SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2000
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-12708
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FRANKLIN SELECT REALTY TRUST
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(Exact name of registrant as specified in its charter)
CALIFORNIA 94-3095938
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer
Identification No.)
P. O. BOX 7777, SAN MATEO, CALIFORNIA 94403-7777
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (650) 312-2000
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N/A
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Former name, former address and former fiscal year, if changed since last
report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Common Stock Shares Outstanding as of June 30, 2000, Series A: 13,875,368
Common Stock Shares Outstanding as of June 30, 2000, Series B: 745,584
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FRANKLIN SELECT REALTY TRUST
UNAUDITED BALANCE SHEET AS OF JUNE 30, 2000 AND
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1999
JUNE 30, December
(In thousands, except per share amounts) 2000 31, 1999
- ---------------------------------------------------------------------
LIQUIDATION Going
BASIS concern
basis
ASSETS
Real Estate
Property held-for-sale, net of accumulated
depreciation of $24,709 as of $ - $110,520
December 31, 1999
Cash and cash equivalents 14,300 14,316
Mortgage-backed securities, available-for-sale 260 286
Deferred rent receivable - 1,692
Other assets 3,286 4,232
===================
Total assets $17,846 $131,046
===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Debt $ - $26,312
Reserve for litigation 50 2,100
Distributions payable 259 1,793
Other liabilities 720 2,477
-------------------
Total liabilities 1,029 32,682
-------------------
Minority interest - 9,096
-------------------
Commitments and contingencies (Notes 5-8) - -
Stockholders' equity:
Common stock, Series A, without par value;
stated value $10 per
share; 50,000 shares authorized; 13,875 and 121,439 103,161
12,250 issued
and outstanding at June 30, 2000 and
December 31, 1999, respectively
Common stock, Series B, without par value;
stated value $10 per share; 1,000 shares - 6,294
authorized; 746 issued and outstanding
Accumulated other comprehensive loss (40) (33)
Accumulated distributions in excess of net (104,582) (20,154)
income
-------------------
Total stockholders' equity 16,817 89,268
===================
Total liabilities and stockholders' $ 17,846 $131,046
equity
===================
The accompanying notes are an integral part of these financial statements.
FRANKLIN SELECT REALTY TRUST
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30,1999
(Unaudited)
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, June 30, JUNE 30, June 30,
(In thousands, except per share 2000 1999 2000 1999
amounts)
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LIQUIDATION Going LIQUIDATION Going
BASIS concern BASIS concern
basis basis
REVENUE:
Rent $ - $3,611 $1,990 $7,480
Interest, dividends and other - 248 1,388 501
-----------------------------------
Total revenue - 3,859 3,378 7,981
-----------------------------------
EXPENSES:
Property operating - 911 427 1,717
Interest - 591 180 1,184
Related party - 307 238 620
Depreciation and amortization - 950 338 1,875
General and administrative - 361 2,063 902
-----------------------------------
Total expenses - 3,120 3,246 6,298
-----------------------------------
Operating income before gain on sale
Of property and minority interest - 739 132 1,683
Gain on sale of property - - 14,093 -
-----------------------------------
Operating income before minority - 739 14,225 1,683
interest
Minority interest - 195 - 372
===================================
NET INCOME $ - $544 $14,225 $1,311
===================================
Unrealized loss on mortgage-backed (6) (106) (7) (12)
securities
===================================
COMPREHENSIVE INCOME $ (6) $438 $14,218 $1,299
===================================
Weighted average shares outstanding of
Series A common stock outstanding 13,875 12,250 13,518 12,250
Net income per share based on weighted
average shares outstanding $ - $.04 $1.05 $.11
===================================
Distributions per share, based on the
actual shares outstanding of Series A
common stock of 13,664 and 12,250 on
the distribution dates in the periods $ - $.12 $7.22 $.24
ended June 30, 2000 and 1999,
respectively
===================================
The accompanying notes are an integral part of these financial statements.
FRANKLIN SELECT REALTY TRUST
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30,1999
(Unaudited)
(In thousands) 2000 1999
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LIQUIDATION Going
BASIS concern
basis
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $14,225 $1,311
----------------
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization 338 1,937
Gain on sale of property (14,093) -
Minority interest - 372
Increase in deferred rent receivable - (3)
Decrease in other assets 829 369
Litigation settlements (2,050) -
(Decrease) increase in tenant deposits, accounts
payable (705) 149
and other liabilities
----------------
(15,681) 2,824
----------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (1,456) 4,135
----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of real estate 104,540 -
Improvements to real estate (83) (343)
Cash in escrow (2,630) -
Collection of notes receivable - 7,700
Net sale (purchase) of mortgage-backed securities 19 (5,256)
Leasing commissions paid and other (3) (427)
----------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 101,843 1,674
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CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes and bonds payable - (201)
Payment of loan costs - (31)
Distributions paid to limited partners (371)
(216)
Distributions paid to stockholders (100,187)(2,855)
----------------
NET CASH USED IN FINANCING ACTIVITIES (100,403)(3,458)
----------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (16) 2,351
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 14,316 1,256
----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $14,300 $3,607
================
SUPPLEMENTAL NON-CASH ACTIVITY
Debt assumed or paid off by Value Enhancement
in connection with the Asset Sale
described in Note 2 $26,312 $ -
The accompanying notes are an integral part of these financial statements.
FRANKLIN SELECT REALTY TRUST
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000
Unaudited
NOTE 1 - DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
The accompanying unaudited interim financial statements of Franklin Select
Realty Trust (the "Company") included herein have been prepared in accordance
with the instructions to Form 10-Q pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. In the opinion of management, all
appropriate adjustments necessary to a fair presentation of the results of
operations have been made for the periods shown.
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.
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 de-listed the Company's shares effective
March 13, 2000.
The Company will continue to wind up its affairs pursuant to the plan of
liquidation. It is expected that shareholders of record holding Series A
common stock will also receive a final liquidating distribution before the
end of 2000, subject to final court approval of settlements of pending
litigation and the release of certain amounts held in escrow to secure
limited representations and warranties made by the Company to Value
Enhancement in connection with the Asset Sale. See Note 6 and the Risk
Factors Relating to the Asset sale and Dissolution Plan in Management's
Discussion and Analysis of Financial Condition and Results of Operations
below. It is not expected that the shareholders of record of the Series B
common stock will receive a distribution.
The financial statements for the periods ended June 30, 2000 have been
prepared on a liquidation basis. No adjustment has been made to the prior
period financial statements, which were prepared on a going concern basis, as
was appropriate at the time that they were presented. The going concern basis
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. Liquidation basis accounting requires
management to estimate and record the value of all transactions anticipated
up until the date of liquidation, including any adjustments relating to the
recoverability and classification of assets and liabilities. The liquidation
basis of accounting is only used when it is reasonably certain that a
business will terminate.
These financial statements should be read in conjunction with the Company's
audited financial statements as of and for the year ended December 31, 1999.
NOTE 2 - REAL ESTATE SALES
The Asset Sale to Value Enhancement closed on February 10, 2000. The Asset
Sale included all real estate directly owned by the Company together with the
interests of the Company in FSRT, L.P. The aggregate base purchase price for
properties with a net book value of $110,317,000 was $131,500,000, reduced
by $26,312,000 for existing debt, which was assumed by the Value Enhancement.
A gain of $14,093,000 was recorded on the Asset Sale. The net proceeds of
approximately $104,540,000 were paid to the Company in cash.
NOTE 3 - CASH AND CASH EQUIVALENTS
Cash and cash equivalents of $14,300,000 and $14,316,000 at June 30, 2000 and
December 31, 1999, respectively, primarily consisted of mortgage-backed
securities and U.S. Government Treasury Bills valued at amortized cost.
Cash equivalents are defined as investments with original maturities of 90
days or less.
NOTE 4 - RELATED PARTY AGREEMENTS
The property management agreement with a related party has been terminated as
a result of the closing of the Asset Sale. Effective January 1, 2000, the
Company amended its advisory agreement with the Advisor to replace the asset
management fee with a fixed quarterly fee of $50,000 for the quarter ended
March 31, 2000 and $35,000 per quarter thereafter. Estimated future quarterly
advisory fees through December 31, 2000 of $70,000 have been accrued as of
June 30, 2000. During the quarter ended June 30, 2000 the Company paid
Supplemental fees of $168,000 to the Advisor in connection with certain
liquidation costs. Of these supplemental fees, $160,000 was accrued as of
December 31, 1999.
NOTE 5 - OTHER ASSETS
Included in Other assets as of June 30, 2000 is $2,630,000 that related to
amounts deposited in escrow to secure certain limited representations and
warranties made by the Company to Value Enhancement with respect to the Asset
Sale. No claims have yet been made against these funds and although no
assurance can be given, management expects the full amount to be released
from escrow in November 2000.
NOTE 6 - LITIGATION
The Company has been involved in shareholder litigation that 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 Company and the defendants have entered into written settlement
agreements 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 requires 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. In the Hodge Lawsuit, the court certified a class
for settlement purposes and approved the mailing of the notice, which was
sent to class members. A fairness hearing was held on June 19, 2000. There
were no objectors to the settlement, and no valid opt-outs. On June 19,
2000, the court approved the settlement of the Hodge lawsuit. That
settlement has now been funded, and unless an appeal is filed, the settlement
will become final on August 21, 2000, when the time for filing an appeal has
run.
In the Vigneau Lawsuit the court certified two classes for settlement
purposes, approved the mailing of the notice, which was sent to class
members, and a fairness hearing was held on July 25, 2000. There were no
objectors to the settlement, and no valid opt-outs. On July 25, 2000, the
court approved the settlement of the Vigneau lawsuit. That settlement has
now been funded, and unless an appeal is filed, the settlement will become
final on or after September 25, 2000, when the time for filing an appeal has
run. If consummated according to the agreements, future legal expenses and
the costs of settlement of the Hodge Lawsuit and the Vigneau Lawsuit have
been or 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 recorded a reserve
related to the shareholder litigation of $2,100,000 in the year ended
December 31, 1999, of which $2,050,000 was paid in the quarter ended June 30,
2000.
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.
NOTE 7 - DISTRIBUTIONS PAYABLE
Distributions payable at June 30, 2000 represented amounts accrued based on
cumulative distributions declared to date on shares of the Company's Series A
common stock that remain unconverted by stockholders of FREIF and Advantage
with respect to the Company's merger with FRIEF and Advantage in May 1996.
NOTE 8 - LIQUIDATION ACCOUNTING ADJUSTMENTS
In accordance with the liquidation basis of accounting, certain adjustments
were made to the financial statements upon adoption of the liquidation basis
during first quarter of 2000. These adjustments represent management's
estimate of the expenses that will be incurred up to the date of the expected
liquidation of the Company. No assurance can be given that the final costs
will be in accordance with these estimates. Included in Other assets as of
June 30, 2000, is $553,000 relating to accrued interest income from the
Company's Cash and cash equivalents and Mortgage-backed securities through
December 2000. The following is a summary of the accruals included within
Other liabilities relating to liquidation events outstanding as of June 30,
2000:
UTILIZED
BALANCE AT QUARTER BALANCE AT
AMOUNTS IN MARCH 31, END JUNE JUNE 30,
THOUSANDS 2000 30, 2000 2000
Liquidation
adjustments
Insurance $ 991 $ (991) $ -
Legal 650 (225) 425
Related party 338 (260) 78
Property related 101 - 101
Accounting fees 53 (5) 48
Other 90 (22) 68
===============================
Total liquidation
expense adjustments $2,223 $(1,503) $720
===============================
NOTE 9 - MINORITY INTEREST IN FSRT, L.P.
In connection with the formation of FSRT, L.P., the limited partners of FSRT,
L.P. were granted rights to convert their limited partner interests into
shares of the Company's Series A common stock. On February 10, 2000, the
limited partner converted its limited partner interests into 1,625,000 shares
of Series A common stock. Following this conversion, FSRT, L.P is
wholly-owned by the Company.
FRANKLIN SELECT REALTY TRUST
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
The following discussion should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in the Company's 1999 Form 10-K.
As described in Note 2 to the financial statements, the Company sold its real
estate properties on February 10, 2000, in accordance with a vote of
shareholders on January 25, 2000. The Company is now expected to be
liquidated by the end of fiscal 2000. As a result, the Company has adopted
liquidation basis accounting, which requires the accrual of all expected
costs and revenues to the date of the liquidation.
When used in the following discussion, the words "believes," "intends,"
"expects," "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 "Risk Factors Relating to the Asset Sale and the Dissolution
Plan," below. Readers are cautioned not to place undue reliance on these
forward-looking statements that speak only as of the date hereof. The
Company undertakes no obligation to publicly release any revisions to these
forward-looking statements that may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE- AND SIX-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999
The financial statements for the periods ended June 30, 2000 were prepared
using the liquidation basis of accounting which differs from the going
concern basis of accounting used to prepare the financial statements for the
periods ended June 30, 1999. See Note 1 to the accompanying financial
statements. Accordingly, the Company did not earn revenues or incur expenses
during the three months ended June 30, 2000, since all costs and expected
revenues to liquidate the Company were estimated in the first quarter of
2000, and were reflected in the Company's results for the quarter ended March
31, 2000. See Note 8 to the accompanying financial statements.
Total revenue for the three- and six-month periods ended June 30, 2000
decreased $3,859,000 and $4,603,000, respectively, when compared to the same
periods a year ago. Rental revenue in the period ended June 30, 2000 was
earned in the period between January 1, 2000 and February 10, 2000, the date
of the Asset Sale. Investment income in the six-month period ended June 30,
2000 represents anticipated revenues to the date of expected final
liquidation in December 2000.
Total expenses for the three- and six-month periods ended June 30, 2000
decreased $3,120,000 and $3,052,000, respectively, when compared to the same
periods a year ago. Property operating, Interest and Depreciation costs in
the current year were incurred during the period January 1, 2000 to February
10, 2000. Related party and General and administrative expenses for the
six-month period represent the amounts that the Company is expected to incur
during the liquidation phase.
General and administrative expenses for the three-month and six-month periods
ended June 30, 2000, decreased $361,000 and $564,000, respectively, when
compared to the same periods a year ago. This decrease was primarily due to
the sale of the Company's remaining properties, and anticipated liquidation,
as discussed in Note 8 to the financial statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents were $14,300,000 at June 30, 2000 as
compared to $14,316,000 at December 31, 1999. Substantially all of these
funds were invested in mortgage-backed and U.S. Treasury securities with
original maturities of 90 days or less.
During the six months ended June 30, 2000, the Company received net proceeds
from the Asset Sale of $104,540,000 and paid distributions to stockholders of
$100,187,000, including the initial distribution of approximately
$98,654,000 or $7.11 per share of Series A common stock outstanding. It is
expected that stockholders of record holding Series A common stock will also
receive a final liquidating distribution before the end of the calendar year.
This final distribution is subject to final court approval of settlements of
pending litigation and expiration of the limited representations and
warranties described in Risk Factors Relating to the Asset Sale and the
Dissolution Plan, below. It is not expected that any interim or quarterly
distribution will be declared or paid before the final liquidating
distribution.
RISK FACTORS RELATING TO THE ASSET SALE AND THE DISSOLUTION PLAN
LIQUIDATION OF THE COMPANY
The Company has sold all of its remaining properties and is now in its
liquidation phase. Hereafter, the Company will continue to wind up its
affairs pursuant to the Plan of Liquidation, as approved by shareholders on
January 25, 2000. 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. Those revenues and expenses have been estimated and accrued in these
financial statements, but there can be no assurance that the final costs will
be in accordance with those estimates.
LITIGATION
The Company is currently involved in shareholder litigation as described in
Note 6 to the accompanying financial statements. The Company and the
defendants have entered into written settlement agreements 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 requires 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.
In the Hodge Lawsuit, the court certified a class for settlement purposes and
approved the mailing of the notice, which was sent to class members. A
fairness hearing was held on June 19, 2000. There were no objectors to the
settlement, and no valid opt-outs. On June 19, 2000, the court approved the
settlement of the Hodge lawsuit. That settlement has now been funded, and
unless an appeal is filed, the settlement will become final on August 21,
2000, when the time for filing an appeal has run. In the Vigneau Lawsuit, the
court certified two classes for settlement purposes, approved the mailing of
the notice, which was sent to class members, and a fairness hearing was held
on July 25, 2000. There were no objectors to the settlement, and no valid
opt-outs. On July 25, 2000, the court approved the settlement of the Vigneau
lawsuit. That settlement has now been funded, and unless an appeal is filed,
the settlement will become final on September 25, 2000, when the time for
filing an appeal has run. If consummated according to the agreements, future
legal expenses and the costs of settlement of 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 recorded a reserve related
to the shareholder litigation of $2,100,000 in the year ended December 31,
1999, of which $2,050,000 was paid in the quarter ended June 30, 2000. If the
settlement efforts are not successful in the year ending December 31, 2000,
costs of litigation and possible settlement could be substantially more than
has been recorded in the financial statements as of June 30, 2000.
REPRESENTATIONS AND WARRANTIES RELATED TO THE ASSET SALE
As required by the Purchase Agreement, the Company has placed $2,630,000 of
the Asset 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 on November 10, 2000, including
interest income. To date, Value Enhancement has not made a claim against the
Company. However, no assurances can be given that Value Enhancement will not
make a claim during the liquidation phase.
FRANKLIN SELECT REALTY TRUST
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company has been involved in shareholder litigation that 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 Company and the defendants have entered into written settlement
agreements 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 requires 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. In the Hodge Lawsuit, the court certified a class
for settlement purposes and approved the mailing of the notice, which was
sent to class members. A fairness hearing was held on June 19, 2000. There
were no objectors to the settlement, and no valid opt-outs. On June 19,
2000, the court approved the settlement of the Hodge lawsuit. That
settlement has now been funded, and unless an appeal is filed, the settlement
will become final on August 21, 2000, when the time for filing an appeal has
run.
In the Vigneau Lawsuit the court certified two classes for settlement
purposes, approved the mailing of the notice, which was sent to class
members, and a fairness hearing was held on July 25, 2000. There were no
objectors to the settlement, and no valid opt-outs. On July 25, 2000, the
court approved the settlement of the Vigneau lawsuit. That settlement has
now been funded, and unless an appeal is filed, the settlement will become
final on September 25, 2000, when the time for filing an appeal has run. If
consummated according to the agreements, future legal expenses and the costs
of settlement of the Hodge Lawsuit and the Vigneau Lawsuit have been or 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 recorded a reserve related
to the shareholder litigation of $2,100,000 in the year ended December 31,
1999, of which $2,050,000 was paid in the quarter ended June 30, 2000.
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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
NO. LIST OF EXHIBITS FOOTNOTE
3.1 Amended and Restated Articles of Incorporation (1)
3.2 Second Amended and Restated Bylaws of Franklin Select Realty Trust (2)
10.1 Amended and Restated Advisory Agreement (3)
10.2 Property Management Agreement (4)
10.3 Agreement of Limited Partnership of FSRT, L.P. between
the Company and (5)
Northport Associates No. 18, a California limited liability company,
dated as October 30, 1996.
10.4 Contribution Agreement, dated as of October 30, 1996, between FSRT,
L.P., (5)
the Company, Northport Associates No. 18, a California limited
liability company, and the members of Northport Associates No. 18.
10.5 Exchange Rights Agreement, dated as of October 30, 1996, among the
Company, (5)
FSRT L.P., and Northport Associates No. 18, a California limited
liability company.
10.6 Registration Rights Agreement, dated as of October 30, 1996, among the
Company and Northport Associates No. 18, a California limited
liability company. (5)
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)
10.11 Amended and Restated Advisory Agreement. (9)
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.
(9) Documents were filed in the Company's Form 10-Q for the quarter ended
March 31, 2000 and are incorporated herein by reference.
(b) Reports filed on Form 8-K
During the quarter ended June 30, 2000, the Company did not file any
reports on Form 8K.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FRANKLIN SELECT REALTY TRUST
By: /S/ DAVID P. GOSS
David P. Goss
Chief Executive Officer
Date: AUGUST 11, 2000