FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999. Commission File No. 0-12708
FRANKLIN SELECT REALTY TRUST
(Exact Name of Company as Specified in its Charter)
California 94-3095938
- ---------------------------------------------------------------------
(State or other jurisdiction or (I.R.S. Employer Identification
incorporation or organization) number)
2000 Alameda de Las Pulgas, San Mateo, CA 94404 (650) 312-2000
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(Address of principal and Company's telephone number,
executive Office) including Area Code
Securities registered pursuant to Section 12(b) of Act:
Title of each class Name of each exchange on which
registered
Common Stock Series A American Stock Exchange (Until
March 13, 2000)
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Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Company (1) has filed all reports required
to be filed by Section 12 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Company
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the Company's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
At February 29, 2000, 12,163,147 shares of the Company's Series A common
stock were held by non-affiliates of the Company. The aggregate market value
of the voting stock held by non-affiliates of the Company, based upon the
closing price of $7 9/16 as of February 29, 2000, is $91,983,799.
Indicate the number of shares outstanding of each of the Company's classes of
common stock at December 31, 1999: 12,250,368 shares of Series A common stock
and 745,584 shares of Series B common stock.
PART I
Item 1. BUSINESS
DESCRIPTION OF BUSINESS
Franklin Select Realty Trust, formerly Franklin Select Real Estate Income
Fund, (the "Company") is a California corporation formed on January 5, 1989,
for the purpose of acquiring, managing and holding for investment
income-producing real estate assets. The Company is a real estate investment
trust ("REIT"). At December 31, 1999, the Company's property portfolio
consisted of ownership interests in the following seven properties: (i) four
industrial research and development ("R & D") properties containing
approximately 546,000 rentable square feet of space; and (ii) three suburban
office properties containing approximately 404,000 rentable square feet of
space. The Company's properties were concentrated in the greater San
Francisco and Los Angeles areas, from which the Company derived 67% and 33%
of its 1999 rental revenue, respectively.
On February 10, 2000, Franklin Select Realty Trust closed the sale of all of
its real estate assets (the "Asset Sale") to Value Enhancement Fund III, LLC
("Value Enhancement") a private real estate fund formed by Lend Lease Real
Estate Investments to purchase properties. The aggregate purchase price was
$131.5 million, less existing project debt, assumed by the buyer or paid off,
in the amount of approximately $26.3 million and related transaction expenses.
Pursuant to the plan of liquidation approved by the shareholders, the Board
of Directors declared an initial liquidating distribution of $7.11 per share
to shareholders of record holding Series A common stock on February 29,
2000. The initial distribution was paid on March 10, 2000. Under applicable
AMEX regulations, the AMEX suspended trading in the Company's shares
beginning on March 1, 2000, and delisted the Company's shares effective March
13, 2000. Accordingly, the Company does not expect that any trading market
for the Company's shares will exist after February 29, 2000 on any securities
exchange.
The Company will continue to wind up its affairs pursuant to the plan of
liquidation. It is expected that shareholders will also receive a final
liquidating distribution before the end of 2000, subject, however, to final
court approval of settlements of pending litigation. It is not expected that
any interim or quarterly distributions will be declared or paid before the
final liquidating distribution.
Franklin Properties, Inc. (the "Advisor") manages the Company's day-to-day
operations under the terms of an advisory agreement that was renewable
annually. The Company does not have any employees. Continental Property
Management Co. ("CPMC"), an affiliate of the Advisor, managed the Company's
commercial properties. As property manager, CPMC performed the leasing,
re-leasing and management-related services for the properties. The Advisor
is a wholly owned subsidiary of Franklin Resources, Inc., ("Franklin"), whose
primary business is the Franklin Templeton Group of Funds. The CPMC property
management agreement has been terminated as a result of the closing of the
Asset Sale. The advisory agreement as been modified to reflect the plan of
liquidation adopted by the Company, and modified terms are described below in
Item 13 "Certain Relationships and Related Transactions."
In 1996, the Company formed a limited partnership, FSRT L.P. ("FSRT"), in
order to acquire two research and development buildings located in Fremont,
California (the "LAM Research Buildings"). FSRT assumed the existing
financing on the LAM Research Buildings and issued 1,625,000 limited
partnership units to the owner of the property in exchange for its equity
interest in the property. On February 10, 2000, in connection with the Asset
Sale, the successor to such owner (the "Limited Partner") converted all of
its limited partnership units into 1,625,000 shares of the Company's Series A
common stock, causing the Company to be the sole remaining partner of FSRT.
As a result, the Company received all of the net sales proceeds in the Asset
Sale related to the properties owned by FSRT. Prior to the Asset Sale, the
Company was the sole general partner of FSRT and held an approximate 70%
ownership interest in FSRT.
Unless the context indicates otherwise, all references to the Company in this
report refer to Franklin Select Realty Trust and its majority owned,
consolidated limited partnership, FSRT.
INVESTMENT AND OPERATING STRATEGY
The Company has successfully completed the sale of all of its properties, has
made an initial liquidating distribution to the Series A shareholders and
does not anticipate acquiring real property in the future. The Company has in
the past acquired income-producing real estate investments located in
California with cash flow growth potential, although it had the flexibility
to purchase properties elsewhere.
The Company's investment program included providing shareholders with a
professionally managed diversified portfolio of income-producing equity real
estate investments in strategic markets which presented the potential for
current cash flow and for capital appreciation.
FINANCING POLICY AND RELATED MATTERS
The Company's policy was to maintain a debt to total assets ratio not to
exceed 50%. At December 31, 1999, the Company's debt to total assets ratio
was 20%. The Company's by-laws prohibit the aggregate amount of the
Company's indebtedness from exceeding 300% of its net assets, and prohibit
unsecured borrowings which would result in asset coverage of less than 300%.
The Company was subject to the risks normally associated with debt financing.
These risks included the risk that the Company's cash flow might have been
insufficient to meet required payments of principal and interest, that the
Company might not be able to refinance existing indebtedness on the
encumbered properties or that the terms of such refinancing may not have been
as favorable as the terms of existing indebtedness.
Management currently estimates that the Company will incur costs of
approximately $2.1 million related to the potential settlement of the
litigation described in Item 3 - "Legal Proceedings." No assurance can be
given that the Company's litigation will be resolved by settlement rather
than litigation, nor that the amounts reserved will be sufficient to provide
for the litigation.
CASH DISTRIBUTION POLICY
As previously discussed, the Company paid an initial liquidating distribution
of $7.11 per Series A share on March 10, 2000., The Company plans to declare
a final liquidating distribution in late 2000 provided that the Company has
wound up its affairs including final settlement of the litigation described
in Item 3 - "Legal Proceedings.
Previously, distributions were declared quarterly at the discretion of the
Board of Directors. The Company's distribution policy was to evaluate the
current distribution rate, at least annually. This evaluation considered
anticipated tenant turnover over the next two to 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 sought to establish a distribution rate
which:
i) provided a stable distribution which is sustainable despite short
term fluctuations in property cash flows;
ii) maximized the amount of cash flow paid out as distributions
consistent with the above listed objective; and
iii) complied with the Internal Revenue Code requirement that a REIT
annually pay out as distributions not less than 95% of its taxable
income.
MATTERS THAT MAY AFFECT THE COMPANY'S RESULTS
Prior to the Asset Sale, the Company was subject to the risks generally
associated with the ownership of real property. These risks included the
possibility that operating expenses, debt service payments and fixed costs
could exceed property revenues; economic conditions could adversely change in
the California and national markets; the real estate investment climate could
change; local market conditions could change adversely due to general or
local economic conditions and neighborhood characteristics; interest rates
could fluctuate and the availability, costs and terms of mortgage financing
could change; unanticipated maintenance and renovations could arise; changes
in real estate tax rates and other operating expenses could arise;
governmental rules and fiscal policies could change; natural disasters,
including earthquakes, floods or tornadoes could result in losses beyond the
coverage of the Company's insurance policies; the financial condition of the
tenants of properties could deteriorate; and other factors which were beyond
the control of the Company could occur. All of the Company's properties were
located in areas that were subject to earthquake activity. The Company
carried earthquake insurance coverage for its properties.
The real estate business is competitive, and the Company was in competition
with many other entities engaged in real estate investment activities, many
of which had greater assets than the Company. The Company's real estate
investments in rental properties were subject to the risk that the Company
might be unable to attract or retain tenants and a consequent decline in
rental income. Furthermore, real estate investments tend to be long-term,
and under the REIT provisions of the Internal Revenue Code, might be subject
to minimum holding periods to avoid adverse tax consequences. Consequently,
the Company had only minimal ability to vary its property portfolio in
response to changing economic, financial and investment conditions.
The Company's fixed rate debt was subject to prepayment penalties that made
it disadvantageous for the Company to prepay the loans, which it may
otherwise have done in the absence of prepayment penalties.
In connection with any lease renewal or new lease, the Company typically
incurred costs for tenant improvements and leasing commissions which were
funded first from operating cash flow and, if necessary, from cash reserves.
In addition, while the Company was historically successful in renewing and
releasing space, it was 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.
The Company has invested substantially all of its remaining cash reserves in
short-term A rated commercial paper and intends to do so throughout 2000.
GOVERNMENT REGULATION
Under various federal, state and local laws, ordinances and regulations, an
owner or operator of real property may become liable for the costs of removal
or remediation of certain hazardous substances released on or in its
property. Such laws often impose such liability without regard to whether
the owner or operator knew of, or was responsible for, the release of such
hazardous substances, the presence of such substances, or the failure to
properly remediate such substances, when released. As part of the
investigation of properties prior to acquisition, the Company typically
obtained inspection reports concerning the condition of the property,
including specialized environmental inspection reports concerning the
presence of hazardous substances on the property. None of these inspection
reports revealed any environmental conditions requiring material expenditures
for remediation. In connection with the Asset Sale, the Company and Value
Enhancement each engaged environmental consultants to inspect the
properties. None of these inspection reports revealed any environmental
conditions requiring remediation; however, such inspection reports do not
necessarily reveal all hazardous substances or sources thereof. Value
Enhancement reviewed the reports and accepted the properties in the condition
described in the reports.
OTHER MATTERS
The Company has agreed to indemnify Value Enhancement and its directors,
officers, employees, agents, representatives and affiliates against costs,
losses, damages, claims and the like arising out of the inaccuracy of any
representation made by, or the failure to comply with any agreement or
obligation of, the Company set forth in the purchase agreement with Value
Enhancement (the "Purchase Agreement") and related agreements, and certain
other matters. To secure the Company's indemnity obligations, $2,630,000 was
deposited with an escrow agent at the closing of the Asset Sale. This fund
is known as the "indemnity escrow fund." The Company's indemnity obligations
do not arise unless and until the total of all claims for indemnity exceeds
$1,315,000. The $1,315,000 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 Company's indemnity obligations to Value Enhancement 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 the Company has any liabilities with respect thereto) are not
subject to the threshold amount required or the maximum indemnity amount, and
Value Enhancement's recourse for them is not limited to the indemnity escrow
fund: (a) intentional misrepresentations by the Company; (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 litigation described in
Item 3- "Legal Proceedings"; and (e) failure to pay certain 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.
The Company 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.
The Company is involved in, and has agreed in principal, to settle certain
shareholder litigation. See Item 3- "Legal Proceedings."
Item 2. PROPERTIES
PORTFOLIO SUMMARY
On February 10, 2000, the Company sold all of its properties to Value
Enhancement.
At December 31, 1999, the Company's property portfolio consisted of seven
income-producing properties located in the greater San Francisco and Los
Angeles areas. The Company's properties were 99% leased at December 31, 1999
as compared to 95% leased at the end of 1998. During the year, the average
occupancy of the properties held by the Company at December 31, 1999 was 92%,
compared to 97% in 1998.
The following table describes the properties formerly owned by the Company:
<TABLE>
<CAPTION>
Total Rentable Year Average Occupancy 1999 Rental
Square Footage Acquired During 1999 Revenue
Property Name/ Location -------------- -------- ----------------- ------------
<S> <C> <C> <C> <C>
- --------------------------------------------------
Industrial R&D Properties:
- --------------------------------------------------
The Northport Buildings
Fremont, California 144,624 1991 100% $1,848,000
- --------------------------------------------------
The LAM Research Buildings
Fremont, California 211,680 1996 100% 2,522,000
- --------------------------------------------------
The Tanon Building
Fremont, California 108,600 1997 58% 893,000
The Hathaway Business Park
Fremont, California 80,752 1997 95% 1,077,000
---------------------- ------------------
545,656 $6,340,000
Office Properties:
The Shores
Redwood City, California 138,546 1989 88% 4,217,000
The Data General Building
Manhattan Beach, California 121,074 1989 89% 2,380,000
The Fairway Center
Brea, California 144,727 1992 100% 2,798,000
---------------------- ------------------
404,347 $9,395,000
Total for properties at December 31, 1999
950,003 $15,735,000
====================== ==================
</TABLE>
The Company or FSRT owned a fee interest in each property. For information
about the encumbrances of the individual properties, see Note 4 to
Consolidated Financial Statements and Schedule III.
At December 31, 1999, the Company's property portfolio contained a total of
51 leases. The Company's portfolio represented, in the aggregate, 950,003
rentable square feet of which 943,051 rentable square feet were leased at
year-end. The following table sets forth for all of the Company's properties
the lease expiration dates and the related annual base rental income at
December 31, 1999.
% of
No. of Current Current
Leases Total Annualized Annualized
Year Expiring Sq. Ft. Base Rent1 Base Rent
2000 10 48,490 $1,152,000 7.8%
2001 9 109,369 1,915,000 13.0%
2002 10 223,765 4,156,000 28.3%
2003 8 99,773 1,446,000 9.8%
2004 6 92,665 2,196,000 15.0%
2008 1 22,400 332,000 2.3%
2009 3 128,909 640,000 4.4%
2012 1 6,000 308,000 2.1%
2014 1 211,680 2,542,000 17.4%
Total 51 943,051 $14,687,000 100.0%
1 Annualized Base Rent means 12 multiplied by the
monthly base rent in effect with respect to each
property at December 31, 1999. Annualized Base Rent
does not reflect any increases or decreases in monthly
rental rates or lease expirations which are scheduled
to occur or which may occur after the date of
calculation or the cost of any leasing commissions or
tenant improvements.
SIGNIFICANT TENANTS
One of the Company's tenants provided 10% or more of the Company's annualized
base rental income as defined above at December 31, 1999.
<TABLE>
<CAPTION>
Annualized
Tenant Name/Property Square Base Rent % of Total Lease Renewal
Feet at 12/31/99 Base Rent Expiration Options
<S> <C> <C> <C> <C> <C> <C>
LAM Research Corporation:
LAM Research Buildings 211,680 $2,542,380 17.4% 12/31/2014 2-5 yr.
Northport Buildings 58,130 $505,698 3.5% 07/31/2003 1-5 yr.
</TABLE>
Item 3. LEGAL PROCEEDINGS
The Company has been 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 ("FREIF"), a predecessor of the Company,
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 ("Advantage"), a predecessor of
the Company, who include the current directors of the Company, against a
purported class action. This action on behalf of certain shareholders of
Advantage was filed on December 2, 1996 in the California Superior Court for
San Mateo County. Other defendants currently include the Advisor and Franklin
Resources. 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 the Company in May 1996.
The plaintiffs in each lawsuit sought damages in an unspecified amount and
certain equitable relief. The defendants in each lawsuit have denied any
wrongdoing and vigorously defended the lawsuits.
The Company and the defendants have agreed in principal with the
representative plaintiffs and their counsel in both cases to settle the cases
on a class-wide basis. The successful conclusion of each of these settlement
efforts would require the court certify a class for settlement purposes and
approve the mailing of notice to the class, that the court determine that the
settlement is fair, reasonable and adequate after a hearing at which class
members may appear and be heard, and that certain other conditions are met, a
process that is expected to take many months to complete. If consummated
according to the agreements, future legal expenses and the costs of
settlement of the Hodge Lawsuit and the Vigneau Lawsuit will be funded by
insurance coverage, contributions from certain other defendants, and
contributions from the Company. No assurance can be given as to the outcome
of the settlement efforts. If the settlement efforts are not successful, the
Company will continue to pursue its vigorous defense of the litigation.
Based on management's assessment of potential liability with respect to the
shareholder litigation, the Company has recorded a reserve related to the
shareholder litigation of $2,100,000 in the year ended December 31, 1999.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 12, 1999 the Board of Directors of the Company authorized the
execution of agreements pertaining to the Asset Sale and the filing of a
Proxy Statement with the Securities and Exchange Commission in connection
with a Special Meeting of Shareholders held on January 25, 2000 to solicit
shareholder approval for the Asset Sale and to authorize the Board of
Directors to liquidate, wind up and dissolve the Company. The Proxy
Statement was filed and mailed to the shareholders on December 14, 1999.
At a Special Meeting of Shareholders held on January 25, 2000, the proposed
Asset Sale and liquidation were approved. Among other requirements, approval
of the Asset Sale required the affirmative vote of a majority of the
outstanding shares of the Company. The actual tabulation of the vote was as
follows:
FOR AGAINST ABSTAIN
Proposal 1: To approve the Asset Sale 8,529,915 101,657 139,977
65.63% .78% 1.08%
Proposal 2: To authorize the board of 8,239,037 94,591 137,178
directors to liquidate, 63.40% .73% 1.06%
wind up and dissolve the Company
There were no other matters submitted to a vote of security holders during
the quarter covered by this report.
PART II - OTHER INFORMATION
Item 5. MARKET FOR COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company has one class of common stock in two series, designated Series A
and Series B (the "Common Stock"). At December 31, 1999, the company had
12,250,368 Series A common shares outstanding and 745,584 Series B common
shares outstanding, and there were 2,591 Series A stockholders of record. The
common stock votes together as one class with each share being entitled to
one vote. The Series B shares are owned by Franklin Properties, Inc., the
Advisor.
In connection with the Asset Sale, the Limited Partner of FSRT L.P. converted
all of its limited partnership units into 1,625,000 shares of Series A common
stock on February 10, 2000. Therefore, subsequent to that date, the total
number of Series A common shares outstanding increased to 13,875,368. The
shares issued to the Limited Partner are restricted securities and may not be
transferred absent registration under the Securities Act of 1933, as amended,
or an exemption from registration.
Until February 29, 2000, the record date for the initial liquidating
distribution, the Company's Series A common stock was registered on the
American Stock Exchange (AMEX) where it is was traded under the symbol
"FSN." Pursuant to applicable AMEX rules, commencing March 1, 2000, trading
in the Company's Series A common stock was suspended and the AMEX de-listed
the shares effective March 13, 2000. Therefore, there is currently no
trading market for the Company's common stock on any securities exchange.
The Company intends to make a final cash distribution after it has wound up
its affairs; the distribution is expected to occur in late 2000. The Company
has retained the cash and other assets on hand at the time of the closing of
the Asset Sale, to meet its obligations, including its existing and known or
unknown contingent liabilities, as well as the costs of dissolution. The
Company stated in the Proxy Statement for the January 25, 2000 Special
Meeting of Shareholders, and continues to believe, that it is not possible to
determine how much of the remainder of the Company's assets will ultimately
be available for distribution to shareholders in connection with the
dissolution of the Company.
Except as described above, there are no restrictions on sales or purchases of
the Company's Series A common stock other than those that may be imposed by
any applicable federal or state securities laws or by the Company's Amended
and Restated Articles of Incorporation or Bylaws with respect to maintaining
the Company's status as a qualified real estate investment trust under
applicable tax laws and regulations.
Set forth below are the quarterly high and low share reported sales prices
for the past two years and the distributions per share declared each
quarter.
DISTRIBUTIONS
QUARTER ENDED HIGH LOW DECLARED
- ------------- ---- --- - --------
December 31, 1999 $ 7 7 /16 $ 6 3/8 $ .12
September 30, 1999 7 5 7/8 .12
June 30, 1999 7 3/8 5 7/8 .12
March 31, 1999 7 1/2 5 1/4 .12
December 31, 1998 $ 7 $ 5 3/8 $ .12
September 30, 1998 8 1/8 6 1/2 .12
June 30, 1998 7 1/2 6 5/16 .12
March 31, 1998 7 6 5/16 .12
RETURN OF CAPITAL
Because depreciation is a non-cash expense, cash flow was typically greater
than earnings from operations and net income. Therefore, quarterly
distributions were generally higher than quarterly earnings, which caused a
portion of the distributions to be considered a return of capital. The
portion of distributions that represented a return of capital for financial
statement purposes on a consolidated basis, for the years ended December 31,
1999, and 1998, was $2,480,000 and $535,000, respectively.
On January 25, 2000, the shareholders approved the authorization to the Board
of Directors for the liquidation, winding up and dissolution of the Company.
Thereafter, all distributions are considered return of capital distributions
for federal and state income tax purposes. All shareholders should consult
their tax advisors to determine their respective gain or loss.
REIT QUALIFICATION MATTERS
The Company is a REIT and elected REIT status commencing with the 1989 tax
year pursuant to the provisions of the Internal Revenue Code (the "Code") and
applicable state income tax law. Under those provisions, the Company will
not be subject to income tax on that portion of its taxable income which is
distributed annually to stockholders if at least 95% of its taxable income
(which excludes capital gains) is distributed and if certain other conditions
are met. Prior to 2000, the Company made quarterly cash distributions to the
stockholders aggregating on an annual basis at least 95% of its taxable
income. In 2000, the Company expects that the initial liquidating
distribution of $7.11 per share will meets its annual distribution
requirement and therefore no quarterly distributions are anticipated. On
January 25, 2000, the shareholders approved a Dissolution Plan that
authorizes the Board to discontinue the Company's status as a REIT at any
time if the Board deems it to be in the best interest of the shareholders.
Among other requirements, the Company must, in order to continue its status
as a REIT under the Code, not have more than 50% in value of its outstanding
shares owned by five or fewer individuals during the last half of a taxable
year (the "5/50 Provision"). In order to meet these requirements, the
Company has the power to redeem a sufficient number of shares in order to
maintain or to bring the ownership of the shares into conformity with these
requirements, and to prohibit the transfer of shares to persons whose
acquisition would result in a violation of these requirements. The price to
be paid in the event of the redemption of shares will be determined in good
faith by the Board of Directors of the Company.
In order to assure compliance with the 5/50 Provision, described above, the
Company's Bylaws permit the Directors of the Company to impose a lower
percentage limit on the remaining stockholders, in the event certain
stockholders (including Franklin and its affiliates) acquire in excess of
9.9% of the outstanding shares of Common Stock during the offering period.
The Directors of the Company have exercised this authority under the Bylaws
to lower the percentage limitation such that stockholders may not acquire
additional shares if such shareholder then holds, or would then hold, in
excess of 7% of the total outstanding voting shares of the Company. Any
shares acquired in excess of the foregoing limitation will be deemed to be
held in trust for the Company, and will not be entitled to receive
distributions or to vote. Subject to certain conditions, the Directors have
waived the percentage limitation with respect to shares currently held by
Franklin Resources and the former Limited Partner, FFRE Acquisitions, LLC.
The directors of the Company may impose, or seek judicial or other imposition
of additional restrictions if deemed necessary or advisable, including but
not limited to further reductions in the foregoing percentage limitation with
or without notice, or redemption of shares, in order to protect the Company's
status as a qualified REIT.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
(In thousands except per share amounts) 1999 1998 1997 1996 1995
Total revenues $16,654 $17,937 $17,726 $14,568 $14,111
Net income $662 $5,055 $4,168 $3,807 $4,462
Per Series A common share1:
Net income $0.05 $0.41 $0.34 $0.28 $0.32
Distributions declared $0.48 $0.48 $0.45 $0.44 $0.44
Weighted average number of shares of
- ----------------------------------------------------------- 12,250 12,250 12,250 13,830 14,145
Series A common stock outstanding
Balance Sheet Data:
Total assets $131,046 $133,892 $150,097 $131,298 $116,457
Debt $26,312 $26,762 $42,487 $22,745 $7,145
Stockholders' equity $89,268 $94,501 $95,316 $96,653 $106,986
Other Data:
Funds from operations1 $6,590 $7,699 $8,171 $7,235 $7,795
Cash flow from
Operating activities $7,452 $8,591 $9,187 $7,831 $8,359
Investing activities $12,594 $11,144 $(17,734) $4,140 $31
Financing activities $(6,986) $(22,300) $9,810 $(15,599) $(6,404)
Total rentable square footage of properties at end of
period 950,003 948,925 1,152,516 963,624 751,944
Number of properties at end of period 7 7 11 8 7
</TABLE>
1 See discussion of funds from operations in Item 7 of this report
-Management Discussion and Analysis of Financial Condition and Results
of Operations.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
The Company announced that on February 10, 2000 it closed the sale of all of
its real estate assets and does not anticipate acquiring any more property in
the future. The Company is currently winding down its operations.
The Advisor managed the Company's day-to-day real estate operations under the
terms of an advisory agreement that was renewable annually. The Company does
not have any employees. CPMC, an affiliate of the Advisor, provided property
management, including leasing, re-leasing and management-related services,
for the Company's seven operating rental properties. Both CPMC and the
Advisor are wholly owned subsidiaries of Franklin Resources, Inc. whose
primary business is the Franklin Templeton funds. The CPMC property
management agreement has been terminated as a result of the closing of the
Asset Sale. The advisory agreement as been modified to reflect the plan of
liquidation adopted by the Company, and modified terms are described below in
Item 13 "Certain Relationships and Related Transactions."
The following discussion is based primarily on the consolidated financial
statements of the Company for the years ended December 31, 1999, 1998 and
1997. This discussion should be read in conjunction with the accompanying
consolidated financial statements and notes.
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 the result of 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.
GENERAL BACKGROUND
During 1999, the Company's rental revenue was generated by investments in
seven properties. The seven properties consisted of four industrial R&D
properties comprising 546,000 rentable square feet of space and three office
properties comprising 403,000 rentable square feet of space. The Company's
properties were located in the greater San Francisco and Los Angeles areas
from which the Company derived 67% and 33% of its 1999 rental revenue,
respectively.
1999 SUMMARY
The Company's property operations were relatively stable in relation to the
prior year, although average occupancy rates decreased from 95% in 1998 to
92% in 1999. This decrease was mainly due to the 5 months vacancy in the
Tanon building following the previous tenant's declaration of bankruptcy.
Subsequent to year end, on January 25, 2000, the company's shareholders
approved proposals to sell all of the Company's real estate assets and to
grant authorization to the Company's Board of Directors for the subsequent
liquidation, winding up and dissolution of the Company. The Company closed
the sale of its remaining properties on February 10, 2000.
RESULTS OF OPERATIONS
COMPARISON OF YEAR ENDED DECEMBER 31, 1999 TO YEAR ENDED DECEMBER 31, 1998
Total revenue decreased 7% in 1999 compared to 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 1999. The decline in rental
income related to the Data General and Tanon properties on an aggregate basis
for the year ended December 31, 1999 was approximately $700,000. Partially
offsetting these factors were greater rental income from the Company's other
properties and increased interest income following higher average investment
levels in 1999.
Total expenses for the year ended December 31, 1999 decreased $394,000, or
3%, compared to 1998. The decrease was primarily due to reduced expenses
following the sale of property in 1998. This decrease was partially offset by
increased general and administrative expenses as referred to below.
General and administrative expenses for the year ended December 31, 1999
increased $710,000, or 66%, 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.
Interest expense decreased $597,000, or 20%, over the prior year as a result
of the 23% reduction in average debt outstanding in 1999. The weighted
average interest rate on borrowings decreased slightly from 8.1% in 1998 to
8.0% in 1999.
There were no changes made to the agreements between the Company and related
parties during the year. Related party fees declined slightly from 1998
levels.
The minority interest in FSRT L.P. net income increased $69,000 or 10%, in
1999 compared to the prior year due to an increase in the distribution rate
to the limited partners.
COMPARISON OF YEAR ENDED DECEMBER 31, 1998 TO YEAR ENDED DECEMBER 31, 1997
Total revenue increased 1% in 1998 compared to 1997. Rental revenues remained
at substantially the same levels as the prior year, despite property
acquisitions in 1997 and dispositions in 1998. The acquisition of the
Hathaway and Tanon buildings in 1997 provided increased revenue for 1998, as
a full year's revenue was received in 1998. However, property sales in 1998
and reduced rental revenue from Fairway combined to offset the increases
associated with the property acquisitions.
The average portfolio occupancy rate remained stable for the existing
properties occupied throughout both periods. The increase in interest income
was due to increases in marketable securities and Notes receivable.
Total expenses rose $611,000 (5%) in 1997 primarily due to the acquisition of
the Hathaway and Tanon Buildings and increased general and administrative
expenses associated with the Company's evaluation of its strategic
alternatives.
Interest expense increased $157,000 (6%) over the prior year as a result of
the increased debt to fund acquisitions in 1997, offset by the paydowns of
debt made in 1998 due to the sales of properties. Debt decreased $15.7
million in 1998, as property sales allowed the Company to pay off its
variable rate debt. The weighted average interest rate on borrowings
decreased from 8.63% in 1997 to 7.63% in 1998.
Property operating expenses stayed relatively stable in 1998 as compared to
the prior year. Decreased utilities and repair expenditures offset increased
administrative and maintenance costs primarily related to the Fairway window
defects discussed under Liquidity and Capital Resources, below.
There were no changes made to the agreements between the Company and related
parties during the year. Related party fees remained at 1997 levels.
General and administrative expenses increased $428,000 (66%) in 1998 as
compared to the prior year. The increases were primarily the result of costs
related to the Company's evaluation of its strategic alternatives and legal
fees incurred with respect to the pending legal actions that are described in
Note 10 to the accompanying financial statements.
The minority interest in FSRT L.P. net income increased $48,000 (7%) in 1998
as compared to the prior year due to an increase in the distribution rate to
the limited partners.
The increase in net income for 1998 over 1997 was primarily due to the gains
recorded on the sale of real estate and the changes in revenues and expenses
described above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents increased to $14,316,000 at December
31, 1999 as compared to $1,256,000 at December 31, 1998. The increase in
cash was principally caused by the $7,700,000 collection of a note receivable
and a net sale of mortgage-backed securities of $7,286,000. Operations
generated $7,452,000, a decrease of $1,139,000 from the previous year as a
result of lower net income, as described above. The sale of assets and other
investing activities produced $12,594,000 in 1999, compared to $11,144,000 in
1998.
The Company also had access to a revolving line of credit through June 30,
1999 of $25 million, which was unused at that date. On July 1, 1999 the
Company chose not to renew the line of credit agreement.
The Company's had mortgage indebtedness of $26.3 million at December 31,
1999. This indebtedness was assumed by the buyer or paid off in the Asset
Sale that closed February 10, 2000. See Note 2 to the Financial Statements.
The Company has invested substantially all of its remaining cash reserves in
A-rated short term commercial paper and plans to continue to do so throughout
2000.
POTENTIAL FACTORS AFFECTING FUTURE OPERATING RESULTS
YEAR 2000 READINESS DISCLOSURE
As of the date of this filing, all of the Company's mission-critical systems
and important non-mission critical systems have successfully transitioned to
the Year 2000 and are operating in production. Management continued to
monitor system compliance through February 29, 2000, which is a non-standard
leap year that potentially could have caused Year 2000-related problems. The
Company did not experience any material system problems in connection with
the leap year date.
The costs of the Company's efforts to identify and correct any potential 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.
LITIGATION
The Company is currently involved in shareholder litigation is described in
Item 3 - "Legal Proceedings." The Company and the defendants have agreed in
principal with the representative plaintiffs and their counsel in both cases
to settle them on a class-wide basis. The successful conclusion of each of
these settlement efforts would require the court certify a class for
settlement purposes and approve the mailing of notice to the class; that the
court determine that the settlement is fair, reasonable and adequate after a
hearing at which class members may appear and be heard; and that certain
other conditions are met, a process that is expected to take many months to
complete. If consummated according to the agreements, future legal expenses
and the costs of settlement of the Hodge Lawsuit and the Vigneau Lawsuit
will be funded by insurance coverage, contributions from certain other
defendants, and contributions from the Company. No assurance can be given as
to the outcome of the settlement efforts. If the settlement efforts are not
successful, the Company will continue to pursue its vigorous defense of the
litigation. Based on management's assessment of potential liability with
respect to the shareholder litigation, the Company has recorded a reserve
related to the shareholder litigation of $2,100,000 in the year ended
December 31, 1999.
REPRESENTATIONS AND WARRANTIES RELATED TO THE ASSET SALE
As required by the Purchase Agreement, the Company has placed $2,630,000 of
the sale proceeds in an escrow account to secure certain limited
representations and warranties made by the Company to Value Enhancement with
respect to the Asset Sale. Provided that Value Enhancement does not make a
claim against the Company that is covered by the escrowed funds, the funds
will be released to the Company from escrow, including interest income
earned, on November 10, 2000. To date, Value Enhancement has not made a
claim against the Company. See Item 1 - "Business - Other Matters" for
further discussion.
LIQUIDATION OF THE COMPANY
The Company has sold all of its remaining properties and is now in its
liquidation phase. The Company has invested substantially all of its
remaining cash reserves in A-rated short-term commercial paper and therefore
it will earn interest on those investments while the Company holds them.
During this phase the Company will continue to incur general and
administrative expenses for legal, accounting, and other professional fees,
directors and officers insurance coverage, advisory and directors fees, and
other costs of operating the Company and winding up its affairs
FUNDS FROM OPERATIONS ("FFO")
The Company considers FFO to be a useful measure of the operating performance
of an equity REIT because, together with net income and cash flows, FFO
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. FFO should not be considered an alternative
to net income or any other generally accepted accounting principles ("GAAP")
measurement of performance, as an indicator of the Company's overall
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"), FFO 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 FFO
in accordance with the revised NAREIT definition. The measure of FFO as
reported by the Company may not be comparable to similarly titled measures of
other companies that follow different definitions.
<PAGE>
FUNDS FROM OPERATIONS
(dollars in thousands)
Year ended
December 31,
1999 1998 1997
Net income $662 $5,055 $4,168
Reserve for litigation 2,100 - -
Depreciation and 3,828 3,979 4,003
amortization
Gain on sale - (1,335) -
Funds from Operations $6,590 $7,699 $8,171
---------------------------
===============================================================================
The primary cause of the decline in FFO in 1999 compared to 1998 was the
decline in revenues as described above under "Results of Operations." The
decline in 1998 compared to 1997 was due to an increase in general and
administrative expenses as discussed above under "Results of Operations".
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
PAGE
Report of Independent Accountants 19
Consolidated Balance Sheets as of December 31, 1999 and 1998 20
Consolidated Statements of Income for the years ended December 31, 20
1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity for the years ended 22
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended December 23
31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements 24
Schedule III - Real Estate and Accumulated Depreciation 32
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable, and therefore have been omitted.
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholders
Franklin Select Realty Trust
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Franklin Select Realty Trust (the "Company") at December 31, 1999
and 1998, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. In addition,
in our opinion, the financial statement schedule listed in the accompanying
index presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements. These financial statements and the financial statement schedule
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements and the financial statement
schedule based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
As described in Note 2, on January 25, 2000 the Company's stockholders
approved and authorized the sale of the Company's real estate assets and
subsequent liquidation, winding up, and dissolution of the Company.
PricewaterhouseCoopers LLP
San Francisco, California
January 25, 2000, except for Notes 1, 2 and 5,
as to which the date is February 10, 2000
C O N S O L I D A T E D B A L A N C E S H E E T S
FRANKLIN SELECT REALTY TRUST
In thousands except per share amounts
- -------------------------------------------------------------------
- -------------------------------------------------------------------
As of December 31, 1999 and 1998 1999 1998
- -------------------------------------------------------------------
ASSETS
Real estate
Rental property:
Land $- $34,054
Buildings and improvements - 100,241
------------------
- 134,295
Less: accumulated depreciation - 21,341
------------------
- 112,954
Property held-for-sale, net of accumulated 110,520 -
depreciation of $24,709
------------------
Real estate, net 110,520 112,954
Cash and cash equivalents 14,316 1,256
Mortgage-backed securities, available for sale 286 7,700
Note receivable - 7,700
Deferred rent receivable 1,692 1,543
Deferred costs and other assets 4,232 2,739
==================
Total assets $131,046 $133,892
==================
- -------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Debt $26,312 $26,762
Tenant deposits, accounts payable and accrued 2,477 1,807
expenses
Reserve for litigation 2,100 -
Distributions payable 1,793 1,641
------------------
Total liabilities 32,682 30,210
Minority interest 9,096 9,181
------------------
Commitments and contingencies (Notes 6 and 10) - -
Stockholders' equity:
Common stock, Series A, without par value;
stated value $10 per
share; 50,000 shares authorized; 12,250 103,161 103,161
shares issued and outstanding
Common stock, Series B, without par value;
stated value $10 per 6,294 6,294
share; 1,000 shares authorized; 746 shares
issued and outstanding
Accumulated other comprehensive income (loss) (33) (18)
Accumulated distributions in excess of net (20,154) (14,936)
income
------------------
Total stockholders' equity 89,268 94,501
==================
Total liabilities and stockholders' $131,046 $133,892
equity ==================
The accompanying notes are an integral part of these consolidated financial
statements.
C ON S O L I D A T E D S T A T E M E N T S O F I N C O M E
FRANKLIN SELECT REALTY TRUST
In thousands, except per share
amounts
- -----------------------------------------------------------
For the years ended December 1999 1998 1997
31, 1999, 1998 and 1997
- -----------------------------------------------------------
REVENUES:
Rent $15,735 $17,635 $17,522
Interest, dividends, and other 919 302 204
--------------------------
Total revenue 16,654 17,937 17,726
--------------------------
EXPENSES:
Property operating 3,645 4,081 4,036
Interest 2,333 2,930 2,773
Related party 1,429 1,459 1,454
General and administrative 1,786 1,076 648
Loss on sale of 110 - -
mortgage-backed securities
Depreciation and amortization 3,828 3,979 4,003
--------------------------
Total expenses 13,131 13,525 12,914
--------------------------
Income before reserve for
litigation, gains on sales of 3,523 4,412 4,812
property and minority interest
Reserve for litigation (2,100) - -
Gains on sales of properties - 1,335 -
--------------------------
Income before minority interest 1,423 5,747 4,812
Minority interest (761) (692) (644)
--------------------------
NET INCOME $662 $5,055 $4,168
==========================
Net income per share, based on
the weighted
average shares outstanding of
Series A
common stock of 12,250 for $0.05 $0.41 $0.34
the years ended
December 31, 1999, 1998 and
1997, respectively ==========================
Distributions per share, based
on the weighted
average shares outstanding of
Series A
common stock of 12,250 for $0.48 $0.48 $0.45
the years ended
December 31, 1999, 1998 and
1997, respectively ==========================
- -----------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
C O N S O L I D A T E D S T A T E M E N T S
O F S T O C K H O L D E R S' E Q U I T Y
FRANKLIN SELECT REALTY TRUST
In thousands
As of and for the years ended December 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
COMMON STOCK
Accumulated
Series A Series B Accumulated other distributions Total Total
Shares Amount Shares Amount comprehensive income in excess of Stockholders Comprehensive
Amount (loss) net income equity income
- ---------------------------------------- ----------------- ---------- ---------- ----------------- ----------------- ---------------
Balance,
<S> <C> <C> <C> <C> <C> <C> <C> <C>
January 1, 1997 12,250 $103,161 746 $6,294 $(36) $(12,766) $96,653
Comprehensive income:
Net income 4,168 4,168 4,168
Unrealized gain on
mortgage-backed
securities 8 8 8
------------
Total comprehensive income 4,176
Cash distributions on
common stock (5,513) (5,513)
- ---------------------------------------- ----------------- ---------- ---------- ----------------- ----------------- ------------
Balance,
December 31, 1997 12,250 103,161 746 6,294 (28) (14,111) 95,316
Comprehensive income:
Net income 5,055 5,055 5,055
Unrealized gain on
mortgage-backed
securities 10 10 10
------------
Total comprehensive income
5,065
Cash distributions on
common stock (5,880) (5,880)
- ---------------------------------------- ----------------- ---------- ---------- ----------------- ----------------- ------------
Balance,
December 31, 1998 12,250 103,161 746 6,294 (18) (14,936) 94,501
Comprehensive income:
Net income 662 662 662
Unrealized loss on
mortgage-backed
securities (15) (15) (15)
------------
Total comprehensive income
647
Cash distributions on
common stock (5,880) (5,880)
======================================== ================= ========== ========== ================= ================= ============
Balance,
December 31, 1999 12,250 $103,161 746 $6,294 $(33) $(20,154) $89,268
======================================== ================= ========== ========== ================= ================= ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
C O N S O L I D A T E D S T A T E M E N T S O F C A S H F L O W S
FRANKLIN SELECT REALTY TRUST
In thousands
- ------------------------------------------------------------------
For the years ended December 31, 1999 1998 1997
1999,1998 and 1997
- ------------------------------------------------------------------
NET INCOME $662 $5,055 $4,168
-----------------------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,938 4,163 4,171
Gain on sales of properties - (1,335) -
Loss on sale of mortgage-backed 110 - -
securities
Reserve for litigation 2,100 - -
Minority interest 761 692 644
(Increase) decrease in deferred rent (149) (29) 53
receivable
(Increase) in deferred costs and other (514) (293) (135)
assets
Increase in tenant deposits, accounts
payable 585 283 312
and accrued expenses
(Increase) decrease in advance rents (41) 55 (26)
-----------------------
6,790 3,536 5,019
-----------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,452 8,591 9,187
-----------------------
Disposition (acquisition) of rental - 20,499 (16,383)
property
Improvements to rental property (934) (1,778) (784)
Collection of notes receivable 7,700 - -
Leasing commissions paid (1,458) (388) (652)
Disposition (acquisition) of 7,286 (7,189) 85
mortgage-back securities
-----------------------
NET CASH PROVIDED BY (USED IN) INVESTING 12,594 11,144 (17,734)
ACTIVITIES
-----------------------
Borrowings under notes payable - - 23,938
Repayment of notes payable (450) (15,725)(7,791)
Payment of loan costs (47) - (288)
Distributions paid to stockholders and (6,489)(6,575) (6,049)
minority interest
-----------------------
NET CASH (USED IN) PROVIDED BY FINANCING (6,986)(22,300) 9,810
ACTIVITIES
-----------------------
NET INCREASE (DECREASE) IN CASH AND CASH 13,060 (2,565) 1,263
EQUIVALENTS
CASH AND CASH EQUIVALENTS, BEGINNING OF 1,256 3,821 2,558
YEAR
=======================
CASH AND CASH EQUIVALENTS, END OF YEAR $14,316 $1,256 $3,821
=======================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for interest $2,204 $2,742 $2,618
- ------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS ACTIVITY
Franklin Select Realty Trust (the "Company") (formerly Franklin Select Real
Estate Income Fund) is a California corporation formed on January 5, 1989 for
the purpose of investing in income-producing real property. Franklin
Properties, Inc. (the "Advisor", or "management") manages the Company's
day-to-day operations under the terms of an advisory agreement that is
renewable annually.
At December 31, 1999, the Company's real estate portfolio consisted of
ownership interests in seven properties: four industrial research and
development properties, and three suburban office properties.
BASIS OF PRESENTATION
The accompanying consolidated financial statements of the Company include all
accounts of the Company and its majority owned partnership, FSRT L.P.
("FSRT"). The Company is the sole General Partner of FSRT. All significant
intercompany amounts and transactions have been eliminated.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions. These estimates and assumptions affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
As described in Note 2 to these financial statements, management has
successfully negotiated a contract for the sale of the Company's remaining
properties. The Company's shareholders ratified the sale and subsequent
liquidation of the Company on January 25, 2000, and the sale closed on
February 10, 2000. Management now expects that the Company will be liquidated
upon resolution of the outstanding litigation described in Note 10 and
certain other issues. 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. The Company
will adopt liquidation basis accounting effective January 25, 2000.
Management does not expect any material losses to be incurred in the event of
the liquidation of the Company. However, there can be no assurance that the
eventual liquidation of the Company will not result in a loss.
REAL ESTATE
Rental property is stated at cost and depreciated using the straight-line
method over an estimated useful life of 35 years for buildings and
improvements. Tenant improvements are generally amortized over the lesser of
the improvements' useful life or the lease term. Significant improvements
and betterments are capitalized. Maintenance and repairs are charged to
expense when incurred. The Company capitalizes interest on property under
development.
Pursuant to the Company's investment objectives, property purchased was
generally held for extended periods. During the holding period, management
periodically, but at least annually, evaluated whether rental property had
suffered an impairment in value. Management's analyses include consideration
of estimated undiscounted future cash flows during the expected holding
period in comparison with carrying values, prevailing market conditions and
other economic matters. If the current carrying value of an individual
property exceeded estimated future undiscounted cash flows, the Company
reduced the carrying value of the asset to fair value; however no such
adjustments were required and the properties were sold on February 10, 2000
at a gain.
Property held-for-sale is held at the lower of cost or fair value. Property
is designated available-for-sale when it is being actively marketed and the
sale of the property is anticipated within twelve months.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, demand deposits with banks,
debt instruments with original maturities of three months or less, and money
market funds, which are readily convertible into cash. Due to the relatively
short-term nature of these investments, the carrying value approximates fair
value.
MORTGAGE-BACKED SECURITIES
Mortgage-backed securities held by the Company are classified as available
for sale and are carried at fair value. The resulting unrealized gains and
losses are reported as a component of other comprehensive income within
stockholders' equity until realized. Realized gains and losses are
recognized on the specific identification method and are included in earnings.
DEFERRED COSTS
Lease commissions are deferred and amortized using the straight-line method
over the term of the related lease. Loan fees and loan costs are deferred,
amortized and recorded in interest expense using the straight-line method,
which approximates the effective interest method, over the term of the
related loan.
RENTAL REVENUES
Rental revenues are recorded on the straight-line method to reflect scheduled
rent increases and free rent over the related lease term. As a result, a
deferred rent receivable is created when rental receivables are less than the
amount earned using the straight-line method or when rental income is
recognized during free rent periods of a lease.
INCOME TAXES
The Company is a real estate investment trust ("REIT"), having elected to
qualify as a REIT under the applicable provisions of the Internal Revenue
Code since 1989. Under the Internal Revenue Code and applicable state income
tax law, a qualified REIT is not subject to income tax if at least 95% of its
taxable income is currently distributed to its stockholders and other REIT
tests are met. At December 31, 1999, the Company is in compliance with these
tests. Accordingly, no provision is made for income taxes in these financial
statements.
CONCENTRATIONS OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of mortgage-backed
securities and operating leases with tenants.
The Company places excess cash in short-term deposits with Franklin Money
Fund, managed by an affiliate of the Advisor, and in money market securities
of companies with strong credit ratings and, by policy, limits credit
exposure to any one issuer. The Company performs ongoing credit evaluations
of its tenants and generally does not require collateral for commercial
tenants. The Company reserves for potential credit losses, as appropriate.
SEGMENT INFORMATION
The Company has adopted Statement of Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information", ("FAS
131"), which establishes requirements for reporting segment information.
The Company has determined that it has one reportable segment under FAS
131.
NOTE 2 - REAL ESTATE SALES AND LIQUIDATION OF THE COMPANY
At a special meeting of shareholders held on January 25, 2000, shareholders
approved proposals to sell all of the Company's real estate assets to Value
Enhancement Fund III, LLC, ("the Asset Sale"), and to grant authorization to
the Company's Board of Directors for the subsequent liquidation, winding up
and dissolution of the Company.
The sale was approved by shareholders on January 25, 2000. The sale of the
properties closed on February 10, 2000.
The sale includes all real estate directly owned by the Company together with
the interests of the Company in FSRT. The aggregate base purchase price is
$131,500,000, reduced by approximately $26,312,000 for existing debt to be
assumed by the buyer or paid off. The net purchase price was payable in cash.
The limited partners of FSRT 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. On February 10, 2000 the limited partners converted their limited
partner interests into 1,625,000 shares of Series A common stock.
The CPMC property management agreement has been terminated as a result of the
closing of the Asset Sale. Commencing January 1, 2000, the Company amended
the Advisory Agreement to replace the asset management fee with a stated fee
of $50,000 for the quarter ended March 31, 2000 and $35,000 per quarter
thereafter. The fees are payable on the first day of each quarter
NOTE 3 - MORTGAGE-BACKED SECURITIES, AVAILABLE FOR SALE
Mortgage-backed securities, available for sale at December 31, 1999, and
1998, were as follows:
(IN THOUSANDS) 1999 1998
--------------------
Amortized cost $319 $7,718
Unrealized loss (33) (18)
====================
Fair value $286 $7,700
====================
Mortgage-backed securities, available for sale at December 31, 1999, had a
coupon rate of 6.61% and a maturity date of 2017. At purchase, the
securities yielded 6.4% and 5.6%, respectively.
<PAGE>
NOTE 4 - DEBT
At December 31, 1999 and 1998 debt was comprised of the following:
(IN THOUSANDS) 1999 1998
---------------------
FAIRWAY CENTER
Bonds payable, net of a prepaid reserve of
$207,000, are
collateralized by a lien, and include serial
bonds maturing
through October 1, 2016, at interest rates
ranging from $2,378 $2,418
4.00% to 6.50%, and term bonds maturing
October 1, 2026,
at an interest rate of 6.625%. The payments
on the bonds are calculated in an amount
sufficient to fully amortize the
indebtedness.
HATHAWAY BUSINESS PARK
Note payable, collateralized by a deed of
trust, bears interest at a fixed rate of
7.75%. The combined interest and principal 3,382 3,484
payment of $30,786 is payable monthly until
maturity in 2003.
TANON BUILDING
Note payable, collateralized by a deed of
trust, bears interest at a fixed rate of
8.47%. The combined interest and principal 4,998 5,070
payment of $41,445 is payable monthly until
maturity in 2004.
LAM RESEARCH BUILDINGS
Notes payable, collateralized by deeds of
trust, bears interest at a fixed rate of
8.44%. The combined principal and interest 15,554 15,790
payment of $129,969 is payable monthly until
maturity in 2006.
=====================
TOTAL DEBT $26,312 $26,762
=====================
Each of the Company's debt facilities outstanding at December 31, 1999 has
associated prepayment penalties. Loans secured on the Hathaway, Tanon and
LAM properties carry yield maintenance prepayment penalties and the bonds
secured by the Fairway center can be prepaid commencing October 2001 with a
1% penalty.
The Company also had access to a revolving line of credit at June 30, 1999 of
$25 million, which was unused at that date. On July 1, 1999 the Company chose
not to renew the line of credit agreement.
Aggregate principal payments required in future years related to notes and
bonds payable are as follows:
(IN
THOUSANDS)
2000 $485
2001 527
2002 3,591
2003 479
2004 5,057
Thereafter 16,173
============
$26,312
============
Management estimates that the carrying amount of aggregate debt approximates
fair value based on a comparison to interest rates available for debt with
similar terms and maturities
NOTE 5 - COMMON STOCK AND INCOME PER SHARE
The Company has one class of common stock in two series: Series A and Series
B. Series A and Series B common stock have the same voting rights.
Distributions on Series A common stock are declared at the discretion of the
Board of Directors. No distribution may be paid or declared on the Series B
shares prior to exercise of the exchange rights, as defined below. After
exercising their exchange rights, the Advisor will receive distributions on
its Series A shares.
The Series B common stock held by the Advisor may be exchanged for Series A
common stock when the Series A common stock achieves certain trading prices
for 20 consecutive trading days. The Series B shares become eligible for
exchange for a total of 622,395 Series A shares when the trading price of the
Series A shares is between $8.42 and $11.33. The market price of the Series
A shares did not meet these conditions and thus the Series B shares were not
convertible. The rates of exchange and trading prices will be subject to
change under certain circumstances as provided in the Exchange Rights
Agreement.
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 exchange agreement of FSRT. No units were
exchanged for common stock. The Company filed a related shelf registration
on Form S-3 that became effective on December 10, 1997. The FSRT Units were
entitled to receive quarterly distributions of $0.1331 per unit, subject to
periodic annual increases, as specified in the partnership agreement.
Residual cash flow after distributions to the FSRT Units is distributable to
the Company. On February 10, 2000 the limited partner converted its limited
partnership interests into 1,625,000 shares of Series A common stock.
The convertible partnership units are deemed anti-dilutive; consequently
there is no difference between basic and diluted earnings per share. In
addition, because the Series B shares are not currently convertible, they are
not included in the earnings per share calculation.
NOTE 6 - RENTAL INCOME
The Company's rental income from commercial properties is received
principally from tenants under non-cancelable operating leases. The tenant
leases typically provide for guaranteed minimum rent plus contingent rents.
Minimum future rentals on non-cancelable tenant operating leases at December
31, 1999 are as follows:
(IN
THOUSANDS)
2000 $15,599
2001 14,324
2002 12,187
2003 8,602
2004 7,428
Thereafter 46,437
----------
$104,577
==========
Minimum future rentals do not include reimbursements of property operating
expenses which were $1,408,000, $2,125,000 and $2,141,000, for the years
ended December 31, 1999, 1998 and 1997, respectively.
During the years ended December 31, 1999, 1998 and 1997, tenants whose base
rental revenues comprised more than 10% of base rental revenues were LAM
Research Corporation and Continental Casualty Company, who together
represented 27%, 28% and 31% of those revenues, respectively.
NOTE 7 - RELATED PARTY TRANSACTIONS
The Company has an agreement with the Advisor to administer the day-to-day
operations of the Company. Under the terms of the agreement, which is
renewable annually, the Advisor receives an annualized fee equal to 0.5% of
the Company's gross real estate assets, defined generally as the book value
of the assets before depreciation, payable quarterly.
The Company's properties are managed by Continental Property Management Co.
("CPMC"), an affiliate of the Advisor. The Company pays a property
management fee, leasing commission and construction supervision fee to CPMC
based on actual services performed. The fees paid to CPMC do not include any
fees or expenses paid to on-site property managers or leasing commissions
paid to third parties, both of which are borne by the Company.
The agreements between the Company and the Advisor, or affiliates of the
Advisor, provide for certain types of compensation and payments including,
but not limited to, the following for the years ended December 31, 1999, 1998
and 1997:
In thousands 1999 1998 1997
------------------------------
Related Party expense:
Advisory fee $833 $753 $766
Reimbursement for data
processing, accounting 47 84 61
and certain other expenses
Property management fee 549 622 627
------------------------------
$1,429 $1,459 $1,454
Leasing commissions, capitalized
and amortized $177 $217 $196
over the term of the related
lease
Construction supervision fee,
capitalized and
amortized over the life of the $51 $80 $31
related investment
or the term of the related
lease, as applicable
In connection with the additional services rendered by the Advisor related to
the development and consideration of strategic alternatives and the
negotiation and consummation of the Asset Sale, the Board of Directors also
approved an additional advisory fee in 1999 of $160,000 payable to the
Advisor.
The Company's Board of Directors (including all of its Independent Directors)
have determined that the compensation paid to the Advisor and to CPMC is fair
and reasonable to the Company.
At December 31, 1999 and 1998, cash and cash equivalents included $3,157,000
and $759,000, respectively, which was invested in Franklin Money Fund, a
registered investment company managed by an affiliate of the Advisor.
Distributions earned from Franklin Money Fund totaled $84,000, $148,000 and
$135,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
The Advisor and its parent company, Franklin Resources, Inc, are
co-defendants in lawsuits brought against the Company described in Note 10.
At December 31, 1999 and 1998, accrued expenses included $169,000 and
$168,000, respectively, payable to the Advisor or its affiliates.
NOTE 8 - DISTRIBUTIONS
The allocation of cash distributions per share for individual stockholders'
income tax purposes, as reported on Internal Revenue Service Form 1099-DIV,
for the years ended December 31, 1999, 1998 and 1997 was as follows:
Ordinary Return of Capital Total
Year Paid Income Capital Gain Paid
- -----------------------------------------------------
1999 $0.23 $0.20 $0.05 $0.48
1998 $0.35 $0.04 $0.09 $0.48
1997 $0.40 $0.04 - $0.44
In December 1994, the Company implemented a Dividend Reinvestment and Share
Purchase Plan (the "Plan"), under which a stockholder's cash distributions
may be reinvested in shares of Series A common stock of the Company, subject
to the terms and conditions of the Plan. As of January 25, 2000, the Plan
was terminated. This was done in connection with the sale of the Company's
properties and the anticipated liquidation of the Company.
NOTE 9 - SUPPLEMENTARY QUARTERLY FINANCIAL DATA (UNAUDITED)
In thousands, except per share amounts.
THREE MONTHS ENDED
------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1999 1999 1999 1999
------------------------------------------------------
Revenue $4,122 $3,859 $3,916 $4,757
Net income (loss) $767 $544 $(278) $(371)
Net income
(loss) per share $.06 $.04 ($.02) ($.03)
THREE MONTHS ENDED
------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1998 1998 1998 1998
------------------------------------------------------
Revenue $4,593 $4,832 $4,339 $4,173
Net income $1,200 $1,152 $1,082 $1,621
Net income per $.10 $.09 $.09 $.13
share
THREE MONTHS ENDED
------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1997 1997 1997 1997
------------------------------------------------------
Revenue $4,132 $4,502 $4,491 $4,601
Net income $1,079 $1,095 $1,074 $920
Net income per $.09 $.09 $.09 $.07
share
NOTE 10 - LITIGATION
The Company has been 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. This action on behalf of certain shareholders of
Advantage was 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 the Company in May 1996.
The plaintiffs in each lawsuit sought damages in an unspecified amount and
certain equitable relief. The defendants in each lawsuit have denied any
wrongdoing and vigorously defended the lawsuits.
The Company and the defendants have agreed in principal with the
representative plaintiffs and their counsel in both cases to settle the cases
on a class-wide basis. The successful conclusion of each of these settlement
efforts would require that the court certify a class for settlement purposes
and approve the mailing of notice to the class, that the court determine that
the settlement is fair, reasonable and adequate after a hearing at which
class members may appear and be heard, and that certain other conditions are
met, a process that is expected to take many months to complete. If
consummated according to the agreements, future legal expenses and the costs
of settlement of the Hodge Lawsuit and the Vigneau Lawsuit will be funded by
insurance coverage, contributions from certain other defendants, and
contributions from the Company. No assurance can be given as to the outcome
of the settlement efforts. If the settlement efforts are not successful, the
Company will continue to pursue its vigorous defense of the litigation.
Based on management's assessment of potential liability with respect to the
shareholder litigation, the Company has recorded a reserve related to the
shareholder litigation of $2,100,000 in the year ended December 31, 1999.
<PAGE>
32
R E A L E S T A T E A N D A C C U M U L A T E D D E P R E C I A T I O N
FRANKLIN SELECT REALTY TRUST
As of December 31, 1999
In thousands
<TABLE>
<CAPTION>
COST CAPITALIZED
INITIAL SUBSEQUENT TO GROSS AMOUNT AT WHICH
COST TO FUND ACQUISITION CARRIED AT CLOSE OF PERIOD
Life on Which
Depreciation in
Buildings Accumu- Latest
Description And lated Year of Operations
Encum- Improve- Improve- Deprecia- construc- Date Statement is
brances Land Buildings ments Land ments Total tion tion Acquired Computed
- ------------------------------ --------------- ------- ---------- -----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
The Shores
Redwood City, CA $7,033 $20,499 $2,689 $7,033 $23,188 $30,221 $7,813 82, 87 09/89 35
Data General Building
Manhattan Beach, CA 5,372 16,994 3,787 5,372 21,053 26,425 7,189 82 12/89 35
Northport Buildings
Fremont, CA 2,874 8,708 662 2,874 9,375 12,249 2,975 85 01/91 35
Fairway Center
Brea, CA $2,378 7,430 14,273 1,508 7,430 15,829 23,259 4,089 87 01/92 35
LAM Research Buildings
Fremont, CA 15,554 7,337 19,591 - 7,337 19,591 26,928 1,773 96 10/96 35
Tanon Building
Fremont, CA 4,998 1,855 6,680 161 1,855 6,956 8,811 538 83 4/97 35
Hathaway Business Park
Fremont, CA 3,382 2,153 5,015 40 2,153 5,183 7,336 332 85 11/97 35
------------------------- ------- --------- ---------- --------- ----------
Total real estate $26,312 $34,054 $91,760 $8,847 $34,054 $101,175 $135,229 $24,709
=============================================== ======= ========= ========== ========= ========== =================================
</TABLE>
R E A L E S T A T E A N D A C C U M U L A T E D D E P R E C I A T I O N
NOTES:
(1) The aggregate cost for federal income tax purposes is $123,147.
(2) RECONCILIATION OF REAL ESTATE
1999 1998 1997
---------------------------------
Balance at beginning of $134,295 $162,387 $141,625
period
Dispositions - (29,870) -
Additions during period:
Acquisitions - - 19,781
Improvements and 934 1,778 981
carrying costs
---------------------------------
Balance at end of period $135,229 $134,295 $162,387
=================================
(3) RECONCILIATION OF ACCUMULATED DEPRECIATION
1999 1998 1997
---------------------------------
Balance at beginning of $21,341 $21,289 $17,583
period
Dispositions - (3,554) -
Depreciation expense for 3,368 3,606 3,706
the period
---------------------------------
Balance at end of period $24,709 $21,341 $21,289
=================================
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Directors of the Company are elected annually by the shareholders. The
officers of the Company are appointed by the Board of Directors, and serve
under the supervision, and, at the pleasure of the Board of Directors. There
is an audit committee consisting of the Independent Directors of the
Company. The Audit Committee's responsibilities generally include review of
the internal controls of the Company, accounting compliance and review of the
Company's financial reporting. In performing these reviews, the Audit
Committee met twice during the year ended December 31, 1999. During 1999,
the Company had a Special Committee of Independent Directors (the "Special
Committee") consisting of all the Independent Directors of the Company. The
Special Committee was formed in 1998 for the purpose of reviewing and
evaluating short-term and long-term strategic alternatives available to the
Company to increase shareholder value. In performing these reviews, the
Special Committee met periodically during the course of the year.
The Directors and officers of the Company are:
NAME POSITION
David P. Goss Chief Executive Officer, President and Director
Lloyd D. Hanford Independent Director
Egon H. Kraus Independent Director
Frank W. T. LaHaye Independent Director
E. Samuel Wheeler Independent Director
Richard S. Barone Secretary
Mark A. TenBoer Vice President - Finance and Chief Financial Officer
In addition, Barry C. L. Fernald and Larry D. Russel were Directors of the
Company from 1996 until September 9, 1999 when they resigned from the Board.
Family trusts of which Mr. Fernald and Mr. Russel were settlors and
beneficiaries were also limited partners of FSRT L.P. FFRE Acquisitions,
LLC, which is the assignee of the former limited partners and owns 1,625,000
shares of Series A common stock, is owned in part by family trusts or other
entities of which Mr. Fernald and Mr. Russel are settlors and/or
beneficiaries. These shares were issued on February 10, 2000 in exchange for
the limited partnership units of FSRT L.P. held by FFRE Acquisitions, LLC.
NAME, AGE AND FIVE-YEAR BUSINESS EXPERIENCE
DIRECTOR SINCE
DAVID P. GOSS (52) 1989
Mr. Goss is the Chief Executive Officer, President and Director of the
Company. He is also Chief Executive Officer, President and Director of
Property Resources, Inc., Property Resources Equity Trust (1987 to date), and
Franklin Properties Inc., the Company's Advisor (the "Advisor"). Mr. Goss
has a B.A degree from the University of California, Berkeley, and a J.D.
degree from the New York University School of Law.
LLOYD D. HANFORD, JR. (71) 1989
Mr. Hanford is an Independent Director of the Company. In 1988 he was
co-founder of, and until July 1992, principal of, the Hanford/Healy
Companies, a San Francisco real estate appraisal, asset management and
consulting firm, practicing on a national basis. In September 1996, GMAC
Commercial Mortgage acquired the assets of the Hanford/Healy Companies. Mr.
Hanford is presently an independent real estate appraiser and consultant but
maintains his offices at Realty Services International, Inc. (the successor
by name change to Hanford/Healy Appraisal Company). Mr. Hanford graduated
from the University of California, Berkeley and holds the professional
designations MAI, CRE and CPM awarded respectively by the Appraisal
Institute, the Counselors of Real Estate and the Institute of Real Estate
Management (IREM). Mr. Hanford is a past national president of IREM and of
the IREM Foundation and was the 1998 Chair of the Appraisal Foundation
(Washington, D.C.). Mr. Hanford is also on the Advisory Board of the Eastern
European Real Property Foundation. Mr. Hanford was also a Director of
Franklin Advantage Real Estate Income Fund (1990 to May 1996).
EGON H. KRAUS (70) 1989
Mr. Kraus is an Independent Director of the Company. He was formerly Vice
President and Director of McNeil Investors Inc. (1991-1995). He is a
Certified Public Accountant, primarily involved in real estate transactions.
He has a B.S. and an M.B.A. from the University of California, Berkeley,
where he was elected to Phi Beta Kappa. Mr. Kraus is a member of the American
Institute of Certified Public Accountants and a former member of the
Financial Executives Institute and the Tax Executives Institute. He was also
a Director of Franklin Real Estate Income Fund (1988 to May 1996) and
Franklin Advantage Real Estate Income Fund(1990 to May 1996).
FRANK W. T. LAHAYE (70) 1996
Mr. LaHaye is an Independent Director of the Company. He is Chairman of
Peregrine Ventures Management Company and a Director for the California
Center for Land Reclamation. Mr. LaHaye is also a Director or Trustee, as
the case may be, of 27 investment companies in the Franklin Templeton Group
of Funds. He is formerly a Director of Quarterdeck Corporation, Fischer
Imaging Corporation and Digital Transmission Systems, Inc. He was also a
Director of Franklin Real Estate Income Fund (1995 to May 1996). Mr. LaHaye
received a B.S. degree in Metallurgical Engineering from Stanford University
in 1954.
E. SAMUEL WHEELER (56) 1989
Mr. Wheeler is an Independent Director of the Company. He is a Certified
Public Accountant, and since 1990, has owned and managed an accounting and
tax practice. He is a member of the National Association of Real Estate
Investment Trusts (NAREIT)'s Government Relations, Research and Accounting
Committees. He received his B.S. in Accounting and Finance from San Jose
State University in 1966, and is a member of the American Institute of
Certified Public Accountants and the California Society of Certified Public
Accountants. Mr. Wheeler was also a Director of Franklin Advantage Real
Estate Income Fund (1990 to May 1996).
The executive officers of the Company other than those listed above are:
RICHARD S. BARONE (49)
Mr. Barone has been Secretary of the Company from 1989 to date. He is also
Secretary of the Advisor, Property Resources, Inc., and Property Resources
Equity Trust. He is also Senior Vice President -Legal of the Advisor and
Property Resources, Inc., and Senior Corporate Counsel of Franklin Resources,
Inc. Mr. Barone received a B.A degree and a J.D. degree from the University
of San Francisco. He is a member of the State Bar of California.
MARK A. TENBOER (43)
Mr. TenBoer has been Vice President - Finance and Chief Financial Officer of
the Company from 1993 to date, and has served as Vice President - Asset
Management for the Advisor and Property Resources, Inc. since 1991. From 1983
to 1991 he was Director - Portfolio Management and Controller of the Advisor
and Property Resources, Inc. He received a B.S. degree in Accounting from the
University of Illinois. Mr. TenBoer is a Certified Public Accountant.
Item 11. EXECUTIVE COMPENSATION
No direct compensation has been paid by the Company to its Directors or its
executive officers, or the Directors or executive officers of the Advisor, in
1999, except that each Independent Director received fees of $6,000 per year
plus $500 for each regular Board meeting attended and $400 for each
telephonic Board meeting attended. In addition, in 1999 each Independent
Director received fees of $2,500 per quarter for his service on the Special
Committee of Independent Directors, except that Mr. Wheeler received fees of
$3,500 per quarter for his service as chairman of the Special Committee. Fees
to all Directors for attendance at Board meetings totaled approximately
$118,000 for 1999, including an aggregate of $46,958 paid to the Independent
Directors for their service on the Special Committee.
The Company has no annuity, pension or retirement plans or any existing plans
or arrangement under which payments were made to any Director or officer
during 1999. The Company has paid certain fees and will reimburse certain
expenses of the Advisor. See Item 13 - "Certain Relationships And Related
Transactions."
Performance Graph
The following graph compares the yearly percentage change in the Company's
cumulative total stockholder return with two indices, the Equity REIT Index
prepared by the National Association of Real Estate Investment Trusts
("NAREIT"), and the S&P 500 Index. The graph assumes $100 was invested at the
closing price on December 31, 1994, in the Series A common stock and the
indices, and that all dividends were reinvested throughout the period.
Performance Measurement Comparison
Total Return
Franklin Select Realty Trust
EDGAR REPRESENTATION OF DATA POINTS USED IN THE PRINTED GRAPHIC
SELECT REIT EQUITY INDEX S&P 500 INDEX
100.00 100.00 100.00
1995 119.73 115.27 137.43
1996 177.73 155.92 168.98
1997 226.88 187.51 225.37
1998 245.22 154.69 289.77
1999 268.77 147.54 350.71
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table and notes thereto set forth information, as of March 8,
2000 (unless otherwise indicated), with respect to the beneficial ownership
of shares of Common Stock (i) by persons known by the Company to own 5% or
more of the outstanding Common Stock, (ii) by each director, and (iii) by the
directors and executive officers of the Company as a group, based upon
information furnished by such persons. The executive officers of the Company
are not included individually because they receive no compensation from the
Company. Except as otherwise indicated, each person included in the table
exercises sole voting and dispositive power over such shares.
AMOUNT OF % OF
NAME TITLE OF CLASS SHARES CLASS
BENEFICIALLY *
OWNED
DIRECTORS AND EXECUTIVE
OFFICERS
David P. Goss, Chief Common Stock, 7,191
Executive Officer, Series A **
President and Director
Lloyd D. Hanford, Jr., Common Stock, 1,000 **
Independent Director Series A
Egon H. Kraus, Common Stock, 12,430 **
Independent Director Series A
Frank W.T. LaHaye, Common Stock, 1,000 **
Independent Director Series A
E. Samuel Wheeler, Common Stock, 2,000 **
Independent Director Series A
Directors and executive Common Stock, 26,821 **
officers as a group Series A
FIVE PERCENT HOLDERS
Franklin Resources, Inc. Common Stock, 1,685,400 11.5%
777 Mariners Island Series A
Boulevard
San Mateo, CA 94404
Franklin Properties, Inc. Common Stock, 745,584 100.0%***
1800 Gateway Drive Series B
San Mateo, CA 94404
FFRE Acquisitions, LLC Common Stock, 1,625,000 11.1%
3880 South Bascom Suite 210 Series A
San Jose, CA. 95124
EastGroup Properties, Common Stock, 850,000 5.8%
Inc.**** Series A
300 One Jackson Place
188 East Capital Street
Jackson, Mississippi 39201
FOOTNOTES
* Except with respect to the row showing the holding by
Franklin Properties, Inc. of shares of Series B Common Stock, all
percentages are based on 14,620,952 shares of Common Stock
outstanding (Series A and Series B) as of the date set forth in the
paragraph immediately preceding this table. This number includes
1,625,000 Series A shares issued to the Limited Partner, FFRE
Acquisitions, LLC, on February 10, 2000 immediately before the
closing of the Asset Sale pursuant to the exercise by such Limited
Partner of its right to convert its limited partnership units into
shares of Series A Common Stock.
** 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 were convertible into 622,395
Series A shares if the market price of Series A shares reached and
remained at certain levels. The conversion ratio is subject to
adjustment in certain circumstances. On March 13, 2000, the AMEX
delisted the Series A shares. Consequently, the Series B shares
are not expected to convert into Series A shares. The Series B
shares owned by Franklin Properties constitute 5.1% 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.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act and the rules of the Commission thereunder
require the Company's Directors and executive officers to file reports of
their ownership and changes in ownership of Common Stock with the Commission.
Personnel of the Company generally prepare these reports on the basis of
information obtained from each Director and executive officer. Based on such
information, the Company believes that all reports required by Section 16(a)
of the Exchange Act to be filed by its Directors and executive officers
during the last fiscal year were filed on time.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company is managed by the Advisor under the terms of an Advisory
Agreement, which was renewable annually and is subject to the overall
approval of the Board of Directors, a majority of whom are independent of the
Advisor. During 1999 the Company paid the Advisor, as an Advisory fee, an
annualized fee of 0.5% of the book value of its real estate assets before
depreciation. The fee was calculated and paid at the end of each fiscal
quarter of the Company, based on the real estate assets at the end of such
quarter. The Advisory fee paid to the Advisor during the year ended December
31, 1999, is stated in the table below.
The Company pays all expenses of its operations except for the following,
which are borne by the Advisor: (i) employment expenses of the Company's
Chairman, President, Senior Vice President, Chief Financial Officer,
Secretary and of the Company's Directors who are also officers of the
Advisor, (ii) office expenses of the Advisor, and (iii) overhead expenses of
the Advisor not properly attributable to the performance of its duties and
obligations under the Advisory Agreement.
The Advisor and its parent company, Franklin Resources, Inc, are
co-defendants in lawsuits brought against the Company described in Item 3 -
"Legal Proceedings" above and in the Notes to the Financial Statements.
All of the Company's properties were managed by Continental Property
Management Co. ("CPMC"), an affiliate of the Advisor. The Company pays a
property management fee, leasing commission and construction supervision fee
to CPMC based on actual services performed. The fees paid to CPMC do not
include any fees or expenses paid to on-site property managers or leasing
commissions paid to third parties, both of which are borne by the Company.
The CPMC property management agreement has been terminated as a result of the
closing of the Asset Sale. Commencing January 1, 2000, the Company amended
the Advisory Agreement to replace the asset management fee with a stated fee
of $50,000 for the quarter ended March 31, 2000 and $35,000 per quarter
thereafter. The fees are payable on the first day of each quarter. In
connection with the additional services rendered by the Advisor related to
the development and consideration of strategic alternatives and the
negotiation and consummation of the Asset Sale, the Board of Directors also
approved an additional advisory fee of $160,000.
For the years ended December 31, 1999, 1998 and 1997, the Company paid or
accrued the following amounts for the services and reimbursements noted above:
In thousands 1999 1998 1997
------------------------------
Related Party expense:
Advisory fee $833 $753 $766
Reimbursement for data
processing, accounting 47 84 61
and certain other expenses
Property management fee 549 622 627
------------------------------
$1,429 $1,459 $1,454
In thousands 1999 1998 1997
------------------------------
Leasing commissions, capitalized
and amortized $177 $217 $196
over the term of the related
lease
Construction supervision fee,
capitalized and
amortized over the life of the $51 $80 $31
related investment
or the term of the related
lease, as applicable
The Company's Board of Directors (including all of its Independent Directors)
have determined that the compensation paid to the Advisor and to CPMC is fair
and reasonable to the Company.
David P. Goss, Mark A. TenBoer and Richard S. Barone, who are officers of the
Company, are also officers of the Advisor.
Barry C. L. Fernald and Larry D. Russel were Directors of the Company from
1996 until September 9, 1999 when they resigned from the Board. Family
trusts of which Mr. Fernald and Mr. Russel were settlors and beneficiaries
were also limited partners of FSRT L.P. FFRE Acquisitions, LLC, which is the
assignee of the former limited partners and owns 1,625,000 shares of Series A
common stock, is owned in part by family trusts or other entities of which
Mr. Fernald and Mr. Russel are settlors and/or beneficiaries. These shares
were issued on February 10, 2000 in exchange for the limited partnership
units of FSRT L.P. held by FFRE Acquisitions, LLC.
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)1. The financial statements of the Company included in Item 8 of this
report are listed on the index on page 18.
2. The supplemental financial statement schedule of the Company included
in Item 8 of this report is found on page 32.
3. 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, (5)
L.P., 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 (5)
Company, 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 (5)
the 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)
10.9 Purchase Agreement dated as of October 12, 1999, by and among the
Company, FSRT, L.P., the limited partners of FSRT L.P., and Value
Enhancement Fund III, LLC. (8)
10.10 Purchase of Conversion Rights Agreement dated as of October 12, 1999
between the Company and the limited partners of FSRT, L.P. (8)
21.1* Subsidiaries of the Company.
27.1* Financial data schedule
* Filed herewith.
FOOTNOTES
(1) Documents were filed in the Company's Form 10-Q for the quarter ended
March 31, 1999 and are incorporated herein by reference.
(2) 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.
(3) Documents were filed in the Company's Form 10-K for the year ended
December 31, 1998, and are incorporated herein by reference.
(4) Documents were filed in the Company's Form 10-K for the year ended
December 31, 1994, and are incorporated herein by reference.
(5) Documents were filed in the Company's Form 8-K, dated October 31, 1996,
and are incorporated herein by reference.
(6) Documents were filed in the Company's Form 10-K, for the year ended
December 31, 1996, and are incorporated herein by reference.
(7) Documents were filed in the Company's Form 10-Q for the quarter June 30,
1999 and are incorporated herein by reference.
(8) Documents were filed in the Company's Form 8-K dated October 12, 1999,
and are incorporated herein by reference.
(b) Reports filed on Form 8-K
During the quarter ended December 31, 1999, the Company filed reports
on Form 8K as follows:
(i) On October 25, 1999, the Company filed a report dated October 12,
1999, (date of earliest event reported). This report contained
information about the sale of its remaining properties.
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
FRANKLIN SELECT REALTY TRUST
(Company)
Date: MARCH 28, 2000 By: S/DAVID P. GOSS
------------------------------ --------------------------
David P. Goss
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Company, and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
s/David P. Goss Chief Executive Officer, March 28, 2000
- ---------------------------- and Director ----------------
David P. Goss
s/Lloyd D. Hanford, Jr. Director 1 March 28, 2000
- ---------------------------- ----------------
Lloyd D. Hanford, Jr.
s/Egon H. Kraus Director 1 March 28, 2000
- ---------------------------- ----------------
Egon H. Kraus
s/Frank W. T. LaHaye Director 1 March 28, 2000
- ---------------------------- ----------------
Frank W. T. LaHaye
s/E. Samuel Wheeler Director 1 March 28, 2000
- ---------------------------- ----------------
E. Samuel Wheeler
1 Independent Director
Exhibit 21.1
Subsidiaries of Franklin Select Realty Trust
SUBSIDIARY NAME STATE OF NAME UNDER WHICH SUBSIDIARY IS
ORGANIZATION DOING BUSINESS
FSRT L.P. Delaware FSRT L.P.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
REGISTRANT'S FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 14,316
<SECURITIES> 286
<RECEIVABLES> 5,924
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 20,526
<PP&E> 135,229
<DEPRECIATION> 24,709
<TOTAL-ASSETS> 131,046
<CURRENT-LIABILITIES> 32,682
<BONDS> 0
0
0
<COMMON> 109,455
<OTHER-SE> (20,187)
<TOTAL-LIABILITY-AND-EQUITY> 131,046
<SALES> 0
<TOTAL-REVENUES> 16,654
<CGS> 0
<TOTAL-COSTS> 15,231
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,333
<INCOME-PRETAX> 662
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
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<EXTRAORDINARY> 0
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<NET-INCOME> 662
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