-----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, RlarhPevlxqQary7nr/FXrKSi4H2Xgm1FPuYiJQXFHeggCQQXCD+nUpjQIfsUe16 yc0dtEAv0b6vHT3HoyldNQ== 0000845613-99-000006.txt : 19990513 0000845613-99-000006.hdr.sgml : 19990513 ACCESSION NUMBER: 0000845613-99-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990512 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: 99618637 BUSINESS ADDRESS: STREET 1: 2000 ALAMEDA DE LAS PULGAS CITY: SAN MATEO STATE: CA ZIP: 94404 BUSINESS PHONE: 6503123000 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, 1999 ------------------------------------------------- OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to -------------------------------------------------- Commission file number 1-12708 -------------------------------------------------------- Franklin Select Realty Trust - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) California 94-3095938 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) 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, 1999, Series A: 12,250,372 Common Stock Shares Outstanding as of March 31, 1999, Series B: 745,584 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS FRANKLIN SELECT REALTY TRUST CONSOLIDATED BALANCE SHEETS (UNAUDITED) MARCH 31, December (In thousands, except per share amounts) 1999 31, 1998 ----------------------------------------------------------------------- ASSETS Real Estate Rental property: Land $34,054 $34,054 Buildings and improvements 100,317 100,241 ----------------------- 134,371 134,295 Less: accumulated depreciation 22,172 21,341 ----------------------- Real estate, net 112,199 112,954 Cash and cash equivalents 3,378 1,256 Mortgage-backed securities, available for sale 13,973 7,700 Notes receivable - 7,700 Deferred rent receivable 1,533 1,543 Deferred costs and other assets 2,727 2,739 ======================= Total assets $133,810 $133,892 ======================= LIABILITIES AND STOCKHOLDERS' EQUITY Notes and bonds payable $26,663 $26,762 Tenant deposits, accounts payable and accrued 2,410 1,807 expenses Distributions payable 1,684 1,641 ----------------------- Total liabilities 30,757 30,210 ----------------------- Minority interest 9,161 9,181 ----------------------- Commitments and contingencies - - Stockholders' equity: Common stock, Series A, without par value; stated value $10 per share; 50,000 shares 103,161 103,161 authorized; 12,250 issued and outstanding Common stock, Series B, without par value; stated value $10 per share; 1,000 shares 6,294 6,294 authorized; 746 issued and outstanding Accumulated other comprehensive income 76 (18) Accumulated distributions in excess of net (15,639) (14,936) income ----------------------- Total stockholders' equity 93,892 94,501 ======================= Total liabilities and stockholders' equity $133,810 $133,892 ======================= The accompanying notes are an integral part of these consolidated financial statements. FRANKLIN SELECT REALTY TRUST CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (Unaudited) (in thousands except per share amounts) 1999 1998 - ------------------------------------------------------------------------ REVENUE: Ren Rent $3,869 $4,533 Interest, dividends and other 253 60 ------------------------ Total revenue 4,122 4,593 ------------------------ EXPENSES: Property operating 806 909 Interest 593 853 Related party 313 376 Depreciation and amortization 925 993 General and administrative 541 271 ------------------------ Total expenses 3,178 3,402 ------------------------ Operating income before minority interest 944 1,191 and sale of property Gain on sale of property - 170 ------------------------ Operating income before minority interest 944 1,361 Minority interest 177 161 ======================== NET INCOME $767 $1,200 ======================== Unrealized gain (loss) on mortgage-backed 95 (2) securities ======================== Comprehensive income $862 $1,198 ======================== Net income per share, based on the weighted average shares outstanding of Series A common stock of 12,250 for the three-month periods $.06 $.10 ended March 31, 1999 and 1998 ======================== Distributions per share, based on the weighted average shares outstanding of Series A common stock of 12,250 for the three-month periods $.12 $.12 ended March 31, 1999 and 1998 ======================== The accompanying notes are an integral part of these consolidated financial statements. FRANKLIN SELECT REALTY TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 Unaudited (In thousands) 1999 1998 - --------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: NET INCOME $767 $1,200 ------------------ Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 957 1,039 Gain on sale of property - (170) Minority interest 177 161 Decrease (increase) in deferred rent receivable 10 (13) Decrease (increase) in other assets 41 (252) Increase (decrease) in tenant deposits, accounts payable and other liabilities 483 (80) ------------------ 1,668 685 ------------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 2,435 1,885 ------------------ CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of real estate - 4,471 Improvements to real estate (76) (112) Leasing commissions paid (124) (54) Collection of notes receivable 7,700 - (Purchase) sale of mortgage-backed securities (6,179) 20 ------------------ NET CASH PROVIDED BY INVESTING ACTIVITIES 1,321 4,325 ------------------ CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of notes and bonds payable (99) (4,211) Payment of loan costs (31) - Distributions paid to limited partners (77) (161) Distributions paid to stockholders (1,427) (1,542) ------------------ NET CASH USED IN FINANCING ACTIVITIES (1,634) (5,914) ------------------ NET INCREASE IN CASH AND CASH EQUIVALENTS 2,122 296 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,256 3,821 ------------------ CASH AND CASH EQUIVALENTS, END OF PERIOD $3,378 $4,117 ================== The accompanying notes are an integral part of these consolidated financial statements. FRANKLIN SELECT REALTY TRUST Notes To Consolidated Financial Statements March 31, 1999 Unaudited NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited interim consolidated financial statements of Franklin Select Realty Trust (the "Company") included herein have been prepared in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all appropriate adjustments necessary to a fair presentation of the results of operations have been made for the periods shown. All adjustments are of a normal recurring nature. Certain prior year amounts have been reclassified to conform to current year presentations. These financial statements should be read in conjunction with the Company's audited financial statements as of and for the year ended December 31, 1998. NOTE 2 - NET INCOME PER SHARE In October 1997, 1,625,000 limited partnership units (the "FSRT Units") became eligible for exchange into a like number of Series A common shares in the Company in accordance with the partnership agreement of FSRT. None of the partnership units have been exchanged for common stock. The convertible partnership units are deemed anti-dilutive to net income and consequently there is no difference between basic and diluted net income per share. NOTE 3 - LITIGATION The Company is currently defending the former directors of Franklin Advantage Real Estate Income Fund ("Advantage") against a purported class action complaint filed in the California Superior Court for San Mateo County on December 2, 1996 by two stockholders for themselves and purportedly on behalf of certain other minority stockholders of Advantage. Other defendants currently include Franklin Resources, Inc. and the Company's advisor, Franklin Properties, Inc. The complaint alleges that defendants breached fiduciary duties to plaintiffs and other minority stockholders in connection with the purchase by Franklin Resources, Inc. in August 1994 of a 46.6% interest in Advantage and in connection with the Merger of Advantage into the Company in May 1996, which was approved by a majority of the outstanding shares of each of the three companies involved. Plaintiffs also allege that defendants misstated certain material facts or omitted to state material facts in connection with these transactions. The complaint includes a variety of additional claims, including claims relating to the investment of Advantage assets, the suspension of the dividend reinvestment program, the allocation of merger-related expenses, revisions to the investment policies of Advantage, and the restructuring of the contractual relationship with the Advisor. Plaintiffs seek damages in an unspecified amount and certain equitable relief. The defendants deny any wrongdoing in these matters and intend to vigorously defend the action. Discovery is continuing. On June 3, 1997, Herbert S. Hodge, Jr., on behalf of himself and certain other shareholders of Franklin Real Estate Income Fund ("FREIF"), filed an alleged class action complaint in the California Superior Court for San Mateo County against the Company, certain of its directors, the Company's advisor, Franklin Properties, Inc., Franklin Resources, Inc., and Bear Stearns Co., Inc. The complaint alleges that defendants breached fiduciary duties to plaintiff and certain other shareholders in connection with the merger of FREIF into Franklin Select Realty Trust in May 1996. Plaintiff also alleges that defendants misstated certain material facts or omitted to state material facts in connection with this transaction. Plaintiff seeks damages in an unspecified amount. The defendants deny any wrongdoing in these matters and intend to vigorously defend the action. Discovery is continuing. FRANKLIN SELECT REALTY TRUST Notes To Consolidated Financial Statements March 31, 1999 Unaudited NOTE 3 - LITIGATION (continued) While the outcome of litigation of these claims cannot be predicted with certainty, the Company's management does not believe that the outcome of litigation of these matters will have a material adverse effect on the Company's financial condition, results of operations or cash flows. NOTE 4 - SUBSEQUENT EVENT On April 21, 1999, the Company was notified that one property tenant, Tanon Manufacturing, Inc., elected to reject its lease under Chapter 11 of the United States Bankruptcy Code. The Company's rental income from this tenant was approximately $98,000 per month including operating expense reimbursements. The Company has commenced efforts to re-lease the property. FRANKLIN SELECT REALTY TRUST Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Introduction The following discussion should be read in conjunction with Management's Discussion and Analysis included in the Company's 1998 Form 10-K. When used in the following discussion, the words "believes," "anticipates" and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected, including, but not limited to, those set forth in the section entitled "Potential Factors Affecting Future Operating Results," below. Readers are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date hereof. The Company undertakes no obligation to publicly release any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Results of Operations Comparison of the three-month periods ended March 31, 1999 and 1998 Total revenue for the three-month period ended March 31, 1999 decreased $471,000, or 10%, compared to the same period a year ago primarily due to the sale of the following properties: Carmel Mountain Gateway Plaza in July 1998 and Mira Loma Retail Shopping Center and Glen Cove Shopping Center in November 1998. In addition, the Company's revenues were affected by the departure on January 31, 1999 of Data General Corporation who vacated 34,000 square feet. To date, the company has re-leased approximately 29,000 square feet of space under leases that will commence rental payments during the second and third quarters of 1999. Partially offsetting these factors, were increased revenues from the Shores, Northport and Hathaway buildings. Total expenses for the three-month period ended March 31, 1999 decreased $224,000, or 7%, when compared to the same period a year ago primarily as a result of the sales of properties referred to in the preceding paragraph. General and administrative expenses for the three-month period ended March 31, 1999 increased $270,000, or 100%, when compared to the same period a year ago primarily due to legal fees and expenses incurred with respect to the Company's evaluation of its strategic alternatives. Liquidity and Capital Resources At March 31, 1999, cash and cash equivalents aggregated $3,378,000. The Company believes this amount is adequate to meet its short-term operating cash requirements. The Company also holds $13,973,000 in mortgage-backed securities and has access to a revolving line of credit in the amount of $25 million, that was unused at March 31, 1999. On January 5, 1999, the Company collected the $7,700,000 note receivable that was outstanding at December 31, 1998 which the Company received from the sale of the Mira Loma and Glen Cove properties in 1998. Net cash provided by operating activities for the three-month period ended March 31,1999 was $2,435,000. The increase in this cash flow when compared to the same period in the prior year was primarily attributable to the increase in tenant deposits, accounts payable and other liabilities in the current quarter compared to a reduction in the same period last year. The changes in net cash provided by investing and financing activities during the three-month period ended March 31, 1999 was primarily the result of the collection of the $7,700,000 note receivable, the purchase of mortgage backed securities and distribution payments to shareholders during the period. FRANKLIN SELECT REALTY TRUST Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Liquidity and Capital Resources (Continued) The Special Committee of the Board of Directors is continuing its review of the strategic alternatives available to the Company. Management does not believe that the outcome of the litigation described in Note 3 to the accompanying financial statements will have a materially adverse effect on the Company's financial condition, results of operations, or cash flows. Management believes that the Company's sources of capital as described under Liquidity and Capital Resources are adequate to meet its liquidity needs in the foreseeable future. Impact of Inflation The Company's policy of negotiating leases which incorporate operating expense "pass-through" provisions is intended to protect the Company against increased operating costs resulting from inflation. Cash Distribution Policy Distributions are declared quarterly at the discretion of the Board of Directors. The Company's present distribution policy is to at least annually evaluate the current distribution rate in light of anticipated tenant turnover over the next two or three years, the estimated level of associated improvements and leasing commissions, planned capital expenditures, any debt service requirements and the Company's other working capital requirements. After balancing these considerations, and considering the Company's earnings and cash flow, the level of its liquid reserves and other relevant factors, the Company seeks to establish a distribution rate which: i) provides a stable distribution which is sustainable despite short-term fluctuations in property cash flows; ii) maximizes the amount of cash flow paid out as distributions consistent with the above listed objective; and iii) complies with the Internal Revenue Code requirement that a REIT annually pay out as distributions not less than 95% of its taxable income. During the three-month period ended March 31, 1999, the Company declared distributions related to the Series A common stock totaling $1,470,000. Funds from Operations The Company considers funds from operations to be a useful measure of the operating performance of an equity REIT because, together with net income and cash flows, funds from operations provides investors with an additional basis to evaluate the ability of a REIT to support general operating expense and interest expense before the impact of certain activities, such as gains and losses from property sales and changes in the accounts receivable and accounts payable. However, it does not measure whether income is sufficient to fund all of the Company's cash needs including principal amortization, capital improvements and distributions to stockholders. Funds from operations should not be considered an alternative to net income or any other GAAP measurement of performance, as an indicator of the Company's operating performance or as an alternative to cash flows from operating, investing or financing activities as a measure of liquidity. As defined by the National Association of Real Estate Investment Trusts, funds from operations is net income (computed in accordance with GAAP), excluding gains or losses from debt restructuring and sales of property, plus depreciation and amortization, and after adjustment for unconsolidated joint ventures. The Company reports funds from operations in accordance with the revised NAREIT definition. The measure of funds from operations as reported by the Company may not be comparable to similarly titled measures of other companies that follow different definitions. FRANKLIN SELECT REALTY TRUST Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Funds from Operations (Continued) For the Three Months Ended March 31, (In thousands) 1999 1998 - ------------------------------------------------------------------- Net income $767 $1,200 Add: Depreciation and amortization 925 993 Less: Gain on sale of property - (170) - ------------------------------------------------------------------- Funds from Operations $1,692 $2,023 =================================================================== The primary difference between the periods reflects the changes in net income as discussed under "Results of Operations". Potential Factors Affecting Future Operating Results Leasing Turnover In connection with any lease renewal or new lease, the Company typically incurs costs for tenant improvements and leasing commissions which will be funded first from operating cash flow and, if necessary, from cash reserves or existing credit facilities. In addition, while the Company has historically been successful in renewing and re-leasing space, the Company will be subject to the risk that leases expiring in the future may be renewed or re-leased at terms that are less favorable than current lease terms. Leasing Turnover - Tanon Manufacturing, Inc. On April 21, 1999, Tanon Manufacturing, Inc. ("TMI"), the sole tenant of a building (the "Property") located in Fremont, California owned by F.S.R.T.,L.P. ("FSRT"), a limited partnership in which the Company is the general partner and owner of a majority interest, notified the Company that TMI was rejecting its lease under Chapter 11 of the United States Bankruptcy Code. TMI filed a bankruptcy petition on December 3, 1998. The Company's rental income from TMI pursuant to the lease was approximately $98,000 per month, including operating expense reimbursements. The tenant has vacated the property and the Company has commenced to re-lease the space. Upon re-leasing the property, the Company is likely to incur costs for tenant improvements and leasing commissions but the amounts are unknown at this time. Leasing Turnover - Data General Building On January 31, 1999, the Data General Corporation vacated approximately 34,000 square feet of space at the Company's office building in Manhattan Beach, California. During 1998, the Company recorded rental income from the Data General lease that was equivalent to approximately $31.03 per square foot on a full service basis. As of this date, the Company has executed new leases for approximately 29,000 square feet of the space at an average annual starting rental rate of $25.50 per square foot. Rental income under these leases commence at various dates during the second and third quarters of the year. The Company will incur costs for tenant improvements and leasing commissions related to the leases totaling approximately $680,000 which will be paid in future periods. FRANKLIN SELECT REALTY TRUST Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Year 2000 The Company has evaluated whether its computer systems, including on-site and embedded systems, and those of third parties with whom the Company interacts will function properly by, at or during the year 2000. The Company has determined certain of its own systems are not currently year 2000 compliant. Management has a plan to replace or upgrade the systems within the next six months. The Company does not expect that the costs associated with these replacements or upgrades will have a materially adverse impact on its financial position, results of operations or cash flows in future periods. However, failure to successfully replace or upgrade these systems could result in material disruptions to its business. The Company is managed and advised by certain affiliates of Franklin Resources, Inc. It is reliant on these entities for its basic computer network and certain other applications. The Company is also reliant on a third-party transfer agent for maintaining its basic shareholder records. Management is monitoring the progress of these entities in achieving year 2000 compliance and does not currently anticipate a materially adverse impact on the Company's business. FRANKLIN SELECT REALTY TRUST PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits:
Exhibit No. List of Exhibits Footnote 3.1* Amended and Restated Articles of Incorporation 3.2 Second Amended and Restated Bylaws of Franklin Select Realty Trust (1) 10.1 Amended and Restated Advisory Agreement (2) 10.2 Property Management Agreement (3) 10.3 Agreement of Limited Partnership of FSRT, L.P. between the Company and (4) Northport Associates No. 18, a California limited liability company, dated as October 30, 1996. 10.4 Contribution Agreement, dated as of October 30, 1996, between FSRT, L.P., (4) the Company, Northport Associates No. 18, a California limited liability company, and the members of Northport Associates No. 18. 10.5 Exchange Rights Agreement, dated as of October 30, 1996, among the Company, (4) FSRT L.P., and Northport Associates No. 18, a California limited liability company. 10.6 Registration Rights Agreement, dated as of October 30, 1996, among the (4) Company and Northport Associates No. 18, a California limited liability company. 10.7 Secured line of credit loan agreement, dated December 10, 1996, by and between the Company and Bank of America. (5) * Filed herewith Footnotes (1) Documents were filed in the Company's Form S-4 Registration Statement, dated November 13, 1995, (Registration No. 033-64131), and are incorporated herein by reference. (2) Documents were filed in the Company's Form 10-K for the year ended December 31, 1998, and are incorporated herein by reference. (3) Documents were filed in the Company's Form 10-K for the year ended December 31, 1994, and are incorporated herein by reference. (4) Documents were filed in the Company's Form 8-K, dated October 31, 1996, and are incorporated herein by reference. (5) Documents were filed in the Company's Form 10-K for the year ended December 31, 1996, and are incorporated herein by reference. (b) Reports on Form 8-K - There were no reports on form 8-K filed during the quarter ended March 31, 1999.
SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FRANKLIN SELECT REALTY TRUST By: /s/ David P. Goss David P. Goss Chief Executive Officer Date: May 12, 1999 Exhibit 13.1 AMENDED AND RESTATED ARTICLES OF INCORPORATION OF FRANKLIN SELECT REALTY TRUST The undersigned, David P. Goss and Richard Barone, hereby certify that: ONE: They are the duly elected and acting President and Secretary, respectively, of FRANKLIN SELECT REALTY TRUST. TWO: The Articles of Incorporation of said corporation shall be amended and restated to read in their entirety as follows: ARTICLE I The name of this corporation is: FRANKLIN SELECT REALTY TRUST ARTICLE II The purpose of the corporation is to engage in any lawful act or activity for which a corporation may be organized under the California General Corporation Law other than the banking business, the trust corporation business, or the practice of a profession permitted to be incorporated by the California Corporations Code. ARTICLE III A. The corporation is authorized to issue one class of shares designated "Common Stock." The total number of shares of Common Stock which this corporation is authorized to issue is fifty-one million (51,000,000). This corporation is authorized to issue two Series of Common Stock, which shall be designated as Common Stock, Series A (the "Series A") and Common Stock, Series B (the "Series B"), respectively. This corporation is authorized to issue fifty million (50,000,000) shares of Series A and one million (1,000,000) shares of Series B. B. The rights, preferences, privileges and restrictions granted to or imposed upon the Series A and Series B are as follows: 1. DIVIDENDS. Subject to Subsection B.2. below, the holders of Series A shall be entitled to receive dividends when, as and if declared by the board of directors out of any assets at the time legally available therefor. No dividends shall be paid or other distributions made with respect to the Series B during any fiscal year of this corporation, other than distributions of Net Proceeds (as defined below) distributed in accordance with Subsection B.2. below and dividends payable solely in Series B. 2. PREFERRED RETURNS. (a) If proceeds from the sale, financing or refinancing of real property of the corporation, after payment by the corporation of expenses incurred in connection with such sale, financing or refinancing ("Net Proceeds"), are distributed to the holders of Common Stock, whether by dividend or otherwise, the holders of Series A shall be entitled to receive Net Proceeds up to a cumulative aggregate of $10 (ten dollars) per share (such amount, subject to adjustment as provided in paragraph (b) below, the "Series A Original Invested Capital") prior to any distribution of Net Proceeds to the holders of Series B. Thereafter, if Net Proceeds remain available after distribution of the Series A Original Invested Capital, then the holders of Series B shall be entitled to receive Net Proceeds up to a cumulative aggregate of $10 (ten dollars) per share (such amount, subject to adjustment as provided in paragraph (c) below, the "Series B Original Invested Capital"). Thereafter, if additional Net Proceeds are available for distribution to the holders of Common Stock, the holders of Series A shall be entitled to receive an amount equal to a 6% per annum cumulative (noncompounded) return on the Series A Adjusted Price Per Share, as calculated from time to time (and no more), prior to any further distributions of Net Proceeds to the holders of Series B. Thereafter, if additional Net Proceeds are available for distribution to the holders of Common Stock, the holders of Series B shall be entitled to receive an amount equal to a 6% per annum cumulative (noncompounded) return on the Series B Adjusted Price Per Share, as calculated from time to time (and no more), prior to any further distributions of Net Proceeds to the holders of Series A. Thereafter, if additional Net Proceeds are available for distribution to the holders of Common Stock, such Net Proceeds, after payment of incentive fees to the corporation's adviser plus any other liabilities, shall be distributed pro rata to the holders of Series A and Series B. The "Series A Adjusted Price Per Share" shall be the Series A Original Invested Capital less all distributions of Net Proceeds to the holders of Series A. The "Series B Adjusted Price Per Share" shall be the Series B Original Invested Capital less all distributions of Net Proceeds to the holders of Series B. (b) If the outstanding shares of Series A shall be subdivided (by stock split, stock dividend, reclassification or otherwise) into a greater number of shares of Series A, then, concurrently with the effectiveness of such subdivision, the Series A Original Invested Capital then in effect shall be proportionately decreased. If the outstanding shares of Series A shall be combined or consolidated, by reclassification or otherwise, into a lesser number of shares of Series A, then concurrently with the effectiveness of such combination or consolidation, the Series A Original Invested Capital then in effect shall be proportionately increased. (c) If the outstanding shares of Series B shall be subdivided (by stock split, stock dividend, reclassification or otherwise) into a greater number of shares of Series B, then, concurrently with the effectiveness of such subdivision, the Series B Original Invested Capital then in effect shall be proportionately decreased. If the outstanding shares of Series B shall be combined or consolidated, by reclassification or otherwise, into a lesser number of shares of Series B, then, concurrently with the effectiveness of such combination or consolidation, the Series B Original Invested Capital then in effect shall be proportionately increased. (d) Nothing contained in this Article III, Section B shall require the payment of dividends or other distributions of Net Proceeds to the holders of Common Stock; the purpose of this Section B is to set forth the relative priorities of Series A and Series B with respect to any dividends or other distributions of Net Proceeds that may be made. ARTICLE IV The board of directors of this corporation shall have the power to prevent the transfer of, or may call for redemption of, in a manner approved by the board of directors, a number of the shares of Series A sufficient in the opinion of the board of directors to maintain or bring the direct or indirect ownership of such shares of this corporation into conformity with the requirements for a Real Estate Investment Trust under the provisions of the Internal Revenue Code of 1986, as amended, and any successor statute (the "Code"). The redemption price shall be (i) the last reported sales price of the shares of Series A on the last business day prior to the redemption date on the principal national securities exchange on which the shares of Series A are listed or admitted to trading, (ii) if the shares of Series A are not so listed or admitted to trading, the average of the highest bid and lowest asked prices on such last business day as reported by the Nasdaq Stock Market or a similar organization selected by the board of directors for the purpose, or (iii) if no such independent quotations exist, as determined in good faith by the board of directors. The holders of any shares of Series A so called for redemption shall be entitled to payment of such redemption price within a reasonable time of the date fixed for redemption. From and after the date fixed for redemption by the board of directors, the holder of any shares of Series A so called for redemption shall cease to be entitled to dividends, distributions, voting rights and other benefits with respect to such shares of Series A, excepting only the right to payment of the redemption price fixed as described above. The board of directors may require, whenever it is deemed by them reasonably necessary to protect the tax status of this corporation, statements or affidavits from any holder of shares of Series A or proposed transferee of shares of Series A, setting forth the number of shares of Series A already owned by him and any related person specified in the form prescribed by the board of directors for that purpose. If, in the opinion of the board of directors, which shall be conclusive upon any proposed transferor or proposed transferee of shares of Series A, any proposed transfer would jeopardize the status of this corporation as a Real Estate Investment Trust under the Code, the board of directors may refuse to permit the transfer. Any attempted transfer as to which the board of directors have refused their permission shall be void and of no effect to transfer any legal or beneficial interest in the shares of Series A. All contracts for the sale or other transfer or exercise of shares of Series A shall be subject to this provision. ARTICLE V A. The liability of the directors of this corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. B. This corporation is authorized to provide indemnification of agents (as defined in Section 317 of the California Corporations Code) to the fullest extent permissible under California law through bylaw provisions, agreements with the agents, votes of shareholders or disinterested directors, or otherwise, in excess of the indemnification otherwise permitted by Section 317 of the California Corporations Code, subject only to applicable limits set forth in Section 204 of the California Corporations Code with respect to actions for breach of duty to the corporation and its shareholders. C. Any repeal or amendment of this Article V shall not adversely affect any right or protection afforded any agent of the corporation in effect at the time of the repeal or amendment. THREE: The foregoing amendment has been approved by the Board of Directors of said corporation. FOUR: The foregoing amendment was approved by the holders of the requisite number of shares of said corporation in accordance with Sections 902 and 903 of the California General Corporation Law and the corporation's bylaws; the total number of outstanding shares of each Series of Common Stock entitled to vote with respect to the foregoing amendment was 12,250,372 shares of Common Stock, Series A and 745,584 shares of Common Stock, Series B. The number of shares voting in favor of the foregoing amendment equaled or exceeded the vote required, such required vote being a majority of the outstanding shares of Common Stock, Series A and Common Stock, Series B, voting together as a single class. We further declare under penalty of perjury under the laws of the State of California that the matters set forth herein are true and correct of our own knowledge. IN WITNESS WHEREOF, the undersigned have executed this certificate on March 12, 1999. /s/ David P. Goss, President /s/ Richard Barone, Secretary -----END PRIVACY-ENHANCED MESSAGE-----