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 SEPTEMBER 30, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from TO
Commission file number 1-12708
FRANKLIN SELECT REALTY TRUST
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-3095938
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer
Identification No.)
P. O. BOX 7777, SAN MATEO, CALIFORNIA 94403-7777
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (650) 312-2000
N/A
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 September 30, 1999, Series A: 12,250,369
Common Stock Shares Outstanding as of September 30, 1999, Series B: 745,584
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FRANKLIN SELECT REALTY TRUST
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER DECEMBER
(In thousands, except per share amounts) 30, 1999 31, 1998
- --------------------------------------------------------------------
ASSETS
Real Estate
Rental property:
Land $34,054 $34,054
Buildings and improvements 100,626 100,241
------------------
134,680 134,295
Less: accumulated depreciation 23,860 21,341
------------------
Real estate, net 110,820 112,954
Cash and cash equivalents 15,638 1,256
Mortgage-backed securities, available for sale 287 7,700
Notes receivable - 7,700
Deferred rent receivable 1,574 1,543
Deferred costs and other assets, net 3,431 2,739
==================
Total assets $131,750 $133,892
==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes and bonds payable $26,458 $26,762
Tenant deposits, accounts payable and accrued 2,548 1,807
expenses
Distributions payable 1,767 1,641
Reserve for litigation 750 -
-------------------
Total liabilities 31,523 30,210
-------------------
Minority interest 9,118 9,181
-------------------
Commitments and contingencies (Notes 3 and 4) - -
Stockholders' equity:
Common stock, Series A, without par value;
stated value $10 per 103,161 103,161
share; 50,000 shares authorized; 12,250
issued and outstanding
Common stock, Series B, without par value;
stated value $10 per 6,294 6,294
share; 1,000 shares authorized; 746 issued
and outstanding
Accumulated other comprehensive income (33) (18)
Accumulated distributions in excess of net (18,313) (14,936)
income
-------------------
Total stockholders' equity 91,109 94,501
===================
Total liabilities and stockholders' $131,750 $133,892
equity
===================
The accompanying notes are an integral part of these consolidated financial
statements.
FRANKLIN SELECT REALTY TRUST
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER
(In thousands, except per share 30, 1999 30, 1998 30, 1999 30, 1998
amounts)
- ----------------------------------------------------------------------
REVENUE:
Rent $3,702 $4,298 $11,183 $13,619
Interest, dividends and other 214 41 715 145
-------------------------------------
Total revenue 3,916 4,339 11,898 13,764
-------------------------------------
EXPENSES:
Property operating 978 1,149 2,694 3,074
Interest 589 631 1,774 2,308
Related party 313 361 933 1,125
General and administrative 307 319 1,208 844
Loss on sale of 110 - 110 -
mortgage-backed securities
Depreciation and amortization 953 1,002 2,828 3,016
-------------------------------------
Total expenses 3,250 3,462 9,547 10,367
-------------------------------------
Operating income before
reserve for litigation, 666 877 2,351 3,397
gains on sales of
property and minority
interest
Reserve for litigation (750) - (750) -
Gains on sales of property - 382 - 552
-------------------------------------
Operating income (loss) (84) 1,259 1,601 3,949
before minority interest
Minority interest 194 177 566 515
-------------------------------------
NET INCOME (LOSS) ($278) $1,082 $1,035 $3,434
-------------------------------------
Unrealized loss on (3) - (15) (2)
mortgage-backed securities
=====================================
TOTAL COMPREHENSIVE INCOME ($281) $1,082 $1,020 $3,432
(LOSS)
=====================================
Net income (loss) per share,
based on the weighted average
shares outstanding of Series A
common stock of 12,250 for the ($.02) $ .09 $.08 $ .28
three- and nine-month periods
ended September 30, 1999, and
1998, respectively
=====================================
Distributions per share, based
on the weighted
average shares outstanding of
Series A common stock of 12,250 $.12 $.12 $.36 $ .36
for the three- and nine-month
periods ended September 30,
1999 and 1998, respectively
=====================================
The accompanying notes are an integral part of these consolidated financial
statements.
FRANKLIN SELECT REALTY TRUST
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Unaudited
(In thousands) 1999 1998
- ------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $1,035 $3,434
---------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,920 3,153
Loss on sale of mortgage-backed securities 110 -
Gains on sales of property - (552)
Reserve for litigation 750 -
Minority interest 566 515
Increase in deferred rent receivable (31) (37)
(Increase) decrease in deferred costs and (78) 49
other assets
Increase in accounts payable, accrued
expenses and other liabilities 678 555
---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,950 7,117
---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of real estate - 13,081
Improvements to real estate (385) (1,262)
Collection of notes receivable 7,700 -
Leasing commissions paid (967) (230)
Acquisition of mortgage-backed securities (6,893) -
Disposition of mortgage-backed securities 14,178 87
---------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 13,633 11,676
---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes and bonds payable (304) (14,793)
Payment of loan costs (47) -
Distributions paid to limited partners (566) (515)
Distributions paid to stockholders (4,284) (4,413)
---------------
NET CASH USED IN FINANCING ACTIVITIES (5,201) (19,721)
---------------
NET INCREASE (DECREASE) IN CASH AND CASH 14,382 (928)
EQUIVALENTS
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,256 3,821
---------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $15,638 $2,893
===============
The accompanying notes are an integral part of these consolidated financial
statements.
FRANKLIN SELECT REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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, the Company has made all
appropriate adjustments necessary to a fair presentation of the results of
operations for the periods shown. All adjustments are of a normal recurring
nature. Certain prior year amounts have been reclassified to conform to
current year presentation. 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.
These financial statements have been prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. As described in Note 4 to these financial
statements, management is currently proposing a sale of the Company's
remaining properties. Although a sales agreement has been signed,
shareholders have yet to ratify the sale and there are certain contingencies
associated with the agreement. However, management believes that a sale will
occur in the foreseeable future. Management believes that the aggregate
market value of the Company's remaining properties are at least equal to
their book value. Accordingly, management does not expect any material
losses to be undertaken in the event of the sale of the assets. However,
there can be no assurance that the eventual liquidation of the Company will
not result in a loss or that a sale will be consummated.
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 involved in 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 (a predecessor of the Company, "FREIF"),
filed a purported class action complaint on June 3, 1997 in the California
Superior Court for San Mateo County against the Company, certain of its then
current and former directors, Franklin Properties, Inc. (the "Advisor"),
Franklin Resources, Inc. ("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 the Company in May 1996.
In the Vigneau Lawsuit, the Company is defending the former directors of
Franklin Advantage Real Estate Income Fund (a predecessor of the Company,
"Advantage"), who include the current directors of the Company, 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
FRANKLIN SELECT REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
Unaudited
NOTE 3 - LITIGATION (CONTINUED)
with the merger of Advantage into The Company 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. The Company continues to believe, as
previously reported and as reflected in the Company's 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 the Company were to remain a going concern.
For some time, the Company has also been pursuing mediation and settlement
efforts with respect to the shareholder litigation. As a result of these
efforts, the Company 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 (see Note 4
- - Subsequent Event below). The Company 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, the Company 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
settlement negotiations. If these settlement negotiations are not
successful, the Company will continue to pursue its vigorous defense of the
litigation. Based on management's current assessment of the potential
liability with respect to this shareholder litigation, the Company has
recognized a $750,000 reserve in the quarter ended September 30, 1999.
NOTE 4 - SUBSEQUENT EVENT
AGREEMENT TO SELL ASSETS
On October 12, 1999, the Company announced that it had signed an agreement to
sell its remaining real estate assets to Value Enhancement Fund III, LLC, a
fund managed by Lend Lease Real Estate Investments, Inc. (the "Asset Sale").
The proposed sale is subject to shareholder approval, due diligence
adjustments and customary conditions. Management expects the sale to be
completed in early 2000. The sale includes all real estate directly owned by
the Company together with the interests of the Company and the limited
partners in FSRT, LP (the "Partnership"), a limited partnership of which the
Company is the sole general partner. The aggregate base purchase price is
$131,500,000 for the Company's and the limited partners' interests. Of the
total price, the purchase price for the Company's interests is $119,377,500,
reduced by approximately $26,458,000 for existing debt to be assumed by the
buyer. The net purchase price for the Company's interest is payable in
cash. The purchase price for the limited partners' interests is $12,122,500
and is payable in installments. The proposed sale is subject to approval by
the Company's shareholders, due diligence-based and other customary
pre-closing price adjustments, closing pro-rations and customary conditions.
In connection with the formation of the Partnership, the limited partners
were granted rights (the "Conversion Rights") to convert their limited
partner interests into shares of the Company's Series A Common Stock or, at
the Company's option, the value of Series A shares in cash. The conversion
ratio is currently one Series A share for each limited partner unit. In
connection with the Purchase Agreement, the Company has also signed a
Purchase of Conversion Rights Agreement dated as of October 12, 1999 with the
limited partners pursuant to which the Company has agreed to purchase the
limited partners'
FRANKLIN SELECT REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
Unaudited
NOTE 4 - SUBSEQUENT EVENT (CONTINUED)
Conversion Rights. The purchase is contingent upon, and is to occur immediately
before, the closing of the sale to Value Enhancement. The purchase price for
each Conversion Right is equal to the amount of the excess, if any, of
distributions per share that the Series A shareholders receive from the sale of
the assets to Value Enhancement and the liquidation of the Company over the
amount per limited partner unit the limited partners receive from Value
Enhancement at the closing.
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",
"will likely result", "expects to", "will incur", "will continue", "will
improve", "estimate", "project" and variations of such expressions or 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.
PROPOSED SALE OF ASSETS AND EVENTUAL LIQUIDATION
On October 12, 1999 the Company announced that it had signed an agreement to
sell its remaining real estate assets to Value Enhancement Fund III, LLC, a
fund managed by Lend Lease Real Estate Investments, Inc. The proposed sale
is subject to shareholder approval, due diligence adjustments and customary
conditions. Management expects the sale to be completed in early 2000. The
sale includes all real estate directly owned by the Company together with the
interests of the Company and the limited partners in FSRT, LP, a limited
partnership of which the Company is the sole general partner. The aggregate
base purchase price is $131,500,000 for the Company's and the limited
partners' interests. Of the total price, the purchase price for the Company's
interests is $119,377,500, reduced by approximately $26,458,000 for existing
debt to be assumed by the buyer. The net purchase price for the Company's
interest is payable in cash. The purchase price for the limited partners'
interests is $12,122,500 and is payable in installments. The proposed sale
is subject to approval by the Company's shareholders, due diligence-based and
other customary pre-closing price adjustments, closing pro-rations and
customary conditions
In connection with the formation of the Partnership, the limited partners
were granted rights (the "Conversion Rights") to convert their limited
partner interests into shares of the Company's Series A Common Stock or, at
the Company's option, the value of Series A shares in cash. The conversion
ratio is currently one Series A share for each limited partner unit. In
connection with the Purchase Agreement, the Company has also signed a
Purchase of Conversion Rights Agreement dated as of October 12, 1999 with the
limited partners pursuant to which the Company has agreed to purchase the
limited partners' Conversion Rights. The purchase is contingent upon, and is
to occur immediately before, the closing of the sale to Value Enhancement.
The purchase price for each Conversion Right is equal to the amount of the
excess, if any, of distributions per share that the Series A shareholders
receive from the sale of the assets to Value Enhancement and the liquidation
of the Company over the amount per limited partner unit the limited partners
receive from Value Enhancement at the closing.
It is expected that if the transaction is approved and the shareholders vote
to authorize the Company's board of directors to eventually liquidate the
Company, the Company would use the sale proceeds to pay costs of the
transaction, costs of liquidation and related insurance and other current
obligations; and to retain reserves in amounts to be determined in the future
to cover contingencies, holdbacks, and other obligations. The Company would
then distribute the remainder of its cash.
FRANKLIN SELECT REALTY TRUST
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Continued)
RESULTS OF OPERATIONS
COMPARISON OF THE THREE- AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND
1998
Total revenue for the three- and nine-month periods ended September 30, 1999
decreased $423,000, or 10%, and $1,866,000, or 14%, respectively, when
compared to the same periods in 1998. The decrease was primarily due to the
sale of property in 1998 and a decline in occupancy at the Data General and
Tanon properties during the periods. Rental income provided by the sold
properties during the three- and nine-month periods ended September 30, 1998
was $511,000 and $2,003,000, respectively. The decline in rental income
related to the Data General and Tanon properties on an aggregate basis for
the three- and nine-month periods ended September 30, 1999 was $398,000 and
$903,000, respectively. Partially offsetting these factors was greater
rental income from the Company's other properties, and increased interest
income following higher average investment levels in 1999.
Total expenses for the three- and nine-month periods ended September 30, 1999
decreased $212,000, or 6%, and $820,000, or 8%, respectively, when compared
to the same periods in 1998. The decrease was primarily a result of the sales
of properties referred to in the preceding paragraph. During the nine-month
period this decrease was partially offset by increased general and
administrative expenses, as referred to below, and by a loss on the sale of
mortgage-backed securities.
General and administrative expenses for the nine-month period ended September
30, 1999 increased $364,000, or 43%, respectively, when compared to the same
period in 1998. The increase was primarily due to legal fees and expenses
incurred with respect to the Company's evaluation of its strategic
alternatives.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, cash and cash equivalents aggregated $15,638,000, and
the Company held $287,000 in mortgage-backed securities. Management believes
that the existing cash and cash equivalents, together with the
mortgage-backed securities are sufficient to meet its short-term operating
requirements.
Net cash provided by operating activities for the nine-month period ended
September 30, 1999 was $5,950,000 compared to $7,117,000 in the prior year.
The decrease in this cash flow was primarily attributable to the reduction in
revenue and the increase in general and administrative expenses described
above. This decrease was partly offset by an increase in accounts payable and
other liabilities.
Net cash provided by investing activities for the nine-month period ended
September 30, 1999 was $13,633,000 compared to $11,676,000 in the prior year.
The increase in this cash flow was primarily attributable to the sale of
mortgage-backed securities during 1999 and reinvestment of the proceeds into
short term investments.
Net cash used by financing activities for the nine-month period ended
September 30, 1999 was $5,201,000 compared to $19,721,000 in the prior year.
The change in this cash flow primarily reflects the use of cash in 1998 for
the repayment of notes and bond payable related to the sales of real estate.
The Company continues to believe, as previously reported and as reflected in
the Company's financial statements, that the outcome of the shareholder
litigation would not have a material adverse effect on its financial
condition, results of operations or cash flows if the Company were to remain
a going concern.
FRANKLIN SELECT REALTY TRUST
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Continued)
Management believes that the Company's sources of capital as described above
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. This evaluation will consider
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 nine-month period ended September 30, 1999, the Company declared
distributions related to the Series A common stock totaling $4,410,000.
FUNDS FROM OPERATIONS
The Company 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 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,
("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 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 were as follows.
For the Nine
Months Ended
September
30,
(In thousands) 1999 1998
- -------------------------------------------------------------------
Net income $1,035 $3,434
Add: Depreciation and amortization 2,828 3,016
Add: Reserve for litigation 750 -
Less: Gain on sale of property - (552)
- -------------------------------------------------------------------
Funds from Operations $4,613 $5,898
===================================================================
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.
YEAR 2000 READINESS DISCLOSURE
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.
The Company 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, Inc., the parent company of the
Advisor, ("FRI"). As part of the FRI worldwide Year 2000 plan, which
encompasses all of its subsidiaries, FRI 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. The
Company relies on only a few of FRI's systems.
The Company's key IT systems include its accounting, property management, and
finance systems, which were certified as Year 2000 compliant as part of the
FRI plan. In addition, the Company has upgraded its property-management
system to one that has been certified Year 2000 compliant. The Company's key
non-IT systems, including the embedded systems in the common areas of
Company-owned properties, were also certified Year 2000 compliant as part of
the FRI plan. The Company 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 FRI plan, a system is considered Year 2000 compliant when it has
passed a number of prescribed tests either (a) established by FRI 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 FRI,
depending upon the importance of the system to operations, FRI may rely upon
vendor representations, the results of point-to-point testing, or test
scripts supplied by the vendor. However, no testing can
FRANKLIN SELECT REALTY TRUST
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Continued)
guarantee that a system which has been certified as Year 2000 compliant will
not have difficulties associated with the Year 2000.
The costs of the Company'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 the Company's results of operations, financial
position or cash flow.
Contingency plans are in place for the Company's advisor as part of the FRI
plan mentioned above. However, contingency plans for the Company'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 the Company.
In addition, if the systems of key tenants in Company-owned properties fail
as a result of the Year 2000 problem, they may not be able to pay rent and
other fees to the Company. This could result in business disruption and loss
of revenue for the Company. Failures of major electrical or telecommunication
utility providers, as well as other third-party vendors, cannot be predicted
and could adversely affect the Company's operations.
FRANKLIN SELECT REALTY TRUST
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
NO. LIST OF EXHIBITS FOOTNOTE
3.1 Amended and Restated Articles of Incorporation (1)
3.2 Second Amended and Restated Bylaws of Franklin Select Realty Trust (2)
10.1 Amended and Restated Advisory Agreement (3)
10.2 Property Management Agreement (4)
10.3 Agreement of Limited Partnership of FSRT, L.P. between the Company and (5)
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., (5)
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,
FSRT L.P., and Northport Associates No. 18, a California limited (5)
liability company.
10.6 Registration Rights Agreement, dated as of October 30, 1996, among the (5)
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. (6)
10.8 Lease agreement dated July 9, 1999, by and between the Company and
Sybron Laboratory Products Corporation (7)
FOOTNOTES
(1) Documents were filed with the Company's Form 10-Q for the quarter ended
March 31, 1999, and are incorporated herein by reference.
(2) Documents were filed with the Company's Form S-4 Registration Statement,
dated November 13, 1995, (Registration No. 033-64131), and are
incorporated herein by reference.
(3) Documents were filed with the Company's Form 10-K for the year ended
December 31, 1998, and are incorporated herein by reference.
(4) Documents were filed with the Company's Form 10-K for the year ended
December 31, 1994, and are incorporated herein by reference.
(5) Documents were filed with the Company's Form 8-K, dated October 31,
1996, and are incorporated herein by reference.
(6) Documents were filed with the Company's Form 10-K for the year ended
December 31, 1996, and are incorporated herein by reference.
(7) Documents were filed with the Company's Form 10-Q for the quarter ended
June 30, 1999, and are incorporated herein by reference.
(b) Reports on Form 8-K - On July 20, 1999, the Company filed a report
on Form 8-K dated July 9, 1999 (date of earliest event reported). The
report contained information related to a new lease agreement with
Sybron Laboratory Products Corporation.
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: NOVEMBER 12, 1999
