money, notes or other evidences of indebtedness, issued in the name of or
payable to the Company, shall be signed or endorsed by the person or persons and
in the manner as from time to time shall be determined by resolution of the
Board of Directors.
10.4 Contracts, Etc., How Executed. The Board of Directors, except as
provided elsewhere in the Bylaws, may authorize any officer or officers or agent
or agents to enter into any contract or execute any instrument in the name of
and on behalf of the Company. That authority may be general or confined to
specific instances. Unless so authorized by the Board of Directors, no officer,
agent or employee shall have any power or authority to bind the Company by any
contract or engagement or to pledge its credit to render it liable for any
purpose or to any amount.
10.5 Representation of Shares of Other Corporations. The Chairman or the
President or, in the event of their absence or inability to serve, any Vice
President and the Secretary or Assistant Secretary of this Company are
authorized to vote, represent and exercise, on behalf of the Company, all rights
incidental to any and all shares of any other company standing in the name of
the Company. The authority granted to the officers to vote or represent on
behalf of the Company any and all Shares held by the Company in any other
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company may be exercised by any authorized person in person or by proxy or power
of attorney duly executed by the officers.
10.6 Annual Report. The Board of Directors of the Company shall cause to
be sent to the Shareholders, not later than one hundred twenty (120) days after
the close of the fiscal or calendar year, and not less than thirty (30) days
before the date of the Company's Annual Meeting of Shareholders as provided in
Section 3.2 of these Bylaws, an Annual Report in the form deemed appropriate by
the Board of Directors, including without limitation, any explanation of excess
borrowing and excess expenses as set forth in Sections 4.14 and 7.5. The reports
shall also disclose the ratio of the cost of raising capital to the capital
raised during the year and the aggregate amount of the advisory fees and other
fees paid during the year to the Advisor and its Affiliates, including fees or
charges paid to the Advisor and Affiliates by a third party. The Annual Report
also shall include as required by Section 4.14 full disclosure of all material
terms, factors and circumstances surrounding any and all transactions involving
the Company and the Directors, Advisor and/or Affiliates thereof occurring
during the year, and the Independent Directors shall examine and comment in the
report as to the fairness of any such transactions. The Annual Report shall
include a statement of assets and liabilities and a statement of income and
expense of the Company prepared in accordance with Generally Accepted Accounting
Principles. The financial statements shall be accompanied by the report of an
independent certified public accountant. A manually signed copy of the
accountant's report shall be filed with the Directors.
10.7 Other Reports. The Chairman of the Board or the President shall
prepare or cause to be prepared annually a full and correct statement of the
affairs of the Company, including a balance sheet and a financial statement of
operations for the preceding fiscal year, which shall be certified by
independent certified public accountants and distributed to stockholders within
120 days after the close of the Company's fiscal year and at least 30 days prior
to the Annual Meeting of Shareholders. The Directors shall furnish the
Shareholders at least annually with a statement in writing advising as to the
source of dividends or distributions so distributed. If the source has not been
determined, the communication shall so state and the statement as to the source
shall be sent to the Shareholders not later than sixty (60) days after the close
of the fiscal year in which the distribution was made.
10.8 Statements re Shares Owned in "Uncertificated" Form. Within two (2)
business days after the transfer of Shares owned in uncertificated form, the
Company shall send a statement to the former registered owner and to the new
registered owner containing the information described in this Section 10.8. In
addition, the Company shall send such a statement at periodic intervals no less
frequent than annually and at any time upon the reasonable request of the
registered owner (if statements are not sent as a matter of routine at least
quarterly). A statement sent pursuant to this Section 10.8 shall contain the
following information:
(a) A description of the issue of which the Shares are a part;
(b) The name and address and any taxpayer identification number of the
registered owner;
(c) The number of Shares registered in the name of the registered owner in
uncertificated form on the date of the statement;
(d) The name and address and any taxpayer identification number of any
registered pledgee and the number of Shares subject to the pledge;
(e) A notation of any liens and restrictions of the Company and any adverse
claims to which the Shares are or may be subject or a statement that there are
none of those liens, restrictions, or adverse claims;
(f) Anything else required by subdivision (b) of Section 416 of the
Corporations Code.
10.9 Provisions of the Company in Conflict with Law or Regulation.
(a) The provisions of these Bylaws are severable, and if the Directors
shall determine, with the advice of counsel, that any one or more of these
provisions (the "Conflicting Provisions") are in conflict with the REIT
Provisions of the Internal Revenue Code of 1986, as amended, or with other
applicable laws and regulations, the Conflicting Provisions shall be deemed
never to have constituted a part of these Bylaws, and the Directors
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shall be able to amend or revise the Bylaws to the extent necessary to bring the
provisions of these Bylaws into conformity with the REIT provisions of the
Internal Revenue Code of 1986, as amended, or any other applicable law or
regulation; provided, however, that this determination by the Directors shall
not affect or impair any of the remaining provisions of these Bylaws or render
invalid or improper any action taken or omitted (including but not limited to
the election of Directors) prior to the determination. A certification signed by
a majority of the Directors setting forth any such determination and reciting
that it was duly adopted by the Directors, or a copy of these Bylaws, with the
Conflicting Provisions removed pursuant to the determination, signed by a
majority of the Directors, shall be conclusive evidence of such determination
when lodged in the records of the Company. The Directors shall not be liable for
failure to make any determination under this Section 10.9.
(b) If any provisions of these Bylaws shall be held invalid or
unenforceable, the invalidity or unenforceability shall attach only to that
provision and shall not in any manner affect or render invalid or unenforceable
any other provision, and these Bylaws shall be carried out as if the invalid or
unenforceable provision were not present.
10.10 Fiscal Year. The Company's first fiscal year will end on the last
day of the month in which the minimum offering is subscribed and funds are
released from escrow. Thereafter, the Company's fiscal year shall end on
December 31 of each year.
10.11 Voluntary Dissolution. The Company may elect to wind up and dissolve
by the vote of Shareholders entitled to exercise a majority of the voting power
of the Company.
10.12 Distributions. The payment of distributions on Shares shall be at
the discretion of the Directors and shall depend upon the earnings, cash flow
and general financial condition of the Company, and such other factors as the
Directors deem appropriate.
ARTICLE XI
AMENDMENTS TO BYLAWS
11.1 Amendments. Bylaws may be adopted, amended, or repealed by the vote
or the written consent of Shareholders entitled to exercise a majority of the
voting power of the Company; provided however, that these Bylaws or any
provision hereof which would affect any rights with respect to any outstanding
class of securities of the Company, by reducing the amount payable upon the
liquidation of the Company, or by diminishing or eliminating any voting rights
pertaining thereto, may not be amended unless approved by the vote or written
consent of the holders of two-thirds of the outstanding securities of such
class. The Board of Directors may propose any such amendment to the
Shareholders, but the Board of Directors may not amend the Bylaws, except to the
extent expressly provided in Section 10.9.
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PART II
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INFORMATION NOT REQUIRED IN PROSPECTUS
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Item 20. Indemnification of Directors and Officers
Under its Articles of Incorporation, as amended, the Company has
eliminated the personal liability of a director to the Company and its
Shareholders to the fullest extent permitted under California law. In effect,
a director will not be held liable for damages to the Company or its
Shareholders for mere negligence or lack of due care in carrying out his
fiduciary duties as a director. A director would, however, still be liable if
he acted in bad faith or in reckless disregard of his duties. This limitation
of liability does not affect the availability to the Shareholders of injunctive
relief or other equitable remedies for any violation of a director's duties to
the Company or its Shareholders, although such equitable remedies may not be an
effective remedy in all circumstances. The Company believes that such
limitations of liability are essential to attract and retain qualified
individuals to serve as directors of the Company.
Under its Articles of Incorporation, as amended, and its Bylaws and
pursuant to indemnification agreements, the Company will also indemnify, to the
fullest extent permitted under California law, its directors, and is permitted
to indemnify officers, employees and other agents (including the Advisor, its
Affiliates, and their respective directors, officers and employees) against all
liabilities incurred on account of their serving in those capacities. This
indemnification arrangement protects the Company's agents against liability for
breach of duty to the Company and its Shareholders to the same extent that the
directors' liability is eliminated with three exceptions:
(i) any claim where an agent is found to be liable to the
Company in the performance of his duty to the Company and the
Shareholders, unless the court determines that the agent is fairly and
reasonably entitled to indemnity for such expenses and then only to the
extent that the court determines;
(ii) amounts paid in settling an action without court approval;
or
(iii) expenses incurred in defending an action which is settled
without court approval.
The indemnification and exculpatory arrangements described above will not deny
or limit third party or derivative suits. To the extent an agent is entitled
to indemnification, though, the financial burden of a suit by a third party
would be borne by the Company. The Company could be precluded from benefiting
from a recovery in a suit brought against a director by a Shareholder on the
Company's behalf and, in the case of a suit brought by a Shareholder against an
agent, the Company might be liable for the agent's expenses, even if the agent
is found liable. The Company maintains directors' and officers' insurance,
which might pay for some of these expenses. The Company has also entered into
indemnification agreements with its directors and certain of its officers.
Insofar as indemnification for liabilities arising under the Securities Act of
1933, as amended may be permitted to directors, officers or persons controlling
the Registrant pursuant to the foregoing provisions,
<PAGE> 268
the Registrant has been informed that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is therefore unenforceable.
Item 21. Exhibits and Financial Statement Schedules.
(a) Exhibits: See Exhibit Index contained herein.
(b) Financial Statement Schedules
All financial statement schedules required are located in the footnotes to the
Financial Information of the Company, FREIF or Advantage, respectively. All
other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable, and therefore have been omitted.
(c) Information required by Item 4(b)
(1) Fairness Opinion
(Appendix B to the Joint Proxy Statement/Prospectus)
Item 22. Undertakings.
(1) The undersigned registrant hereby undertakes as
follows: that prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus
will contain the information called for by the applicable registration form
with respect to reofferings by persons who may be deemed underwriters, in
addition to the information called for by the other items of the applicable
form.
(2) The registrant undertakes that every prospectus: (i)
that is filed pursuant to paragraph (1) immediately preceding, or (ii) that
purports to meet the requirements of Section 10(a)(3) of the Act and is used in
connection with an offering of securities subject to Rule 415, will be filed as
a part of an amendment to the registration statement and will not be used until
such amendment is effective, and that, for purposes of determining any
liability under the Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) The undersigned registrant hereby undertakes to
respond to requests for information that is incorporated by reference into the
prospectus pursuant to Item 4, 10(b), 11, or 13 of this form, within one
business day of receipt of such request, and to send the incorporated documents
by first class mail or other equally prompt means. This includes information
contained in documents filed subsequent to the effective date of the
registration statement through the date of responding to the request.
(4) The undersigned registrant hereby undertakes to
supply by means of a post-effective amendment all information concerning a
transaction, and the company being acquired involved therein, that was not the
subject of and included in the registration statement when it became effective.
<PAGE> 269
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of San Mateo,
State of California, on the 10th day of November, 1995.
FRANKLIN SELECT REAL
ESTATE INCOME FUND
By: David P. Goss
--------------------------------------
David P. Goss, Chief Executive Officer
Each person whose signature appears below hereby authorizes David P.
Goss and Mark A. TenBoer, and each of them, as attorney-in-fact, to sign on his
behalf, individually and in each capacity stated below, any amendment,
including post-effective amendments to this Registration Statement, and to file
the same, with all exhibits thereto, and all documents in connection therewith,
with the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
David P. Goss Chief Executive Officer, President November 10, 1995
----------------------- and Director (principal executive
David P. Goss officer)
Mark A. TenBoer Vice President - Finance and Chief November 10, 1995
----------------------- Financial Officer (principal
Mark A. TenBoer financial officer and principal
accounting officer)
Lloyd D. Hanford, Jr. Director November 10, 1995
-----------------------
Lloyd D. Hanford, Jr.
Lawrence C. Werner Director November 10, 1995
-----------------------
Lawrence C. Werner
Egon H. Kraus Director November 10, 1995
-----------------------
Egon H. Kraus
E. Samuel Wheeler Director November 10, 1995
-----------------------
E. Samuel Wheeler
</TABLE>
<PAGE> 270
EXHIBIT INDEX
2.1 Form of Agreement and Plan of Merger
(Appendix A to Joint Proxy Statement/Prospectus)
3.1 Articles of Incorporation, as amended. Filed with Registrant's
Registration Statement No. 33-26562 and incorporated herein by
reference.
3.2 Amended and Restated Bylaws. Filed with Registrant's
Registration Statement No. 33-26562 and incorporated herein by
reference.
5.1* Opinion Regarding Legality (including Consent of Counsel)
8.1* Opinion Regarding Tax Matters
10.1 Advisory Agreement. Filed with Registrant's Registration
Statement No. 33-26562 and incorporated herein by reference.
10.2 First Amendment to Advisory Agreement. Filed with Registrant's
Annual Report on 10-K for the year ended December 31, 1994 and
incorporated herein by reference.
10.3 Property Management Agreement. Filed with Registrant's Annual
Report on 10-K for the year ended December 31, 1994 and
incorporated herein by reference.
10.4* Form of Indemnification Agreement
11.1 Statement regarding computation of earnings per share. See
Note 3 to the Financial Statements of the Company.
13.1 Annual Report to Shareholders for the fiscal year ended
December 31, 1994 (to be deemed filed only to the extent
required by the instructions to exhibits for report on Form
10-K). Filed with Registrant's Annual Report on 10-K for the
year ended December 31, 1994 and incorporated herein by
reference.
24.1* Consent of Steinhart & Falconer
24.2 Consent of Coopers & Lybrand, LLP (Independent Public
Accountants)
24.3* Consent of Bear, Stearns & Co., Inc.
25.1 Power of Attorney (contained on signature page)
99.1* Proxy Card for Registrant
99.2* Proxy Card for FREIF
99.2* Proxy Card for Advantage
* To be filed by Amendment.
<PAGE> 1
EXHIBIT 24.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this joint proxy statement/prospectus related to
the merger of the Franklin real estate investment trusts of our reports dated
January 13, 1995 on our audits of the financial statements and financial
statement schedules of Franklin Select Real Estate Income Fund, Franklin Real
Estate Income Fund and Franklin Advantage Real Estate Income Fund. We also
consent to the reference to our firm under the caption "Experts."
COOPERS & LYBRAND L.L.P.
San Francisco, California
November 10, 1995
