-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, P33mrx5o54AULOHUPy7GyUVQtsmQbOWurGnD15MWWGlouD5H065YxYa5EoJ9DDsH V6ZDSXU309Yp+NaovKg4BQ== 0000845613-98-000003.txt : 19980518 0000845613-98-000003.hdr.sgml : 19980518 ACCESSION NUMBER: 0000845613-98-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRANKLIN SELECT REALTY TRUST CENTRAL INDEX KEY: 0000845613 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 943095938 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-12708 FILM NUMBER: 98622028 BUSINESS ADDRESS: STREET 1: 1800 GATEWAY DR - STE 200 CITY: SAN MATEO STATE: CA ZIP: 94404 BUSINESS PHONE: 4153122000 MAIL ADDRESS: STREET 1: P O BOX 7777 CITY: SAN MATEO STATE: CA ZIP: 94403-7777 FORMER COMPANY: FORMER CONFORMED NAME: FRANKLIN SELECT REAL ESTATE INCOME FUND DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: FRANKLIN CALIFORNIA REAL ESTATE FUND DATE OF NAME CHANGE: 19890307 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) (x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended MARCH 31, 1998 -------------------------------------------------- OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from TO -------------------------------------------------- Commission file number 1-12708 --------------------------------------------------------- FRANKLIN SELECT REALTY TRUST - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) CALIFORNIA 94-3095938 - -------------------------------------------------------------------------------- (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) P. O. BOX 7777, SAN MATEO, CALIFORNIA 94403-7777 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (650) 312-2000 ------------------------- N/A - -------------------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Common Stock Shares Outstanding as of March 31, 1998, Series A: 12,250,373 Common Stock Shares Outstanding as of March 31, 1998, Series B: 745,584 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS FRANKLIN SELECT REALTY TRUST CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 1998 AND DECEMBER 31, 1997 Unaudited (In thousands, except per share amounts) 1998 1997 - ---------------------------------------------------------------------------- ASSETS Real Estate Rental property: Land $38,787 $38,787 Buildings and improvements 110,818 110,733 ------------------- 149,605 149,520 Less: accumulated depreciation 21,683 20,817 ------------------- 127,922 128,703 Rental property held for sale, net of accumulated 8,083 12,395 depreciation ------------------- Real estate, net 136,005 141,098 Cash and cash equivalents 4,117 3,821 Mortgage-backed securities, available for sale 479 501 Deferred rent receivable 1,876 1,863 Deferred costs and other assets 2,985 2,814 =================== Total assets $145,462 $150,097 =================== - ---------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Notes and bonds payable $38,276 $42,487 Tenant deposits, accounts payable and accrued expenses 1,329 1,391 Distributions payable 1,573 1.645 -------------------- Total liabilities 41,178 45,523 -------------------- Minority interest 9,240 9,258 -------------------- Commitments and contingencies - - Stockholders' equity: Common stock, Series A, without par value; stated value $10 per share; 110,000 shares authorized; 12,250 issued and outstanding 103,161 103,161 Common stock, Series B, without par value; stated value $10 per share; 2,500 shares authorized; 746 issued and outstanding 6,294 6,294 Accumulated other comprehensive income (30) (28) Accumulated distributions in excess of net income (14,381) (14,111) -------------------- Total stockholders' equity 95,044 95,316 ==================== Total liabilities and stockholders' equity $145,462 $150,097 ==================== The accompanying notes are an integral part of these consolidated financial statements. FRANKLIN SELECT REALTY TRUST CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (Unaudited) (In thousands, except per share amounts) 1998 1997 - --------------------------------------------------------------------- REVENUE: Rent $4,533 $4,096 Interest, dividends, and other 60 36 -------------------------- Total revenue 4,593 4,132 -------------------------- EXPENSES: Property operating 909 829 Interest 853 592 Related party 376 337 General and administrative 271 162 Depreciation and amortization 993 972 -------------------------- Total expenses 3,402 2,892 -------------------------- Operating income before gain on sale of property and minority interest 1,191 1,240 Gain on sale of property 170 - -------------------------- Operating income before minority 1,361 1,240 interest Minority interest 161 161 -------------------------- NET INCOME $1,200 $1,079 ========================== Unrealized loss on mortgage-backed (2) (2) securities ========================== Total comprehensive income $1,198 $1,077 ========================== Net income per share, based on the weighted average shares outstanding of Series A common stock of 12,250 for the three-month periods ended March $ .10 $ .09 31, 1998 and 1997 ========================== Distributions per share, based on the weighted average shares outstanding of Series A common stock of 12,250 for the three-month periods ended March $ .12 $ .11 31, 1998 and 1997 ========================== The accompanying notes are an integral part of these consolidated financial statements. FRANKLIN SELECT REALTY TRUST CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 Unaudited (In thousands) 1998 1997 - ----------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: NET INCOME $1,200 $1,079 ----------------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,039 1,013 Gain on sale of property (170) - Minority interest 161 161 (Increase) decrease in deferred rent receivable (13) 11 Increase in other assets (252) (268) (Decrease) increase in accounts payable, accrued expenses and other liabilities (80) 26 ----------------- 685 943 ----------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 1,885 2,022 ----------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of real estate 4,471 - Improvements to real estate (112) (60) Leasing commissions paid (54) (81) Disposition of mortgage-backed securities 20 11 ----------------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 4,325 (130) ----------------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings under notes and bonds payable - 2,478 Repayment of notes and bonds payable (4,211) (2,402) Payment of loan costs - (3) Distributions paid to limited partners (161) (119) Distributions paid to stockholders (1,542) (1,248) ----------------- NET CASH USED IN FINANCING ACTIVITIES (5,914) (1,294) ----------------- NET INCREASE IN CASH AND CASH EQUIVALENTS 296 598 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,821 2,558 ----------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $4,117 $3,156 ================= The accompanying notes are an integral part of these consolidated financial statements. FRANKLIN SELECT REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1998 Unaudited NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited interim consolidated financial statements of Franklin Select Realty Trust (the "Company") included herein have been prepared in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all appropriate adjustments necessary to a fair presentation of the results of operations have been made for the periods shown. All adjustments are of a normal recurring nature. Certain prior year amounts have been reclassified to conform to current year presentations. These financial statements should be read in conjunction with the Company's audited financial statements for the year ended December 31, 1997. NOTE 2 - NET INCOME PER SHARE The Company has adopted Statement of Financial Accounting Standard No. 128, "Earnings per share" ("FAS 128"). FAS 128 requires that the Company retroactively restate prior period earnings per share ("EPS") data. The impact on the previously reported EPS is not material. In October 1997, 1,625,000 limited partnership units (the "FSRT Units") became eligible for exchange into a like number of Series A common shares in the Company in accordance with the partnership agreement of FSRT. None of the partnership units have been exchanged for common stock. The convertible partnership units are deemed anti-dilutive according to the terms of FAS 128 and consequently there is no difference between basic and diluted earnings per share. NOTE 3 - SALE OF REAL ESTATE On January 21, 1998, the Company sold a 12.5-acre parcel of undeveloped land that was acquired in June 1997. Net proceeds of $4,471,000 were received and of that amount approximately $4,100,000 was applied to the outstanding balance of the Company's line of credit and the remainder was retained by the Company. NOTE 4 - LITIGATION The Company is currently defending the former directors of Franklin Advantage Real Estate Income Fund ("Advantage") against a purported class action 0complaint filed in the California Superior Court for San Mateo on December 2, 1996 by two stockholders for themselves and purportedly on behalf of certain other minority stockholders of Advantage. Other defendants to the complaint currently include Franklin Resources, Inc. and the Company's advisor, Franklin Properties, Inc. The complaint alleges that defendants breached fiduciary duties to plaintiffs and other minority stockholders in connection with the purchase by Franklin Resources, Inc. in August 1994 of a 46.6% interest in Advantage and in connection with the Merger of Advantage into the Company in May 1996, which was approved by a majority of the outstanding shares of each of the three companies. Plaintiffs also allege that defendants misstated certain material facts or omitted to state material facts in connection with these transactions. FRANKLIN SELECT REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1997 Unaudited The complaint includes a variety of additional claims, including claims relating to the investment of Advantage assets, the suspension of the dividend reinvestment program, the allocation of merger-related expenses, revisions to the investment policies of Advantage, and the restructuring of the contractual relationship with the Advisor. Plaintiffs seek damages in an unspecified amount and certain equitable relief. The defendants deny any wrongdoing in these matters and intend to vigorously defend the action. As a result of the pleadings filed by the various defendants, the plaintiffs have filed an amended complaint to address the court's response to such filings. Defendants are challenging the legal sufficiency of certain aspects of the complaint. Document production by the defendants is currently in progress. On June 3, 1997, Herbert S. Hodge, Jr., on behalf of himself and certain other shareholders of Franklin Real Estate Income Fund ("FREIF"), filed an alleged class action complaint in the California Superior Court for San Mateo County against the Company, certain of its directors, the Company's advisor, Franklin Properties, Inc., Franklin Resources, Inc., and Bear Stearns Co., Inc. The complaint alleges that defendants breached fiduciary duties to plaintiff and certain other shareholders in connection with the merger of FREIF into Franklin Select Realty Trust in May 1996. Plaintiff also alleges that defendants misstated certain material facts or omitted to state material facts in connection with this transaction. Plaintiff seeks damages in an unspecified amount. The defendants deny any wrongdoing in these matters and intend to vigorously defend the action. Plaintiff has filed an amended complaint, to which defendants will respond in May 1998. Document production by the defendants is currently in progress. Management does not believe that the outcome of these matters will have a material adverse effect on the Company's financial condition, results of operations or cash flows. NOTE 5 - STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS The Company has adopted Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("FAS 130"). FAS 130 establishes the disclosure requirements for reporting comprehensive income in an entity's annual and interim financial statements and became effective for the Company in the current fiscal year. Comprehensive income includes unrealized gains and losses on securities previously reported by the Company as a component of stockholders' equity. The Company is now required to show comprehensive income in a financial statement and display the accumulated balance of other comprehensive income separately in the equity section of the consolidated balance sheet. FRANKLIN SELECT REALTY TRUST ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION The following discussion is based primarily on the consolidated financial statements of the Company for the period ended March 31, 1998. The information should be read in conjunction with the accompanying consolidated financial statements and the notes thereto. 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. RESULTS OF OPERATIONS COMPARISON OF THE THREE-MONTH PERIODS ENDED MARCH 31, 1998 AND 1997 Total revenue for the three-month period ended March 31, 1998 increased $461,000, or 11% compared to the same period in 1997, primarily due to rental revenue provided by the Tanon Building and the Hathaway Building which were acquired in April 1997 and November 1997, respectively. The rental revenue from buildings owned during both periods decreased slightly (1%) as a result of lower rent from a lease renewed in November 1997 and from a temporary decline in occupancy at the Data General building. Total expenses for the three-month period ended March 31, 1998, increased $510,000, or 18%, when compared to the same period in 1997. The increase for the period reported was primarily as a result of increases in interest, general and administrative and property operating expenses related to property acquisitions. General and administrative expenses for the three-month period ended March 31, 1998, increased $109,000, or 67% compared to the same period in 1997 primarily as a result of legal expenses incurred with respect to the actions that are described in Note 4 to the accompanying financial statements. The increase in net income for the three-month period under review was primarily due to changes in revenues and expenses described above and also the gain recorded on the sale of a parcel of undeveloped land in January 1998. LIQUIDITY AND CAPITAL RESOURCES At March 31, 1998, cash and cash equivalents aggregated $4,117,000. The Company believes this amount is adequate to meet its short-term operating cash requirements. The Company also holds $479,000 in mortgage-backed securities and has access to a revolving line of credit in the amount of $25 million, of which $17.9 remains available as at March 31, 1998. At March 31, 1998, the outstanding balance under the Company's credit facility was $7.1 million. Borrowings under the line of credit bear interest at the London Interbank Offered Rate plus 1.90%, or at Bank of America's Reference rate at the Company's option. At March 31, 1998, the weighted average interest rate of borrowings under the line of credit was 7.8%. FRANKLIN SELECT REALTY TRUST ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) LIQUIDITY AND CAPITAL RESOURCES (Continued) Management continues to evaluate properties for acquisition by the Company. The Company expects to fund the cost of acquisitions, capital expenditures, costs associated with lease renewals and reletting of space, repayment of indebtedness, and development of properties from (i) cash flow from operations, (ii) borrowings under its credit facility and, if available, other indebtedness (which may include indebtedness assumed in acquisitions), and (iii) the issuance of partnership interests in connection with acquisitions. The Company's operating cash flow has been its principal source of capital for minor property improvements, leasing costs and the payment of quarterly distributions. Net cash provided by operating activities for the three-month period ended March 31, 1998 was $1,885,000. The decrease in cash flow provided by operating activities is attributable to the changes in revenues and expenses as explained previously, and also to a decline in the level of accounts payable compared to 1997. The changes in net cash provided by investing and financing activities principally resulted from the sale of a parcel of undeveloped land in January 1998. Management does not believe that the outcome of the litigation described in Note 4 to the accompanying financial statements will have a material adverse affect on the Company's financial condition, results of operations, or cash flows. Management believes that the Company's sources of capital as described under Liquidity and Capital Resources are adequate to meet its liquidity needs in the foreseeable future. IMPACT OF INFLATION The Company's policy of negotiating leases which incorporate operating expense "pass-through" provisions is intended to protect the Company against increased operating costs resulting from inflation. CASH DISTRIBUTION POLICY Distributions are declared quarterly at the discretion of the Board of Directors. The Company's present distribution policy is to at least annually evaluate the current distribution rate in light of anticipated tenant turnover over the next two or three years, the estimated level of associated improvements and leasing commissions, planned capital expenditures, any debt service requirements and the Company's other working capital requirements. After balancing these considerations, and considering the Company's earnings and cash flow, the level of its liquid reserves and other relevant factors, the Company seeks to establish a distribution rate which: i) provides a stable distribution which is sustainable despite short-term fluctuations in property cash flows; ii) maximizes the amount of cash flow paid out as distributions consistent with the above listed objective; and iii) complies with the Internal Revenue Code requirement that a REIT annually pay out as distributions not less than 95% of its taxable income. During the three month period ended March 31, 1993, the Company declared distributions related to the Series A common stock totaling $1,470,000. FRANKLIN SELECT REALTY TRUST ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) LIQUIDITY AND CAPITAL RESOURCES (Continued) FUNDS FROM OPERATIONS The Company considers funds from operations to be a useful measure of the operating performance of an equity REIT because, together with net income and cash flows, funds from operations provides investors with an additional basis to evaluate the ability of a REIT to support general operating expense and interest expense before the impact of certain activities, such as gains and losses from property sales and changes in the accounts receivable and accounts payable. However, it does not measure whether income is sufficient to fund all of the Company's cash needs including principal amortization, capital improvements and distributions to stockholders. Funds from operations should not be considered an alternative to net income or any other GAAP measurement of performance, as an indicator of the Company's operating performance or as an alternative to cash flows from operating, investing or financing activities as a measure of liquidity. As defined by the National Association of Real Estate Investment Trusts, funds from operations is net income (computed in accordance with GAAP), excluding gains or losses from debt restructuring and sales of property, plus depreciation and amortization, and after adjustment for unconsolidated joint ventures. The Company reports funds from operations in accordance with the revised NAREIT definition. The measure of funds from operations as reported by the Company may not be comparable to similarly titled measures of other companies that follow different definitions. For the Three Months Ended March 31, (In thousands) 1998 1997 - ----------------------------------------------------------------- Net income $1,200 $1,079 Add: Depreciation and amortization 993 972 Less: Gain on sale of property (170) - - ----------------------------------------------------------------- Funds from Operations $2,023 $2,051 ================================================================= The primary difference between the periods reflects the changes in net income as discussed under "Results of Operations". POTENTIAL FACTORS AFFECTING FUTURE OPERATING RESULTS LEASING TURNOVER In connection with any lease renewal or new lease, the Company typically incurs costs for tenant improvements and leasing commissions which will be funded first from operating cash flow and, if necessary, from cash reserves or the line of credit. In addition, while the Company has historically been successful in renewing and releasing space, the Company will be subject to the risk that leases expiring in the future may be renewed or released at terms that are less favorable than current lease terms. LEASING TURNOVER - DATA GENERAL BUILDING Over the next twelve months, the Company's greatest leasing exposure consists of one lease at the Data General Building covering approximately 48,000 square feet, which expires in January 1999. The lease carries a triple net rental rate that is equivalent to approximately $28.00 per square foot on a full service basis. Compared to the estimated current market rate of approximately $20.10 per square foot, this lease provides over-market rent of approximately $380,000 annually, or 2% of the Company's current annual revenue based on annualizing the total revenue for the quarter ended March 31, 1998. It is not possible to predict the market rental rate in 1999; however, the Company expects that when this lease expires, the rental income related to this space will be less than $28.00 per square foot regardless of whether the lease is renewed or new leases are signed. The Company will also incur costs for tenant improvements and leasing commissions related to the renewal or re-leasing of the space, however, the amounts are unknown at this time. YEAR 2000 The Company is in the process of assessing the impact of Year 2000 issues on its computer systems and applications. At this time, management believes that the costs associated with resolving these issues will not have a material effect on the Company's financial statements. FRANKLIN SELECT REALTY TRUST PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Not applicable (b) Reports on Form 8-K - None . SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FRANKLIN SELECT REALTY TRUST By: /S/ DAVID P. GOSS David P. Goss Chief Executive Officer Date: MAY 14, 1998 EX-27 2
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM REGISTRANT'S FINANCIAL STATEMENTS FOR THE QUARTER ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1998 MAR-31-1998 4,117 479 4,861 0 0 9,457 157,688 21,683 145,462 2,902 38,276 0 0 103,161 (8,117) 145,462 0 4,763 0 2,493 0 0 909 1,200 0 0 0 0 0 1,200 0.10 0.10
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