SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-12708
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Franklin Select Realty Trust
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(Exact name of registrant as specified in its charter)
California 94-3095938
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
P. O. Box 7777, San Mateo, California 94403-7777
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (650) 312-2000
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N/A
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Former name, former address and former fiscal year, if changed since last
report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Common Stock Shares Outstanding as of March 31, 1999, Series A: 12,250,372
Common Stock Shares Outstanding as of March 31, 1999, Series B: 745,584
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FRANKLIN SELECT REALTY TRUST
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
MARCH 31, December
(In thousands, except per share amounts) 1999 31, 1998
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ASSETS
Real Estate
Rental property:
Land $34,054 $34,054
Buildings and improvements 100,317 100,241
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134,371 134,295
Less: accumulated depreciation 22,172 21,341
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Real estate, net 112,199 112,954
Cash and cash equivalents 3,378 1,256
Mortgage-backed securities, available for sale 13,973 7,700
Notes receivable - 7,700
Deferred rent receivable 1,533 1,543
Deferred costs and other assets 2,727 2,739
=======================
Total assets $133,810 $133,892
=======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes and bonds payable $26,663 $26,762
Tenant deposits, accounts payable and accrued 2,410 1,807
expenses
Distributions payable 1,684 1,641
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Total liabilities 30,757 30,210
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Minority interest 9,161 9,181
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Commitments and contingencies - -
Stockholders' equity:
Common stock, Series A, without par value;
stated value $10 per share; 50,000 shares 103,161 103,161
authorized; 12,250 issued and outstanding
Common stock, Series B, without par value;
stated value $10 per share; 1,000 shares 6,294 6,294
authorized; 746 issued and outstanding
Accumulated other comprehensive income 76 (18)
Accumulated distributions in excess of net (15,639) (14,936)
income
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Total stockholders' equity 93,892 94,501
=======================
Total liabilities and stockholders' equity $133,810 $133,892
=======================
The accompanying notes are an integral part of these consolidated financial
statements.
FRANKLIN SELECT REALTY TRUST
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(Unaudited)
(in thousands except per share amounts) 1999 1998
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REVENUE:
Ren Rent $3,869 $4,533
Interest, dividends and other 253 60
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Total revenue 4,122 4,593
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EXPENSES:
Property operating 806 909
Interest 593 853
Related party 313 376
Depreciation and amortization 925 993
General and administrative 541 271
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Total expenses 3,178 3,402
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Operating income before minority interest 944 1,191
and sale of property
Gain on sale of property - 170
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Operating income before minority interest 944 1,361
Minority interest 177 161
========================
NET INCOME $767 $1,200
========================
Unrealized gain (loss) on mortgage-backed 95 (2)
securities
========================
Comprehensive income $862 $1,198
========================
Net income per share, based on the weighted
average shares outstanding of Series A common
stock of 12,250 for the three-month periods $.06 $.10
ended March 31, 1999 and 1998
========================
Distributions per share, based on the weighted
average shares outstanding of Series A common
stock of 12,250 for the three-month periods $.12 $.12
ended March 31, 1999 and 1998
========================
The accompanying notes are an integral part of these consolidated financial
statements.
FRANKLIN SELECT REALTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
Unaudited
(In thousands) 1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $767 $1,200
------------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 957 1,039
Gain on sale of property - (170)
Minority interest 177 161
Decrease (increase) in deferred rent receivable 10 (13)
Decrease (increase) in other assets 41 (252)
Increase (decrease) in tenant deposits,
accounts payable and other liabilities 483 (80)
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1,668 685
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NET CASH PROVIDED BY OPERATING ACTIVITIES 2,435 1,885
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of real estate - 4,471
Improvements to real estate (76) (112)
Leasing commissions paid (124) (54)
Collection of notes receivable 7,700 -
(Purchase) sale of mortgage-backed securities (6,179) 20
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NET CASH PROVIDED BY INVESTING ACTIVITIES 1,321 4,325
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CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes and bonds payable (99) (4,211)
Payment of loan costs (31) -
Distributions paid to limited partners (77) (161)
Distributions paid to stockholders (1,427) (1,542)
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NET CASH USED IN FINANCING ACTIVITIES (1,634) (5,914)
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NET INCREASE IN CASH AND CASH EQUIVALENTS 2,122 296
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,256 3,821
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CASH AND CASH EQUIVALENTS, END OF PERIOD $3,378 $4,117
==================
The accompanying notes are an integral part of these consolidated financial
statements.
FRANKLIN SELECT REALTY TRUST
Notes To Consolidated Financial Statements
March 31, 1999
Unaudited
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements of
Franklin Select Realty Trust (the "Company") included herein have been
prepared in accordance with the instructions to Form 10-Q pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management, all appropriate adjustments
necessary to a fair presentation of the results of operations have been made
for the periods shown. All adjustments are of a normal recurring nature.
Certain prior year amounts have been reclassified to conform to current year
presentations. These financial statements should be read in conjunction with
the Company's audited financial statements as of and for the year ended
December 31, 1998.
NOTE 2 - NET INCOME PER SHARE
In October 1997, 1,625,000 limited partnership units (the "FSRT Units")
became eligible for exchange into a like number of Series A common shares in
the Company in accordance with the partnership agreement of FSRT. None of the
partnership units have been exchanged for common stock. The convertible
partnership units are deemed anti-dilutive to net income and consequently
there is no difference between basic and diluted net income per share.
NOTE 3 - LITIGATION
The Company is currently defending the former directors of Franklin Advantage
Real Estate Income Fund ("Advantage") against a purported class action
complaint filed in the California Superior Court for San Mateo County on
December 2, 1996 by two stockholders for themselves and purportedly on behalf
of certain other minority stockholders of Advantage. Other defendants
currently include Franklin Resources, Inc. and the Company's advisor,
Franklin Properties, Inc. The complaint alleges that defendants breached
fiduciary duties to plaintiffs and other minority stockholders in connection
with the purchase by Franklin Resources, Inc. in August 1994 of a 46.6%
interest in Advantage and in connection with the Merger of Advantage into the
Company in May 1996, which was approved by a majority of the outstanding
shares of each of the three companies involved. Plaintiffs also allege that
defendants misstated certain material facts or omitted to state material
facts in connection with these transactions.
The complaint includes a variety of additional claims, including claims
relating to the investment of Advantage assets, the suspension of the
dividend reinvestment program, the allocation of merger-related expenses,
revisions to the investment policies of Advantage, and the restructuring of
the contractual relationship with the Advisor. Plaintiffs seek damages in an
unspecified amount and certain equitable relief. The defendants deny any
wrongdoing in these matters and intend to vigorously defend the action.
Discovery is continuing.
On June 3, 1997, Herbert S. Hodge, Jr., on behalf of himself and certain
other shareholders of Franklin Real Estate Income Fund ("FREIF"), filed an
alleged class action complaint in the California Superior Court for San Mateo
County against the Company, certain of its directors, the Company's advisor,
Franklin Properties, Inc., Franklin Resources, Inc., and Bear Stearns Co.,
Inc. The complaint alleges that defendants breached fiduciary duties to
plaintiff and certain other shareholders in connection with the merger of
FREIF into Franklin Select Realty Trust in May 1996. Plaintiff also alleges
that defendants misstated certain material facts or omitted to state material
facts in connection with this transaction. Plaintiff seeks damages in an
unspecified amount. The defendants deny any wrongdoing in these matters and
intend to vigorously defend the action. Discovery is continuing.
FRANKLIN SELECT REALTY TRUST
Notes To Consolidated Financial Statements
March 31, 1999
Unaudited
NOTE 3 - LITIGATION (continued)
While the outcome of litigation of these claims cannot be predicted with
certainty, the Company's management does not believe that the outcome of
litigation of these matters will have a material adverse effect on the
Company's financial condition, results of operations or cash flows.
NOTE 4 - SUBSEQUENT EVENT
On April 21, 1999, the Company was notified that one property tenant, Tanon
Manufacturing, Inc., elected to reject its lease under Chapter 11 of the
United States Bankruptcy Code. The Company's rental income from this tenant
was approximately $98,000 per month including operating expense
reimbursements. The Company has commenced efforts to re-lease the property.
FRANKLIN SELECT REALTY TRUST
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Introduction
The following discussion should be read in conjunction with Management's
Discussion and Analysis included in the Company's 1998 Form 10-K.
When used in the following discussion, the words "believes," "anticipates"
and similar expressions are intended to identify forward-looking statements.
Such statements are subject to certain risks and uncertainties which could
cause actual results to differ materially from those projected, including,
but not limited to, those set forth in the section entitled "Potential
Factors Affecting Future Operating Results," below. Readers are cautioned
not to place undue reliance on these forward-looking statements that speak
only as of the date hereof. The Company undertakes no obligation to publicly
release any revisions to these forward-looking statements that may be made to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
Results of Operations
Comparison of the three-month periods ended March 31, 1999 and 1998
Total revenue for the three-month period ended March 31, 1999 decreased
$471,000, or 10%, compared to the same period a year ago primarily due to the
sale of the following properties: Carmel Mountain Gateway Plaza in July 1998
and Mira Loma Retail Shopping Center and Glen Cove Shopping Center in
November 1998. In addition, the Company's revenues were affected by the
departure on January 31, 1999 of Data General Corporation who vacated 34,000
square feet. To date, the company has re-leased approximately 29,000 square
feet of space under leases that will commence rental payments during the
second and third quarters of 1999. Partially offsetting these factors, were
increased revenues from the Shores, Northport and Hathaway buildings.
Total expenses for the three-month period ended March 31, 1999 decreased
$224,000, or 7%, when compared to the same period a year ago primarily as a
result of the sales of properties referred to in the preceding paragraph.
General and administrative expenses for the three-month period ended March
31, 1999 increased $270,000, or 100%, when compared to the same period a year
ago primarily due to legal fees and expenses incurred with respect to the
Company's evaluation of its strategic alternatives.
Liquidity and Capital Resources
At March 31, 1999, cash and cash equivalents aggregated $3,378,000. The
Company believes this amount is adequate to meet its short-term operating
cash requirements. The Company also holds $13,973,000 in mortgage-backed
securities and has access to a revolving line of credit in the amount of $25
million, that was unused at March 31, 1999. On January 5, 1999, the Company
collected the $7,700,000 note receivable that was outstanding at December 31,
1998 which the Company received from the sale of the Mira Loma and Glen Cove
properties in 1998.
Net cash provided by operating activities for the three-month period ended
March 31,1999 was $2,435,000. The increase in this cash flow when compared to
the same period in the prior year was primarily attributable to the increase
in tenant deposits, accounts payable and other liabilities in the current
quarter compared to a reduction in the same period last year.
The changes in net cash provided by investing and financing activities during
the three-month period ended March 31, 1999 was primarily the result of the
collection of the $7,700,000 note receivable, the purchase of mortgage backed
securities and distribution payments to shareholders during the period.
FRANKLIN SELECT REALTY TRUST
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
(Continued)
Liquidity and Capital Resources (Continued)
The Special Committee of the Board of Directors is continuing its review of
the strategic alternatives available to the Company.
Management does not believe that the outcome of the litigation described in
Note 3 to the accompanying financial statements will have a materially
adverse effect on the Company's financial condition, results of operations,
or cash flows.
Management believes that the Company's sources of capital as described under
Liquidity and Capital Resources are adequate to meet its liquidity needs in
the foreseeable future.
Impact of Inflation
The Company's policy of negotiating leases which incorporate operating
expense "pass-through" provisions is intended to protect the Company against
increased operating costs resulting from inflation.
Cash Distribution Policy
Distributions are declared quarterly at the discretion of the Board of
Directors. The Company's present distribution policy is to at least annually
evaluate the current distribution rate in light of anticipated tenant
turnover over the next two or three years, the estimated level of associated
improvements and leasing commissions, planned capital expenditures, any debt
service requirements and the Company's other working capital requirements.
After balancing these considerations, and considering the Company's earnings
and cash flow, the level of its liquid reserves and other relevant factors,
the Company seeks to establish a distribution rate which:
i) provides a stable distribution which is sustainable despite short-term
fluctuations in property cash flows;
ii) maximizes the amount of cash flow paid out as distributions consistent
with the above listed objective; and
iii) complies with the Internal Revenue Code requirement that a REIT annually
pay out as distributions not less than 95% of its taxable income.
During the three-month period ended March 31, 1999, the Company declared
distributions related to the Series A common stock totaling $1,470,000.
Funds from Operations
The Company considers funds from operations to be a useful measure of the
operating performance of an equity REIT 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 the accounts receivable and
accounts payable. However, it does not measure whether income is sufficient
to fund all of the Company's cash needs including principal amortization,
capital improvements and distributions to stockholders. Funds from
operations should not be considered an alternative to net income or any other
GAAP measurement of performance, as an indicator of the Company'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, 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 after adjustment for unconsolidated joint ventures. The Company reports
funds from operations in accordance with the revised NAREIT definition. The
measure of funds from operations as reported by the Company may not be
comparable to similarly titled measures of other companies that follow
different definitions.
FRANKLIN SELECT REALTY TRUST
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
(Continued)
Funds from Operations (Continued)
For the
Three Months Ended
March 31,
(In thousands) 1999 1998
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Net income $767 $1,200
Add: Depreciation and amortization 925 993
Less: Gain on sale of property - (170)
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Funds from Operations $1,692 $2,023
===================================================================
The primary difference between the periods reflects the changes in net income
as discussed under "Results of Operations".
Potential Factors Affecting Future Operating Results
Leasing Turnover
In connection with any lease renewal or new lease, the Company typically
incurs costs for tenant improvements and leasing commissions which will be
funded first from operating cash flow and, if necessary, from cash reserves
or existing credit facilities. In addition, while the Company has
historically been successful in renewing and re-leasing space, the Company
will be subject to the risk that leases expiring in the future may be renewed
or re-leased at terms that are less favorable than current lease terms.
Leasing Turnover - Tanon Manufacturing, Inc.
On April 21, 1999, Tanon Manufacturing, Inc. ("TMI"), the sole tenant of a
building (the "Property") located in Fremont, California owned by
F.S.R.T.,L.P. ("FSRT"), a limited partnership in which the Company is the
general partner and owner of a majority interest, notified the Company that
TMI was rejecting its lease under Chapter 11 of the United States Bankruptcy
Code. TMI filed a bankruptcy petition on December 3, 1998. The Company's
rental income from TMI pursuant to the lease was approximately $98,000 per
month, including operating expense reimbursements. The tenant has vacated the
property and the Company has commenced to re-lease the space. Upon
re-leasing the property, the Company is likely to incur costs for tenant
improvements and leasing commissions but the amounts are unknown at this
time.
Leasing Turnover - Data General Building
On January 31, 1999, the Data General Corporation vacated approximately
34,000 square feet of space at the Company's office building in Manhattan
Beach, California. During 1998, the Company recorded rental income from the
Data General lease that was equivalent to approximately $31.03 per square
foot on a full service basis. As of this date, the Company has executed new
leases for approximately 29,000 square feet of the space at an average annual
starting rental rate of $25.50 per square foot. Rental income under these
leases commence at various dates during the second and third quarters of the
year. The Company will incur costs for tenant improvements and leasing
commissions related to the leases totaling approximately $680,000 which will
be paid in future periods.
FRANKLIN SELECT REALTY TRUST
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
(Continued)
Year 2000
The Company has evaluated whether its computer systems, including on-site and
embedded systems, and those of third parties with whom the Company interacts
will function properly by, at or during the year 2000. The Company has
determined certain of its own systems are not currently year 2000 compliant.
Management has a plan to replace or upgrade the systems within the next six
months. The Company does not expect that the costs associated with these
replacements or upgrades will have a materially adverse impact on its
financial position, results of operations or cash flows in future periods.
However, failure to successfully replace or upgrade these systems could
result in material disruptions to its business.
The Company is managed and advised by certain affiliates of Franklin
Resources, Inc. It is reliant on these entities for its basic computer
network and certain other applications. The Company is also reliant on a
third-party transfer agent for maintaining its basic shareholder records.
Management is monitoring the progress of these entities in achieving year
2000 compliance and does not currently anticipate a materially adverse impact
on the Company's business.
FRANKLIN SELECT REALTY TRUST
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit
<S> <C> <C>
No. List of Exhibits
Footnote
3.1* Amended and Restated Articles of Incorporation
3.2 Second Amended and Restated Bylaws of Franklin Select Realty Trust (1)
10.1 Amended and Restated Advisory Agreement (2)
10.2 Property Management Agreement (3)
10.3 Agreement of Limited Partnership of FSRT, L.P. between the Company and (4)
Northport Associates No. 18, a California limited liability company,
dated as October 30, 1996.
10.4 Contribution Agreement, dated as of October 30, 1996, between FSRT, L.P., (4)
the Company, Northport Associates No. 18, a California limited
liability company, and the members of Northport Associates No. 18.
10.5 Exchange Rights Agreement, dated as of October 30, 1996, among the Company, (4)
FSRT L.P., and Northport Associates No. 18, a California limited liability company.
10.6 Registration Rights Agreement, dated as of October 30, 1996, among the (4)
Company and Northport Associates No. 18, a California limited liability company.
10.7 Secured line of credit loan agreement, dated December 10, 1996, by and
between the Company and Bank of America. (5)
* Filed herewith
Footnotes
(1) Documents were filed in the Company's Form S-4 Registration Statement,
dated November 13, 1995, (Registration No. 033-64131), and are
incorporated herein by reference.
(2) Documents were filed in the Company's Form 10-K for the year ended
December 31, 1998, and are incorporated herein by reference.
(3) Documents were filed in the Company's Form 10-K for the year ended
December 31, 1994, and are incorporated herein by reference.
(4) Documents were filed in the Company's Form 8-K, dated October 31, 1996,
and are incorporated herein by reference.
(5) Documents were filed in the Company's Form 10-K for the year ended
December 31, 1996, and are incorporated herein by reference.
(b) Reports on Form 8-K - There were no reports on form 8-K filed during
the quarter ended March 31, 1999.
</TABLE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FRANKLIN SELECT REALTY TRUST
By: /s/ David P. Goss
David P. Goss
Chief Executive Officer
Date: May 12, 1999
Exhibit 13.1
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
FRANKLIN SELECT REALTY TRUST
The undersigned, David P. Goss and Richard Barone, hereby certify that:
ONE: They are the duly elected and acting President and Secretary,
respectively, of FRANKLIN SELECT REALTY TRUST.
TWO: The Articles of Incorporation of said corporation shall be amended
and restated to read in their entirety as follows:
ARTICLE I
The name of this corporation is:
FRANKLIN SELECT REALTY TRUST
ARTICLE II
The purpose of the corporation is to engage in any lawful act or
activity for which a corporation may be organized under the California
General Corporation Law other than the banking business, the trust
corporation business, or the practice of a profession permitted to be
incorporated by the California Corporations Code.
ARTICLE III
A. The corporation is authorized to issue one class of shares
designated "Common Stock." The total number of shares of Common Stock which
this corporation is authorized to issue is fifty-one million (51,000,000).
This corporation is authorized to issue two Series of Common Stock,
which shall be designated as Common Stock, Series A (the "Series A") and
Common Stock, Series B (the "Series B"), respectively.
This corporation is authorized to issue fifty million (50,000,000)
shares of Series A and one million (1,000,000) shares of Series B.
B. The rights, preferences, privileges and restrictions granted to or
imposed upon the Series A and Series B are as follows:
1. DIVIDENDS. Subject to Subsection B.2. below, the holders of
Series A shall be entitled to receive dividends when, as and if declared by
the board of directors out of any assets at the time legally available
therefor. No dividends shall be paid or other distributions made with
respect to the Series B during any fiscal year of this corporation, other
than distributions of Net Proceeds (as defined below) distributed in
accordance with Subsection B.2. below and dividends payable solely in Series
B.
2. PREFERRED RETURNS. (a) If proceeds from the sale, financing or
refinancing of real property of the corporation, after payment by the
corporation of expenses incurred in connection with such sale, financing or
refinancing ("Net Proceeds"), are distributed to the holders of Common Stock,
whether by dividend or otherwise, the holders of Series A shall be entitled
to receive Net Proceeds up to a cumulative aggregate of $10 (ten dollars) per
share (such amount, subject to adjustment as provided in paragraph (b) below,
the "Series A Original Invested Capital") prior to any distribution of Net
Proceeds to the holders of Series B. Thereafter, if Net Proceeds remain
available after distribution of the Series A Original Invested Capital, then
the holders of Series B shall be entitled to receive Net Proceeds up to a
cumulative aggregate of $10 (ten dollars) per share (such amount, subject to
adjustment as provided in paragraph (c) below, the "Series B Original
Invested Capital"). Thereafter, if additional Net Proceeds are available for
distribution to the holders of Common Stock, the holders of Series A shall be
entitled to receive an amount equal to a 6% per annum cumulative
(noncompounded) return on the Series A Adjusted Price Per Share, as
calculated from time to time (and no more), prior to any further
distributions of Net Proceeds to the holders of Series B. Thereafter, if
additional Net Proceeds are available for distribution to the holders of
Common Stock, the holders of Series B shall be entitled to receive an amount
equal to a 6% per annum cumulative (noncompounded) return on the Series B
Adjusted Price Per Share, as calculated from time to time (and no more),
prior to any further distributions of Net Proceeds to the holders of Series
A. Thereafter, if additional Net Proceeds are available for distribution to
the holders of Common Stock, such Net Proceeds, after payment of incentive
fees to the corporation's adviser plus any other liabilities, shall be
distributed pro rata to the holders of Series A and Series B. The "Series A
Adjusted Price Per Share" shall be the Series A Original Invested Capital
less all distributions of Net Proceeds to the holders of Series A. The
"Series B Adjusted Price Per Share" shall be the Series B Original Invested
Capital less all distributions of Net Proceeds to the holders of Series B.
(b) If the outstanding shares of Series A shall be subdivided (by stock
split, stock dividend, reclassification or otherwise) into a greater number
of shares of Series A, then, concurrently with the effectiveness of such
subdivision, the Series A Original Invested Capital then in effect shall be
proportionately decreased. If the outstanding shares of Series A shall be
combined or consolidated, by reclassification or otherwise, into a lesser
number of shares of Series A, then concurrently with the effectiveness of
such combination or consolidation, the Series A Original Invested Capital
then in effect shall be proportionately increased.
(c) If the outstanding shares of Series B shall be subdivided (by stock
split, stock dividend, reclassification or otherwise) into a greater number
of shares of Series B, then, concurrently with the effectiveness of such
subdivision, the Series B Original Invested Capital then in effect shall be
proportionately decreased. If the outstanding shares of Series B shall be
combined or consolidated, by reclassification or otherwise, into a lesser
number of shares of Series B, then, concurrently with the effectiveness of
such combination or consolidation, the Series B Original Invested Capital
then in effect shall be proportionately increased.
(d) Nothing contained in this Article III, Section B shall require the
payment of dividends or other distributions of Net Proceeds to the holders of
Common Stock; the purpose of this Section B is to set forth the relative
priorities of Series A and Series B with respect to any dividends or other
distributions of Net Proceeds that may be made.
ARTICLE IV
The board of directors of this corporation shall have the power to
prevent the transfer of, or may call for redemption of, in a manner approved
by the board of directors, a number of the shares of Series A sufficient in
the opinion of the board of directors to maintain or bring the direct or
indirect ownership of such shares of this corporation into conformity with
the requirements for a Real Estate Investment Trust under the provisions of
the Internal Revenue Code of 1986, as amended, and any successor statute (the
"Code"). The redemption price shall be (i) the last reported sales price of
the shares of Series A on the last business day prior to the redemption date
on the principal national securities exchange on which the shares of Series A
are listed or admitted to trading, (ii) if the shares of Series A are not so
listed or admitted to trading, the average of the highest bid and lowest
asked prices on such last business day as reported by the Nasdaq Stock Market
or a similar organization selected by the board of directors for the purpose,
or (iii) if no such independent quotations exist, as determined in good faith
by the board of directors. The holders of any shares of Series A so called
for redemption shall be entitled to payment of such redemption price within a
reasonable time of the date fixed for redemption. From and after the date
fixed for redemption by the board of directors, the holder of any shares of
Series A so called for redemption shall cease to be entitled to dividends,
distributions, voting rights and other benefits with respect to such shares
of Series A, excepting only the right to payment of the redemption price
fixed as described above. The board of directors may require, whenever it is
deemed by them reasonably necessary to protect the tax status of this
corporation, statements or affidavits from any holder of shares of Series A
or proposed transferee of shares of Series A, setting forth the number of
shares of Series A already owned by him and any related person specified in
the form prescribed by the board of directors for that purpose. If, in the
opinion of the board of directors, which shall be conclusive upon any
proposed transferor or proposed transferee of shares of Series A, any
proposed transfer would jeopardize the status of this corporation as a Real
Estate Investment Trust under the Code, the board of directors may refuse to
permit the transfer. Any attempted transfer as to which the board of
directors have refused their permission shall be void and of no effect to
transfer any legal or beneficial interest in the shares of Series A. All
contracts for the sale or other transfer or exercise of shares of Series A
shall be subject to this provision.
ARTICLE V
A. The liability of the directors of this corporation for monetary
damages shall be eliminated to the fullest extent permissible under
California law.
B. This corporation is authorized to provide indemnification of agents
(as defined in Section 317 of the California Corporations Code) to the
fullest extent permissible under California law through bylaw provisions,
agreements with the agents, votes of shareholders or disinterested directors,
or otherwise, in excess of the indemnification otherwise permitted by Section
317 of the California Corporations Code, subject only to applicable limits
set forth in Section 204 of the California Corporations Code with respect to
actions for breach of duty to the corporation and its shareholders.
C. Any repeal or amendment of this Article V shall not adversely
affect any right or protection afforded any agent of the corporation in
effect at the time of the repeal or amendment.
THREE: The foregoing amendment has been approved by the Board of
Directors of said corporation.
FOUR: The foregoing amendment was approved by the holders of the
requisite number of shares of said corporation in accordance with Sections
902 and 903 of the California General Corporation Law and the corporation's
bylaws; the total number of outstanding shares of each Series of Common Stock
entitled to vote with respect to the foregoing amendment was 12,250,372
shares of Common Stock, Series A and 745,584 shares of Common Stock, Series
B. The number of shares voting in favor of the foregoing amendment equaled
or exceeded the vote required, such required vote being a majority of the
outstanding shares of Common Stock, Series A and Common Stock, Series B,
voting together as a single class.
We further declare under penalty of perjury under the laws of the State
of California that the matters set forth herein are true and correct of our
own knowledge.
IN WITNESS WHEREOF, the undersigned have executed this certificate on March 12,
1999.
/s/ David P. Goss, President
/s/ Richard Barone, Secretary
