SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to (section) 240-14a-11(c) or (section)
240-14a-12
FRANKLIN SELECT REALTY TRUST
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(Name of Registrant as Specified In its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than Registrant))
Payment of Filing Fee (Check the appropriate box):
[ X] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11
1) Title of each class of securities to which transaction applies: N/A
2) Aggregate number of securities to which transaction applies: N/A
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
Aggregate amount of consideration to be
received by Registrant: $131,500,000
One-fiftieth of one percent equals $26,300
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4) Proposed maximum aggregate value of transaction: $131,500,000
5) Total fee paid: $26,300 (including amount previously paid; see
below)
[X] Fee paid previously with preliminary material.
[X} Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by
registration statement number, or the Form or Schedule and the date
of its filing.
1) Amount Previously Paid: $23,876
2) Form, Schedule or Registration Statement No.: Preliminary Proxy
Statement
3) Filing Party: Registrant
4) Date Filed: November 15, 1999
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[FRANKLIN TEMPLETON LETTERHEAD]
FRANKLIN SELECT REALTY TRUST
777 MARINERS ISLAND BOULEVARD
SAN MATEO, CALIFORNIA 94403
(650) 312-3000
December 8, 1999
Dear Shareholder:
You are cordially invited to attend a special meeting of shareholders
of Franklin Select Realty Trust ("Franklin Select") to be held on Tuesday,
January 25, 2000, at 9:00 a.m., Pacific Standard Time, at the offices of
Franklin Resources, Inc., 777 Mariners Island Boulevard, San Mateo, California
94403. At the special meeting, we will seek your consideration of and
affirmative vote on the sale of all of Franklin Select's real estate assets to
Value Enhancement Fund III, LLC, a Georgia limited liability company affiliated
with Lend Lease Real Estate Investments, Inc., and on the authorization to
Franklin Select's Board of Directors (the "Board") for the subsequent
liquidation, winding up and dissolution of Franklin Select as described in the
proposed plan of Liquidation and Dissolution (the "Dissolution Plan"). We urge
you to vote FOR these proposals, which have been unanimously approved by your
Board after careful consideration. Please remember that your failure to vote
would have the same effect as a vote against the proposed asset sale and
Dissolution Plan.
The process leading to your Board's decision to enter into the proposed
transaction with Value Enhancement Fund III, LLC, began in February 1998 with an
examination of the strategic alternatives available to Franklin Select. After
this review, the Board concluded that as an independent company, Franklin Select
did not have the business attributes necessary to achieve appropriate growth in
earnings and cash flow and, consequently, an adequate total return to its
shareholders. In particular, the Board considered the following constraints:
1. Franklin Select's relatively small equity market capitalization, its
lack of asset diversity relative to larger real estate companies, and
its related exposure to lease rollover risks and risks associated with
asset concentration.
2. The lack of equity capital available in the public markets at an
attractive cost to equity REITs generally and Franklin Select in
particular.
3. The limited growth prospects for Franklin Select, particularly because
of the limited availability of equity capital and increased competition
in the real estate industry.
Your Board considered a wide range of alternatives to address these
challenges. Through its financial advisor, Prudential Securities Incorporated,
the Board contacted a number of
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potential merger partners or acquirers and discussed a variety of possible
transactions. Your Board determined that the alternative proposals were inferior
to the proposed transaction with Value Enhancement Fund III, LLC. In making this
determination, the Board considered the advice and recommendations of Prudential
Securities and of Franklin Select's management advisor, Franklin Properties,
Inc.
All of the members of your Board are firmly committed to the proposed
sale of Franklin Select's real estate assets to Value Enhancement Fund III. We
strongly believe there is no better alternative currently available to Franklin
Select, either as an independent company or in an alternative transaction, to
maximize value for our shareholders.
The proposed asset sale and the subsequent liquidation, winding up and
dissolution of Franklin Select pursuant to the Dissolution Plan cannot be
completed unless holders of at least a majority of the outstanding shares of
common stock of Franklin Select vote in favor of each of the proposals.
YOUR VOTE IS VERY IMPORTANT
Whether or not you plan to attend the special meeting, please take the
time to vote by completing the enclosed proxy card and returning it in the
accompanying postage-paid envelope. If you sign, date and mail your proxy card
without indicating how you want to vote, your proxy will be voted in favor of
the asset sale and the Dissolution Plan. Failure to return your proxy card will
have the same effect as a vote against these proposals. The other directors and
I urge you to vote FOR each of the proposals. More detailed voting instructions
are included in the accompanying proxy statement. We encourage you to read the
entire proxy statement.
Also enclosed are Franklin Select's Annual Report on Form 10-K for the
year ended December 31, 1998 and its Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1999. In addition, you may obtain
information about Franklin Select from documents it has filed with the
Securities and Exchange Commission, which may be accessed on the SEC's web site
located at www.sec.gov. To find out how to obtain additional copies of these
documents, please read the section of the proxy statement entitled "Where You
Can Find More Information."
Your participation is extremely important, and your early response will
be greatly appreciated.
Sincerely,
/s/ DAVID P. GOSS
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David P. Goss
Chairman of the Board
President and Chief Executive Officer
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FRANKLIN SELECT REALTY TRUST
777 MARINERS ISLAND BOULEVARD
SAN MATEO, CA 94403
(650) 312-3000
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD JANUARY 25, 2000
Dear Shareholder:
Notice is hereby given that a Special Meeting of Shareholders (the
"Meeting") of Franklin Select Realty Trust ("Franklin Select"), a California
corporation, will be held on January 25, 2000, at 9:00 a.m., Pacific Standard
Time, at the offices of Franklin Resources, Inc., located at 777 Mariners
Island Boulevard, San Mateo, California 94403 for the following purposes:
1. To consider and vote upon the proposed sale (the "Asset Sale") of all
of Franklin Select's real estate assets pursuant to the terms of the
Purchase Agreement dated as of October 12, 1999 (the "Purchase
Agreement") among Franklin Select, FSRT, L.P., a Delaware limited
partnership (the "Partnership"), each of the limited partners of FSRT,
L.P. (the "Limited Partners"), and Value Enhancement Fund III, LLC
("Value Enhancement"), a Georgia limited liability company that is an
affiliate of Lend Lease Real Estate Investments, Inc. ("Lend Lease").
2. If the Asset Sale is approved, to consider and vote upon the proposed
authorization to Franklin Select's Board of Directors for the
liquidation, winding up and dissolution of Franklin Select as described
in the proposed Plan of Liquidation and Dissolution (the "Dissolution
Plan"), a copy of which is attached hereto as EXHIBIT A. If the Asset
Sale is not approved, no vote will be taken on this proposal.
3. To transact such other business as may properly come before the
Meeting or any postponements or adjournments thereof.
These items are discussed in the following pages, which are made part of
this Notice. Pursuant to Franklin Select's bylaws, the Board of Directors has
fixed the close of business on December 8, 1999 as the record date for the
determination of shareholders entitled to notice of and to vote at the Meeting.
Only shareholders of record at that time will be entitled to vote at the
Meeting or any postponement or adjournment thereof.
You are cordially invited to attend the Meeting in person. Even if you
plan to attend the Meeting, please complete, date, sign, and return the
enclosed proxy card promptly in the enclosed self-addressed, stamped envelope.
If you attend the Meeting and wish to withdraw your proxy, you may vote
personally.
By Order of the Board of Directors
/s/ RICHARD S. BARONE
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Richard S. Barone
Secretary
Dated: December 8, 1999
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PLEASE RETURN YOUR PROXY CARD PROMPTLY.
YOUR VOTE IS IMPORTANT NO MATTER HOW MANY SHARES YOU OWN.
SHAREHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON. IF YOU
DO NOT EXPECT TO ATTEND THE 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 FRANKLIN SELECT OF FURTHER SOLICITATION, WE ASK YOUR COOPERATION
IN MAILING YOUR PROXY CARD PROMPTLY.
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FRANKLIN SELECT REALTY TRUST
PROXY STATEMENT
TABLE OF CONTENTS
PAGE
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SOLICITATION, REVOCATION AND VOTING OF PROXIES 1
INFORMATION ABOUT FORWARD-LOOKING STATEMENTS 2
RISK FACTORS RELATING TO THE ASSET SALE AND THE DISSOLUTION PLAN 2
Estimates of the Net Proceeds from the Asset Sale and Distributions
to be Received by Shareholders May Not be Realized 2
Franklin Select Would Incur Costs if the Purchase Agreement Were
Terminated Because of the Failure of the Shareholders to
Approve the Asset Sale or the Receipt by Franklin Select of a
Superior Proposal 3
The Asset Sale May Not be Consummated 4
Anticipated Timing of Dissolution Plan May Not be Achieved 4
There Can be No Assurance that the Asset Sale and the Dissolution
Plan Will Result in Greater Returns to Shareholders Than a
Continuation of Franklin Select As a Going Concern 4
The Board May Amend, Delay Implementation of, or Terminate the
Dissolution Plan Even if it is Approved by the Shareholders 4
Shareholders Could be Liable if Contingent Reserves are Insufficient
to Satisfy Franklin Select's Liabilities 4
PROPOSAL 1: TO APPROVE THE ASSET SALE 5
DESCRIPTION OF THE ASSET SALE 5
General Overview 5
Background and History of the Asset Sale 5
Buyer 7
Purchase Price 8
Description of the Partnership; Agreement with the Limited Partners 8
Expected Proceeds of the Asset Sale 9
Description of the Properties 10
Expected Timing of the Asset Sale 10
Representations and Warranties; Closing Conditions 10
Purchase Price Adjustment or Termination 11
Indemnity and Indemnity Escrow Fund 12
Termination of the Purchase Agreement 12
Dissolution Restrictions 13
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PAGE
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Government Approvals 13
OPINION OF PRUDENTIAL SECURITIES TO THE SPECIAL COMMITTEE 13
Introduction 13
Fairness Opinion-General 14
Conclusion of Prudential Securities Opinion 14
Methodology; Items Reviewed 14
Comparable Companies Analysis 15
Comparable Transactions Analysis 16
Liquidation Analysis 16
Stock Trading Analysis 16
Consideration To Be Received From Value Enhancement 16
Fees and Indemnification of Prudential Securities 17
ACCOUNTING TREATMENT OF THE ASSET SALE 17
FEDERAL INCOME TAX CONSEQUENCES OF THE ASSET SALE 17
INTEREST OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON 18
DISSENTERS' RIGHTS 18
VOTE REQUIRED 18
RECOMMENDATION OF THE BOARD 18
PROPOSAL 2: TO LIQUIDATE, WIND UP AND DISSOLVE FRANKLIN SELECT 19
Shareholder Action Proposed 19
DESCRIPTION OF THE DISSOLUTION PLAN 19
Operations 19
Payment of Legally Enforceable Claims 20
Directors and Officers 20
Continued Indemnification of Directors And Officers 20
Fractional Shares 20
Termination of REIT Status 20
Dissolution; No Transfers 20
EXPECTED DISTRIBUTION 21
Effect of Shareholder Litigation 21
Possible Effect of Series B Shares 22
FEDERAL INCOME TAX CONSEQUENCES OF THE LIQUIDATION AND DISSOLUTION 23
Tax Consequences of the Dissolution Plan to Franklin Select 24
Tax Consequences of the Dissolution Plan to Shareholders 25
ii
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PAGE
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Liquidating Trust 25
Special Tax Considerations Applicable to Non-U.S. Shareholders 26
State and Local Income Tax 27
AMENDMENT OR TERMINATION OF THE DISSOLUTION PLAN 27
DISSENTERS' RIGHTS 27
VOTE REQUIRED 27
RECOMMENDATION OF THE BOARD 28
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 29
SELECTED FINANCIAL DATA, INCLUDING PRO FORMA INFORMATION 30
PRINCIPAL ACCOUNTANTS 38
PRICE RANGE OF SERIES A SHARES 38
YEAR 2000 COMPLIANCE 38
OTHER MATTERS 39
OTHER INFORMATION 39
Shareholder Proposals 39
WHERE YOU CAN FIND MORE INFORMATION 39
INFORMATION INCORPORATED BY REFERENCE 40
EXHIBITS
EXHIBIT A-PLAN OF LIQUIDATION AND DISSOLUTION A-1
EXHIBIT B-OPINION OF PRUDENTIAL SECURITIES INCORPORATED B-1
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FRANKLIN SELECT REALTY TRUST
PROXY STATEMENT
SPECIAL MEETING OF SHAREHOLDERS, JANUARY 25, 2000
SOLICITATION, REVOCATION AND VOTING OF PROXIES
This Proxy Statement and the enclosed proxy card are furnished in
connection with the Special Meeting of Shareholders (the "Meeting") of Franklin
Select Realty Trust ("Franklin Select"), a California corporation, to be held
on Tuesday, January 25, 2000, at 9:00 a.m., Pacific Standard Time, at the
offices of Franklin Resources, Inc. located at 777 Mariners Island Boulevard,
San Mateo, California 94403. Shareholders of record at the close of business on
December 8, 1999 are entitled to notice of and to vote at the Meeting. On that
date, there were 12,250,369 shares of Common Stock, Series A, ("Series A
Shares") outstanding, and 745,584 shares of Common Stock, Series B, ("Series B
Shares") outstanding (collectively the "Common Stock"). Each holder of Common
Stock is entitled to one vote for or against each matter presented for each
share held as of the record date. For action to be taken at the Meeting, a
majority of the shares entitled to vote must be represented at the Meeting in
person or by proxy. Under California law, the affirmative vote of at least a
majority of the outstanding shares of Common Stock is required for approval of
the Asset Sale. Under California law and Franklin Select's bylaws, the
affirmative vote of at least a majority of the outstanding shares of Common
Stock is required to approve the Dissolution Plan. Because abstentions with
respect to any matter are treated as shares present or represented and entitled
to vote for the purposes of determining whether that matter has been approved
by shareholders, abstentions have the same effect as negative votes. Broker
non-votes and shares as to which proxy authority has been withheld with respect
to any matter are not deemed to be present or represented for purposes of
determining whether shareholder approval of that matter has been obtained.
However, because the affirmative vote of at least a majority of outstanding
shares is required for both proposals, broker non-votes and shares as to which
proxy authority has been withheld would have the same effect as negative votes.
The cost of soliciting proxies will be borne by Franklin Select. Franklin
Select has retained ChaseMellon Shareholder Services, L.L.C, its transfer
agent, and may also retain a professional proxy solicitation firm, to assist it
and its shareholders in the voting process in connection with the Meeting.
Franklin Select may request brokerage houses and other institutions to forward
the solicitation material to persons for whom they hold shares of Common Stock
and to obtain authorization for the execution of proxies. Franklin Select will
reimburse brokerage houses and other institutions for their reasonable expenses
in forwarding Franklin Select's proxy material.
The enclosed proxy is being solicited by Franklin Select's Board of
Directors (the "Board"). When proxies are properly dated, executed and
returned, the shares they represent will be voted at the Meeting in accordance
with the instructions of the shareholders. If no specific instructions are
given, the shares will be voted: FOR the approval of the Asset Sale; if the
Asset Sale is approved, FOR the approval of the Dissolution Plan; and, in the
discretion of the proxy holders, upon such other matters not now known or
determined which may properly come before the Meeting.
Any person giving a proxy in the form accompanying this Proxy Statement
has the power to revoke it at any time before its exercise by (a) filing with
the Secretary of Franklin Select a signed written statement revoking his or her
proxy, or (b) submitting an executed proxy bearing a date later than that of
the proxy being revoked. A proxy may also be revoked by attendance at the
Meeting and election to vote in person. Attendance at the Meeting will not by
itself constitute the revocation of a proxy.
This Proxy Statement, the enclosed Notice of Special Meeting of
Shareholders and the enclosed proxy card are scheduled to be mailed to
shareholders commencing on or about December 14, 1999.
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INFORMATION ABOUT FORWARD-LOOKING STATEMENTS
Certain sections of this Proxy Statement contain forward-looking
statements that are based on current beliefs, estimates and assumptions
concerning the operations and future results of Franklin Select, the Asset
Sale, the Dissolution Plan, estimated costs and expenses, the amount of cash
expected to be distributed to shareholders and the timing of such
distributions. All statements that address events or developments that are
anticipated to occur in the future, including statements related to future
revenues, expenses, income, earnings per share, the status of pending
litigation, and anticipated distributions, or statements expressing general
optimism about future results, are forward-looking statements. In addition,
words such as "expects," "anticipates," "intends," "plans," "believes,"
"estimates," and variations of such words and similar expressions are intended
to identify forward-looking statements.
The statements described in the preceding paragraph, and the sections of
this Proxy Statement referred to therein, constitute "forward-looking
statements" within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended (the "Exchange Act"). Because these statements are based on a
number of beliefs, estimates and assumptions that could cause actual results to
materially differ from those in the forward-looking statements, there can be no
assurance that the forward-looking statements will prove to be accurate.
Any number of factors could affect Franklin Select's operations and future
results and the amount and timing of cash expected to be distributed to
shareholders, including the actions of third parties (including the other
parties to the Asset Sale), the timely consummation of the Asset Sale, the
timing and method of implementation of the Dissolution Plan, Franklin Select's
ability to maintain its real estate investment trust ("REIT") status, general
industry and economic conditions, changes in applicable laws, rules and
regulations (including changes in tax laws) and those specific risks that are
discussed in the Risk Factors detailed herein and in Franklin Select's previous
filings with the SEC.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date of this Proxy Statement. Franklin
Select undertakes no obligation to update any forward-looking statements,
whether as a result of new information or future events.
RISK FACTORS RELATING TO THE ASSET SALE AND THE DISSOLUTION PLAN
In addition to the other information included elsewhere in this Proxy
Statement, the following factors should be considered carefully in determining
whether to vote in favor of the proposals to approve the Asset Sale and the
Dissolution Plan.
ESTIMATES OF THE NET PROCEEDS FROM THE ASSET SALE AND DISTRIBUTIONS TO BE
RECEIVED BY SHAREHOLDERS MAY NOT BE REALIZED
There can be no assurance that the Asset Sale will be consummated or that
any of the estimates set forth in this Proxy Statement will be realized.
Shareholders, in determining whether to vote in favor of the proposals to
approve the Asset Sale and the Dissolution Plan, are cautioned not to attribute
undue certainty to any estimates set forth herein. Such estimates are based on
a variety of assumptions relating to the likelihood of closing the Asset Sale,
the value of Franklin Select's other remaining assets, the amount of Franklin
Select's liabilities and expenses to be paid in the future, the resolution of
pending litigation, general business and economic conditions and other matters.
The amount of proceeds from the Asset Sale and the amount to be distributed to
shareholders are based on Franklin Select's current estimates and are subject
to various and significant uncertainties, many of which are beyond Franklin
Select's control, that could cause the actual results to differ materially from
Franklin Select's expectations. See "Dissolution-Expected Distribution."
Examples of uncertainties that could cause the amount of proceeds from the
Asset Sale and distributions to shareholders to be less than Franklin Select's
estimates include the following:
2
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o Franklin Select's estimates of net proceeds from the Asset Sale and
the amount of the initial cash distribution are based on estimates of
the costs and expenses of the Asset Sale and the dissolution. If
actual costs and expenses exceed Franklin Select's estimates, actual
net proceeds and distributions to shareholders could be less than
estimated.
o If liabilities of Franklin Select that are unknown or contingent at
the time of the mailing of this Proxy Statement later arise or become
fixed in amount and must be satisfied or reserved for as part of the
dissolution, the amount of distributions to shareholders could be
reduced.
o Delays in consummating the Asset Sale or the Dissolution Plan, such as
delays in the closing of the Purchase Agreement, could result in
additional expenses and result in lower actual distributions to
shareholders than the amounts estimated by Franklin Select. See
"Anticipated Timing of Asset Sale and Dissolution May Not be Achieved"
below.
o Franklin Select is currently involved in two shareholder lawsuits,
each of which it has previously reported (the "Shareholder
Litigation"). Franklin Select continues to believe, as previously
reported, that the outcome of litigation of these matters would not
have a material adverse effect on its financial condition, results of
operations or cash flows if Franklin Select were to remain a going
concern. However, if the Asset Sale and subsequent dissolution of
Franklin Select occur and the Shareholder Litigation is still pending,
Franklin Select will hold back sufficient assets from available
proceeds of sale and other sources to provide for, or otherwise make
provision for, the costs of litigation whatever its outcome, including
any possible settlement or adverse judgment with respect to these
lawsuits. The aggregate amount of any such provisions and holdbacks
cannot be determined with certainty at this time, but would be
substantial. Such provisions include the purchase by Franklin Select
of additional insurance with respect to these lawsuits so as to allow
Franklin Select to limit the amounts that would have to be held back
to provide for these lawsuits in the course of dissolving Franklin
Select. See "Dissolution Plan-Effect of Shareholder Litigation."
The actual distributions to shareholders could, for the foregoing reasons,
vary materially from Franklin Select's estimate and may be substantially less.
See "Information About Forward-Looking Statements."
FRANKLIN SELECT WOULD INCUR COSTS IF THE PURCHASE AGREEMENT WERE TERMINATED
BECAUSE OF THE FAILURE OF THE SHAREHOLDERS TO APPROVE THE ASSET SALE OR THE
RECEIPT BY FRANKLIN SELECT OF A SUPERIOR PROPOSAL
If Franklin Select or Value Enhancement terminates the Purchase Agreement
because Franklin Select is unable to obtain shareholder approval by February
28, 2000, or if Franklin Select terminates the Purchase Agreement because it
has received a "superior proposal" (as defined in the Purchase Agreement),
Franklin Select is obligated under the Purchase Agreement to reimburse Value
Enhancement for up to an aggregate of $250,000 of specified out-of-pocket due
diligence costs and loan assumption fees (including related legal costs) and
for up to $25,000 in legal fees. In addition, Franklin Select has incurred, and
expects to continue to incur, substantial costs on its own behalf in connection
with the Asset Sale.
If Franklin Select terminates the Purchase Agreement because it has
received a "superior proposal" or if either Franklin Select or Value
Enhancement terminates the Purchase Agreement because Franklin Select has
failed to obtain shareholder approval, and, if within 12 months after the date
of the Purchase Agreement Franklin Select, in one or more transactions,
consummates or enters into an agreement providing for any merger, sale,
consolidation, share exchange, business combination or similar transaction with
a third party involving all or substantially all of Franklin Select's
properties, assets or shares of stock, or the Partnership's properties, then,
in addition to reimbursing Value Enhancement for the costs and expenses
described above, Franklin Select would be required to pay Value Enhancement a
break-up fee of $1,315,000. The break-up fee is prorated for transactions that
involve substantially all, but less than all, of Franklin Select or its assets
or properties.
3
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THE ASSET SALE MAY NOT BE CONSUMMATED
The consummation of the Asset Sale is subject to numerous conditions.
There can be no assurance, even if the shareholders vote to approve the Asset
Sale, that the Asset Sale will be consummated. If the Asset Sale is not
consummated, Franklin Select may not be able to sell its assets on terms as
favorable as those provided in the Purchase Agreement, which would mean that
less cash would be available for distribution to shareholders than if the Asset
Sale had been consummated.
ANTICIPATED TIMING OF DISSOLUTION PLAN MAY NOT BE ACHIEVED
The Purchase Agreement provides that the Asset Sale will close as soon as
practicable, but not more than 20 business days after Franklin Select obtains
shareholder approval, and in all events by March 31, 2000. Franklin Select has
agreed in the Purchase Agreement to remain in existence for at least nine
months after the closing of the Asset Sale and to maintain liquid assets of at
least $2,630,000 during that period. Even if the Asset Sale were consummated on
a timely basis, Franklin Select could not be dissolved for at least nine months
after the closing without breaching the Purchase Agreement. Moreover, although
the Board presently intends to dissolve Franklin Select as soon as feasible
after the expiration of this period, it may decide not to dissolve Franklin
Select until after the resolution of the Shareholder Litigation.
THERE CAN BE NO ASSURANCE THAT THE ASSET SALE AND THE DISSOLUTION PLAN WILL
RESULT IN GREATER RETURNS TO SHAREHOLDERS THAN A CONTINUATION OF FRANKLIN
SELECT AS A GOING CONCERN
If the Asset Sale and the Dissolution Plan are not approved, the Board
intends to continue to manage Franklin Select and its assets substantially as
they are currently being managed and may entertain and consider indications of
interest from third parties to acquire Franklin Select or all or a portion of
its assets. There can be no assurance that the Asset Sale and Dissolution Plan
will result in greater returns to the shareholders than a continuation of
Franklin Select as described above. The purchase price for Franklin Select's
assets under the Purchase Agreement is essentially capped, and Franklin Select
will not be able to realize the benefits from any improvements in economic,
real estate and credit market conditions that would increase the market value
of Franklin Select's assets.
THE BOARD MAY AMEND, DELAY IMPLEMENTATION OF, OR TERMINATE THE DISSOLUTION PLAN
EVEN IF IT IS APPROVED BY THE SHAREHOLDERS
Even if the shareholders vote to approve the Dissolution Plan, the Board
has reserved the right, in its sole discretion, to amend, delay implementation
of, or terminate the Dissolution Plan unless it determines that such action
would materially and adversely affect the shareholders' interests.
SHAREHOLDERS COULD BE LIABLE IF CONTINGENT RESERVES ARE INSUFFICIENT TO SATISFY
FRANKLIN SELECT'S LIABILITIES
If Franklin Select (or a liquidating trust to which Franklin Select's
assets are transferred) has inadequate reserves for payment of Franklin
Select's expenses, obligations and liabilities, each shareholder could be held
personally liable for any additional amounts owed, up to the amount of total
distributions such shareholder received.
If a court holds at any time that Franklin Select has failed to make
adequate provision for its obligations and liabilities or if the amount
ultimately required to be paid in respect of such liabilities exceeds the
amount available from the contingency holdbacks and the assets of the
liquidating trust, a creditor of Franklin Select could seek an injunction
against the making of distributions under the Dissolution Plan on the grounds
that the amounts to be distributed are needed to provide for the payment of
Franklin Select's expenses and liabilities. Any such action could delay or
substantially diminish the cash distributions to be made to shareholders and/or
holders of beneficial interests of the liquidating trust under the Dissolution
Plan.
4
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PROPOSAL 1: TO APPROVE THE ASSET SALE
DESCRIPTION OF THE ASSET SALE
GENERAL OVERVIEW
This Proxy Statement contains a brief summary of the material aspects of
the Asset Sale and of the Purchase Agreement. This summary is qualified in all
respects by the text of the Purchase Agreement, which was filed as an exhibit
to the Form 8-K filed by Franklin Select on October 25, 1999 with the SEC.
Shareholders are advised to read the entire Purchase Agreement.
The Purchase Agreement provides for the sale to Value Enhancement of all
of Franklin Select's real estate assets. The assets being sold consist of all
real estate owned directly by Franklin Select (the "Owned Properties"), either
Franklin Select's partner interests in the Partnership or the real estate
presently owned by the Partnership, and the personal property, rights and other
intangible assets related thereto. The Partnership was formed in 1996 by
Franklin Select and an entity owned by the Limited Partners to acquire certain
properties. It owns four real estate projects located in California (the
"Partnership Properties"). The Owned Properties and the Partnership Properties
are collectively referred to herein as the "Properties." Under the Purchase
Agreement, Franklin Select will retain any cash on hand at the time the Asset
Sale is completed, subject to certain contingent adjustments and pro-rations
described below. The Purchase Agreement also provides for the sale by the
Limited Partners of their limited partner interests to Value Enhancement,
provided the Limited Partners have not elected to convert their limited partner
interests into Series A Shares effective immediately prior to the Asset Sale.
By notice to Franklin Select dated November 19, 1999, all the Limited
Partners exercised their rights (the "Conversion Rights") to convert their
limited partner interests into Series A Shares. (See "Description of the
Partnership; Agreement with the Limited Partners" below.) Pursuant to the
Exchange Rights Agreement dated as of September 30, 1996 among Franklin Select,
the Partnership and each of the Limited Partners (the "Exchange Rights
Agreement"), as modified by the Purchase Agreement, Franklin Select will,
immediately before the closing of the Asset Sale, issue 1,625,000 Series A
Shares to the Limited Partners and become the owner of all the partner
interests. At the closing Franklin Select will either sell all of the partner
interests to Value Enhancement pursuant to the Purchase Agreement or sell the
Partnership Properties to Value Enhancement. Because all the Limited Partners
exercised their Conversion Rights in a timely manner, the base purchase price
payable by Value Enhancement to Franklin Select will be $131,500,000, including
$12,122,500 that would have been payable to the Limited Partners had they not
exercised their Conversion Rights. The base purchase price for Franklin
Select's interests is to be reduced by approximately $26,458,000 for existing
debt to be assumed by Value Enhancement. The net purchase price is payable in
cash. See "Purchase Price," "Purchase Price Adjustment or Termination" and
"Indemnity and Indemnity Escrow Fund." In addition, the number of Series A
Shares outstanding will increase to 13,875,369 as of the closing of the Asset
Sale.
BACKGROUND AND HISTORY OF THE ASSET SALE
In recent years, it has been progressively more difficult for REITs with
relatively small equity market capitalization, such as Franklin Select, to
compete in the REIT marketplace. Over time, the Board became increasingly aware
that Franklin Select did not have the business attributes necessary to achieve
appropriate growth in earnings and cash flow and, consequently, an adequate
total return to its shareholders. In particular, the Board considered the
following constraints:
1. Franklin Select's relatively small equity market capitalization, its
lack of asset diversity relative to larger real estate companies, and
its related exposure to lease rollover risks and risks associated with
asset concentration.
2. The lack of equity capital available in the public markets at an
attractive cost to equity REITs generally and Franklin Select in
particular.
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3. The limited growth prospects of Franklin Select, particularly because
of the limited availability of equity capital and increased
competition in the real estate industry.
As a result of these considerations, Franklin Select's Board formed a
special committee (the "Special Committee") in February 1998 and directed the
Special Committee to review and evaluate short-term and long-term strategic
alternatives available to Franklin Select to increase shareholder value, report
its recommendations to the full Board and recommend a course of action to the
full Board. The Special Committee is and has been composed entirely of
independent directors. The members of the Special Committee are: E. Samuel
Wheeler, Chairman; Lloyd D. Hanford, Jr.; Egon H. Kraus; and Frank W. T.
LaHaye, Barry C.L. Fernald and Larry D. Russel, each of whom is affiliated with
a Limited Partner, were members of the Special Committee and independent
directors until their resignations from the Board and the Special Committee
effective September 9, 1999. See "Interests of Certain Persons In Matters To Be
Acted Upon." David Goss, the only member of the Board who is not a member of
the Special Committee, was not named to and did not participate on the Special
Committee in order to avoid any conflict of interest that might arise as a
result of Mr. Goss's employment by Franklin Properties, Inc., Franklin Select's
management advisor (the "Advisor"). The Special Committee engaged Farella Braun
& Martel LLP ("Farella") as its independent counsel in February 1998. Farella
had represented, and currently represents, the independent directors in the
Shareholder Litigation.
The Special Committee met several times during the first quarter of 1998
and, during that period, interviewed a number of potential independent
financial advisors. In April 1998, it engaged Prudential Securities
("Prudential Securities") to analyze and consider various strategic
alternatives available to Franklin Select to enhance shareholder value,
identify specific opportunities for a transaction, advise the Special Committee
concerning such opportunities, participate on Franklin Select's behalf in
negotiations concerning such a transaction, and assist the Special Committee in
structuring such a transaction. Prudential Securities's engagement also
included rendering an opinion as to the fairness from a financial point of view
to Franklin Select of the consideration to be received in any such transaction.
The Special Committee met several times during the second quarter of 1998.
At each of these meetings, Prudential Securities made presentations to the
Special Committee regarding the various alternatives available to Franklin
Select, including: growing through acquisitions, acquiring a strategic investor
or partner, selling all of Franklin Select's stock or merging with another
public or private REIT, or liquidating Franklin Select's assets. In June 1998,
the Special Committee concluded that Franklin Select should explore the
strategic alternatives presented by Prudential Securities, and authorized
Prudential Securities to solicit expressions of interest and report back to the
Special Committee.
Prudential Securities and Franklin Select's management then prepared
confidential offering materials describing Franklin Select and its real estate
assets. The offering materials invited the prospective purchasers to submit
bids to Prudential Securities for either: (i) the office assets, (ii) the
industrial assets, (iii) the office and industrial assets, (iv) the retail
assets, or (v) Franklin Select's entire real estate portfolio. Beginning in
June 1998, Prudential Securities contacted potential purchasers on behalf of
Franklin Select. From June through August of 1998, Franklin Select received
indications of interest from numerous potential purchasers regarding the sale
of its stock or some or all of its assets, and commenced negotiations with
several potential purchasers. In September 1998, a substantial decline in the
financial markets caused a number of potential purchasers to withdraw their
indications of interest. Of the remaining indications of interest, the Board
determined that the offer from Pan Pacific Retail Properties, Inc. to purchase
Franklin Select's retail properties was the most attractive. In November 1998,
Franklin Select sold its retail assets to Pan Pacific for $15,400,000. The
Special Committee continued to meet regularly during the remainder of 1998 to
consider its alternatives, in consultation with Prudential Securities, the
Special Committee's legal counsel and the Advisor.
In January 1999, the Special Committee instructed Prudential Securities to
solicit bids for Franklin Select's office and industrial properties.
Thereafter, Prudential Securities contacted potential
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purchasers on behalf of Franklin Select. The Special Committee received
indications of interest from several potential purchasers. After extensive
analysis of the proposals received from such potential purchasers, due
diligence by the potential purchasers and preliminary negotiations, the Special
Committee unanimously concluded, with guidance from Prudential Securities and
the Advisor, that of all the possible alternatives available to Franklin
Select, a transaction with Value Enhancement offered the best opportunity to
maximize shareholder value. Therefore, the Special Committee and the Advisor
recommended that Franklin Select pursue a transaction with Value Enhancement.
Franklin Select then began to negotiate with Value Enhancement and reported on
a regular basis to the Special Committee on the proposed terms of a
transaction. During this time, Value Enhancement undertook an extensive due
diligence investigation of Franklin Select's assets.
On June 21, 1999, Franklin Select and Value Enhancement entered into an
exclusive negotiations arrangement relating to the sale of Franklin Select's
real estate assets. The arrangement provided that, while Value Enhancement
conducted its due diligence review, the parties would negotiate the basic terms
of a transaction, which would be formalized in a definitive asset purchase
agreement.
The Special Committee held a meeting on October 2, 1999 to consider the
Value Enhancement proposal. During the meeting, Prudential Securities described
for the Special Committee the process it had conducted in soliciting offers for
Franklin Select's real estate assets and reviewed the negotiations with Value
Enhancement. After a thorough discussion of the terms of the Value Enhancement
proposal and after consultation with Prudential Securities, the Special
Committee unanimously voted to recommend to the Board that, subject to
shareholder approval and negotiation of final documentation, Franklin Select
sell its remaining real estate assets to Value Enhancement. In addition,
subject to shareholder approval, the Special Committee voted unanimously to
recommend to the Board to effect the liquidation, winding up and dissolution of
Franklin Select. The Board's decision was made after considering various
strategic alternatives available to Franklin Select. As discussed more fully
below, the Board concluded that the sale of the real estate assets, and
subsequent liquidation, winding up and dissolution of Franklin Select, would be
more likely to provide the shareholders with a greater return on their
investment than they would have received through the continuation of Franklin
Select's then-current operating strategy or by the adoption of one of several
different strategic alternatives considered by the Board.
Following additional negotiations between Franklin Select and Value
Enhancement and the completion of all due diligence, the Purchase Agreement was
executed by the parties effective as of October 12, 1999, subject to
shareholder approval.
BUYER
The buyer is Value Enhancement, whose address is c/o Lend Lease Real
Estate Investments, Inc., 3424 Peachtree Road, N.E., Suite 800, Atlanta,
Georgia 30326. Value Enhancement is a private real estate fund formed by Lend
Lease Real Estate Investments to purchase properties. Lend Lease Real Estate
Investments is an affiliate of Lend Lease Corporation, a diversified financial
services and real estate investment, development, construction and management
company based in Australia which reported operating revenues in excess of $2
billion and pre-tax operating profits in excess of $300 million for its fiscal
year ended June 30, 1999.
To Franklin Select's knowledge, there is no material relationship between
Value Enhancement or Lend Lease Corporation, on the one hand, and Franklin
Select or its affiliates, on the other hand, except the transactions
contemplated by the Purchase Agreement. Franklin Resources, Inc. ("Franklin
Resources") owns approximately 13% of Franklin Select's outstanding Common
Stock and is the ultimate parent company of the Advisor, which owns all the
outstanding Series B Shares. Several mutual funds managed by Franklin
Resources, and various investment portfolios managed or advised by Franklin
Resources, own publicly traded equity securities of Lend Lease Corporation
purchased on securities exchanges or directly from third parties in arms'
length transactions. Franklin Select believes that these securities, in the
aggregate, constitute approximately 3% of the outstanding equity securities of
Lend Lease Corporation as of October 22, 1999.
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PURCHASE PRICE
The base purchase price to be paid by Value Enhancement to Franklin Select
pursuant to the Purchase Agreement is $131,500,000. The base purchase price is
to be reduced by the amount of the outstanding principal balance, and all
accrued and unpaid interest and other charges (not including loan assumption
fees and costs and loan prepayment charges) with respect to the existing loans
secured by the Owned Properties and the Partnership Properties. The net
purchase price for Franklin Select's interests is payable in cash. The base
purchase price is to be adjusted as of the closing date for pro-ratable items
and certain other items.
For each outstanding loan secured by the Properties, Value Enhancement has
agreed to either, at its option: (a) assume the loan effective as of the
closing and pay any loan assumption fees and costs, in which case Franklin
Select or the Partnership, as applicable, shall be released from any
liabilities arising after assumption, or (b) pay the entire principal balance
of the loan at closing, together with accrued interest and any prepayment
charges. The aggregate principal balance of the existing loans on the
Properties was approximately $26,458,000 as of September 30, 1999.
Real estate taxes, assessments and other municipal charges, utility
charges, service contract obligations and interest on assumed debt will be
pro-rated as of midnight of the day immediately preceding the closing date.
With certain exceptions, rents will be pro-rated as of midnight of the day
immediately preceding the closing date. Amounts prepaid by Franklin Select or
the Partnership and refundable security deposits will be credited to Franklin
Select. Security deposits that the landlord is obligated to hold will be
credited to Value Enhancement. Franklin Select and Value Enhancement have
agreed to allocate payments for leasing commissions, tenant improvement
allowances, cost of tenant improvements and similar inducements for leases
signed after April 30, 1999, and the cost of certain capital expenditures
incurred after April 30, 1999. Franklin Select does not expect the net amount
of such allocations to be material.
DESCRIPTION OF THE PARTNERSHIP; AGREEMENT WITH THE LIMITED PARTNERS
Franklin Select is a party to an Agreement of Limited Partnership of FSRT,
LP, dated as of October 30, 1996, among Franklin Select, as the general
partner, and Northport Associates No. 18, a California limited liability
company ("Northport"), as a limited partner. Shortly after the formation of the
Partnership, Northport transferred its interest to its four members, who later
transferred their respective interests to family trusts; these trusts are the
Limited Partners. The four Limited Partners are trusts of which Barry C. L.
Fernald, Larry D. Russel, C. Gerald Engles, Gary Filizetti and their families,
respectively, are settlors and beneficiaries. Franklin Select, the Partnership
and the Limited Partners are parties to the Exchange Rights Agreement, which
grants each Limited Partner Conversion Rights. A Conversion Right is the right
to exchange limited partner interests (which are denominated in limited partner
units) for Series A Shares.
Concurrently with the Purchase Agreement, Franklin Select entered into a
Purchase of Conversion Rights Agreement (the "Conversion Rights Agreement")
dated as of October 12, 1999 with the four Limited Partners, pursuant to which
the Limited Partners, if they had not timely exercised their Conversion Rights,
agreed to sell to Franklin Select their Conversion Rights and their related
rights to register their shares for resale under certain circumstances. This
Proxy Statement contains a summary of the Conversion Rights Agreement. The
summary is qualified in all respects by the text of the Conversion Rights
Agreement, which was filed as an exhibit to the Form 8-K filed by Franklin
Select with the SEC on October 25, 1999. Shareholders are advised to read the
entire Conversion Rights Agreement.
Pursuant to the Purchase Agreement, Value Enhancement agreed to pay the
Limited Partners separately for their limited partner interests. However,
pursuant to the Conversion Rights Agreement and the Purchase Agreement, each
Limited Partner also retained its respective Conversion Rights, but was
required to notify Franklin Select on or before November 19, 1999 of its
election to exercise its
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Conversion Rights. All of the Limited Partners notified Franklin Select on
November 19, 1999 that they were exercising their Conversion Rights. Value
Enhancement has informed Franklin Select that, before the Limited Partners
exercised their Conversion Rights, Value Enhancement agreed to pay each Limited
Partner $25,000 in connection with such Limited Partner's exercise of its
Conversion Rights. Each Limited Partner's election to exercise its Conversion
Rights is irrevocable, but the conversion is contingent upon the closing of the
Asset Sale. Pursuant to the Purchase Agreement, the conversion will take place
immediately before the closing and the purchase price to be paid by Value
Enhancement to Franklin Select will be increased to $131,500,000. Franklin
Select will issue a total of 1,625,000 Series A Shares to the Limited Partners
in exchange for their limited partner units, resulting in a total of
approximately 13,875,369 Series A Shares issued and outstanding. After the
conversion, the Limited Partners' aggregate percentage ownership of the Series
A Shares will be approximately 11.71%. Upon issuance of the Series A Shares to
the Limited Partners, the Limited Partners, as shareholders, will have the same
rights as other holders of Series A Shares. However, because the issuance of
these shares will occur after the record date for voting on the proposals
described in this Proxy Statement, the Limited Partners will not be able to
vote such shares with respect to these proposals. By exercising their
Conversion Rights, the Limited Partners have waived their rights under the
Purchase Agreement to sell their limited partner interests to Value
Enhancement. Because all the Limited Partners elected to convert into Series A
Shares, Franklin Select can either sell the Partnership Properties directly to
Value Enhancement or sell its partner interests.
Under the terms of the Conversion Rights Agreement, Franklin Select
agreed, regardless of whether the Limited Partners exercised their Conversion
Rights, to reimburse the Limited Partners for their reasonable accountants' and
attorneys' fees and costs in connection with the sale of their limited partner
units and Conversion Rights, and the negotiation of the Purchase Agreement,
Conversion Rights Agreement and related documentation. Franklin Select has
agreed to indemnify the Limited Partners against all claims resulting from the
Asset Sale and the Purchase Agreement except with respect to certain specified
matters. Franklin Select has also agreed to advance reasonable legal fees to,
or defend, the Limited Partners in connection with matters for which Franklin
Select has agreed to indemnify the Limited Partners, upon receipt of an
undertaking, reasonably satisfactory to Franklin Select, by the Limited Partner
to repay such amounts if it is ultimately determined that the Limited Partner
is not entitled to indemnity.
EXPECTED PROCEEDS OF THE ASSET SALE
Franklin Select expects to receive proceeds from the Asset Sale of
approximately $105,042,000 in cash. This amount is composed of the $131,500,000
base purchase price reduced by approximately $26,458,000 of debt as of
September 30, 1999 to be assumed or prepaid by Value Enhancement. This amount
does not reflect adjustments for pro-rations at closing or any adjustments to
the purchase price that may be made for breaches of representations and
warranties discovered before the closing. After deducting approximately
$3,700,000 for estimated legal, accounting, investment banking, title
insurance, closing, directors' and officers' liability insurance and other
liability insurance, shareholder communication and other costs, and $2,630,000
required to be deposited in an indemnity escrow fund pursuant to the Purchase
Agreement to secure indemnity obligations (see "Indemnity and Indemnity Escrow
Fund"), Franklin Select anticipates that the initial cash distribution
following the Asset Sale will be approximately $7.11 per Series A Share
($98,712,000 in the aggregate). See "Dissolution-Expected Distribution." All
estimates of proceeds and distributions per share in this Proxy Statement
assume the issuance of 1,625,000 Series A Shares to the Limited Partners
immediately before the closing of the Asset Sale pursuant to the exercise of
the Limited Partners' Conversion Rights.
In addition to the estimated proceeds from the Asset Sale, Franklin Select
will also have other assets at the time of the closing of the Asset Sale,
consisting primarily of cash, cash equivalents and mortgage-backed securities.
As of September 30, 1999, the latest period for which Franklin Select has
announced its financial results, the value of these other assets was
approximately $15,925,000 before the payment of liabilities. From these other
assets as they may exist at the time of the closing, Franklin Select must
retain sufficient funds to meet its obligations, including its then existing
and contingent
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liabilities, as well as its costs of dissolution. Assets will be retained to
cover (a) liabilities or possible liabilities relating to the Shareholder
Litigation (as defined herein - see "Effect of Shareholder Litigation"), unless
such lawsuits are settled or dismissed prior to the closing of the Asset Sale,
(b) other known or contingent and future claims, (c) professional fees and
other expenses of management and dissolution, and (d) various other
liabilities, expenses and obligations of Franklin Select that will be incurred
by Franklin Select and any liquidating trust. See "Dissolution-Expected
Distribution."
DESCRIPTION OF THE PROPERTIES
The Owned Properties consist of the following:
(a) an office building located at 1800 East Imperial Highway, Brea,
California, and an adjacent land parcel;
(b) research and development industrial buildings located at 4545-55-75
Cushing Parkway, Fremont, California;
(c) research and development industrial buildings located at 45635 & 45875
Northport Loop East, Fremont, California;
(d) an office building located at 100 Marine World Parkway, Redwood City,
California; and
(e) office buildings located at 1 & 3 Twin Dolphin Drive, Redwood City,
California.
The Partnership Properties consist of the following:
(a) a research and development industrial building located at 46360
Fremont Boulevard, Fremont, California;
(b) research and development industrial buildings located at 40455 and
40563 Encyclopedia Circle, Fremont, California;
(c) research and development industrial buildings located at 4540-4650
Cushing Parkway, Fremont, California; and
(d) an office building located at 1500 Rosecrans Avenue, Manhattan Beach,
California.
Continental Property Management Company ("Continental"), an affiliate of
the Advisor, manages the Owned Properties and the Partnership Properties
pursuant to property management agreements with Franklin Select and the
Partnership, respectively. Franklin Select, the Partnership and Continental
have agreed to terminate these agreements contingent, and effective, upon the
closing of the Asset Sale.
EXPECTED TIMING OF THE ASSET SALE
Franklin Select has agreed in the Purchase Agreement to make commercially
reasonable efforts to seek shareholder approval of the Asset Sale, including
filing the required proxy statement with the SEC. The Purchase Agreement
provides that the closing is to occur as soon as practicable, but not more than
twenty (20) business days, after Franklin Select notifies Value Enhancement of
receipt of shareholder approval, and in all events by March 31, 2000.
REPRESENTATIONS AND WARRANTIES; CLOSING CONDITIONS
The Purchase Agreement contains representations and warranties by Franklin
Select and the Partnership to Value Enhancement customary for transactions of
this type, including representations regarding Franklin Select, the Limited
Partners, the Partnership and the Properties.
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The parties' obligations to consummate the Asset Sale are subject to the
satisfaction or waiver of conditions customary for transactions of this type,
including: (a) approval by Franklin Select's shareholders, (b) there being no
court order or other governmental prohibition or restraint preventing the
consummation of the transactions, (c) each of the parties having complied with
or performed all required obligations (except any for which a failure to comply
or perform does not have a material adverse effect on the transaction); (d) the
title insurance company being ready, willing and able to issue the required
title insurance policies, subject to the permitted exceptions; and (e) the
representations and warranties of the other party being true and correct, with
certain materiality exceptions.
PURCHASE PRICE ADJUSTMENT OR TERMINATION
The Purchase Agreement provides that if the representations and warranties
of Franklin Select, the Limited Partners or the Partnership are not true and
correct as of the closing date, other than because of damage, destruction or
condemnation or certain exceptions regarding title, and such failure to be true
and correct would result in an aggregate loss or liability to Value Enhancement
of at least $400,000, then the purchase price including, on a pro rata basis,
the purchase price for the limited partner interests is reduced by the full
amount of such loss or liability. If the breach of representation and warranty
is due to certain liens on title that have not been discharged at or before the
closing, then the purchase price including, on a pro rata basis, the purchase
price for the limited partner interests, is reduced by the cost of removing the
lien or any diminution in value caused by the lien. As of the date of this
Proxy Statement, Value Enhancement has identified certain potential losses and
liabilities which total less than $400,000 and which the parties are in the
process of trying to resolve.
If the failure of the representations and warranties to be true and
correct (other than because of damage, destruction or condemnation) would
result in an aggregate loss or liability to Value Enhancement of at least
$7,500,000, then either Value Enhancement or Franklin Select may terminate the
transaction. However, Franklin Select has no right to terminate if the failure
of the representation or warranty resulted from its or the Limited Partners'
intentional action or omission or breach of a covenant. Instead of terminating
the Asset Sale, Value Enhancement may elect to limit the claimed loss or
liability to less than $7,500,000 and to reduce the purchase price (including,
on a pro rata basis, the purchase price for the limited partner interests) by
such lesser amount. If Value Enhancement elects this adjustment, Franklin
Select will have no right to terminate the Purchase Agreement; the price
adjustment will be Value Enhancement's sole and exclusive remedy regarding
representations and warranties determined prior to the closing not to be true
and correct. However, Value Enhancement will retain any rights it would
otherwise have had regarding intentional breaches of representations and
warranties.
Any disputes regarding the existence, before closing, of a breach of
representation or warranty and the amount of any resulting loss or liability
under the Purchase Agreement are to be resolved by mediation in San Francisco
under the rules of the American Arbitration Association and, if the parties
cannot reach an agreement in mediation, by final, binding arbitration in San
Francisco under the Commercial Arbitration Rules of the American Arbitration
Association. Any disputed amounts at the time of closing will be withheld from
the purchase price payment and placed in escrow with the title company pending
resolution of the dispute.
If, before the closing, the Properties are damaged or all or any part of
the Properties are taken by eminent domain, Value Enhancement is required to
close the transactions and has the right to any insurance proceeds or
compensation payable with respect to such damage or taking, unless, as a result
of such damage or taking, a "major lease termination" occurs. If a major lease
termination occurs, Value Enhancement has the right to terminate the Purchase
Agreement. A major lease termination occurs if any tenant leasing over 40,000
square feet of the affected Properties, or 20% of more (by number of tenants)
of the remaining tenants leasing over 10,000 square feet in the affected
Properties, either (a) fail to provide a written statement waiving any and all
rights to terminate their respective leases as a result of such damage or
taking, or (b) threaten or assert in writing a right to terminate their leases
as a result of such damage or taking.
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INDEMNITY AND INDEMNITY ESCROW FUND
Franklin Select and the Partnership have agreed to indemnify Value
Enhancement and its directors, officers, employees, agents, representatives and
affiliates (the "Indemnitees") against costs, losses, damages, claims and the
like ("Losses") arising out of: (a) the inaccuracy of any representation made
by, or the failure to comply with any agreement or obligation of, Franklin
Select or the Partnership set forth in the Purchase Agreement and related
agreements, and (b) filings made by or on behalf of Franklin Select or its
shareholders or affiliates with governmental authorities in connection with the
transaction, including this Proxy Statement (with certain exceptions). Franklin
Select has agreed to indemnify the Indemnitees against Losses arising out of
the Shareholder Litigation.
To secure the indemnity obligations of Franklin Select and the
Partnership, $2,630,000 in cash will be withheld from the cash paid by Value
Enhancement to Franklin Select at closing and will be deposited with a mutually
acceptable escrow agent. This fund is known as the "indemnity escrow fund." The
indemnity obligations of Franklin Select and the Partnership do not arise
unless and until the total of all claims for indemnity exceeds $1,350,000. The
$1,350,000 threshold is also a deductible amount; even if the threshold is
reached, the indemnity obligations only apply to claims above the threshold.
In general, the indemnity obligations of Franklin Select and the
Partnership are limited to any funds remaining in the indemnity escrow fund,
and the indemnity escrow fund is Value Enhancement's sole recourse for these
indemnities. However, indemnity obligations relating to the following (to the
extent Franklin Select, the Partnership or the Limited Partners have any
liabilities with respect thereto) are not subject to the threshold amount
requirement or the maximum indemnity amount, and Value Enhancement's recourse
for them is not limited to the indemnity escrow fund: (a) intentional
misrepresentations by Franklin Select or the Partnership; (b) failure to comply
with post-closing obligations contained in the Purchase Agreement and related
agreements; (c) breaches of representations regarding brokerage commissions;
(d) indemnity obligations regarding the Shareholder Litigation; and (e) failure
to pay costs or expenses under the Purchase Agreement and related agreements,
including closing adjustments. Except for these claims, for which the Purchase
Agreement provides no time limit, claims for breaches of representations,
warranties and covenants must be made by Value Enhancement on or before the
nine month anniversary of the closing date. For all claims, indemnity payments
are reduced by any proceeds received by the indemnified party from insurance
and by indemnity, contribution or other payments from third parties.
TERMINATION OF THE PURCHASE AGREEMENT
Upon the execution of the Purchase Agreement, Value Enhancement deposited
$1,315,000 in the form of a standby letter of credit in escrow with the title
company as a deposit against payment of the purchase price at closing. If the
sale of the Owned Properties and Franklin Select's general partner interest is
not consummated because of a default by Value Enhancement, and if the
conditions to consummation that are not within Value Enhancement's control have
been satisfied, then Franklin Select is entitled to retain the deposit,
together with all interest, as liquidated damages. Retaining the deposit by
Franklin Select would be Franklin Select's and the Limited Partners' sole and
exclusive remedy against Value Enhancement for such a default by Value
Enhancement that prevented consummation of the transactions.
If, notwithstanding its efforts, Franklin Select is unable to obtain the
requisite shareholder approval by February 28, 2000, then Franklin Select (on
behalf of itself and the Limited Partners) and Value Enhancement are each
entitled to terminate the Purchase Agreement. Moreover, if, following the date
of the Purchase Agreement (i.e., October 12, 1999), Franklin Select receives a
"superior proposal," then, to the extent required by the fiduciary obligations
of the Board as determined in good faith in consultation with outside counsel,
Franklin Select is entitled to terminate the Agreement on behalf of itself and
the Limited Partners. A "superior proposal" means any proposal relating to any
direct or indirect acquisition of the Properties, the Common Stock or the
limited partner units that the Board
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determines, in good faith, after consultation with outside legal counsel and
financial and other advisers, is reasonably likely to be consummated, taking
into account the relevant factors and that would, if consummated, result in net
proceeds and tax benefits to Franklin Select's shareholders and the Limited
Partners in excess of the amount of proceeds and benefits the shareholders
(treating the Limited Partners as having fully converted their limited partner
units to Series A Shares) would receive in liquidating dividends as a result of
the Asset Sale. If (a) Franklin Select or Value Enhancement terminates the
Purchase Agreement because Franklin Select has been unable to obtain the
required shareholder approval by February 28, 2000, or (b) Franklin Select
terminates it because it has received a "superior proposal," Franklin Select is
required to reimburse Value Enhancement for up to an aggregate of $250,000 of
specified out-of-pocket due diligence costs and loan assumption fees (including
related legal costs) and for up to $25,000 in legal fees. In addition, the
$1,315,000 deposit made by Value Enhancement is to be promptly returned to it
and the Purchase Agreement will terminate. However, Franklin Select and the
Limited Partners are not required to make the reimbursements if the Asset Sale
fails to close as a result of any default by Value Enhancement.
If (a) Franklin Select terminates the Purchase Agreement because it has
received a "superior proposal," or either Franklin Select or Value Enhancement
terminates the Purchase Agreement because Franklin Select has failed to obtain
shareholder approval, and, (b) within twelve (12) months after the date of the
Purchase Agreement (i.e., October 12, 2000), Franklin Select consummates or
enters into an agreement providing for any merger, share exchange, business
combination or similar transaction with a third party involving all or
substantially all of Franklin Select's assets or stock, or any sale of all or
substantially all the Properties, then, in addition to reimbursing Value
Enhancement the costs and expenses described above, Franklin Select is required
to pay Value Enhancement a break-up fee of $1,315,000. The break-up fee is
prorated for transactions that involve substantially all, but less than all, of
Franklin Select or the Properties. However, Franklin Select is not required to
pay the reimbursements or the break-up fee if the Asset Sale fails to close as
the result of any default by Value Enhancement.
DISSOLUTION RESTRICTIONS
Franklin Select has agreed in the Purchase Agreement to remain in
existence for at least nine months after the closing of the Asset Sale and to
maintain liquid assets of at least $2,630,000 during that period.
GOVERNMENT APPROVALS
No federal or state regulatory requirements or approvals must be complied
with or obtained in connection with the Asset Sale other than compliance with
applicable state corporate law and federal and state securities laws.
OPINION OF PRUDENTIAL SECURITIES TO THE SPECIAL COMMITTEE
INTRODUCTION. The Special Committee engaged Prudential Securities in April
1998 to be its exclusive financial advisor with respect to the analysis and
consideration of strategic alternatives available to Franklin Select to enhance
shareholder value. Prudential Securities is not affiliated with Franklin
Select, the Advisor, Franklin Resources, Inc., or Franklin Templeton. The
Special Committee selected Prudential Securities because it is a nationally
recognized investment banking firm engaged in the valuation of businesses and
their securities in connection with mergers and acquisitions and for other
purposes and has substantial experience in transactions similar to the Asset
Sale. See "Background and History of the Asset Sale."
Prudential Securities has informed the Board and the Special Committee
that in the ordinary course of business, Prudential Securities may actively
trade the shares of Franklin Select's common stock for its own account and for
the accounts of customers, and accordingly, may at any time hold a long or
short position in such securities.
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Prudential Securities, the Special Committee and Franklin Select entered
into an Engagement Letter dated April 17, 1998, as extended by a Letter
Agreement dated September 23, 1999, pursuant to which the Special Committee
engaged Prudential Securities to analyze and consider strategic alternatives
available to Franklin Select to enhance shareholder value, including the
disposition of certain assets or the entire real estate portfolio. Prudential
Securities was engaged to identify opportunities for a transaction, advise the
Special Committee concerning such opportunities, whether or not identified by
Prudential Securities, and, as requested by the Special Committee, participate
on Franklin Select's behalf in negotiations concerning such a transaction and
assist the Special Committee in structuring a transaction. Prudential
Securities' engagement also included rendering an opinion as to the fairness
from a financial point of view to Franklin Select of the consideration to be
received in a transaction.
FAIRNESS OPINION-GENERAL. On October 2, 1999, Prudential Securities
delivered its oral opinion to the Special Committee to the effect that, as of
such date, the consideration to be paid to Franklin Select by Value Enhancement
pursuant to the Asset Sale is fair to Franklin Select from a financial point of
view. Prudential Securities did not address the fairness of the consideration
to be paid to Franklin Select's shareholders or the Limited Partners.
Prudential Securities made a presentation of the financial analysis underlying
its oral opinion at a Special Committee meeting on October 2, 1999. This
analysis is summarized below. All of the members of the Special Committee were
present at the meeting and had an opportunity to ask questions regarding the
Prudential Securities presentation. Prudential Securities subsequently
confirmed its opinion by a letter dated October 2, 1999 (the "Prudential
Securities Opinion").
In requesting the Prudential Securities Opinion, the Special Committee did
not give any special instructions to Prudential Securities or impose any
limitation upon the scope of the investigation that Prudential Securities
deemed necessary to enable it to deliver the Prudential Securities Opinion. A
copy of the Prudential Securities Opinion, which sets forth the assumptions
made, matters considered and limits on the review undertaken, is attached to
this Proxy Statement as EXHIBIT B and is incorporated herein by reference.
Franklin Select's shareholders are urged to read the Prudential Securities
Opinion in its entirety.
THE PRUDENTIAL SECURITIES OPINION IS DIRECTED ONLY TO THE FAIRNESS OF THE
CONSIDERATION TO FRANKLIN SELECT FROM A FINANCIAL POINT OF VIEW AND DOES NOT
CONSTITUTE A RECOMMENDATION TO ANY SHAREHOLDER AS TO HOW SUCH SHAREHOLDER
SHOULD VOTE AT THE SPECIAL MEETING OR AS TO ANY OTHER ACTION SUCH SHAREHOLDER
SHOULD TAKE REGARDING THE ASSET SALE.
CONCLUSION OF PRUDENTIAL SECURITIES OPINION. In the Prudential Securities
Opinion, Prudential concludes that the consideration to be paid to Franklin
Select pursuant to the Asset Sale is fair to Franklin Select from a financial
point of view.
METHODOLOGY; ITEMS REVIEWED. In conducting its analysis and arriving at
the Prudential Securities Opinion, Prudential Securities reviewed such
information and considered such financial data and other factors as it deemed
relevant under the circumstances, including, among others, the following: (a) a
draft of the Purchase Agreement, dated September 30, 1999; (b) a draft of the
Conversion Rights Agreement, dated September 30, 1999; (c) certain publicly
available historical financial and operating data concerning Franklin Select
including, but not limited to, the Annual Reports on Form 10-K of Franklin
Select for the fiscal years ended December 31, 1996, 1997 and 1998, and the
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999; (d)
historical stock market prices and trading volumes for Franklin Select common
stock; (e) publicly available financial, operating and stock market data
concerning certain companies engaged in businesses deemed comparable to the
business of Franklin Select or otherwise relevant to Prudential Securities'
inquiry; (f) the financial terms of certain recent transactions Prudential
Securities deemed relevant; (g) internal valuation analyses of Franklin
Select's properties prepared by the management of Franklin Select; and (h) such
other financial studies, analyses and investigations as Prudential Securities
deemed appropriate.
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Prudential Securities assumed, with Franklin Select's consent, that the drafts
of the Purchase Agreement and the Conversion Rights Agreement which Prudential
Securities reviewed (as referred to above) would conform in all material
respects to those documents in final form.
In connection with its review and analysis and in arriving at the
Prudential Securities Opinion, Prudential Securities relied upon the accuracy
and completeness of the financial and other information provided to Prudential
Securities by Franklin Select's management and did not undertake any
independent verification of such information or any independent valuation or
appraisal of any of the assets or liabilities of Franklin Select. With respect
to certain financial forecasts provided to Prudential Securities by the
management of Franklin Select, Prudential Securities assumed such information
(and the assumptions and bases therefor) represented the best currently
available estimates and judgments of Franklin Select's management as to the
future financial performance of Franklin Select. Further, the Prudential
Securities Opinion is necessarily based on economic, financial and market
conditions as they existed, and can only be evaluated, as of October 2, 1999.
The Prudential Securities Opinion does not address nor should it be
construed to address the relative merits of the Asset Sale and alternative
business strategies which may be available to Franklin Select.
In arriving at the Prudential Securities Opinion, Prudential Securities
performed a variety of financial analyses, including those summarized herein.
The summary set forth below of the analyses presented to the Special Committee
at the October 2, 1999 meeting does not purport to be a complete description of
the analyses performed. The preparation of a fairness opinion is a complex
process that involves various determinations as to the most appropriate and
relevant methods of financial analyses and the application of these methods to
the particular circumstances and, therefore, such an opinion is not necessarily
susceptible to partial analysis or summary description. Prudential Securities
believes its analysis must be considered as a whole and selecting portions
thereof or portions of the factors considered by it, without considering all
analyses and factors, could create an incomplete view of the evaluation process
underlying the Prudential Securities Opinion. Prudential Securities made
numerous assumptions with respect to industry performance, general business,
economic, market and financial conditions and other matters, many of which are
beyond the control of Franklin Select. Any estimates contained in Prudential
Securities' analyses are not necessarily indicative of actual values or future
results, which may be significantly more or less favorable than suggested by
such analyses. Additionally, estimates of the values of businesses and
securities do not purport to be appraisals or necessarily reflect the prices at
which businesses or securities may be sold. Accordingly, such analyses and
estimates are inherently subject to substantial uncertainty. Subject to the
foregoing, the following is a summary of the material financial analyses
presented by Prudential Securities to the Special Committee on October 2, 1999.
COMPARABLE COMPANIES ANALYSIS. Prudential Securities employed a comparable
companies analysis to establish implied consideration ranges. Prudential
Securities analyzed publicly-available historical and projected financial
results, including multiples of current stock prices of the Comparable
Companies (as defined below) compared to such companies' respective actual 1998
funds from operations per share ("1998 Actual FFO"), projected 1999 funds from
operations per share ("1999 Projected FFO"), and projected 2000 funds from
operations per share ("2000 Projected FFO") of such Comparable Companies. The
"Comparable Companies" consist of certain companies, considered by Prudential
Securities to be reasonably similar to Franklin Select, and include: Bedford
Property Investors, Inc., CenterPoint Properties Trust, EastGroup Properties,
Inc., Great Lakes REIT, Kilroy Realty Corporation, Pacific Gulf Properties
Inc., Parkway Properties, Inc., Prime Group Realty Trust and SL Green Realty
Corp. All of the trading multiples of the Comparable Companies were based on
their respective closing stock prices on September 30, 1999 (the "September
30th Closing Price") and all FFO per share estimates were published by First
Call Corporation. The estimates published by First Call Corporation were not
prepared in connection with the Asset Sale or at the request of Prudential
Securities.
The Comparable Companies were found to have a September 30th Closing Price
estimated to be within a range of: (a) 8.2x to 13.1x 1998 Actual FFO, (b) 7.0x
to 11.5x 1999 Projected FFO, and
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(c) 6.4x to 10.3x 2000 Projected FFO. Applying such multiples to Franklin
Select's fully-diluted (a) actual 1998 FFO per share ($0.61), (b) estimated
1999 FFO per share ($0.48), and (c) estimated 2000 FFO per share ($0.68), and
making certain adjustments to reflect other assets and liabilities of Franklin
Select, resulted in implied consideration ranges of $5.00 to $8.01, $3.75 to
$5.93 and $4.74 to $7.40, respectively.
COMPARABLE TRANSACTIONS ANALYSIS. Prudential Securities also analyzed the
consideration paid in several recent merger and acquisition transactions it
deemed to be reasonably similar to the Asset Sale and considered the multiple
of the equity purchase price (defined as the purchase price of the acquired
entity's equity) to the acquired entity's latest twelve months funds from
operations ("LTM FFO") and to the acquired entity's forward twelve months funds
from operations ("F-FFO"), based upon publicly available information for such
transactions. The transactions considered were the combinations of: (a) the
then pending merger of Health Care Property Investors, Inc. and American Health
Properties, Inc., (b) the pending merger of SHP Acquisition, LLC and Sunstone
Hotel Investors, (c) the then pending merger of Equity Residential Properties
Trust and Lexford Residential Trust, (d) the then pending merger of Berkshire
Realty Holdings, L.P. and Berkshire Realty Company, (e) Duke Realty
Investments, Inc. and Weeks Corporation, (f) Reckson Associates Realty Corp.
and Tower Realty Trust, Inc., (g) Prologis Trust and Meridian Industrial Trust,
and (g) Public Storage and Storage Trust Realty (the "Comparable
Transactions"). The Comparable Transactions were found to imply for the
acquired entity an equity purchase price within a range of 6.1x to 13.2x LTM
FFO and 5.0x to 11.2x F-FFO. Applying such multiples to Franklin Select's LTM
FFO per share ($0.53) and F-FFO per share ($0.65), and then making certain
adjustments to reflect other assets and liabilities of Franklin Select,
resulted in implied consideration ranges of $3.63 to $7.40 and $3.65 to $7.68,
respectively.
None of the companies or acquired entities utilized in the above
Comparable Companies analysis and Comparable Transactions analysis for
comparative purposes is, of course, identical to Franklin Select. Accordingly,
a complete analysis of the results of the foregoing calculations cannot be
limited to a quantitative review of such results and involves complex
considerations and judgments concerning differences in financial and operating
characteristics of the Comparable Companies and the acquired entities in the
Comparable Transactions and other factors that could affect the public trading
value and consideration paid for each of the Comparable Companies and the
acquired entities, respectively, as well as that of Franklin Select.
LIQUIDATION ANALYSIS. Prudential Securities compared the estimated
liquidation value per share of $8.41 (before estimated commissions,
transaction, timing, claim resolution and other costs associated with a
liquidation process) to the consideration to be paid to Franklin Select by
Value Enhancement and made certain adjustments to reflect other assets and
liabilities of Franklin Select. This estimate was based on Franklin Select's
estimates and was made before testing the market to determine the feasibility
of actually achieving this level of liquidation value.
STOCK TRADING ANALYSIS. Prudential Securities reviewed the latest twelve
months' historical trading prices for Franklin Select's common stock and noted
that the low stock price was approximately $5.25 per share and the high stock
price was approximately $7.50 per share. Prudential Securities compared these
prices to the consideration to be paid to Franklin Select and made certain
adjustments to reflect other assets and liabilities of Franklin Select.
Projected financial and other information concerning Franklin Select and
the impact of the Asset Sale upon the holders of Franklin Select's common stock
are not necessarily indicative of future results. All projected financial
information is subject to numerous contingencies, many of which are beyond the
control of management of Franklin Select.
CONSIDERATION TO BE RECEIVED FROM VALUE ENHANCEMENT. The Prudential
Securities Opinion was one of the many factors taken into consideration by the
Special Committee in making its determination to recommend approval of the
Asset Sale. Consequently, the analyses of Prudential
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Securities described above should not be viewed as determinative of the opinion
of the Special Committee with respect to the consideration to be received by
Franklin Select from Value Enhancement. The consideration was determined
through negotiations between Franklin Select and Value Enhancement and was
approved by the Special Committee and the Board. The decision to enter into the
Purchase Agreement and to accept the consideration to be received in the Asset
Sale was solely that of the Special Committee and the Board.
FEES AND INDEMNIFICATION OF PRUDENTIAL SECURITIES. Pursuant to the
Engagement Letter, Franklin Select paid Prudential Securities an initial
$60,000 retainer and agreed to pay it a transaction fee in the amount of 0.65%
of the "total consideration" paid in certain types of transactions, including
the Asset Sale. The retainer is credited against the transaction fee. The
"total consideration" includes debt assumed or paid by the buyer. Pursuant to
the Engagement Letter, Franklin Select paid Prudential Securities $300,000 for
rendering the Prudential Securities Opinion; however, the full amount of this
payment will be credited against the transaction fee due Prudential Securities
for the Asset Sale. Therefore, if the transaction contemplated by the Purchase
Agreement is consummated, a transaction fee in the amount of 0.65% of the
"total consideration" would be payable to Prudential Securities (with the
payment due at closing being reduced by the $60,000 retainer and the $300,000
fee for the Prudential Securities Opinion). Franklin Select has also agreed to
reimburse Prudential Securities for its reasonable out-of-pocket and incidental
expenses incurred in connection with its engagement, including its attorneys'
fees.
As compensation for services rendered by Prudential Securities in
connection with Franklin Select's sale of its two remaining retail properties
in November 1998, Franklin Select paid Prudential Securities a transaction fee
in the amount of 0.65% of the $15,400,000 proceeds from the sale at the closing
of the sale.
Franklin Select and Prudential Securities are parties to a letter
agreement dated April 17, 1998, pursuant to which Franklin Select agreed to
indemnify Prudential Securities and its affiliates, their respective directors,
officers, controlling persons, if any, agents, and employees from and against
claims, liabilities, losses, damages and expenses which are related to or arise
out of actions taken or omitted to be taken (including any untrue statements
made or any statements omitted to be made) by Franklin Select, or by an
indemnified person with Franklin Select's consent, or are otherwise related to
or arise out of the engagement of Prudential Securities. However, Franklin
Select is not responsible for any claims or the like which are finally
judicially determined to have resulted primarily from the bad faith or gross
negligence of Prudential Securities.
ACCOUNTING TREATMENT OF THE ASSET SALE
The Asset Sale will be reflected on Franklin Select's financial statements
as a sale, with a gain recognized in the year in which the Asset Sale is
consummated in the amount of the difference between the purchase price and the
aggregate net book value of the real estate assets (or partnership interest)
sold to Value Enhancement.
FEDERAL INCOME TAX CONSEQUENCES OF THE ASSET SALE
The following summary of the material federal income tax consequences of
the Asset Sale is not intended to be tax advice to any person, nor is it
binding upon the Internal Revenue Service. In addition, no information is
provided herein with respect to the tax consequences of the Asset Sale under
applicable state, local, or foreign tax laws.
Franklin Select will recognize gain on the Asset Sale in an amount equal
to the difference between the amount realized by Franklin Select from the Asset
Sale and Franklin Select's adjusted tax basis in
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the assets sold. The amount realized by Franklin Select on the Asset Sale will
equal the sum of the money received by Franklin Select, plus the amount of the
liabilities assumed by Value Enhancement, plus the amount of any liabilities to
which the sold assets are subject. Franklin Select will be subject to federal
income taxation on any gain it recognizes on the Asset Sale. However, Franklin
Select may be able to avoid entity level U.S. federal income tax on this gain,
if, among other things, it remains qualified as a REIT and if it makes certain
"liquidating distributions" to its shareholders. See "Federal Income Tax
Consequences of Dissolution and Liquidation" below.
Franklin Select shareholders receiving liquidating distributions pursuant
to the Dissolution Plan should generally be unaffected by any gain or loss
recognized by Franklin Select on the Asset Sale, and should also generally be
unaffected by the Limited Partners exercise of their respective Conversion
Rights. Liquidating distributions received by shareholders pursuant to the
Dissolution Plan should be treated as full payment for such shareholder's
shares. Consequently, each shareholder receiving liquidating distributions will
recognize gain or loss (which generally should qualify for capital gain or loss
treatment) equal to the difference between the amount of the distribution and
the shareholder's basis in its Franklin Select shares. As each shareholder will
have a different basis in its shares, each shareholder will be responsible for
calculating its own gain or loss in connection with the liquidating
distributions it receives from Franklin Select. See "Federal Income Tax
Consequences of Dissolution and Liquidation" below.
INTEREST OF CERTAIN PERSONS IN
MATTERS TO BE ACTED UPON
Two of the four Limited Partners are family trusts of which Barry C. L.
Fernald and Larry D. Russel, respectively, are settlors and beneficiaries. Each
of these two Limited Partners owns 25% of the total limited partner interest in
the Partnership. Messrs. Fernald and Russel were Directors of Franklin Select
from 1996 and members of the Special Committee from its inception in February
1998 until they resigned from the Board effective September 9, 1999. Messrs.
Fernald and Russel were no longer Directors when the Board approved the Asset
Sale, the Purchase Agreement or the Purchase of Conversion Rights Agreement on
October 2, 1999. However, they were Directors and Special Committee members at
the time the Special Committee and the Board met to consider proposals from
various parties, including Value Enhancement. If they had not exercised their
respective Conversion Rights, each of these Limited Partners would have
received approximately $3,030,625 in installment obligations for their partner
interests from Value Enhancement pursuant to the Purchase Agreement and would
have been entitled to receive contingent payments from Franklin Select pursuant
to the Conversion Rights Agreement. Because these Limited Partners exercised
their Conversion Rights in a timely manner, each will be entitled to receive
406,250 Series A Shares immediately before the closing of the Asset Sale. Value
Enhancement has informed Franklin Select that, before the Limited Partners
exercised their Conversion Rights, Value Enhancement agreed to pay each Limited
Partner $25,000 in connection with such Limited Partner's exercise of its
Conversion Rights.
DISSENTERS' RIGHTS
Shareholders of Franklin Select will have no dissenters' rights or
appraisal rights under California law with respect to the Asset Sale.
VOTE REQUIRED
The affirmative vote of the holders of a majority of the outstanding
shares of Common Stock is required to approve the Asset Sale. Franklin
Resources and Franklin Properties have informed the Board that they intend to
vote all Series A Shares and Series B Shares owned by them, respectively, in
favor of the Asset Sale.
RECOMMENDATION OF THE BOARD
THE BOARD UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR THE
PROPOSAL TO APPROVE THE ASSET SALE.
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PROPOSAL 2: TO LIQUIDATE, WIND UP AND DISSOLVE FRANKLIN SELECT
SHAREHOLDER ACTION PROPOSED
The Board has unanimously approved the Dissolution Plan. The Dissolution Plan
provides that the Board, without further action by the shareholders (except as
such action may be required by law or as the Board may deem appropriate), after
passage of the waiting period required by the Purchase Agreement, may elect at
any time to dissolve Franklin Select after payment of, or provision for the
payment of, any legally enforceable obligations of Franklin Select. Any
remaining assets would be distributed to shareholders. Approval by the holders
of a majority of the outstanding shares of Common Stock is required to adopt
the Dissolution Plan. APPROVAL OF THE DISSOLUTION PLAN IS CONTINGENT UPON THE
APPROVAL OF THE ASSET SALE BY THE SHAREHOLDERS. IF THE SHAREHOLDERS DO NOT
APPROVE THE ASSET SALE, THE VOTE ON THE PROPOSAL TO APPROVE THE DISSOLUTION
PLAN WILL NOT BE TAKEN.
The following description of the Dissolution Plan contained in this Proxy
Statement is qualified in its entirety by reference to the Dissolution Plan and
the relevant provisions of the California Corporations Code. The text of the
Dissolution Plan is contained in EXHIBIT A attached hereto.
DESCRIPTION OF THE DISSOLUTION PLAN
The Dissolution Plan provides for the liquidation, winding up and
dissolution of Franklin Select pursuant to the California Corporations Code.
Franklin Select has agreed in the Purchase Agreement to remain in existence for
at least nine months after the closing of the Asset Sale and to maintain liquid
assets of at least $2,630,000 during that period. Therefore, Franklin Select
does not expect to file the required certificate of election to wind up and
dissolve with the Secretary of State of the State of California (which would
formally initiate the dissolution process), or take other required actions to
actually dissolve, until at least nine months after the closing of the Asset
Sale, or such longer period as the Board may deem feasible. Moreover, although
the Board presently intends to dissolve Franklin Select as soon as feasible
after the expiration of this period, it may decide not to actually dissolve
Franklin Select until after the resolution of the Shareholder Litigation.
Moreover, the Dissolution Plan authorizes the Board to abandon the dissolution
of Franklin Select at any time if the Board deems such action to be in the best
interests of the shareholders.
The Dissolution Plan contemplates that upon its adoption by the
shareholders, and, contingent upon the consummation of the Asset Sale, and as
soon as feasible thereafter and as permitted by the Purchase Agreement, payment
of, or provision for payment of, any legally enforceable obligations of
Franklin Select will be made out of Franklin Select's assets. Thereafter,
remaining assets will be distributed to the shareholders in one or more
distributions. See "Expected Distributions" below.
The Board will set a record date for the initial cash distribution to
shareholders (the "Initial Distribution"), which it expects to be made as soon
as practicable after the Closing of the Asset Sale. Franklin Select will notify
shareholders in advance of the record date. Franklin Select expects that the
Series A Shares will be de-listed from the American Stock Exchange on, or
shortly after, the date the Initial Distribution is made. After that date, it
is anticipated that the market price of the Series A Shares will decline as
liquidating distributions are made to shareholders.
OPERATIONS. After the closing of the Asset Sale, Franklin Select will
cease business operations, other than managing its investments in cash, cash
equivalents and other marketable securities. Its corporate existence will
continue thereafter, but solely for the purpose of managing such investments,
providing for the satisfaction of its obligations, adjusting and winding up its
business and affairs, and distributing its remaining assets. No further
approvals by the shareholders will be obtained. One or more liquidating
distributions from these remaining assets will be conditioned upon setting
aside a sufficient amount of money for the purpose of meeting any residual
obligations or liabilities which Franklin Select has not otherwise met.
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PAYMENT OF LEGALLY ENFORCEABLE CLAIMS. Franklin Select will satisfy, or
provide for the satisfaction of, all its legally enforceable claims,
liabilities and obligations in an orderly manner. This will include claims
arising from the residual liabilities discussed below. See "Expected
Distributions."
DIRECTORS AND OFFICERS. Franklin Select anticipates that its current
Directors and officers will continue to serve in such capacities after adoption
of the Dissolution Plan. Directors remaining in office will continue to receive
directors' fees in accordance with Franklin Select's director compensation
policies.
CONTINUED INDEMNIFICATION OF DIRECTORS AND OFFICERS. Franklin Select will
also reserve sufficient assets and/or obtain and maintain such insurance as
shall be necessary to provide for the continued indemnification of the
Directors, officers, Advisor and agents of Franklin Select to the full extent
provided by the bylaws, any existing indemnification agreements between
Franklin Select and any of such persons, and applicable law. It is expected
that such insurance would include coverage for periods after the dissolution of
Franklin Select, including periods after the termination of any liquidating
trust, and would include coverage for trustees, employees and agents of such
liquidating trust.
FRACTIONAL SHARES. Holders of fractional shares will receive, for each
distribution, an amount equal to their fraction of a share multiplied by the
amount distributed per Series A Share. Multiple fractional shares owned by a
single holder will be aggregated.
TERMINATION OF REIT STATUS. The Directors will have the authority to
terminate Franklin Select's status as a real estate investment trust under
Sections 856-860 of the Internal Revenue Code of 1986, as amended (the "Code"),
if and when they determine that such action would be in the best interests of
the shareholders. Although Franklin Select expects that it will be able to meet
the REIT requirements for the tax year ending December 31, 2000, there can be
no assurance that it will be able to do so. See "Federal Income Tax
Consequences of Dissolution and Liquidation."
If all of Franklin Select's assets are not sold or distributed prior to
the second anniversary of the approval of the Dissolution Plan by Franklin
Select's shareholders, or if unpaid claims, liabilities and other obligations
remain outstanding, Franklin Select may transfer any assets not sold or
distributed to a liquidating trust. In the event a liquidating trust is
established, Franklin Select would distribute to the then holders of Series A
Shares beneficial interests in the liquidating trust ("Interests") in
proportion to the number of Series A Shares owned by such holders. The sole
purpose of the liquidating trust will be to liquidate any remaining assets of
Franklin Select on terms satisfactory to the liquidating trustees and, after
paying any remaining liabilities of Franklin Select, distribute the proceeds of
the sale of assets formerly owned by Franklin Select to the holders of
Interests. The liquidating trust will be obligated to pay any expenses and
liabilities of Franklin Select which remain unsatisfied. Approval of the
Dissolution Plan will constitute the approval by the shareholders of the
Board's establishment of such a liquidating trust, its appointment of one or
more individuals (who may or may not be former directors) or corporate persons
to act as trustee or trustees and the terms of any liquidating trust agreement
adopted by the Board. It is anticipated that the Interests will not be freely
transferable. Therefore, the recipients of the Interests will not realize any
value from the Interests unless and until the liquidating trust distributes
cash or other assets to them, which will be solely in the discretion of the
trustees.
DISSOLUTION; NO TRANSFERS. After all of Franklin Select's assets have been
sold, all its known and contingent debts, liabilities and obligations have been
paid and discharged, or adequate provision has otherwise been made therefor,
and all net proceeds have been distributed to or for the benefit of the
shareholders, Franklin Select will file a Certificate of Dissolution with the
Secretary of State of the State of California. Upon filing of the Certificate
of Dissolution, Franklin Select will cease to exist as a legal entity and will
be dissolved. The stock transfer books of Franklin Select will be closed as of
the close of business on the date the Secretary of State of the State of
California accepts the filing of Franklin Select's Certificate of Dissolution.
Thereafter, no assignments or transfers of the Common Stock (except for those
occurring by will, intestate succession or operation of law) will be recorded.
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EXPECTED DISTRIBUTION
Based on the information currently available to it, Franklin Select
presently expects to pay the Initial Distribution in the amount of
approximately $7.11 per Series A Share (approximately $98,712,000 in the
aggregate) as soon as practicable after the closing of the Asset Sale. The
actual amount of the Initial Distribution will depend upon factors that cannot
be predicted with certainty, including whether or not adjustments are made to
the purchase price pursuant to the Purchase Agreement, and the amount of costs,
fees and expenses related to the Asset Sale, including legal, accounting,
investment banking, title insurance, closing, shareholder communication and
other costs. All estimates of proceeds and distributions per share in this
Proxy Statement assume the issuance of 1,625,000 Series A Shares to the Limited
Partners immediately before the closing of the Asset Sale pursuant to the
exercise of the Limited Partners' Conversion Rights.
In addition to the estimated proceeds from the Asset Sale, Franklin Select
will also have other assets at the time of the closing of the Asset Sale,
consisting primarily of cash, cash equivalents and mortgage-backed securities.
As of September 30, 1999, the latest period for which Franklin Select has
announced its financial results, the value of these other assets was
approximately $15,925,000 before the payment of liabilities. From these other
assets as they may exist at the time of the closing, Franklin Select must
retain sufficient funds to meet its obligations, including its then existing
and contingent liabilities, as well as its costs of dissolution. Assets will be
retained to cover (a) liabilities or possible liabilities relating to the
Shareholder Litigation (as defined herein - see "Effect of Shareholder
Litigation"), unless such lawsuits are settled or dismissed prior to the
closing of the Asset Sale, (b) other known or contingent and future claims, (c)
professional fees and other expenses of management and dissolution, and (d)
various other liabilities, expenses and obligations of Franklin Select that
will be incurred by Franklin Select and any liquidating trust.
With the exception of the Initial Distribution, Franklin Select has not
established a timetable for further distributions, if any, to shareholders. It
is not possible at this time to determine how much, if any, of the remainder of
Franklin Select's cash and securities will ultimately be available for
distribution. The actual amount, timing of, and record dates for, such
additional distributions, if any, will be determined by the Board, in its sole
discretion, and will depend upon a variety of factors, including the ultimate
amounts of liquidation-related expenses and other obligations and liabilities
that must be satisfied out of Franklin Select's assets. Upon the closing of the
Asset Sale, Franklin Select will have sufficient cash to pay all of its current
and accrued obligations. However, the existence of contingent or unknown
liabilities means that the ultimate amount of liabilities cannot be determined
with certainty. Claims, liabilities and expenses will continue to accrue
following approval of the Dissolution Plan, and Franklin Select anticipates
that expenses for professional fees and other expenses of liquidation will be
significant. These expenses will reduce the amount of cash available for
ultimate distribution to shareholders. Until all its remaining cash and
securities are distributed, Franklin Select intends to invest its funds in
investment grade securities, including short-term, interest-bearing money
market funds, and may invest in mortgage-backed securities issued by Ginnie
Mae, Fannie Mae and similar issuers. After satisfaction of all of Franklin
Select's legally enforceable obligations, any remaining assets will be
distributed to the shareholders of Franklin Select in accordance with their
respective shareholdings.
In the event that Franklin Select were to make distributions to the
shareholders without payment or adequate provision for payment of its
obligations, each shareholder could be held personally liable for up to the
amount of total distributions such shareholder received.
EFFECT OF SHAREHOLDER LITIGATION
Franklin Select is currently involved in the Shareholder Litigation, which
it has previously reported: the "Hodge Lawsuit" and the "Vigneau Lawsuit."
In the Hodge Lawsuit, Herbert S. Hodge, Jr. on behalf of certain
shareholders of Franklin Real Estate Income Fund ("FREIF"), a predecessor of
Franklin Select, filed a purported class action
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complaint on June 3, 1997 in the California Superior Court for San Mateo County
against Franklin Select, certain of its then current and former directors, the
Advisor, Franklin Resources and Bear Stearns Co., Inc. The complaint alleges,
among other things, that the defendants breached their fiduciary duties to the
plaintiffs in connection with the merger of FREIF into Franklin Select in May
1996.
In the Vigneau Lawsuit, Franklin Select is defending the former directors
of Franklin Advantage Real Estate Income Fund ("Advantage"), a predecessor of
Franklin Select, who include the current directors of Franklin Select, against
a purported class action on behalf of certain shareholders of Advantage, filed
on December 2, 1996 in the California Superior Court for San Mateo County.
Other defendants currently include the Advisor and Franklin Resources, Inc. The
complaint alleges, among other things, that the defendants breached their
fiduciary duties to the plaintiffs and other minority shareholders in
connection with the purchase of an interest in Advantage by Franklin Resources
in August 1994 and in connection with the merger of Advantage into Franklin
Select in May 1996.
The plaintiffs in each lawsuit seek damages in an unspecified amount and
certain equitable relief. The defendants in each lawsuit have denied any
wrongdoing and have been vigorously defending the lawsuits. Neither purported
class has yet been certified. Franklin Select continues to believe, as
previously reported and as reflected in its financial statements, that the
outcome of litigation of these matters would not have a material adverse effect
on its financial condition, results of operations or cash flows if Franklin
Select were to remain a going concern.
For some time, Franklin Select has also been pursuing mediation and
settlement efforts with respect to the Shareholder Litigation. As a result of
these efforts, Franklin Select recently entered into negotiations with the
plaintiffs and other involved parties over a possible settlement related to the
Hodge Lawsuit. Pending the outcome of these negotiations, the parties have
agreed to postpone further discovery efforts. In the Vigneau Lawsuit, the court
has ordered the parties to proceed to mediation in December, 1999 and in the
interim has limited the plaintiffs' discovery activities. Any successful
conclusion to these efforts to negotiate a settlement would require that the
court certify a class and approve any settlement, that all parties give their
consent, and that notice be given to the class members, a process which would
take many months and extend beyond the closing of the Asset Sale. Franklin
Select expects that the costs of any settlement or judgment in the litigation
would be funded by insurance coverage and contributions from it and certain
defendants as agreed or required. However, Franklin Select may be required to
incur substantial additional costs in addition to its reserves in connection
with this litigation. No assurances can be given as to the successful outcome
of these negotiations. If these settlement negotiations are not successful,
Franklin Select will continue to pursue its vigorous defense of the litigation.
If the Asset Sale and subsequent dissolution of Franklin Select occur and
the Shareholder Litigation is still pending, Franklin Select will hold back
sufficient assets from available proceeds of sale and other sources to provide
for, or otherwise make provision for, the costs of litigation whatever its
outcome, including possible settlement or adverse judgment with respect to
these lawsuits. The aggregate amount of any such provisions and holdbacks
cannot be determined with certainty at this time, but would be substantial.
Such provisions include the purchase by Franklin Select of additional insurance
with respect to these lawsuits so as to allow Franklin Select to limit the
amounts that would have to be held back to provide for these lawsuits in the
course of dissolving Franklin Select.
POSSIBLE EFFECT OF SERIES B SHARES
Franklin Select has one class of Common Stock in two series, designated
Series A and Series B. Franklin Properties, Inc., an affiliate of Franklin
Select, owns all 745,584 outstanding Series B Shares. Pursuant to the Amended
and Restated Series B Stock Exchange Agreement dated as of May 7, 1996 between
Franklin Select and Franklin Properties, the Series B Shares are convertible
into 622,395 Series A Shares if the market price of Series A Shares reaches and
remains at certain levels. The conversion ratio and target prices are subject
to adjustment in certain circumstances.
22
<PAGE>
The Exchange Agreement classifies the Series B Shares into three tranches
of 149,088; 185,866; and 410,630 Series B Shares, respectively. The exchange
option becomes exercisable with respect to: (i) 149,088 Series A Shares
issuable upon exchange of the 149,088 Series B Shares in the first tranche, if
and when the last reported sale price of the Series A Shares on the American
Stock Exchange (the "Target Price") reaches $8.42 and remains at or above that
price for twenty (20) consecutive trading days; (ii) 185,866 Series A Shares
issuable upon exchange of the 185,866 Series B Shares in the second tranche if
and when the Target Price reaches $10.35 and remains at or above that price for
twenty (20) consecutive trading days; and (iii) 287,441 Series A Shares
issuable upon exchange of the 410,630 Series B Shares in the third tranche if
and when the Target Price reaches $11.33 and remains at or above that price for
twenty (20) consecutive trading days. As of the date hereof, the Series A Share
price has not reached and/or remained at the Target Price for any of the
tranches for the required time; therefore, no Series A Shares have been issued
in exchange for Series B Shares.
ALL DISCUSSION IN THIS PROXY STATEMENT CONCERNING THE AMOUNT PER SERIES A
SHARE OF ASSET SALE PROCEEDS AND OF EXPECTED DISTRIBUTIONS, INCLUDING ALL PRO
FORMA FINANCIAL STATEMENT PRESENTATION OF THESE ITEMS, ASSUMES THAT NO SERIES B
SHARES WILL BE EXCHANGED FOR SERIES A SHARES. IF THE TARGET PRICE FOR ONE OR
MORE OF THE SERIES B TRANCHES WERE REACHED AND SERIES A SHARES WERE ISSUED IN
EXCHANGE FOR SERIES B SHARES, THE NUMBER OF OUTSTANDING SERIES A SHARES WOULD
INCREASE BY 149,088 OR 334,954 OR 622,395, DEPENDING ON THE NUMBER OF TRANCHES
FOR WHICH THE TARGET PRICE WERE REACHED. THE AMOUNT PER SERIES A SHARE
AVAILABLE FOR DISTRIBUTION WOULD DECREASE CORRESPONDINGLY.
Franklin Select's Amended and Restated Articles of Incorporation provide
that distributions of net proceeds from any sale, financing or refinancing of
its real property, if made, are to be made in the following order: (i) $10 per
share to the holders of Series A Shares before any net proceeds are distributed
to the holders of Series B Shares, and (ii) if any net proceeds remain after
the distribution to the holders of the Series A Shares, then, $10 per share to
the holders of Series B Shares before any further net proceeds are distributed
to the holders of Series A Shares. The Articles of Incorporation provide a
further order for distribution of any net proceeds remaining after these
distributions. The per share distribution amounts are appropriately adjusted if
the Series A Shares or Series B Shares are subdivided by stock split, stock
dividend, reclassification or similar action, or if they are combined or
consolidated into a lesser number of shares. Neither the Series A Shares nor
the Series B Shares have been split, combined or the like.
No distributions of net proceeds have previously been made to the holders
of Series A Shares or Series B Shares. Franklin Select anticipates that less
than $10 per share will be distributed to the Series A shareholders from the
net proceeds of the Asset Sale and from all other sources and, therefore, that
no distributions would be made to Franklin Properties, Inc. as the holder of
all the outstanding Series B Shares. However, if distributions from net
proceeds totaling $10 per share were made to the Series A shareholders and
additional net proceeds were available for distribution, a distribution of $10
per Series B Share would be made to Franklin Properties, Inc. as the holder of
the Series B Shares before any further distributions from net proceeds could be
made to the Series A shareholders.
FEDERAL INCOME TAX CONSEQUENCES OF
THE LIQUIDATION AND DISSOLUTION
The following discussion summarizes the material U.S. federal income tax
consequences of Franklin Select's adoption and implementation of the
Dissolution Plan. This discussion is not exhaustive of all possible tax
considerations and does not include a discussion of any state, local or foreign
tax considerations. In addition, the discussion is intended to address only
those federal income tax considerations that are generally applicable to all
U.S. shareholders and does not discuss all of the
23
<PAGE>
aspects of federal income taxation that may be relevant to certain types of
shareholders (including insurance companies, tax-exempt entities, financial
institutions, broker-dealers, foreign corporations and persons who are not
citizens or residents of the United States) who are subject to special
treatment under the federal income tax laws.
This discussion is based on current provisions of the Code and its
legislative history, existing, temporary and currently proposed Treasury
Regulations, existing administrative rulings and practices of the Internal
Revenue Service ("IRS") and judicial decisions. No assurance can be given that
legislative, judicial or administrative changes will not affect the accuracy of
this discussion, possibly on a retroactive basis. In addition, Franklin Select
has not requested and does not plan to request any rulings from the IRS with
respect to the tax consequences of the Dissolution Plan. Accordingly, no
assurance can be given that the statements contained in this discussion (which
do not bind the IRS or the courts) will not be challenged by the IRS or
sustained by the courts if so challenged.
This discussion is not intended as a substitute for careful tax planning.
Each shareholder is urged to consult with his own tax advisor regarding the
specific tax consequences of the Dissolution Plan, including the federal,
state, local, and foreign tax consequences that may be applicable to such
shareholder.
TAX CONSEQUENCES OF THE DISSOLUTION PLAN TO FRANKLIN SELECT
Franklin Select believes that it has satisfied the applicable requirements
for qualification as a REIT under the Code since its inception through its tax
year ended December 31, 1998. Franklin Select expects to operate so that it
will be able to continue to so qualify for the tax years ended December 31,
1999 and December 31, 2000. However, because Franklin Select will be selling
all of its real estate assets pursuant to the Asset Sale and because of changes
in Franklin Select's sources of income, including the need to retain assets to
satisfy its claims, obligations and liabilities, there can be no assurance that
Franklin Select will meet the applicable REIT requirements for the tax year
ended December 31, 2000, and Franklin Select may not be able to meet the
applicable REIT qualification tests thereafter. Moreover, the Dissolution Plan
authorizes the Board to discontinue Franklin Select's status as a REIT at any
time if the Board deems it to be in the best interest of Franklin Select's
shareholders.
Provided Franklin Select remains qualified as a REIT, it will be entitled
to deduct "dividends" paid to its shareholders in computing its taxable income
under Section 857(b) of the Code. Although distributions in liquidation of a
corporation generally are not treated as "dividends," Section 562(b) of the
Code provides special rules under which distributions in liquidation of a REIT
are treated as deductible dividends by the REIT. First, a REIT will be entitled
to a dividends paid deduction with respect to a liquidating distribution to the
extent the distribution is attributable to accumulated earnings and profits (in
excess of the REIT's capital and paid-in surplus) through the date of
distribution. Second, distributions in liquidation of a REIT that are made
within 24 months after the adoption of a plan of complete liquidation are
treated as deductible dividends by the REIT (but not by its shareholders) to
the extent of the REIT's earnings and profits for the year of the distribution
(determined without regard to capital losses). No assurance can be given that
Franklin Select will be able to liquidate within 24 months. Moreover, to ensure
application of Sections 562(b) and 857(b) of the Code, the Board may decide to
cause Franklin Select to contribute its assets, subject to any liabilities, to
a liquidating trust for the benefit of Franklin Select's shareholders, which
would be treated for federal income tax purposes as if Franklin Select had
distributed all of its assets to its shareholders in complete liquidation
within the prescribed 24-month period. See - "Possible Use of Liquidating
Trust" below.
If Franklin Select fails to qualify as a REIT, it will not be entitled to
deduct liquidating distributions paid to shareholders with respect to the tax
year in which it failed to qualify or in subsequent tax years. In such event,
Franklin Select will be liable for federal income taxes (including any
applicable alternative minimum taxes) with respect to any net income or gain
for such tax years to the extent not offset by any available net operating loss
or capital loss carryovers.
24
<PAGE>
TAX CONSEQUENCES OF THE DISSOLUTION PLAN TO SHAREHOLDERS
Distributions in liquidation of Franklin Select pursuant to the
Dissolution Plan generally will be treated by shareholders as amounts received
in full payment in exchange for their stock under Section 331(a) of the Code.
Each shareholder receiving such liquidating distributions will recognize gain
or loss equal to the difference between the amount of the distribution and the
shareholder's basis in Franklin Select's shares. Such gain or loss generally
will be capital gain or loss if the shareholder's shares are held as a "capital
asset" within the meaning of Section 1221 of the Code. Presently, capital gains
generally are taxed to non-corporate taxpayers at a maximum rate of 20% with
respect to capital assets held for more than one year.
The Dissolution Plan is expected to result in one or more liquidating
distributions to Franklin Select's shareholders. Each liquidating distribution
will be applied first against the adjusted tax basis of each of a shareholder's
shares, and gain will be recognized with respect to a share only after an
amount equal to the adjusted tax basis of such share has been fully recovered.
Any loss with respect to a share may be recognized only after Franklin Select
makes its final liquidating distribution, if any, or after the last substantial
liquidating distribution is determinable with reasonable certainty. If a
shareholder owns several blocks of shares with different tax bases and holding
periods, each liquidating distribution must be allocated ratably among the
several blocks of shares in the proportion that the number of shares in a
particular block bears to the total number of shares owned by the shareholder.
In summary, each shareholder should not recognize any gain associated with
each liquidating distribution until the aggregate amount of these distributions
exceed such shareholder's basis in its shares. At such time that the aggregate
amount of liquidating distributions exceed a shareholder's basis in its shares,
such shareholder will recognize gain equal to such excess. Such gain will
qualify for capital gain treatment (long-term if the shares have been held for
more than one year) if the shareholder's shares are held as a "capital asset."
Otherwise, this gain will represent ordinary income to the shareholder. In the
event that a shareholder's basis in its shares exceeds the aggregate
liquidating distributions such shareholder receives for these shares pursuant
to the Dissolution Plan, such shareholder will be entitled to claim a loss. A
shareholder will be allowed to recognize such loss only after Franklin Select
makes its final liquidating distribution.
As each shareholder will have a different basis in its shares, each
shareholder will be responsible for calculating its own gain or loss in
connection with liquidating distributions it receives from Franklin Select.
Each shareholder is advised to consult with its own tax advisor as to these
gain and loss calculations.
LIQUIDATING TRUST
As discussed above, in the event Franklin Select is unable to dispose of
all of its assets within 24 months after adoption of the Dissolution Plan, if
Franklin Select will no longer qualify as a REIT, or if it is otherwise
appropriate to do so, the Board may cause Franklin Select to contribute its
remaining assets to a liquidating trust for the benefit of Franklin Select's
shareholders. For federal income tax purposes, each shareholder of Franklin
Select receiving an interest in the trust will be treated as having received a
distribution of a pro rata share of the assets contributed to the trust,
subject to a pro rata share of any then existing liabilities of Franklin
Select, and then as having contributed such pro rata share of assets and
liabilities to the liquidating trust in exchange for such interest.
The interests in the trust distributed to Franklin Select's shareholders
will be treated as additional payments in exchange for their stock under
Section 331(a) of the Code, with the amount of such payments being equal to the
sum of the cash and the fair market value of the assets deemed to have been
received by such shareholder, less the shareholder's pro rata share of any
liabilities to which the assets are subject. To the extent that such amount
exceeds a shareholder's remaining basis in his shares of Franklin Select stock,
the shareholder will recognize taxable gain, which could cause the shareholder
to incur a tax liability even though the shareholder would not have received
any cash with which to pay such liability.
25
<PAGE>
The activities of the liquidating trust will be limited to selling the
assets it receives from Franklin Select, using the proceeds of such asset sales
to discharge Franklin Select's liabilities, and distributing any remaining
amounts to Franklin Select's shareholders. Because the shareholders will be
considered the owners of the liquidating trust's assets for tax purposes, each
shareholder will be required to take into account in computing his own taxable
income his pro rata share of each item of the trust's income, gain, loss, and
deduction. Distributions received from the trust will not be separately
taxable.
SPECIAL TAX CONSIDERATIONS APPLICABLE TO NON-U.S. SHAREHOLDERS
Because distributions to shareholders following adoption of the
Dissolution Plan will be treated as payments in exchange for their stock and
not as dividends, Franklin Select will not be required to withhold any amounts
with respect to such distributions to a non-U.S. shareholder unless the
non-U.S. shareholder's shares are treated as "United States real property
interests" under the provisions of the Foreign Investment in Real Property Tax
Act of 1980, as amended (commonly referred to as "FIRPTA"). If Franklin
Select's shares were to constitute United States real property interests in the
hands of a non-U.S. shareholder, Franklin Select would be required under
Section 1445(e)(3) of the Code to withhold 10% of the gross amount of each
liquidating distribution to such shareholder (even if the shareholder
recognizes a loss on the distribution). In addition, the non-U.S. shareholder
would be subject to regular U.S. income tax with respect to any gain or loss
realized on the deemed sale of such shares resulting from the receipt of
liquidating distributions (subject to any applicable alternative minimum tax, a
special alternative minimum tax in the case of nonresident alien individuals,
and the possible application of the 30% "branch profits" tax in the case of
entities treated as foreign corporations for U.S. federal income tax purposes).
If Franklin Select's Series A Shares are regularly traded on an
established securities market at any time during the calendar year, its shares
will not constitute United States real property interests with respect to any
shareholder in such calendar year unless such shareholder has owned, actually
or constructively under certain attribution rules, more than 5% of Franklin
Select's outstanding stock at all times during the shorter of (i) the period
during which the shareholder has held its shares or (ii) the five-year period
ending on the date that the liquidating distributions are received. Shares of
Franklin Select's stock that are owned by a non-U.S. shareholder whose actual
or constructive ownership of Franklin Select's outstanding stock has exceeded
the 5% threshold described above, or shares owned by any non-U.S. shareholder
if the Series A Shares are not regularly traded on an established securities
market at any time during the calendar year, will be treated as United States
real property interests unless, at all times during a prescribed testing
period, either (i) Franklin Select has not been a "United States real property
holding corporation" or (ii) Franklin Select has been a "domestically
controlled REIT." Franklin Select will constitute a "United States real
property holding corporation" with respect to a particular non-U.S. shareholder
if, at any time during the five-year period preceding the distribution or
shorter period that the shareholder has held its shares, the fair market value
of Franklin Select's "United States real property interests" equals or exceeds
50% of the fair market value of such United States real property interests, its
interests in real property located outside the United States, and any other of
its assets which are used or held for use in a trade or business. For this
purpose, the term "United States real property interest" includes any interest
other than an interest solely as a creditor in real estate located within the
United States and in certain entities that own U.S. real estate. Franklin
Select will constitute a "domestically controlled REIT" only if, at all times
during the five-year period preceding the distribution in question or shorter
period that Franklin Select has been in existence, Franklin Select remains
qualified as a REIT and less than 50% of the value of its stock is beneficially
owned, directly or indirectly, by non-U.S. persons (taking into account as
beneficial owners for this purpose those persons who are required to include
dividends from Franklin Select in taxable income for U.S. federal income tax
purposes). Although Franklin Select believes that it is a "domestically
controlled REIT," no assurance can be given that Franklin Select will remain a
"domestically controlled REIT" because Franklin Select's stock is publicly
traded.
Although Franklin Select will not be required to withhold against
liquidating distributions to any non-U.S. shareholder unless its shares
constitute United States real property interests with respect to
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<PAGE>
such shareholder, a non-U.S. shareholder who is not subject to withholding
nevertheless will be subject to U.S. federal income tax with respect to
liquidating distributions from Franklin Select under the following
circumstances. First, if a non-U.S. shareholder's investment in Franklin
Select's shares is effectively connected with the non-U.S. shareholder's U.S.
trade or business, the non-U.S. shareholder will be subject to the same
treatment as U.S. shareholders with respect to liquidating distributions from
Franklin Select, and if the non-U.S. shareholder is a corporation, it may also
be subject to the branch profits tax. Second, if the non-U.S. shareholder is a
nonresident alien individual who is present in the United States for 183 days
or more during the taxable year in which the liquidating distributions are
received and certain other conditions apply, the nonresident alien individual
will be subject to a 30% tax on the individual's capital gains. Finally, if
Franklin Select recognizes gain from the disposition of a United States real
property interest and remains qualified as a REIT, all of Franklin Select's
non-U.S. shareholders could be subject to U.S. federal income tax on
liquidating distributions under Section 897(h)(1) of the Code, which provides
that any distribution by a REIT to a non-U.S. shareholder, to the extent
attributable to gain from sales or exchanges by the REIT of United States real
property interests, is treated as gain recognized by such non-U.S. shareholder
from the sale or exchange of a United States real property interest.
Non-U.S. shareholders should consult their own tax advisors regarding the
U.S. federal income tax consequences of receiving liquidating distributions
from Franklin Select, including the consequences that would apply if Franklin
Select were to contribute its assets to a liquidating trust.
STATE AND LOCAL INCOME TAX
Shareholders also may be subject to state or local income taxes with
respect to distributions received by them pursuant to the Dissolution Plan and
should consult their tax advisors regarding such taxes.
THE ABOVE DISCUSSION DOES NOT ATTEMPT TO DISCUSS ALL TAX MATTERS THAT MAY
AFFECT FRANKLIN SELECT OR THE SHAREHOLDERS IN THE COURSE OF THE LIQUIDATION AND
DISSOLUTION, OR TO CONSIDER VARIOUS FACTS OR LIMITATIONS APPLICABLE TO ANY
PARTICULAR SHAREHOLDER. SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX
ADVISERS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE LIQUIDATION AND
DISSOLUTION.
AMENDMENT OR TERMINATION OF THE DISSOLUTION PLAN
The Board may amend or terminate the Dissolution Plan if it determines
such action to be in the best interests of Franklin Select or the shareholders,
without the necessity of further shareholder approval unless the Board
determines that such amendment or termination would materially and adversely
affect shareholders' interests. The Board expects to terminate the Dissolution
Plan if the Asset Sale is not consummated.
DISSENTERS' RIGHTS
California law does not provide dissenters' rights or appraisal rights
with respect to the dissolution, winding up and liquidation of Franklin Select.
VOTE REQUIRED
The affirmative vote of the holders of a majority of the outstanding
shares of Common Stock is required to approve the Dissolution Plan. If the
requisite number of shareholders approves the Dissolution Plan, Franklin Select
will be dissolved, terminated and liquidated, even though individual
27
<PAGE>
shareholders may have voted against the proposal. The Dissolution Plan may be
amended or terminated, either before or after shareholder approval has been
obtained, unless the Board determines that such amendment or termination would
materially and adversely affect the shareholders' interests.
Franklin Resources and Franklin Properties have informed the Board that
they intend to vote all Series A Shares and Series B Shares owned by them,
respectively, in favor of the proposal to approve the Dissolution Plan.
RECOMMENDATION OF THE BOARD
The Board unanimously recommends that the shareholders vote FOR the
proposal to approve the Dissolution Plan.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table and notes thereto set forth information, as of
November 2, 1999 (unless otherwise indicated), with respect to the beneficial
ownership of shares of Common Stock (i) by persons known by Franklin Select to
own 5% or more of the outstanding Common Stock, (ii) by each director, and
(iii) by the directors and executive officers of Franklin Select as a group,
based upon information furnished by such persons. The executive officers of
Franklin Select are not included individually because they receive no
compensation from Franklin Select. Except as otherwise indicated, each person
included in the table exercises sole voting and dispositive power over such
shares.
<TABLE>
<CAPTION>
AMOUNT OF SHARES % OF
NAME TITLE OF CLASS BENEFICIALLY OWNED CLASS *
- --------------------------------- ------------------------ -------------------- ----------
<S> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS
David P. Goss, Chief Executive Common Stock, Series A 7,191 **
Officer, President and Director
Lloyd D. Hanford, Jr., Common Stock, Series A 1,000 **
Independent Director
Egon H. Kraus, Common Stock, Series A 12,430 **
Independent Director
Frank W.T. LaHaye, Common Stock, Series A 1,000 **
Independent Director
E. Samuel Wheeler, Common Stock, Series A 2,000 **
Independent Director
Directors and executive officers Common Stock, Series A 26,821 **
as a group
FIVE PERCENT HOLDERS
Franklin Resources, Inc. Common Stock, Series A 1,685,400 13.0%
777 Mariners Island Boulevard
San Mateo, CA 94404
Franklin Properties, Inc.*** Common Stock, Series B 745,584 5.7%
1800 Gateway Drive
San Mateo, CA 94404
EastGroup Properties, Inc.**** Common Stock, Series A 850,000 6.5%
300 One Jackson Place
188 East Capital Street
Jackson, Mississippi 39201
</TABLE>
- ----------------
* All percentages are based on the number of shares of Common Stock
outstanding as of the date set forth in the paragraph immediately preceding
this table. This number does not include the 1,625,000 Series A Shares
issuable to the Limited Partners immediately before the closing of the
Asset Sale pursuant to the exercise by such Limited Partners of their
Conversion Rights.
** Indicates ownership of less than 1% of the class.
*** Franklin Select has one class of Common Stock in two series, designated
Series A and Series B. Pursuant to that certain Amended and Restated Series
B Stock Exchange Agreement dated as of May 7, 1996 between Franklin Select
and Franklin Properties, Inc., the outstanding 745,584 Series B Shares are
convertible into 622,395 Series A Shares if the market price of Series A
Shares reaches and remains at certain levels. The conversion ratio is
subject to adjustment in certain circumstances. The Series B Shares owned
by Franklin Properties constitute 5.7% of the total outstanding shares of
Common Stock and 100% of the outstanding Series B Shares.
**** The information concerning EastGroup Properties, Inc. ("EastGroup") has
been obtained solely from filings made with the SEC by EastGroup pursuant
to Sections 13(d) and 13(g) of the Exchange Act.
29
<PAGE>
SELECTED FINANCIAL DATA, INCLUDING PRO FORMA INFORMATION
The following tables set forth selected financial data on a historical
basis and on a pro forma basis for Franklin Select after giving effect to (a)
the Asset Sale and (b) certain prior property dispositions. The financial data
should be read in conjunction with Franklin Select's financial statements and
notes thereto incorporated by reference into this Proxy Statement. The
historical financial data as of December 31, 1998 and 1997 and for the years
ended December 31, 1998, 1997, 1996, 1995 and 1994 has been derived from
audited financial statements. The financial data as of September 30, 1999 and
for the nine-month period ending September 30, 1999 and 1998 has been derived
from unaudited financial statements, which, in the opinion of Franklin Select's
management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of the results for the unaudited
interim periods.
The unaudited pro forma operating data for the nine months ended September
30, 1999 and for the year ended December 31, 1998 is presented as if (a) the
Asset Sale and (b) certain prior property dispositions had occurred on January
1, 1998. The unaudited pro forma balance sheet as of September 30, 1999 is
presented as if the transactions had occurred on September 30, 1999.
The pro forma information included in "Selected Financial Data" is based
upon assumptions that are included in the notes to the pro forma financial
statements included elsewhere in this Proxy Statement. The pro forma
information is unaudited and is not necessarily indicative of what the
financial position and results of operations of Franklin Select would have been
as of and for the dates or periods indicated, nor does it purport to represent
the future financial position and results of operations for future dates or
periods.
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<PAGE>
FRANKLIN SELECT REALTY TRUST
SELECTED FINANCIAL DATA
IN $000'S EXCEPT PER SHARE AMOUNTS
<TABLE>
<CAPTION>
PRO FORMA
---------------------------
FOR THE NINE FOR THE
MONTHS YEAR
ENDED ENDED
-------------- ------------
9/30/99 12/31/98
-------------- ------------
<S> <C> <C>
Total revenue $ 715 $ 302
Net income (loss) $ (1,387) $ (857)
Per Series A common
share:
Net income (loss) $ (0.10) $ (0.06)
Distributions declared N/A N/A
Weighted average number
of shares of Series A
common stock
outstanding 13,875 13,875
Balance Sheet Data:
Real estate, net $ -- N/A
Total assets $ 119,478 N/A
Debt $ -- N/A
Stockholders' equity $ 116,114 N/A
Other Data:
Funds from
operations (1) $ (637) $ (857)
Cash flow from:
Operating activities N/A N/A
Investing activities N/A N/A
Financing activities N/A N/A
<CAPTION>
HISTORICAL
----------------------------------------------------------------------------------------------------
FOR THE
NINE MONTHS ENDED YEAR ENDED DECEMBER 31,
---------------------------- -----------------------------------------------------------------------
9/30/99 9/30/98 1998 1997 1996 1995 1994
------------- -------------- -------------- -------------- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenue $ 11,898 $ 13,764 $ 17,937 $ 17,726 $ 14,568 $ 14,111 $ 12,990
Net income (loss) $ 1,035 $ 3,434 $ 5,055 $ 4,168 $ 3,807 $ 4,462 $ 4,273
Per Series A common
share:
Net income (loss) $ 0.08 $ 0.28 $ 0.41 $ 0.34 $ 0.28 $ 0.32 $ 0.30
Distributions declared $ 0.36 $ 0.36 $ 0.48 $ 0.45 $ 0.44 $ 0.44 $ 0.44
Weighted average number
of shares of Series A
common stock
outstanding 12,250 12,250 12,250 12,250 13,830 14,145 14,145
Balance Sheet Data:
Real estate, net $ 110,820 $ 127,278 $ 112,954 $ 128,703 $ 124,042 $ 99,654 $ 102,450
Total assets $ 131,750 $ 134,877 $ 133,892 $ 150,097 $ 131,298 $ 116,457 $ 117,873
Debt $ 26,458 $ 27,694 $ 26,762 $ 42,487 $ 22,745 $ 7,145 $ 7,279
Stockholders' equity $ 91,109 $ 94,338 $ 94,501 $ 95,316 $ 96,653 $ 106,986 $ 108,316
Other Data:
Funds from
operations (1) $ 4,613 $ 5,898 $ 7,699 $ 8,171 $ 7,235 $ 7,795 $ 7,396
Cash flow from:
Operating activities $ 5,950 $ 7,117 $ 8,591 $ 9,187 $ 7,831 $ 8,359 $ 8,771
Investing activities $ 13,633 $ 11,676 $ 11,144 $ (17,734) $ 4,140 $ 31 $ (5,904)
Financing activities $ (5,201) $ (19,721) $ (22,300) $ 9,810 $ (15,599) $ (6,404) $ (3,184)
</TABLE>
- ----------------
(1) Franklin Select considers funds from operations to be a useful measure of
the operating performance of an equity REIT. This is because, together
with net income and cash flows, funds from operations provides investors
with an additional basis to evaluate the ability of a REIT to support
general operating expense and interest expense before the impact of
certain activities, such as gains and losses from property sales and
changes in accounts receivable and accounts payable. However, it does not
measure whether income is sufficient to fund all of Franklin Select's cash
needs including principal amortization, capital improvements and
distributions to shareholders. Funds from operations should not be
considered an alternative to net income or any other GAAP measurement of
performance, as an indicator of Franklin Select"s operating performance or
as an alternative to cash flows from operating, investing or financing
activities as a measure of liquidity. As defined by the National
Association of Real Estate Investment Trusts ("NAREIT"), funds from
operations is net income (computed in accordance with GAAP), excluding
gains or losses from debt restructuring and sales of property, plus
depreciation and amortization, and adjustment for unconsolidated joint
ventures. Franklin Select reports funds from operations in accordance with
the revised NAREIT definition. The measure of funds from operations as
reported by Franklin Select may not be comparable to similarly titled
measures of other companies that follow different definitions.
31
<PAGE>
PRO FORMA FINANCIAL INFORMATION
FRANKLIN SELECT REALTY TRUST
PRO FORMA BALANCE SHEET
SEPTEMBER 30, 1999
(IN 000'S)
(UNAUDITED)
<TABLE>
<CAPTION>
ASSET SALE
HISTORICAL (NOTE 2) PRO FORMA
------------ --------------- ------------
<S> <C> <C> <C> <C>
ASSETS
Real estate, net $ 110,820 $ (110,820) A $ --
Cash and cash equivalents 15,638 103,315 B 118,953
Mortgage-backed securities, available for sale 287 -- 287
Deferred rent receivable 1,574 (1,574) C --
Deferred costs and other assets 3,431 (3,193) C 238
--------- ----------- ---------
Total assets $ 131,750 $ (12,772) $ 119,478
--------- ----------- ---------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Notes and bonds payable $ 26,458 $ (26,458) D $ --
Tenant deposits, accounts payable and accrued expenses 2,548 (1,701) C 847
Reserve for litigation 750 -- 750
Distributions payable 1,767 -- 1,767
--------- ----------- ---------
Total liabilities 31,523 (28,159) 3,364
--------- ----------- ---------
Commitments and contingencies (Note 5)
Minority interest 9,118 (9,118) E --
Stockholders' equity
Common stock, Series A 103,161 11,172 F 114,333
Common stock, Series B 6,294 -- 6,294
Unrealized loss (33) -- (33)
Accumulated distributions over net income (loss) (18,313) 13,833 G (4,480)
--------- ----------- ---------
Total stockholders' equity 91,109 25,005 116,114
--------- ----------- ---------
Total liabilities and stockholders' equity $ 131,750 $ (12,272) $ 119,478
--------- ----------- ---------
</TABLE>
The accompanying notes are an integral part of these pro forma financial
statements.
32
<PAGE>
FRANKLIN SELECT REALTY TRUST
PRO FORMA STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(IN 000'S EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
ASSET SALE
HISTORICAL (NOTE 3) PRO FORMA
------------ -------------- ------------
<S> <C> <C> <C> <C>
Revenue:
Rent $ 11,183 $ (11,183) H $ --
Interest, dividends and other 715 -- 715
-------- ---------- --------
Total revenue 11,898 (11,183) 715
-------- ---------- --------
Expenses:
Property operating 2,694 (2,694) I --
Interest 1,774 (1,774) J --
Related party 933 (899) K 34
General and administrative 1,208 -- 1,208
Loss on the sale of mortgage backed securities 110 -- 110
Depreciation and amortization 2,828 (2,828) L --
-------- ---------- --------
Total expenses 9,547 (8,195) 1,352
Operating income (loss) before
reserve for litigation and minority interest 2,351 (2,988) (637)
Reserve for litigation (750) -- (750)
Minority interest (566) 566 M --
-------- ---------- --------
Net income (loss) $ 1,035 $ (2,422) $ (1,387)
======== ========== ========
Net income (loss) per share $ 0.08 $ (0.10)
Weighted average shares outstanding 12,250 1,625 N 13,875
</TABLE>
The accompanying notes are an integral part of these pro forma financial
statements.
33
<PAGE>
FRANKLIN SELECT REALTY TRUST
PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN 000'S EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
PRIOR SALES ASSET SALE
HISTORICAL (NOTE 4) (NOTE 3) PRO FORMA
------------ ------------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Rent $ 17,635 $ (2,250) O $ (15,385) H $ --
Interest, dividends and other 302 -- -- 302
-------- --------- ---------- -------
Total revenue 17,937 (2,250) (15,385) 302
-------- --------- ---------- -------
Expenses:
Property operating 4,081 (419) P (3,662) I --
Interest 2,930 (182) Q (2,748) J --
Related party 1,459 (185) R (1,191) K 83
General and administrative 1,076 -- -- 1,076
Depreciation and amortization 3,979 (429) S (3,550) L --
-------- --------- ---------- -------
Total expenses 13,525 (1,215) (11,151) 1,159
-------- --------- ---------- -------
Operating income (loss) before gains on sales
and minority interest 4,412 (1,035) (4,234) (857)
Gains on sales of property 1,335 (1,335) T -- --
-------- --------- ---------- -------
Operating income (loss) before minority
interest 5,747 (2,370) (4,234) (857)
Minority interest (692) -- 692 M --
-------- --------- ---------- -------
Net income (loss) $ 5,055 $ (2,370) $ (3,542) $ (857)
======== ========= ========== =======
Net income (loss) per share $ 0.41 $ (0.06)
Weighted average shares outstanding 12,250 1,625 N 13,875
</TABLE>
The accompanying notes are an integral part of these pro forma financial
statements.
34
<PAGE>
FRANKLIN SELECT REALTY TRUST
NOTES TO PRO FORMA FINANCIAL STATEMENTS
AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1998
(IN 000'S)
(UNAUDITED)
1. BASIS OF PRESENTATION
The pro forma financial statements of Franklin Select Realty Trust
("Franklin Select") have been prepared based on the historical financial
statements of Franklin Select. It is intended that Franklin Select sell its
remaining wholly owned real estate assets and its general partner interest in
FSRT L.P (collectively, the "Properties" or the "Asset Sale"). In 1998,
Franklin Select sold three properties -- Carmel Mountain Gateway Plaza, Mira
Loma Shopping Center and Glen Cove Center (collectively, the "Prior Sales").
The accompanying pro forma balance sheet as of September 30, 1999, has been
prepared as if the Asset Sale had occurred on September 30, 1999. The
accompanying pro forma statements of operations for the nine months ended
September 30, 1999 and the year ended December 31, 1998 have been prepared as
if the Asset Sale and the Prior Sales had occurred on January 1, 1998. In
management's opinion, all adjustments necessary to reflect the effects of these
transactions have been made. The pro forma financial statements should be read
in conjunction with the historical financial statements of Franklin Select.
Accordingly, they do not purport to show the amount of cash available for
distribution upon the liquidation of Franklin Select.
The unaudited pro forma financial statements are not necessarily
indicative of what the actual financial condition or the actual results of
operations of Franklin Select would have been as of and for the nine months
ended September 30, 1999, or for the year ended December 31, 1998, had the
sales occurred on January 1, 1998, nor do they purport to represent the future
financial condition or results of operations for Franklin Select. In
particular, they do not purport to show the amount of cash available for
distribution upon the liquidation of Franklin Select.
Franklin Select has entered into agreements with Value Enhancement Fund
III, LLC ("Value Enhancement") and the Limited Partners of FSRT, L.P. ("Limited
Partners") to sell all of Franklin Select's real estate interests as described
under "Description of Asset Sale" in this Proxy Statement. In addition, the
Limited Partners have agreed to exercise their conversion rights immediately
prior to the closing of the Asset Sale. In connection with this conversion, the
Limited Partners will receive 1,625,000 shares of Franklin Select Series A
Common Stock (the "Series A Shares") in exchange for their minority interest in
FSRT, L.P. The impact of this conversion is also reflected in the Asset Sale
adjustment described above.
The pro forma financial statements assume that Franklin Select 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.
2. PRO FORMA BALANCE SHEET ADJUSTMENTS
Adjustments have been made to reflect the sale of the Properties, giving
effect to the following items:
A The adjustment to real estate, net represents the net carrying value of
the Properties.
35
<PAGE>
B The adjustment to cash and cash equivalents reflects the estimated net
proceeds to Franklin Select from the sale of the Properties. The amount
reflects adjustments for prorations and estimated closing costs.
Purchase Price $ 131,500
Less debt assumed (26,458)
Less closing costs (1,261)
Less prorations (466)
----------
Net proceeds $ 103,315
C The adjustments to deferred rent receivable; deferred costs and other
assets; and tenant deposits, accounts payable and accrued expenses
represent assets and liabilities specifically related to the Properties.
D The adjustment to notes and bonds payable represents debt assumed by Value
Enhancement.
E The adjustment represents the elimination of the minority interest of the
Limited Partners pursuant to the conversion discussed at F below.
F The adjustment represents the estimated market price of the Series A
Shares issued to the Limited Partners in connection with the conversion of
their minority interest in FSRT, L.P.
G The amount represents the estimated gain on sale.
3. PRO FORMA INCOME STATEMENT ADJUSTMENTS -- ASSET SALE
Adjustments have been made to reflect the sale of the Properties giving
effect to the following items. The adjustments reflect only those items that
are directly related to the Asset Sale (including conversion of the Limited
Partners' minority interest in FSRT, L.P.) and do not include all costs that
Franklin Select may incur at the time of closing the Asset Sale. For instance,
they do not include expenses or holdbacks related to the future liquidation of
Franklin Select, liabilities or possible liabilities or insurance costs
relating to the Shareholder Litigation or other contingencies, or the effects
on Franklin Select's cash and liabilities balances of its operations and
capital expenditures subsequent to the pro forma financial statement periods.
H The adjustment represents the elimination of rental revenue of the
Properties.
I The adjustment represents the elimination of operating expenses of the
Properties.
J The adjustment represents the elimination of interest expense on debt
assumed by Value Enhancement.
K The adjustment represents the elimination of property management and asset
management fees related to the Properties.
L The adjustment represents the elimination of depreciation and amortization
related to the Properties.
M The adjustment represents the elimination of the minority interest of the
Limited Partners pursuant to the conversion discussed at N below.
N The adjustment represents the Series A Shares issued to the Limited
Partners in connection with the conversion of their minority interest in
FSRT, L.P.
4. PRO FORMA INCOME STATEMENT ADJUSTMENTS -- PRIOR SALES
Adjustments have been made to reflect the Prior Sales, giving effect to
the following items:
O The adjustment represents the elimination of rental revenue from the Prior
Sales.
P The adjustment represents the elimination of operating expenses from the
Prior Sales.
36
<PAGE>
Q The adjustment represents the elimination of interest expense on debt that
was related to the Prior Sales.
R The adjustment represents the elimination of property management and asset
management fees related to the Prior Sales.
S The adjustment represents the elimination of depreciation and amortization
related to the Prior Sales.
T The adjustment to gains on sales of property represents the elimination of
the gains related to the Prior Sales.
5. COMMITMENTS AND CONTINGENCIES
See discussion regarding commitments and contingencies in Franklin
Select's financial statements, which have been incorporated by reference into
this Proxy Statement.
37
<PAGE>
PRINCIPAL ACCOUNTANTS
Franklin Select has appointed PricewaterhouseCoopers LLP as independent
auditors to audit its financial statements for the fiscal year ending December
31, 1999. PricewaterhouseCoopers audited Franklin Select's financial statements
for the fiscal years ended December 31, 1998, and December 31, 1997.
PricewaterhouseCoopers has no material direct or indirect beneficial interest
in Franklin Select. PricewaterhouseCoopers does not intend to send a
representative to be present at the Meeting and, therefore, does not intend to
have a representative available to respond to questions. However, if
PricewaterhouseCoopers does send a representative to the Meeting, the
representative will be available to respond to questions.
PRICE RANGE OF SERIES A SHARES
The Series A Shares have been traded on the American Stock Exchange under
the symbol FSN since January 14, 1994. The Asset Sale was publicly announced by
Franklin Select on October 1, 1999. On September 30, 1999, the last trading day
before the announcement, the high sale price of Series A Shares on the American
Stock Exchange was $6.50 per share and the low sale price was $6.50 per share.
The Series B Shares are not listed for trading on any national securities
exchange and no public market otherwise exists for them.
YEAR 2000 COMPLIANCE
Many of the world's computer systems currently record years in a two-digit
format and may be unable to correctly process dates beyond the year 1999.
Franklin Select is dependent on various information technology ("IT") hardware
and software systems that may be affected by the Year 2000 problem, and has
implemented a plan to address this issue in conjunction with its affiliated
companies, including Franklin Resources, the parent company of the Advisor. As
part of its worldwide Year 2000 plan, which encompasses all of its
subsidiaries, Franklin Resources has now certified as Year 2000 compliant all
mission-critical systems as well as the non-mission critical systems maintained
by its Information Services & Technology department. Franklin Select relies on
only a few of FRI's systems.
Franklin Select's key IT systems include its accounting, property
management, and finance systems, which were certified as Year 2000 compliant as
part of the Franklin Resources plan. In addition, Franklin Select has upgraded
its property-management system to one that has been certified Year 2000
compliant. Franklin Select's key non-IT systems, including the embedded systems
in the common areas of the Properties, were also certified Year 2000 compliant
as part of the FRI plan. Franklin Select is also dependent upon certain non-IT
systems such as third-party long distance telephone and data lines, and public
utility electrical power.
Under the Franklin Resources plan, a system is considered Year 2000
compliant when it has passed a number of prescribed tests either (a)
established by Franklin Resources and/or the vendor of the system, (b) viewed
as the industry standard, or (c) suggested by regulators. For certain
third-party systems that cannot be tested by Franklin Resources, depending upon
the importance of the system to operations, Franklin Resources may rely upon
vendor representations, the results of point-to-point testing, or test scripts
supplied by the vendor. However, no testing can guarantee that a system which
has been certified as Year 2000 compliant will not have difficulties associated
with the Year 2000.
The costs of Franklin Select's efforts to identify and correct its Year
2000 problems have not been material and are not expected to have a material
effect in the future on Franklin Select's results of operations, financial
position or cash flow.
Contingency plans are in place for the Advisor as part of the Franklin
Resources plan mentioned above. However, contingency plans for Franklin
Select's IT and non-IT systems are limited due to the nature of these systems.
Failure of key operating systems could adversely affect the operations of
Franklin Select. In addition, if the systems of key tenants in the Properties
fail as a result of the Year
38
<PAGE>
2000 problem, they may not be able to pay rent and other fees to Franklin
Select. This could result in business disruption and loss of revenue for
Franklin Select. Failures of major electrical or telecommunication utility
providers, as well as other third-party vendors, cannot be predicted and could
adversely affect Franklin Select's operations.
OTHER MATTERS
The Board knows of no other matters to be brought before the Meeting. If
any other matters properly come before the Meeting, the proxy holders will vote
the proxies in accordance with their best judgment. In the event that
sufficient votes in favor of the proposals set forth in the Notice of Special
Meeting of Shareholders are not received by the date of the Meeting, the proxy
holders may propose one or more adjournments of the Meeting for a period or
periods of not more than 45 days in the aggregate to permit further
solicitation of proxies, even though a quorum is present. Any such adjournment
will require the affirmative vote of a majority of the votes cast on the
question in person or by proxy at the session of the meeting to be adjourned.
The proxy holders will vote in favor of such adjournment those proxies which
they are entitled to vote in favor of the Asset Sale. The costs of any such
additional solicitation and of any adjourned session will be borne by Franklin
Select.
OTHER INFORMATION
SHAREHOLDER PROPOSALS
If the Asset Sale and the dissolution are approved and the Asset Sale is
consummated in a timely manner, Franklin Select does not intend to hold an
annual shareholders meeting in 2000 or thereafter. If the Asset Sale and the
dissolution are not approved and if a shareholder desires to present any
proposal for consideration at Franklin Select's 2000 Annual Meeting of
Shareholders the shareholder must, in addition to meeting other applicable
requirements, mail such proposal to Franklin Select so that it is received at
Franklin Select's executive offices not later than January 31, 2000.
WHERE YOU CAN FIND MORE INFORMATION
Franklin Select is subject to the informational requirements of the
Exchange Act, and in accordance therewith files reports, proxy statements and
other information with the SEC. Such reports, proxy statements and other
information filed by Franklin Select may be inspected and copied at the public
reference facilities maintained by the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the regional offices of the SEC located at 75
Park Place, New York, New York 10007 and 500 West Madison Street, Chicago,
Illinois 60661. Copies of such material can be obtained from the Public
Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549,
at prescribed rates. In addition, certain of the documents filed by Franklin
Select with the Commission are available through the SEC's Electronic Data
Gathering and Retrieval System ("EDGAR") at www.sec.gov.
Franklin Select furnishes shareholders with annual reports containing
consolidated financial statements audited by independent certified public
accountants. Franklin Select's 1998 Annual Report, which was integrated with
and included in its Annual Report on Form 10-K for the fiscal year ended
December 31, 1998, was sent to shareholders on March 17, 1999.
No person is authorized to give any information or to make any
representations other than the information or representations contained herein
and, if given or made, such information or representations should not be relied
upon as having been authorized. This Proxy Statement does not constitute the
solicitation of a proxy in any jurisdiction where, or to any person to whom, it
is unlawful to make such a solicitation. The delivery of this Proxy Statement
shall not, under any circumstances, create any implication that there has been
no change in the affairs of Franklin Select since the date hereof, or the dates
as of which certain information is set forth herein.
39
<PAGE>
INFORMATION INCORPORATED BY REFERENCE
Franklin Select's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998 (a copy of which is being delivered to shareholders
concurrently with this Proxy Statement), Quarterly Report on Form 10-Q for the
fiscal quarter ended March 31, 1999, Quarterly Report on Form 10-Q for the
fiscal quarter ended June 30, 1999, Quarterly Report on Form 10-Q for the
fiscal quarter ended September 30, 1999 (a copy of which is being delivered to
shareholders concurrently with this Proxy Statement) and Report on Form 8-K
filed with the SEC on October 25, 1999, are hereby incorporated by reference
into this Proxy Statement. All documents filed by Franklin Select with the SEC
pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the
date of this Proxy Statement and prior to the completion of the vote at the
Meeting shall be deemed to be incorporated by reference into this Proxy
Statement and to be a part hereof from the date of filing of such documents.
Any statement contained in a document incorporated or deemed to be incorporated
by reference herein shall be deemed to be modified or superseded for purposes
of this Proxy Statement to the extent that a statement contained herein or in
any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Proxy Statement.
THIS PROXY STATEMENT INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT
PRESENTED HEREIN OR DELIVERED HEREWITH. COPIES OF ANY SUCH DOCUMENTS, OTHER
THAN EXHIBITS TO SUCH DOCUMENTS WHICH ARE NOT SPECIFICALLY INCORPORATED BY
REFERENCE HEREIN, ARE AVAILABLE WITHOUT CHARGE TO ANY PERSON, INCLUDING ANY
SHAREHOLDER, TO WHOM THIS PROXY STATEMENT IS DELIVERED, UPON WRITTEN OR ORAL
REQUEST TO FRANKLIN SELECT REALTY TRUST, 777 MARINERS ISLAND BOULEVARD, SAN
MATEO, CA 94403, TELEPHONE (650) 312-5789. IN ORDER TO ASSURE TIMELY DELIVERY
OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BEFORE DECEMBER 31, 1999.
By Order of the Board of Directors,
/s/ RICHARD S. BARONE
------------------------------------
Richard S. Barone
Secretary
SHAREHOLDERS ARE REQUESTED TO FILL IN, DATE AND SIGN THE PROXY CARD AND RETURN
IT PROMPTLY IN THE ENCLOSED POSTAGE PREPAID ENVELOPE.
WHEN SIGNING AS ATTORNEY, EXECUTOR, ADMINISTRATOR, TRUSTEE OR GUARDIAN, GIVE
YOUR FULL TITLE AS SUCH. WHERE STOCK IS HELD JOINTLY, BOTH SIGNATURES ARE
REQUESTED.
40
<PAGE>
EXHIBIT A
PLAN OF LIQUIDATION AND DISSOLUTION
This Plan of Liquidation and Dissolution (this "Plan") is for the purpose
of effecting the complete liquidation and dissolution of Franklin Select Realty
Trust, a California corporation (the "Company").
1. APPROVAL OF THIS PLAN. In accordance with Section 1900(a) of the
California Corporations Code, this Plan shall be submitted to the shareholders
of the Company for approval at the Special Meeting of Shareholders to be held
for that purpose. This Plan shall become effective on such date, after the
approval of the holders of a majority of the Company's outstanding shares of
stock, as the Board of Directors (the "Board") may designate (the "Effective
Date").
2. CONSUMMATION OF THE PURCHASE AGREEMENT TRANSACTIONS; CESSATION OF
BUSINESS. Following consummation of the transactions (the "Asset Sale")
contemplated by that certain Purchase Agreement dated as of October 12, 1999,
among the Company, FSRT, L.P., the Limited Partners of FSRT, and Value
Enhancement Fund III, LLC (as it may be amended, the "Purchase Agreement"), the
Company shall not engage in any further business activities, except for the
purpose of managing its investments in cash, cash equivalents and other
marketable securities, completing work in process, disposing of its assets,
providing for satisfaction of its obligations, adjusting and winding up its
business and affairs, and distributing the proceeds from the disposition of its
assets in accordance with this Plan. The Board then in office shall continue in
office solely for that purpose. The Board shall dissolve the Company as soon as
it deems feasible, but shall remain in existence for at least the period
required by the Purchase Agreement (unless waived).
3. CONTINUING EMPLOYEES AND CONSULTANTS. For the purpose of effecting the
liquidation of the Company's assets, the Company shall hire or retain, subject
to the pleasure of the Board, such employees and consultants as the Board deems
desirable to supervise the liquidation.
4. EXPENSES OF LIQUIDATION. The Board may provide, from the assets of the
Company, reasonable funds for payment of the expenses of the dissolution and
liquidation of the Company, including filing fees and other expenses relating
to the holding of the Special Meeting of Shareholders to consider this Plan and
other documentation required in connection with this Plan, continuation of
employees and/or consultants engaged in the liquidation process, accountants'
and attorneys' fees and expenses, and other reasonable fees and expenses
incurred in connection with the liquidation process.
5. PAYMENT OF LEGALLY ENFORCEABLE CLAIMS. The Company shall satisfy, or
provide for the satisfaction of, all its legally enforceable claims and
obligations in an orderly manner.
6. PROVISION FOR CONTINUED INDEMNIFICATION OF BOARD AND OFFICERS. The
Company shall reserve sufficient assets and/or obtain and maintain such
insurance as shall be necessary to provide for continued indemnification of the
Board, officers and agents of the Company, and other parties whom the Company
has agreed to indemnify, to the full extent provided by the articles of
incorporation and bylaws of the Company, any existing indemnification
agreements between the Company and any of such persons, and applicable law. At
the discretion of the Board, such insurance may include coverage for periods
after the dissolution of the Company, including periods after the termination
of any Liquidating Trust (as defined below), and may include coverage for
trustees, employees and agents of such Liquidating Trust.
7. DISTRIBUTIONS TO SHAREHOLDERS. After reserving sufficient assets and/or
obtaining insurance as set forth in Section 6, the Board is authorized to make
an initial distribution to shareholders from the proceeds of the Asset Sale.
Thereafter, after satisfaction of all of the Company's legally enforceable
obligations, remaining assets will be distributed to the shareholders of the
Company in accordance with their respective shareholdings. Holders of
fractional shares will receive, for each distribution, an amount equal to their
fraction of a share multiplied by the amount distributed per Series A share.
Multiple fractional shares owned by a single holder will be aggregated.
A-1
<PAGE>
8. TERMINATION OF REIT STATUS. In the course of liquidation, the Board,
acting in its discretion, shall have the authority to terminate the Company's
election to be taxed as a real estate investment trust under Sections 856-860
of the Internal Revenue Code of 1986, as amended, if it determines that such
action would be in the best interests of the shareholders.
9. LIQUIDATING TRUST. If, in the Board's judgment, it appears that the
Company will be unable to satisfy its legally enforceable obligations within 24
months after the Effective Date, or if, at any time, the Company will no longer
qualify as REIT, the Board may cause the Company to create a liquidating trust
(the "Liquidating Trust") and to distribute beneficial interests in the
Liquidating Trust to the shareholders as part of the liquidation process. The
Liquidating Trust shall be constituted pursuant to a liquidating trust
agreement in such form as the Board may approve, it being intended that the
transfer and assignment to the Liquidating Trust pursuant hereto and the
distribution to shareholders of the beneficial interests therein shall
constitute a part of the final liquidating distribution by the Company to the
shareholders of their pro rata interests in the remaining amount of cash and
other property held by or for the account of the Company. From and after the
date of the Company's transfer of cash and property to the Liquidating Trust,
the Company shall have no interest of any character in and to any such cash and
property and all of such cash and property shall thereafter be held by the
Liquidating Trust solely for the benefit of and ultimate distribution of the
shareholders, subject to any unsatisfied debts, liabilities and expenses.
10. AUTHORIZATION. The Board or the trustees of the Liquidating Trust, and
such officers of the Company as the Board may direct, are hereby authorized to
interpret the provisions of this Plan and are hereby authorized and directed to
take such further actions, to execute such agreements, conveyances,
assignments, transfers, certificates and other documents, as may in their
judgment be necessary or desirable in order to wind up expeditiously the
affairs of the Company and complete the liquidation thereof, including, without
limitation, (i) the execution of any contracts, deeds, assignments or other
instruments necessary or appropriate to sell or otherwise dispose of, any and
all property of the Company remaining after the consummation of the Asset Sale,
whether real or personal, tangible or intangible, (ii) the appointment of other
persons to carry out any aspect of this Plan, (iii) the temporary investment of
funds in such medium as the Board may deem appropriate, and (iv) the
modification of this Plan as may be necessary to implement this Plan. The
death, resignation or other disability of any Director or officer of the
Company shall not impair the authority of the surviving or remaining Directors
or officers of the Company (or any persons appointed as substitutes therefor)
to exercise any of the powers provided for in this Plan. Upon such death,
resignation or other disability, the surviving or remaining Directors shall
have the authority to fill the vacancy or vacancies so created, but the failure
to fill such vacancy or vacancies shall not impair the authority of the
surviving or remaining Directors or officers to exercise any of the powers
provided for in this Plan.
11. AMENDMENT OR TERMINATION OF THIS PLAN. The Board may, by vote of the
majority of the Board then in office, amend this Plan or terminate this Plan
and revoke the dissolution of the Company, whether or not a vote of the
shareholders has previously occurred, unless the Board determines that such
amendment or termination would materially and adversely affect the
shareholders' interests.
A-2
<PAGE>
[PRUDENTIAL LETTERHEAD]
October 2, 1999
The Special Committee of the Board of Directors
Franklin Select Realty Trust
777 Mariners Island Boulevard
San Mateo, CA 94403
Members of the Special Committee of the Board of Directors,
We understand that Franklin Select Realty Trust, a California Corporation (the
"Company"), FSRT, L.P., a Delaware limited partnership of which the Company is
the sole general partner (the "Partnership"), Value Enhancement Fund III, LLC, a
Georgia limited liability company ("Value") and the limited partners of the
Partnership (the "Limited Partners"), propose to enter into a Purchase Agreement
(the "Agreement"), pursuant to which Value will simultaneously purchase (i) all
of the Company's right, title and interest in properties owned by the Company
identified in the Agreement (the "Properties"), as well as the Company's general
partnership interest in the Partnership (collectively, the "Transaction") and
(ii) all of the Partnership units held by the Limited Partners. The purchase
price to be paid pursuant to the Transaction is $131.5 million, subject to
certain adjustments. Value may exclude, upon certain conditions, from the
Properties to be acquired under the Agreement the Data General property in which
event the purchase price to be paid pursuant to the Transaction will be reduced
by $16 million.
You have requested our opinion as to the fairness, from a financial point of
view, to the Company of the consideration to be paid by Value pursuant to the
Agreement.
In conducting our analysis and arriving at the opinion expressed herein, we
have reviewed such materials and considered such financial and other factors as
we deemed relevant under the circumstances, including:
(i) a draft dated September 30, 1999 of the Purchase Agreement, including a
side letter regarding the potential exclusion of the Data General
property.
(ii) a draft dated September 30, 1999 of the purchase of conversion rights
agreement:
B-1
<PAGE>
[PRUDENTIAL LETTERHEAD]
(iii) Certain publicly available historical financial and operating data
concerning the Company including, but not limited to, the Annual
Reports on Form 10-K of the Company for the fiscal years ended
December 31, 1996, 1997 and 1998, and Quarterly Reports on Form 10-Q
for the quarter ended June 30, 1999:
(iv) historical stock market prices and trading volumes for the Company
Common Stock:
(v) publicly available financial, operating and stock market data
concerning certain companies engaged in businesses we deemed
comparable to the businesses of the Company, or otherwise relevant
to our inquiry:
(vi) the financial terms of certain recent transactions we deemed relevant
to our inquiry:
(vii) internal valuation analyses of the Company's properties prepared by
management of the Company; and
(viii) such other financial studies, analyses and investigations that we
deemed appropriate.
We have assumed, with your consent, that the draft of the Agreement, the
conversion rights agreement and side-letter regarding the Data General property
we reviewed will conform in all material respects to those documents when in
final form.
We have discussed with senior management of the Company; (i) the past and
current operating and financial condition of the Company, (ii) the prospects
for the Company, (iii) their estimates of the Company's future financial
performance and (iv) such other matters we deemed relevant.
In connection with our review and analysis and in arriving at our opinion, we
have relied upon the accuracy and completeness of the financial and other
information that is publicly available or was provided to us by the Company and
we have not undertaken any independent verification of such information or any
independent valuation or appraisal of any of the assets or liabilities of the
Company and, except as noted in clause (vii) above, we have not been furnished
with any such valuation or appraisal. With respect to certain financial
forecasts for the Company provided to us by the management of the Company, we
have assumed that such information (and the assumptions and bases therefor)
represents management's best currently available estimate as to the future
financial performance of the Company. Further, our opinion is based on
economic, financial and market conditions as they currently exist and can only
be evaluated as of the date hereof and we assume no responsibility to update or
revise our opinion based upon events or circumstances occurring after the date
hereof.
Our opinion does not address, nor should it be construed to address, the
relative merits of the Transaction, on the one hand, or any alternative
business strategies that may be available to the Company, on the other hand. At
the direction of the Company, we have assumed that the financial exposure to
which the Company may directly or indirectly become subject arising out of
certain litigation captioned "Herbert S. Hodge, Jr., on behalf of himself and
all others similarly situated v. Franklin Select Realty Trust, a California
Corporation" and "Adrian H. Vigneau Trustee, et al. v. Franklin Advantage Real
Estate Income Fund, et al.", will not exceed, in the aggregate, $6.5 million.
B-2
<PAGE>
[PRUDENTIAL LETTERHEAD]
Also, at the direction of the Company, we have assumed the asset value of the
Data General property to be $16 million. Furthermore, this opinion (a) assumes
the notes to be received by the Limited Partners are worth their face value,
and (b) does not in any manner address the fairness of the consideration to be
received by the Limited Partners under the Agreement.
We have been retained by the Special Committee of the Board of Directors of the
Company to render this opinion and provide other financial advisory services in
connection with the Transactions and will receive an advisory fee for such
services. In the ordinary course of business we may actively trade the common
stock of the Company for our own account and for the accounts of customers and,
accordingly, may at any time hold a long or short position in such securities.
This letter and the opinion expressed herein are for the use of the Special
Committee of the Board of Directors of the Company. This opinion does not
constitute a recommendation to the stockholders of the Company as to how such
stockholders should vote in connection with the Agreement or as to any other
action such holders should take regarding the Transaction. This opinion may not
be reproduced, summarized, excerpted from or otherwise publicly referred to or
disclosed in any manner without our prior written consent.
Based upon and subject to the foregoing, we are of the opinion that, as of the
date hereof, the consideration to be paid to the Company pursuant to the
Agreement is fair to the Company from a financial point of view.
Very truly yours,
/s/ PRUDENTIAL SECURITIES INCORPORATED
- ----------------------------------------
PRUDENTIAL SECURITIES INCORPORATED
B-3
<PAGE>
FRANKLIN SELECT REALTY TRUST
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints David P. Goss and Richard S. Barone, jointly and
severally, with full power of substitution, as proxies, and hereby authorizes
each of them, having authority hereby to act alone, to represent and to vote, as
designated below, all the shares of Common Stock (Series A and Series B) of
Frankling Select Realty Trust ("Franklin Select") held of record by the
undersigned at the Special Meeting of Shareholders to be held at the offices of
Franklin Resources, Inc., 777 Mariners Island Boulevard, San Mateo, California
94403 on January 25, 2000, at 9:00 a.m. Pacific Standard time, or any
postponement or adjournment thereof, on the following proposals. The Board of
Directors recommends a vote for all proposals.
(CONTINUED AND TO BE SIGNED ON THE REVERSE)
- --------------------------------------------------------------------------------
FOLD AND DETACH HERE
<PAGE>
FRANKLIN SELECT REALTY TRUST
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR PROPOSALS 1 AND 2.
PLEASE MARK X
YOUR VOTES AS
INDICATED IN
THIS EXAMPLE
1. Proposal to approve the sale of all of FOR AGAINST ABSTAIN
Franklin Select's real estate assets [ ] [ ] [ ]
pursuant to the terms of the Purchase
Agreement dated as of October 12, 1999
among Franklin Select, FSRT, L.P., a
Delaware limited partnership, each of
the limited partners of FSRT, L.P., and
Value Enhancement Fund III, LLC, a
Georgia limited liability company.
2. Proposal to approve the authorization to FOR AGAINST ABSTAIN
Franklin Select's Board of Directors for [ ] [ ] [ ]
the liquidation, winding up and dissolution
of Franklin Select as described in the proposed
Plan of Liquidation and Dissoution, a
copy of which is attached as EXHIBIT A
to the accompanying Proxy Statement.
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS AND MAY BE REVOKED PRIOR TO
EXERCISE. THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED AS DIRECTED HEREIN
BY THE UNDERSIGNED SHAREHOLDER. IN THE ABSENCE OF DIRECTION, THIS PROXY WILL BE
VOTED FOR PROPOSALS NOS. 1 AND 2 AND WITHIN THE DISCRETION OF THE PROXYHOLDERS
AS TO OTHER MATTERS WHICH MAY PROPERLY COME BEFORE THE MEETING AND ANY
POSTPONEMENTS OR ADJOURNMENTS THEREOF. HOWEVER, IF THE SHAREHOLDERS DO NOT
APPROVE PROPOSAL NO. 1 THE VOTE ON PROPOSAL NO. 2 WILL NOT OCCUR.
Signature_________________________Signature_____________________Date____________
(Please sign exactly as the name or names appear on your account statement or
your Common Stock certificate. In signing as attorney, executor, administrator,
trustee or guardian, or for a corporation, please give your full title. When
Shares are in the names of more than one person, each should sign the proxy.)
- --------------------------------------------------------------------------------
FOLD AND DETACH HERE
FRANKLIN SELECT REALTY TRUST
Enclosed is a proxy statement that outlines one or more issues that require a
shareholder vote. We encourage you to read the proxy information carefully, and
return your vote by the date indicated. Because your input is so important, you
may receive a telephone call from a company hired to help encourage shareholders
to vote.
PLEASE SIGN AND RETURN YOUR PROXY CARD BY
TEARING OFF THE TOP PORTION OF THIS SHEET AND
RETURNING IT IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
