SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant |X|
Filed by a Party Other than the Registrant |_|
Check the appropriate box:
|X| Preliminary Proxy Statement |_| Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
|_| Definitive Proxy Statement
|_| Definitive Additional Materials
|_| Soliciting Material under Rule 14a-12
Franklin Street Properties Corp.
(formerly known as Franklin Street Partners Limited Partnership)
(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
PAYMENT OF FILING FEE (CHECK THE APPROPRIATE BOX):
|_| No fee required.
|X| Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(i) Title of each class of securities to which transaction applies:
Common Stock, $0.0001 par value per share
(ii) Aggregate number of securities to which transaction applies:
25,000,091
(iii) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is
calculated and state how it was determined):
$14.75
(iv) Proposed maximum aggregate value of transaction:
$368,751,342
(v) Total fee paid:
$73,750*
|_| Fee paid previously with preliminary materials.
----------------------------------------------------
|_| Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
----------------------------------------------------
(4) Date Filed:
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* Franklin Street Properties Corp. previously paid the Commission
excess amounts for prior filings and therefore has an excess balance
of approximately $22,165. Franklin Street Properties Corp. hereby
allocates all such excess funds as partial payment of the
registration fee due hereunder.
FRANKLIN STREET PROPERTIES CORP.
401 Edgewater Place, Suite 200
Wakefield, Massachusetts 01880
(781) 557-1300
A Merger Proposal - Your Vote Is Very Important
Dear Stockholders of Franklin Street Properties Corp.:
The board of directors of Franklin Street Properties Corp. ("FSP Corp.")
has approved and adopted an agreement and plan of merger (the "Merger
Agreement") with 13 real estate investment trusts (the "Target REITs"),
providing for FSP Corp. to acquire the Target REITs by merger (the "Mergers").
We will hold a special meeting of stockholders at 401 Edgewater Place,
Suite 200, Wakefield, Massachusetts, the corporate offices of FSP Corp., on
Friday, March [28], 2003 at [9:00 a.m.], local time, at which we will ask you to
approve the Merger Agreement. You may vote either by attending the meeting or by
signing and returning the enclosed proxy card. If the Merger Agreement is
approved:
o The Target REITs will merge with and into FSP Corp., and
o FSP Corp. will issue an aggregate of approximately 25,000,091 shares
of common stock, $0.0001 par value per share (the "FSP Common
Stock"), to the holders of preferred stock ("Target Stock") of the
Target REITs (the "Target REIT Stockholders").
The following questions and answers are intended to help clarify the key
issues involved in the transactions contemplated by the Merger Agreement and the
Mergers. For your convenience, we have included page references parenthetically
to direct you to a more complete description of the topics found in the enclosed
Proxy Statement.
Q: Is the business of FSP Corp. changing?
A: No. The business of FSP Corp. immediately before the Mergers will be
the same as the business of FSP Corp. immediately after the Mergers.
FSP Corp.'s assets, however, are increasing. FSP Corp. will acquire
the real properties owned by the Target REITs. (See pages 61 to 65
of the enclosed Proxy Statement for additional information.)
Q: Will my proportional interest in FSP Corp. change?
A: Yes. You will incur substantial dilution to your voting power and
percentage ownership in FSP Corp. due to the number of shares of FSP
Common Stock being issued to the Target REIT Stockholders. Of
course, the Mergers will also substantially increase the assets
owned by FSP Corp. (See page 16 of the enclosed Proxy Statement for
additional information.)
Q: Will the directors and officers of FSP Corp. or their affiliates
receive any fees, commissions or other compensation in connection
with the Merger Agreement or the Mergers?
A: No. (See pages 43 and 44 of the enclosed Proxy Statement for
additional information.)
Q: How do I know if the price paid for the Target Stock is fair to me?
A: You should carefully read the information you have received in the
enclosed Proxy Statement and make your own determination. Your Board
of Directors believes the Mergers are fair to you and recommends you
vote in favor of them. The members of your Board of Directors have a
number of significant conflicts of interest regarding the Mergers;
however, they believe that they have not been affected by these
conflicts and that they have properly exercised their fiduciary duty
in recommending approval of the Mergers. (See pages 41 to 44 of the
enclosed Proxy Statement for additional information.)
Q: Will the investment objectives and policies of FSP Corp. change?
A: No. (See pages 63 and 64 of the enclosed Proxy Statement for
additional information.)
Q: Why does FSP Corp. propose to merge with the Target REITs?
A: FSP Corp. believes that the Mergers will provide several benefits to
FSP Corp. and the FSP Stockholders, including:
o FSP Corp.'s real estate portfolio following the Mergers will
be substantially larger and more diverse both geographically
and by tenant business, reducing the dependence of an
investment in FSP Corp. on the performance of a smaller group
of assets.
o FSP Corp.'s business will generate a greater percentage of its
revenues from rentals from real properties and a lesser
percentage from real estate investment banking/brokerage
activities, constituting a more stable income stream than that
currently received by FSP Corp.
o FSP Corp.'s larger portfolio of real estate may produce
economies of scale, increase its purchasing power relating to
goods and services and reduce the percentage that expenses
constitute of gross revenue.
o FSP Corp.'s increased asset base should give FSP Corp. the
flexibility to increase its $50,000,000 line of credit,
enabling FSP Corp. to finance the acquisition of real property
for itself or to provide larger loans to Sponsored Entities or
to finance their acquisition of real property.
o FSP Corp.'s larger portfolio of real properties and larger
equity capitalization should increase the likelihood that FSP
Corp. may eventually be able to provide liquidity for its
equity investors through the public markets.
(See pages 14 to 15 of the enclosed Proxy Statement for additional
information.)
Q: Will I receive any consideration in the Mergers?
A: No. However, if you are a Target REIT Stockholder as well as an FSP
Stockholder, you will receive FSP Common Stock (in addition to the
shares you currently own) for your Target Stock. (See pages 36 to 37
of the enclosed Proxy Statement for additional information.)
Q: How will FSP Corp. issue shares of FSP Common Stock to the Target
REIT Stockholders?
A: FSP Corp. will issue shares to the Target REIT Stockholders in
private placements under an exemption from registration under the
Securities Act pursuant to Section 4(2) and Rule 506 of Regulation
D. (See page 22 of the enclosed Proxy Statement for additional
information.)
Q: When do you expect to complete the Mergers?
A: We expect to complete the Mergers on or about April 1, 2003. (See
page 27 of the enclosed Proxy Statement for additional information.)
Q: Who must approve the Mergers?
A: In addition to the approvals of the board of directors of FSP Corp.
and the boards of directors of the Target REITs, which have already
been obtained, the FSP Stockholders and Target REIT Stockholders
must approve the Mergers. (See page 25 of the enclosed Proxy
Statement for additional information.)
Q: What do I need to do now?
A: FSP Corp. urges you to carefully read the enclosed Proxy Statement,
including its appendices, and to consider how the Mergers will
affect you as an FSP Stockholder.
Q: How do I vote?
A: You may indicate how you want to vote on your proxy card. You may
also attend the stockholder meeting and vote in person instead of
submitting a proxy. If you fail either to return your proxy card or
to vote in person at the stockholder meeting, or if you mark your
proxy "abstain," the effect will be a vote against the Mergers. If
you return your proxy card but fail to indicate your vote on your
proxy, your proxy will be counted as a vote for the Mergers. (See
pages 1 to 2 of the enclosed Proxy Statement for additional
information.)
Q: May I change my vote after I have mailed in my signed proxy card?
A: You may change your vote at any time before the vote takes place at
the stockholder meeting by either submitting a later dated proxy
card or sending a written notice stating that you would like to
revoke your proxy. In addition, you may attend the stockholder
meeting and vote in person. However, if you elect to vote in person
at the stockholder meeting and your shares are held by a bank or
other nominee, you must bring to the stockholder meeting a legal
proxy from the bank or other nominee authorizing you to vote the
shares. (See pages 1 to 2 of the enclosed Proxy Statement for
additional information.)
Q: Where and when is the special meeting?
A: The special meeting of FSP Stockholders will be held at 401
Edgewater Place, Suite 200, Wakefield, Massachusetts, the corporate
offices of FSP Corp., at [9:00 a.m.], local time, on Friday, March
[28], 2003. (See page 1 of the enclosed Proxy Statement for
additional information.)
Q: Whom may I contact with any additional questions?
A: You may call your investment executive at FSP Investments at (800)
950-6288.
After careful consideration, including the consideration of significant
conflicts of interest in connection with the Mergers, the FSP Corp. board of
directors unanimously approved and adopted the Merger Agreement and concluded
that the Merger Agreement is in the best interests of FSP Corp. and its
stockholders. The FSP Corp. board of directors unanimously recommends that you
vote "FOR" approval of the Merger Agreement.
Please carefully consider all of the information in this proxy statement
regarding FSP Corp., the Target REITs and the Mergers, including in particular
the discussion in the section called "Risk Factors" starting on page 13.
Very truly yours,
George J. Carter
President and Chief Executive
Officer
FRANKLIN STREET PROPERTIES CORP.
401 Edgewater Place, Suite 200
Wakefield, Massachusetts 01880
(781) 557-1300
Notice of Special Meeting of Stockholders to be Held
on Friday, March [28], 2003
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of Franklin
Street Properties Corp. ("FSP Corp.") will be held at 401 Edgewater Place, Suite
200, Wakefield, Massachusetts, the corporate offices of FSP Corp., on Friday,
March [28], 2003 at [9:00 a.m.], local time, to consider and act upon the
following matters:
(1) To approve the Agreement and Plan of Merger, dated as of January 14,
2003, by and among FSP Corp. and 13 real estate investment trusts
("Target REITs"), providing for (i) the acquisition by merger of
each of the Target REITs and (ii) the issuance of an aggregate of
approximately 25,000,091 shares of FSP Corp. Common Stock as
consideration in connection with the mergers.
(2) To transact such other business as may properly come before the
meeting or any adjournment thereof.
The Board of Directors of FSP Corp. currently has no knowledge of any
other business to be transacted at the meeting.
Stockholders of record at the close of business on ___________, _________
__, 2003 will be entitled to notice of and to vote at the meeting or any
adjournment thereof.
By Order of the Board of Directors of FSP Corp.,
Barbara J. Corinha, Secretary
Wakefield, Massachusetts
________ __, 2003
All stockholders are cordially invited to attend the meeting. To ensure
your representation at the meeting, you are urged to mark, sign and return the
enclosed proxy card in the accompanying envelope, whether or not you expect to
attend the meeting. No postage is required if the proxy is mailed in the United
States. Any stockholder attending the meeting may vote in person even if the
stockholder has returned a proxy.
YOUR VOTE IS IMPORTANT
TO VOTE YOUR SHARES, PLEASE SIGN, DATE AND COMPLETE
THE ENCLOSED PROXY CARD AND MAIL IT PROMPTLY IN THE
ENCLOSED RETURN ENVELOPE.
FRANKLIN STREET PROPERTIES CORP.
401 Edgewater Place, Suite 200
Wakefield, Massachusetts 01880
PROXY STATEMENT
For the Special Meeting of Stockholders on Friday, March [28], 2003
This Proxy Statement and Notice of Special Meeting are furnished in
connection with the solicitation of proxies by the Board of Directors (the "FSP
Board") of Franklin Street Properties Corp. ("FSP Corp.") for use at the Special
Meeting of Stockholders of FSP Corp. (the "Meeting"), in connection with the
solicitation of votes to approve that certain Agreement and Plan of Merger,
dated January 14, 2003 (the "Merger Agreement"). The Merger Agreement provides
for the acquisition by FSP Corp. by merger (the "Mergers") of 13 real estate
investment trusts (each, a "Target REIT" and, collectively, the "Target REITs").
The Target REITs are FSP Forest Park IV Corp. ("Forest Park"), FSP Gael
Apartments Corp. ("The Gael"), FSP Goldentop Technology Center Corp.
("Goldentop"), FSP Centennial Technology Center Corp. ("Centennial"), FSP Meadow
Point Corp. ("Meadow Point"), FSP Timberlake Corp. ("Timberlake"), FSP Federal
Way Corp. ("Federal Way"), FSP Fair Lakes Corp. ("Fair Lakes"), FSP Northwest
Point Corp. ("Northwest Point"), FSP Timberlake East Corp. ("Timberlake East"),
FSP Merrywood Apartments Corp. ("Merrywood"), FSP Plaza Ridge I Corp. ("Plaza
Ridge I") and FSP Park Ten Corp. ("Park Ten"), each a Delaware corporation. The
Merger Agreement also provides for the issuance of FSP Corp.'s shares of common
stock, $0.0001 par value per share (the "FSP Common Stock"), to the holders of
preferred stock ("Target Stock") of the Target REITs (the "Target REIT
Stockholders") as merger consideration.
The boards of directors of the Target REITs are referred to collectively
as the "Target Boards". FSP Corp., its subsidiaries and the Target REITs, after
giving effect to the consummation of the Mergers, are referred to as the
"Combined Company".
The Merger Agreement provides that upon consummation of the Mergers, each
share of Target Stock in the Target REITs will be converted into that number of
shares of FSP Common Stock set forth below opposite the name of the applicable
Target REIT. FSP Corp. will issue the shares of FSP Common Stock to the Target
REIT Stockholders in private placements, exempt from registration under Section
4(2) of the Securities Act of 1933, as amended (the "Securities Act"), and Rule
506 of Regulation D promulgated thereunder.
Shares of FSP Total Shares of FSP
Common Stock Common Stock
Total Number of Issuable in Exchange Issuable to Target
Shares of Target for Each Share of REIT
Target REIT Stock Outstanding Target Stock Stockholders
--------------- ----------------- -------------------- -------------------
Forest Park 78 7,299.59 569,368.02
The Gael 212.50 6,975.59 1,482,312.88
Goldentop 231.50 7,302.58 1,690,547.27
Centennial 158 6,905.56 1,091,078.48
Meadow Point 257.50 6,983.25 1,798,186.88
Timberlake 515 6,787.12 3,495,366.80
Federal Way 200 6,779.66 1,355,932.00
Fair Lakes 480 6,805.36 3,266,572.80
Northwest Point 372.50 6,779.66 2,525,423.35
Timberlake East 250 6,830.85 1,707,712.50
Merrywood 206 6,854.51 1,412,029.06
Plaza Ridge I 400 6,822.03 2,728,812.00
Park Ten 275 6,824.54 1,876,748.50
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Total 25,000,090.54
Consummation of the Mergers is subject to a number of conditions and will
not occur unless, among other things, holders of a majority of the shares of
Target Stock of each Target REIT vote to approve the Mergers.
The stockholders of FSP Corp. (the "FSP Stockholders") are being asked to
approve the Merger Agreement, providing for the Mergers and the issuance of FSP
Common Stock, as described in this Proxy Statement. The directors of FSP Corp.,
who have significant conflicts of interest in connection with the Mergers,
strongly recommend that you vote "FOR" the Merger Agreement set forth as
Appendix A hereto.
TABLE OF CONTENTS
PAGE
THE SPECIAL MEETING..........................................................1
General Information........................................................1
Solicitation of Proxies....................................................1
Voting Rights, Quorum Requirement and Votes Required.......................1
Revocability of Proxy and Voting of Shares.................................1
AVAILABLE INFORMATION........................................................2
FORWARD-LOOKING STATEMENTS...................................................2
SUMMARY......................................................................3
FSP Corp...................................................................3
The Target REITs...........................................................4
Votes Required.............................................................5
Recommendation to FSP Stockholders.........................................6
The Mergers................................................................6
Expected Benefits from the Mergers.........................................8
Fairness of the Mergers....................................................8
Third Party Opinions......................................................10
Conflicts of Interest.....................................................11
Dissenters' Rights of FSP Stockholders....................................11
Material United States Federal Income Tax Considerations..................11
Accounting Treatment......................................................12
Dividends in Respect of First Quarter 2003................................12
RISK FACTORS................................................................13
Risks Relating to the Mergers.............................................13
General Real Estate Investment Risks......................................17
THE MERGERS.................................................................22
Overview..................................................................22
The Parties...............................................................22
Effect of the Mergers on Certain FSP Stockholders.........................24
Votes Required............................................................25
Board Approvals...........................................................25
Accounting Treatment......................................................26
Interests of Certain Persons in the Mergers...............................26
Material United States Federal Income Tax Considerations..................27
Timing and Effectiveness of the Mergers...................................27
Comparison of Ownership Rights............................................27
Market Information........................................................27
Independent Accountants...................................................28
Expenses of the Mergers...................................................29
BACKGROUND AND REASONS FOR THE MERGERS......................................29
History of FSP Corp. and the Target REITs.................................29
Background of the Mergers.................................................31
Reasons for the Mergers...................................................33
Consequences if Mergers not Completed.....................................35
THE MERGER AGREEMENT........................................................36
The Mergers...............................................................36
Representations and Warranties............................................37
Covenants.................................................................38
Conduct of Business Pending the Effective Date............................38
Conditions Precedent to the Mergers.......................................38
Termination...............................................................40
Effect of Termination.....................................................40
FAIRNESS OF THE MERGERS.....................................................41
Conclusions of the FSP Board..............................................41
Determination of Merger Consideration.....................................41
Fairness of the Merger Consideration......................................41
ADVICE OF FINANCIAL ADVISORS AND APPRAISALS.................................44
Advice of A.G. Edwards....................................................44
Appraisals of the Target REITs' Properties................................45
Conclusions as to Value...................................................48
CONFLICTS OF INTEREST.......................................................49
Common Composition of Directors and Officers..............................49
Ownership of FSP Stock....................................................50
Consequences of Merger with Fair Lakes....................................50
SELECTED FINANCIAL INFORMATION OF FSP CORP..................................51
SELECTED PRO FORMA CONSOLIDATED FINANCIAL DATA..............................52
COMPARATIVE PER share/UNIT DATA.............................................59
DESCRIPTION OF FSP CORP.....................................................61
Business..................................................................61
Investment Objectives.....................................................63
Policies..................................................................64
Competition...............................................................64
Employees.................................................................65
Legal Proceedings.........................................................65
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS...............................................................66
Overview..................................................................66
Critical Accounting Policies..............................................68
Recent Accounting Standards...............................................70
Financing and Other Commitments...........................................71
Investments in Non-Consolidated Entities..................................72
Results of Operations.....................................................72
Trends and Uncertainties..................................................79
Liquidity and Capital Resources as of September 30, 2002..................81
Liquidity and Capital Resources as of December 31, 2001...................81
Liquidity and Capital Resources as of December 31, 2000...................82
Sources and Uses of Funds.................................................83
Related Party Transactions................................................84
DESCRIPTION OF FSP CORP. CAPITAL STOCK......................................85
General...................................................................85
FSP Common Stock..........................................................85
Preferred Stock...........................................................86
Ownership Limits..........................................................86
Unregistered Shares.......................................................87
Redemption................................................................87
Classification of the FSP Board...........................................88
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..................89
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE..................................................................90
BENEFICIAL OWNERSHIP OF VOTING STOCK........................................91
EXECUTIVE COMPENSATION......................................................93
Certain Relationships and Related Transactions............................95
Employment Agreements.....................................................97
Compensation of Directors.................................................97
DIRECTORS AND EXECUTIVE OFFICERS............................................98
NO DISSENTERS' APPRAISAL RIGHTS............................................100
BUSINESS AND PROPERTIES OF THE Target REITs................................101
SELECTED FINANCIAL INFORMATION FOR TARGET REITS............................111
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OF TARGET REITS............................................................119
Results of Operations....................................................119
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS...................127
LEGAL MATTERS..............................................................143
FINANCIAL STATEMENTS
FSP Corp. Nine months ended September 30, 2002.....................F-2
Year ended December 31, 2001.............................F-41
Year ended December 31, 2000.............................F-74
Forest Park Nine months ended September 30, 2002.....................F-95
Year ended December 31, 2001.............................F-101
Year ended December 31, 2000.............................F-110
Period from date of inception to December 31, 1999.......F-120
The Gael Nine months ended September 30, 2002.....................F-131
Year ended December 31, 2001.............................F-137
Period from date of inception to December 31, 2000.......F-146
Goldentop Nine months ended September 30, 2002.....................F-156
Year ended December 31, 2001.............................F-162
Period from date of inception to December 31, 2000.......F-171
Centennial Nine months ended September 30, 2002.....................F-181
Year ended December 31, 2001.............................F-187
Period from date of inception to December 31, 2000.......F-196
Meadow Point Nine months ended September 30, 2002.....................F-206
Period from date of inception to December 31, 2001.......F-213
Timberlake Nine months ended September 30, 2002.....................F-222
Period from date of inception to December 31, 2001.......F-228
Federal Way Nine months ended September 30, 2002.....................F-237
Period from date of inception to December 31, 2001.......F-243
Fair Lakes Nine months ended September 30, 2002.....................F-252
Period from date of inception to December 31, 2001.......F-258
Northwest Point Nine months ended September 30, 2002.....................F-267
Period from date of inception to December 31, 2001.......F-273
Timberlake East Nine months ended September 30, 2002.....................F-283
Merrywood Nine months ended September 30, 2002.....................F-292
Plaza Ridge I Nine months ended September 30, 2002.....................F-301
Park Ten Nine months ended September 30, 2002.....................F-310
APPENDICES
Appendix A Merger Agreement
Appendix B Glossary of Terms
Appendix C A.G. Edwards Report
Appendix D Valuation Overview
THE SPECIAL MEETING
General Information
This Proxy Statement and Notice of Special Meeting of Stockholders are
furnished in connection with the solicitation of proxies by the FSP Board for
use at the Meeting to be held at 401 Edgewater Place, Suite 200, Wakefield,
Massachusetts, the corporate offices of FSP Corp., on Friday, March [28], 2003
at [9:00 a.m.], local time, or at any adjournments of the Meeting, for the
purposes set forth in this Proxy Statement and the foregoing Notice of Special
Meeting of FSP Stockholders. This Proxy Statement and accompanying proxy card
are being mailed on or about _____ ___, 2003 to all FSP Stockholders entitled to
notice of and to vote at the Meeting. The principal executive offices of FSP
Corp. are located at 401 Edgewater Place, Suite 200, Wakefield, Massachusetts
01880, and FSP Corp.'s telephone number is (781) 557-1300.
Solicitation of Proxies
All costs of solicitation of proxies will be borne by FSP Corp. In
addition to solicitations by mail, FSP Corp.'s directors, officers and
employees, without additional remuneration, may solicit proxies by telephone,
telegraph and personal interviews, and FSP Corp. reserves the right to retain
outside agencies for the purpose of soliciting proxies. Brokers, custodians and
fiduciaries will be requested to forward proxy soliciting material to the owners
of stock held in their names, and, as required by law, FSP Corp. will reimburse
them for their out-of-pocket expenses in this regard.
Voting Rights, Quorum Requirement and Votes Required
At the close of business on ____ __, 2003, the record date for the
determination of stockholders entitled to notice of and to vote at the Meeting,
there were outstanding and entitled to vote an aggregate of 24,630,247 shares of
FSP Common Stock, constituting all of the outstanding voting stock of FSP Corp.
Holders of FSP Common Stock are entitled to one vote per share. Under FSP
Corp.'s charter and by-laws, the presence, in person or by proxy, of the holders
of a majority of the outstanding shares of FSP Common Stock is necessary to
constitute a quorum at the Meeting. Votes withheld, abstentions and broker
non-votes (where a broker or nominee does not exercise discretionary authority
to vote on a matter) are counted for purposes of determining the presence or
absence of a quorum for the transaction of business. Abstentions and broker
non-votes are not counted, however, for purposes of tabulating the votes cast.
The affirmative vote of the holders of a majority of the shares of FSP Common
Stock present in person or represented by proxy and voting at the Meeting is
required to approve the matter scheduled to be voted on at the Meeting. If you
fail either to return your proxy card or to vote in person at the shareholder
meeting, or if you mark your proxy "abstain," the effect will be a vote against
the Mergers.
Revocability of Proxy and Voting of Shares
Any FSP Stockholder giving a proxy has the power to revoke it at any time
before it is exercised. It may be revoked by filing with the Secretary of FSP
Corp., at the principal executive offices of FSP Corp., 401 Edgewater Place,
1
Suite 200, Wakefield, Massachusetts 01880, an instrument of revocation or a duly
executed proxy bearing a later date. It may also be revoked by attendance at the
Meeting and an election given to the Secretary of FSP Corp. to vote in person.
If not revoked, the proxy will be voted at the Meeting in accordance with the
FSP Stockholder's instructions indicated on the proxy card. If the proxy card is
returned but no instructions are indicated, the proxy will be voted FOR the
approval of the Merger Agreement scheduled to be voted on at the Meeting and in
accordance with the judgment of the proxies as to any other matter that may be
properly brought before the Meeting or any adjournments thereof.
AVAILABLE INFORMATION
FSP Corp. is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports and other information with the Securities and Exchange
Commission (the "Commission"). The reports and other information so filed by FSP
Corp. can be inspected and copied at the public reference facilities maintained
by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of
such material can be obtained by mail from the Public Reference Section of the
Commission at 450 West Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. Such reports and other information may also be obtained from the web site
that the Commission maintains at http://www.sec.gov.
Reports and other information concerning FSP Corp. may also be obtained
electronically through a variety of databases, including, among others, the
Commission's Electronic Data Gathering and Retrieval ("EDGAR") program,
Knight-Ridder Information Inc., Federal Filing/Dow Jones and Lexis/Nexis.
FORWARD-LOOKING STATEMENTS
This Proxy Statement contains forward-looking statements. In some cases
you can identify these statements by forward-looking words such as "anticipate,"
"believe," "could," "estimate," "expect," "intend," "may," "should," "will," and
"would" or similar words. You should read statements that contain these words
carefully because they discuss future expectations, contain projections of
future results of operations or of financial position or state other
"forward-looking" information. Forward-looking statements are inherently subject
to risks and uncertainties, many of which cannot be predicted with accuracy and
some of which might not even be anticipated. Future events and actual results,
financial and otherwise, may differ materially from the expectations discussed
in the forward-looking statements. Important factors that might cause such a
difference include, but are not limited to, those discussed under the caption
"Risk Factors" starting on page 13. Accordingly, there can be no assurance that
the actual results will conform to the forward-looking statements contained in
this Proxy Statement. You should be aware that the occurrence of the events
described in these risk factors and elsewhere in this Proxy Statement could have
an adverse effect on the business, results of operations and financial condition
of FSP Corp.
Any forward-looking statements in this Proxy Statement are not guarantees
of future performance, and actual results, developments and business decisions
may differ from those envisaged by such forward-looking statements, possibly
materially. FSP Corp. disclaims any duty to update any forward-looking
statements, all of which are expressly qualified by the statements in this
section.
2
SUMMARY
This Summary highlights selected information from this document and may
not contain all of the information that is important to you. To understand the
proposal presented in this Proxy Statement with respect to the approval of the
Merger Agreement, providing for the Mergers and the issuance of shares of FSP
Common Stock, you should read carefully the entire document. For your
convenience, a glossary of terms is included in Appendix B to this Proxy
Statement. We have included page references parenthetically to direct you to a
more complete description of the topics of the summary.
FSP Corp. (Pages 61 to 65)
FSP Corp. is a Maryland corporation that operates in a manner intended to
qualify as a real estate investment trust for federal income tax purposes. It is
the successor to Franklin Street Partners Limited Partnership, a Massachusetts
limited partnership (the "FSP Partnership"). The FSP Partnership was originally
formed as a Massachusetts general partnership in January 1997 as the successor
to a Massachusetts general partnership that was formed in 1981 and was
subsequently formed as a Massachusetts limited partnership in February 1997. On
January 1, 2002, the FSP Partnership merged with and into FSP Corp., which was a
wholly owned subsidiary of the FSP Partnership, with FSP Corp. being the
surviving entity (the "Conversion"). Pursuant to the Conversion, the FSP
Partnership ceased to exist, FSP Corp. succeeded to the business of the FSP
Partnership and each unit of both general and limited partnership interests in
the FSP Partnership was converted into one share of FSP Common Stock. As a
result of the Conversion, FSP Corp. now holds, directly and indirectly, 100% of
the interest in three former subsidiaries of the FSP Partnership: FSP
Investments LLC, a Massachusetts limited liability company ("FSP Investments"),
FSP Property Management LLC, a Massachusetts limited liability company ("FSP
Property Management"), and FSP Holdings LLC, a Delaware limited liability
company ("FSP Holdings").
FSP Investments acts as a real estate investment firm and broker/dealer
with respect to (a) the organization of investment vehicles which are typically
syndicated through private placements exempt from registration under the
Securities Act ("Sponsored Entities"), some of which were limited partnerships
(the "Sponsored Partnerships") and some of which are corporations intended to
qualify for federal income tax purposes as real estate investment trusts,
including the Target REITs (the "Sponsored REITs"), (b) the acquisition of real
estate by the Sponsored Entities and (c) the sale of equity interests in the
Sponsored Entities. FSP Investments derives revenue from commissions received in
connection with the sale of equity interests in the Sponsored Entities. FSP
Investments also derives revenue from fees paid by the Sponsored Entities for
the services of FSP Investments in identifying, inspecting and negotiating to
purchase real properties on behalf of the Sponsored Entities. FSP Investments is
a registered broker/dealer with the Commission and is a member of the National
Association of Securities Dealers, Inc. FSP Corp. has made an election to treat
FSP Investments as a "taxable REIT subsidiary" for federal income tax purposes.
3
FSP Property Management asset manages each Sponsored Entity and provides
property management services or property accounting services to eight Sponsored
Entities. FSP Property Management receives fee income from those Sponsored
Entities that have not been acquired by FSP Corp. FSP Property Management does
not receive any rental income.
FSP Holdings acts as the general partner of each Sponsored Partnership.
FSP Corp.'s principal executive offices are located at 401 Edgewater
Place, Suite 200, Wakefield, Massachusetts 01880, and its telephone number is
(781) 557-1300. FSP Corp. leases its executive offices.
The Target REITs (Pages 101 to 110)
Each Target REIT is a privately-held real estate investment trust formed
as a corporation under the laws of the State of Delaware for the purpose of
acquiring and operating a single real property. Forest Park holds an office
building in Charlotte, North Carolina; The Gael holds an apartment complex in
Houston, Texas; Goldentop holds a research and development/office building in
San Diego, California; Centennial holds "flex" office buildings in Colorado
Springs, Colorado; Meadow Point holds an office building in Chantilly, Virginia;
Timberlake holds office buildings in Chesterfield, Missouri; Federal Way holds
office buildings in Federal Way, Washington; Fair Lakes holds an office building
in Fairfax, Virginia; Northwest Point holds an office building in Elk Grove
Village, Illinois; Timberlake East holds an office building in Chesterfield,
Missouri; Merrywood holds an apartment complex in Katy, Texas; Plaza Ridge I
holds an office building in Herndon, Virginia; and Park Ten holds an office
building in Houston, Texas. Set forth below for the properties owned by the
respective Target REITs are the number of square feet in the property, the
percentage of rentable square feet leased as of September 30, 2002 and the
weighted average annual rent per net rentable square foot for the nine-month
period ended September 30, 2002:
Weighted Annual
Average Rent/Net
Percentage of Rentable Square
Rentable Square Rentable Foot for Nine
Feet Leased as Square Months Ended
of 9/30/02 Feet 9/30/02
---------- ---- -------
Forest Park 87% 61,291 $13.85/sf
The Gael 94% 187,338 $14.19/sf
Goldentop 100% 141,405 $16.96/sf
Centennial 100% 110,730 $16.46/sf
Meadow Point 100% 134,849 $27.51/sf
Timberlake 100% 232,722 $25.91/sf
Federal Way 100% 117,227 $14.52/sf
Fair Lakes 100% 210,993 $30.97/sf
Northwest Point 100% 176,848 $30.56/sf
Timberlake East 92% 116,361 $25.56/sf
Merrywood 95% 231,363 $11.62/sf
Plaza Ridge I 100% 158,018 $32.40/sf
Park Ten 100% 155,715 $22.86/sf
4
Votes Required (Page 25)
The affirmative vote of the holders of a majority of the shares of FSP
Common Stock present in person or represented by proxy and voting at the Meeting
is required to approve the Merger Agreement, providing for the Mergers and the
issuance of FSP Common Stock in exchange for Target Stock.
The affirmative vote of the holders of a majority of the Target Stock in
each of the Target REITs is also required to effectuate the respective Merger.
Each Target REIT will solicit the vote of its Target REIT Stockholders
separately.
Consummation of the Mergers is subject to a number of conditions and will
not occur unless, among other things, holders of a majority of the shares of
Target Stock of each Target REIT vote to approve the Mergers.
The executive officers and directors of FSP Corp. hold an aggregate of
3,707,977.01 shares of FSP Common Stock. The executive officers and directors
have indicated that they intend to vote all of their respective shares in favor
of the Merger Agreement.
Barry Silverstein and Dennis J. McGillicuddy, each a director of FSP
Corp., own an aggregate of 601.25 and 229 shares of Target Stock, respectively.
Such shares of Target Stock will convert into 4,130,961.11 and 1,586,343.29
shares of FSP Common Stock, respectively, upon consummation of the Mergers.
Messrs. Silverstein and McGillicuddy have indicated that they intend to vote
their respective shares of Target Stock in favor of the Merger Agreement.
5
Recommendation to FSP Stockholders (Pages 25 to 26)
The FSP Board, whose members have significant conflicts of interest in
connection with the Mergers, believes that the Merger Agreement, providing for
the Mergers and the issuance of FSP Common Stock in exchange for Target Stock,
is in the best interest of FSP Corp. and the FSP Stockholders and recommends you
vote FOR approval of the Merger Agreement.
The Mergers (Pages 22 to 29)
Overview. As a result of inquiries from members of the FSP Board, the
management of FSP Corp. in late July 2002 instructed Hale and Dorr LLP to
explore the feasibility of the acquisition of the Target REITs. After reaching
an agreement on a methodology to value the proposed transaction, receiving a
report from a third party as to the reasonableness of such methodology and
reaching agreement on the amount of Merger Consideration to be paid and the
terms of the Mergers, the FSP Board and the Target Boards voted to approve the
Merger Agreement and the Mergers and recommend to the FSP Stockholders and the
Target REIT Stockholders to vote to approve the Mergers.
The Mergers. With respect to each Target REIT, following the satisfaction
or waiver of the conditions to closing relating to that Target REIT, on the
effective date of the Mergers (the "Effective Date"), which is expected to be on
or about April 1, 2003, each Target REIT will be acquired by merger. Each share
of Target Stock of that Target REIT will be converted into a specified number of
shares of FSP Common Stock. The aggregate shares of FSP Common Stock to be
issued in connection with the Mergers are referred to as the "Merger
Consideration."
The following chart sets forth the number of shares of FSP Common Stock to
be received as Merger Consideration by the Target REIT Stockholders for each
share of Target Stock of the respective Target REIT. FSP Corp. will issue the
Merger Consideration to the Target REIT Stockholders in private placements,
exempt from registration pursuant to Section 4(2) under the Securities Act and
Rule 506 of Regulation D promulgated thereunder.
Shares of FSP Total Shares of FSP
Common Stock Common Stock
Total Number of Issuable in Exchange Issuable to Target
Shares of Target for Each Share of REIT
Target REIT Stock Outstanding Target Stock Stockholders
--------------- ----------------- -------------------- -------------------
Forest Park 78 7,299.59 569,368.02
The Gael 212.50 6,975.59 1,482,312.88
Goldentop 231.50 7,302.58 1,690,547.27
Centennial 158 6,905.56 1,091,078.48
Meadow Point 257.50 6,983.25 1,798,186.88
Timberlake 515 6,787.12 3,495,366.80
Federal Way 200 6,779.66 1,355,932.00
Fair Lakes 480 6,805.36 3,266,572.80
Northwest Point 372.50 6,779.66 2,525,423.35
Timberlake East 250 6,830.85 1,707,712.50
Merrywood 206 6,854.51 1,412,029.06
Plaza Ridge I 400 6,822.03 2,728,812.00
Park Ten 275 6,824.54 1,876,748.50
6
Consummation of the Mergers is subject to a number of conditions and will
not occur unless, among other things, holders of a majority of the shares of
Target Stock of each Target REIT vote to approve the mergers.
The following table sets forth the value ascribed to each Target REIT for
purposes of the Merger Consideration.
Forest Park $ 8,398,178.30
The Gael $ 21,864,114.98
Goldentop $ 24,935,572.23
Centennial $ 16,093,407.58
Meadow Point $ 26,523,256.48
Timberlake $ 51,556,660.30
Federal Way $ 19,999,997.00
Fair Lakes $ 48,181,948.80
Northwest Point $ 37,249,994.41
Timberlake East $ 25,188,759.38
Merrywood $ 20,827,428.64
Plaza Ridge I $ 40,249,977.00
Park Ten $ 27,682,040.38
---------------
Total $368,751,335.48
7
Expected Benefits from the Mergers (Pages 33 to 35)
The following highlights the primary benefits the Mergers are expected to
generate for FSP Corp. and the FSP Stockholders:
o The Combined Company's real estate portfolio will be substantially
larger and more diverse both geographically and by tenant business
than that of FSP Corp., reducing the dependence of an investment in
the Combined Company on the performance of a smaller group of
assets.
o The Combined Company's business will generate a greater percentage
of its revenues from rentals from real properties and a lesser
percentage from real estate investment banking/brokerage activities,
constituting a more stable income stream than that currently
received by FSP Corp.
o The Combined Company's larger portfolio of real estate may produce
economies of scale, increase its purchasing power relating to goods
and services and reduce the percentage that expenses constitute of
gross revenue.
o The Combined Company's increased asset base should give FSP Corp.
the flexibility to increase its $50,000,000 line of credit, enabling
the Combined Company to finance the acquisition of real property for
itself or to provide larger loans to Sponsored Entities or to
finance their acquisition of real property.
o The Combined Company's larger portfolio of real properties and
larger equity capitalization should increase the likelihood that the
Combined Company may eventually be able to provide liquidity for its
equity investors through the public markets.
Fairness of the Mergers (Pages 41 to 43)
The FSP Board believes that the terms of the Merger Agreement, when
considered as a whole, are fair to the FSP Stockholders and the Merger
Consideration offered in exchange for the Target Stock in the Target REITs
constitutes fair consideration for the interests of the Target REIT
Stockholders. The following provides a summary of the factors upon which the FSP
Board based its conclusion as to the fairness of the Mergers and the Merger
Consideration to be paid by FSP Corp. The FSP Board did not find it practicable
to, and did not attempt to, quantify or otherwise assign relative weight to
these factors in reaching its determination.
8
o FSP Corp.'s management exercised its reasonable judgment to
determine an estimated value of FSP Corp. and of the Combined
Company and determined the amount of the Merger Consideration to be
the difference between those two values.
o FSP Corp.'s management retained A.G. Edwards, Inc. ("A.G. Edwards")
to consult with management regarding the valuation methodology of
FSP Corp. and the Combined Company. A.G. Edwards has advised the FSP
Board that it believes the methodology used by management to
estimate hypothetical values of FSP Corp. and the Combined Company
is not unreasonable.
o The Target Boards obtained independent third-party appraisals of the
real property owned by the Target REITs, and FSP Corp.'s management
considered these appraisals in allocating the Merger Consideration
among the Target REITs.
o FSP Corp.'s management considered historical financial information
concerning the real estate properties owned by the Target REITs and
the amount of cash held by each of the Target REITs;
o The FSP Board considered FSP Corp.'s management's view of the
financial condition, results of operations and business of FSP Corp.
and each of the Target REITs before and after giving effect to the
Mergers;
o The members of the FSP Board have significant conflicts of interest
in connection with the Mergers, and no unaffiliated representatives
were appointed to negotiate the terms of the Mergers on behalf of
FSP Corp. In particular, Barry Silverstein and Dennis J.
McGillicuddy own an aggregate of 601.25 and 229 shares of Target
Stock, respectively. Such shares of Target Stock will convert into
4,130,961.11 and 1,586,343.29 shares of FSP Common Stock,
respectively, upon consummation of the Mergers. Messrs. Silverstein
and McGillicuddy also currently own, however, 1,148,878.50 and
990,325.75 shares of FSP Common Stock, respectively. The FSP Board
concluded that retaining independent representatives was not
necessary nor cost effective, in part because there are no members
of the FSP Board that do not have conflicts of interest in
connection with the Mergers. This decision was also based, in part,
upon the receipt of the advice from A.G. Edwards regarding the
methodology used to value FSP Corp. and the Combined Company. No
fees or other compensation will be payable to the members of the FSP
Board in connection with the Mergers, although Messrs. Silverstein
and McGillicuddy will participate in the Merger Consideration to the
extent of their ownership of Target Stock. The FSP Board believes
that its determination regarding the fairness of the Mergers was
based upon the proper exercise of its fiduciary duty, unaffected by
these conflicts of interest.
9
Third Party Opinions (Pages 44 to 48)
Valuation. A.G. Edwards advised the FSP Board that it believes the
methodology used by FSP Corp.'s management to estimate hypothetical values of
FSP Corp. and the Combined Company is not unreasonable. A.G. Edwards provides
many businesses with comprehensive capital raising and financial advisory
services and has extensive experience with all types of real estate securities.
FSP Corp.'s management provided A.G. Edwards with historical and forecasted
financial information describing FSP Corp. and the Target REITs. Such
information was not audited, reviewed or compiled by an independent certified
public accounting firm and A.G. Edwards takes no responsibility for the accuracy
of such information. Forecasted financial information was prepared by FSP
Corp.'s management and A.G. Edwards was not asked to consider, nor did it
consider, the reasonableness of the assumptions on which such forecasts were
based.
In particular, A.G. Edwards received the "Valuation Overview" prepared by
FSP Corp, and attached to this Proxy Statement as Appendix D. A.G. Edwards
concluded that the methodology techniques used in the valuation overview, the
range of multiples applied to cash available for distribution ("CAD") and the
range of discounts applied for lack of marketability were not unreasonable. The
estimated hypothetical value ranges contained in the valuation overview (a range
of estimated hypothetical value for FSP Corp. of $328 million to $416 million
and a range of estimated hypothetical value for the Combined Company of $642
million to $815 million) represent analysis considering value as of the date
specified, do not reflect any changes in value that may have occurred after that
date, are subject to certain assumptions and may not represent the true worth or
realizable value of FSP Corp. or the Combined Company. A.G. Edwards was not
engaged to, nor did it render, a valuation or fairness opinion.
The Appraisals. The respective Target Boards retained independent third
party appraisers to appraise the fair market value of each Target REIT's real
estate as of a date no earlier than August 23, 2002 (the "Appraisals"). The
applicable Target REITs obtained appraisals for the properties owned by
Merrywood, Plaza Ridge I and Park Ten during the due diligence period in 2002
prior to acquisition of the properties. No new appraisals were ordered by the
respective Target Boards for these properties because the respective Target
Boards did not believe that there had been material changes in the buildings or
real estate markets since the time of the last appraisals, each of which had
been prepared within the last twelve calendar months.
In preparing the Appraisals, the appraisers collected from the Target
REITs information regarding the operating history of the properties, conducted
site inspections of all of the Target REITs' properties in August 2002 and
September 2002 and interviewed and relied on representations of certain
representatives of the Target REITs. The appraisers' conclusions are based upon
conditions they observed at the properties during their inspection and
assumptions, qualifications and limitations deemed reasonable at the time
concerning, among other things, legal title, the absence of physical defects or
hazardous materials, future percentage of leased rentable square feet, income
and competition with respect to each property. The Appraisals reflect the
appraisers' valuation of the real estate of the Target REITs as of their
respective dates, in the context of the information available on that date.
Events occurring subsequent to the dates of the respective Appraisals could
affect the properties or assumptions used in preparing the Appraisals. The
10
Target Boards imposed no limitations on the scope of the Appraisers' appraisals.
The Target REITs have made the Appraisals available to FSP Corp. and have
allowed the FSP Board to rely on the Appraisals. FSP Corp.'s mangement took the
Appraisals into consideration and used them as guides in allocating the Merger
Consideration among the Target REITs.
Conflicts of Interest (Pages 49 to 50)
A number of conflicts of interest are inherent in the relationships among
the Target REITs, the Target Boards, FSP Corp., the FSP Board and their
respective affiliates. These conflicts of interest include, among others:
o George J. Carter, the President, Chief Executive Officer and a
director of FSP Corp., is the President and a director of each
Target REIT;
o Barry Silverstein and Dennis J. McGillicuddy, each a director of FSP
Corp., own an aggregate of 601.25 and 229 shares of Target Stock,
respectively. Such shares of Target Stock will convert into
4,130,961.11 and 1,586,343.29 shares of FSP Common Stock,
respectively, upon consummation of the Mergers;
o Richard R. Norris, an Executive Vice President and a director of FSP
Corp., is also a director and an Executive Vice President of each
Target REIT;
o Barbara J. Corinha, Vice President, Chief Operating Officer,
Treasurer, Secretary and a director of FSP Corp. is also Vice
President, Chief Operating Officer, Treasurer, Secretary and a
director of each Target REIT;
o Janet P. Notopoulos, Vice President and a director of FSP Corp., is
also a Vice President of each Target REIT; and
o Each of R. Scott MacPhee and William W. Gribbell, each an Executive
Vice President of FSP Corp., is also each a director and an
Executive Vice President of each Target REIT.
Dissenters' Rights of FSP Stockholders (Page 100)
No FSP Stockholder will be entitled to dissenters' rights in connection
with the Mergers.
Material United States Federal Income Tax Considerations (Pages 127 to 142)
The Mergers are intended to qualify as reorganizations within the meaning
of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code").
If the Mergers qualify as reorganizations, there will be no United States
federal income tax consequences to FSP Corp. as a result of the Mergers.
11
There should be no United States federal income tax consequences of the
Mergers to FSP Stockholders, subject to certain risks described below.
Accounting Treatment (Page 26)
Each of the Mergers will be accounted for as a purchase under generally
accepted accounting principles ("GAAP").
Dividends in Respect of First Quarter 2003 (Pages 15 to 16)
Each Target REIT expects to declare in the first quarter of 2003 and pay
to its Target REIT Stockholders thereafter a dividend with respect to its first
quarter 2003 operations. The cash paid out in these dividends will reduce the
amount of cash held by each Target REIT and acquired by FSP Corp. upon
consummation of the Mergers. Because the Target REITs have not yet declared
these cash dividends, FSP Corp. cannot estimate the aggregate amount of such
dividends. Pursuant to the Merger Agreement, FSP Corp. has assumed the
obligation to pay any such dividends that have been declared but not paid prior
to the Effective Date. In addition, FSP Corp. expects to declare in the first
quarter of 2003 and pay to FSP Stockholders in the second quarter of 2003
dividends in respect of first quarter 2003 operations. The cash available for
this dividend and possibly for future dividends to the FSP Stockholders will be
reduced by the amount of expenses related to the Mergers paid by FSP Corp.
12
RISK FACTORS
In evaluating the Mergers and the Combined Company, you should carefully
consider the following factors, in addition to other matters set forth elsewhere
in this Proxy Statement.
Risks Relating to the Mergers
The officers and directors of FSP Corp. have conflicts of interest that may have
influenced them to support or approve the Merger Agreement.
A number of conflicts of interest are inherent in the relationships among
the Target REITs, the Target Boards, FSP Corp., the FSP Board and their
respective affiliates. These conflicts of interest include, among others:
o George J. Carter, the President, Chief Executive Officer and a
director of FSP Corp., is the President and a director of each
Target REIT;
o Barry Silverstein and Dennis J. McGillicuddy, each a director of FSP
Corp., own an aggregate of 601.25 and 229 shares of Target Stock,
respectively. Such shares of Target Stock will convert into
4,130,961.11 and 1,586,343.29 shares of FSP Common Stock,
respectively, upon consummation of the Mergers;
o Richard R. Norris, an Executive Vice President and a director of FSP
Corp., is also a director and an Executive Vice President of each
Target REIT;
o Barbara J. Corinha, Vice President, Chief Operating Officer and a
director of FSP Corp. is also Vice President, Chief Operating
Officer, Treasurer, Secretary and a director of each Target REIT;
o Janet P. Notopoulos, Vice President and a director of FSP Corp., is
also a Vice President of each Target REIT; and
o R. Scott MacPhee and William W. Gribbell, each an Executive Vice
President of FSP Corp., is also each a director and an Executive
Vice President of each Target REIT.
o The Target REITs' properties are managed by FSP Property Management,
a subsidiary of FSP Corp., pursuant to Management Services
Agreements under which FSP Corp. receives certain fees for its
management services.
The officers and directors of FSP Corp. who are officers and directors of
the Target REITs have fiduciary duties to manage the Target REITs in a manner
beneficial to the Target REIT Stockholders. Similarly, FSP Corp.'s directors and
officers, including Mr. Carter, have fiduciary duties to manage FSP Corp. in a
manner beneficial to FSP Corp. and FSP Stockholders. In some circumstances,
including the negotiation of the Merger Agreement, Mr. Carter's and the other
directors' and officers' duties to the Target REITs and the Target REIT
13
Stockholders and their ownership of Target REIT Stock may conflict with their
duties, as directors and officers of FSP Corp., to FSP Corp. and FSP
Stockholders. A potential conflict between such fiduciary duties may not be
resolved, or if resolved, may be resolved in a manner less favorable to FSP
Corp. and FSP Stockholders than would otherwise have been the case if FSP Corp.
were dealing with unaffiliated parties.
The terms of the Merger Agreement were not negotiated at arms'-length.
The terms of the Merger Agreement have been established by the directors
and officers of FSP Corp., who have significant conflicts of interest as
described above, and are not the result of arms'-length negotiations. The FSP
Stockholders were not separately represented in structuring and negotiating the
terms of the Merger Agreement by an unaffiliated representative. Had separate
representation been arranged for the FSP Stockholders, the terms of the Merger
Agreement might have been different and fewer shares of FSP Common Stock might
have been allocated for the stock of some or all of the Target REITs, thereby
reducing the overall dilution to voting power and percentage ownership FSP
Stockholders will incur upon consummation of the Mergers.
The nature of the FSP Stockholders' investment in FSP Corp. will change upon
consummation of the Mergers.
Immediately prior to the consummation of the Mergers, FSP Corp. will own
17 real properties. Immediately following the consummation of the Mergers, FSP
Corp. will own 30 real properties. This increase in the number of real estate
holdings will change the manner in which FSP Corp. derives its revenues.
Following the consummation of the Mergers, FSP Corp. will derive a larger
percentage of its revenues from rents and a smaller percentage of its revenues
from real estate investment banking fees and brokerage commissions. If rental
revenues decrease in the near term, the value of the FSP Stockholders'
investment in FSP Corp. may decrease proportionately.
Although FSP Corp. and the Target REITs expect that the Mergers will result in
benefits, those benefits may not be realized.
FSP Corp. and the Target REITs entered into the Merger Agreement with the
expectation that the Mergers will result in benefits, including:
o The Combined Company's real estate portfolio will be substantially
larger and more diverse both geographically and by tenant business
than that of FSP Corp., reducing the dependence of an investment in
the Combined Company on the performance of a smaller group of
assets.
o The Combined Company's business will generate a greater percentage
of its revenues from rentals from real properties and a lesser
percentage from real estate investment banking/brokerage activities,
constituting a more stable income stream than that currently
received by FSP Corp.
14
o The Combined Company's larger portfolio of real estate may produce
economies of scale, increase its purchasing power relating to goods
and services and reduce the percentage that expenses constitute of
gross revenue.
o The Combined Company's increased asset base should give FSP Corp.
the flexibility to increase its $50,000,000 line of credit, enabling
the Combined Company to finance the acquisition of real property for
itself or to provide larger loans to Sponsored Entities or to
finance their acquisition of real property.
o The Combined Company's larger portfolio of real properties and
larger equity capitalization should increase the likelihood that the
Combined Company may eventually be able to provide liquidity for its
equity investors through the public markets.
Achieving the benefits of the Mergers will depend in part on the
sustainability of long term tenants in the real properties owned by the Combined
Company and the ability of FSP Corp.'s key personnel to effectively manage the
additional 13 properties. If the occupancy levels and creditworthiness of
tenants are not maintained, the Combined Company will not achieve the intended
benefits of the Mergers and the operating results of the Combined Company may be
adversely effected.
If the Combined Company is not able to collect sufficient rents from each of its
owned real properties, the Combined Company may suffer significant operating
losses.
A substantial portion of the Combined Company's revenues will be generated
by the rental income of its real properties. If the additional properties
acquired by FSP Corp. in the Mergers or the existing properties owned by FSP
Corp. do not provide the Combined Company a steady rental income, the Combined
Company's revenues will decrease and may cause the Combined Company to incur
operating losses in the future.
The Mergers may affect the level of dividends received by the FSP Stockholders.
The Mergers may affect the level of dividends made to the FSP Stockholders
by the Combined Company. The level of dividends after the consummation of the
Mergers may be lower than the level of dividends the FSP Stockholders received
with respect to their FSP Common Stock prior to the Mergers due to the dilution
of their percentage ownership FSP Stockholders will incur upon consummation of
the Mergers. Each Target REIT expects to declare in the first quarter of 2003
and pay to its Target REIT Stockholders thereafter a dividend with respect to
its first quarter 2003 operations. The cash paid out in these dividends will
reduce the amount of cash held by each Target REIT and acquired by FSP Corp.
upon consummation of the Mergers. Because the Target REITs have not yet declared
these cash dividends, FSP Corp. cannot estimate the aggregate amount of such
dividends. Pursuant to the Merger Agreement, FSP Corp. has assumed the
obligation to pay any such dividends that have been declared but not paid prior
to the Effective Date. In addition, FSP Corp. expects to declare in the first
quarter of 2003 and pay to FSP Stockholders in the second quarter of 2003
dividends in respect of first quarter 2003 operations. The cash available for
this dividend and possibly for future
15
dividends to the FSP Stockholders will be reduced by the amount of expenses
related to the Mergers paid by FSP Corp. Regardless of the initial level of the
Combined Company's dividends, they could decline in the future to a level at
which the FSP Stockholders could receive lower dividends than they received
prior to the consummation of the Mergers. Moreover, because FSP Corp.'s
investment banking business is transactional in nature, there is no predictable
recurring level of revenue for such activities. As a result of this, the amount
of cash available for distribution may fluctuate, which may result in FSP
Corp.'s not being able to maintain growth in dividend levels in the future.
The real properties held by the Combined Company may significantly decrease in
value.
The Combined Company will hold 30 properties as its assets following the
consummation of the Mergers. Some or all of these properties may decline in
value. To the extent the Combined Company's real properties decline in value,
the FSP Stockholders could lose some or all the value of their initial
investments.
FSP Stockholders will be diluted upon the consummation of the Mergers.
The issuance of approximately 25,000,091 shares of FSP Common Stock as
Merger Consideration will cause FSP Stockholders to be immediately and
substantially diluted in percentage ownership. As of ____________, 2003, the
record date, there were 24,630,246.71 shares of FSP Common Stock issued and
outstanding. Moreover, because the Target REIT Stockholders will become
stockholders of the Combined Company immediately following the Mergers, FSP
Stockholders will also lose relative voting power relating to matters of the
Combined Company to be voted on by all security holders.
The Combined Company may be liable for contingent or undisclosed liabilities of
the Target REITs.
Each of the Target REITs has delivered to FSP Corp. its financial
statements disclosing all known material liabilities and contingent liabilities.
Each Target REIT has represented and warranted that the financial statements
fairly present the financial position of each Target REIT, and each Target REIT
will represent on the Effective Date that there have been no material adverse
changes between the date of the financial statements and the Effective Date. The
accuracy and completeness of these representations are conditions to the
consummation of the Mergers and if, on or prior to the Effective Date, these
representations and warranties are known to be inaccurate, FSP Corp. may elect
not to consummate the Mergers with the Target REIT that failed to fully and
accurately disclose its financial position. As these representations do not
survive the Effective Date, after the Effective Date the Combined Company will
have no recourse against the Target REITs or the Target REIT Stockholders for
any contingent or undisclosed liabilities which first became known after the
Effective Date. If any contingent or undisclosed liabilities are discovered
after the Effective Date, the Combined Company's balance sheet may be adversely
affected, causing the value of the FSP Stockholders' interests in the Combined
Company to decrease.
16
General Real Estate Investment Risks
The Combined Company would incur adverse tax consequences if it failed to
qualify as a REIT.
The parties intend that the Combined Company will continue to qualify as a
real estate investment trust for federal income tax purposes following the
consummation of the Mergers. If in any taxable year the Combined Company does
not qualify as a real estate investment trust, it would be taxed as a
corporation and distributions to its stockholders would not be deductible by the
Combined Company in computing its taxable income. In addition, if the Combined
Company were to fail to qualify as a real estate investment trust, the Combined
Company could be disqualified from treatment as a real estate investment trust
in the year in which such failure occurred and for the next four taxable years
and, consequently, would be taxed as a corporation during such years. Failure to
qualify for even one taxable year could result in a significant reduction of the
Combined Company's cash available for distributions to its stockholders or could
require the Combined Company to incur indebtedness or liquidate investments in
order to generate sufficient funds to pay the resulting federal income tax
liabilities. In addition, timing differences between the receipt of income and
payment of expenses and the inclusion and deduction of such amounts in arriving
at taxable income of the Combined Company could make it necessary for the
Combined Company to borrow in order to make certain distributions to its
stockholders in satisfaction of the 90% distribution requirement applicable to
real estate investment trusts. The provisions of the Internal Revenue Code
governing the taxation of real estate investment trusts are very technical and
complex, and although the Combined Company expects that it will be organized and
will operate in a manner that will enable it to meet such requirements, no
assurance can be given that it will succeed in doing so during the entire life
of the Combined Company. In addition, you should note that if one or more of the
Target REITs did not qualify as a real estate investment trust immediately prior
to the consummation of the Mergers, the Combined Company would be disqualified
as a REIT as a result of the Mergers.
The Combined Company faces risks in continuing to attract investors for the
Sponsored Entities.
The Combined Company will continue FSP Corp.'s investment banking business
which will depend upon the Combined Company's ability to attract purchasers of
equity interests in Sponsored Entities. The Combined Company's success in this
area will depend on the propensity and ability of investors who have previously
invested in Sponsored Entities to continue to invest in future Sponsored
Entities and on the Combined Company's ability to expand the investor pool for
the Sponsored Entities by identifying new potential investors. Moreover, FSP
Corp.'s investment banking business may be impacted to the extent existing
Sponsored Entities incur losses or have operating results that fail to meet
investors' expectations. The Combined Company expects that its investment
banking business will account for a smaller percentage of its overall revenue on
a going forward basis due to the expected increase in the percentage of revenues
derived from rents.
17
The Combined Company faces risks in owning and operating real property.
An investment in the Combined Company is subject to the risks incident to
the ownership and operation of real estate-related assets. These risks include
the fact that real estate investments are generally illiquid, which may impact
the Combined Company's ability to vary its portfolio in response to changes in
economic and other conditions, as well as the risks normally associated with:
o changes in general and local economic conditions;
o the supply or demand for particular types of properties in
particular markets;
o changes in market rental rates;
o the impact of environmental protection laws; and
o changes in tax, real estate and zoning laws.
Certain significant costs, such as real estate taxes, utilities, insurance
and maintenance costs, generally are not reduced even when a property's rental
income is reduced. In addition, environmental and tax laws, interest rate
levels, the availability of financing and other factors may affect real estate
values and property income. Furthermore, the supply of commercial and
multi-family residential space fluctuates with market conditions.
The Combined Company faces risks from tenant defaults or bankruptcies.
If any of the Combined Company's tenants defaults on its lease, the
Combined Company may experience delays in enforcing its rights as a landlord and
may incur substantial costs in protecting its investment. In addition, at any
time, a tenant of one of the Combined Company's properties may seek the
protection of bankruptcy laws, which could result in the rejection and
termination of such tenant's lease and thereby cause a reduction in cash
available for distribution to the Combined Company's stockholders.
The Combined Company may encounter significant delays in reletting vacant space,
resulting in losses of income.
When leases expire, the Combined Company will incur expenses and may not
be able to re-lease the space on the same terms. Certain leases provide tenants
the right to terminate early if they pay a fee. If the Combined Company is
unable to re-lease space promptly, if the terms are significantly less favorable
than anticipated or if the costs are higher, the Combined Company may have to
reduce its distributions to its stockholders.
18
The Combined Company faces risks from geographic concentration.
The properties in the Combined Company's portfolio are distributed among
the major geographic segments by aggregate square footage to be owned by the
Combined Company, as follows: Southwest - 30%; Northeast - 29%; Midwest - 18%;
West - 15%; and Southeast - 8%. However, within certain of those segments, a
large concentration exists within a particular city and its immediately
surrounding area; specifically, Houston, Texas - 22% and Washington, DC - 12.6%.
The Combined Company is likely to face risks to the extent that any of these
areas suffer deteriorating economic conditions.
FSP Corp. competes and the Combined Company will compete with national, regional
and local real estate operators and developers, which could adversely affect the
Combined Company's cash flow.
Competition exists in every market in which FSP Corp.'s properties are
located and in every market in which the Combined Company's properties will be
located. The Combined Company will compete with, among others, national,
regional and numerous local real estate operators and developers. Such
competition may adversely affect the percentage of leased space and the rental
revenues of the Combined Company's properties, which could adversely affect the
Combined Company's cash flow from operations and its ability to make expected
distributions to the FSP Stockholders. Some of the Combined Company's
competitors may have more resources than the Combined Company or other
competitive advantages. Competition may be accelerated by any increase in
availability of funds for investment in real estate. For example, decreases in
interest rates tend to increase the availability of funds and therefore can
increase competition. The extent to which the Combined Company is affected by
competition will depend in significant part on local market conditions.
There is limited potential for an increase in leased space gains in the Combined
Company's properties.
The Combined Company anticipates that future increases in revenue from the
Combined Company's properties will be primarily the result of scheduled rental
rate increases or rental rate increases as leases expire. Twelve out of the 17
FSP Corp. properties' percentage of rentable square feet leased was in excess of
95% as of September 30, 2002 and 9 out of 13 of the Target REITs' properties
percentage of rentable square feet leased was in excess of 95% as of September
30, 2002. Those properties with higher rates of vacancy are located in soft
economic markets so that it may be difficult to realize increases in revenue
when vacant space is re-leased. To the extent that the properties of the
Combined Company continue to operate profitably, this will likely stimulate new
development of competing properties.
The Combined Company will be subject to possible liability relating to
environmental matters, and FSP Corp. cannot assure you that it has identified
all possible liabilities.
Under various federal, state and local laws, ordinances and regulations,
an owner or operator of real property may become liable for the costs of removal
or remediation of certain hazardous substances released on or in its property.
Such laws may impose liability without regard to whether the owner or operator
knew of, or caused, the release of such hazardous substances. The presence of
hazardous substances on a property may adversely affect the owner's ability to
sell such property or to borrow using such property as collateral, and it may
cause the owner of the property to incur substantial remediation costs. In
addition to claims for cleanup costs, the presence of hazardous substances on a
19
property could result in the owner incurring substantial liabilities as a result
of a claim by a private party for personal injury or a claim by an adjacent
property owner for property damage. FSP Corp. cannot assure you that any
environmental assessments of the Target REITs' properties that have been
provided to it have revealed all potential environmental liabilities, that any
prior owner or operator of the properties did not create any material
environmental condition not known to FSP Corp. or the Target REIT, or that an
environmental condition does not otherwise exist as to any one or more of the
properties that could have a material adverse effect on the Combined Company's
financial condition or results of operations. In addition, FSP Corp. cannot
assure you that:
o future laws, ordinances or regulations will not impose any material
environmental liability;
o the current environmental conditions of FSP Corp.'s and the Target
REITs' respective properties will not be affected by the condition
of properties in the vicinity of such properties (such as the
presence of leaking underground storage tanks) or by third parties
unrelated to FSP Corp. or the Target REITs;
o the current environmental conditions of the Target REITs' properties
will not be affected by mold or other environmental pollutants that
could affect indoor air quality;
o tenants will not violate their leases by introducing hazardous or
toxic substances into the Combined Company's properties that could
expose the Combined Company to liability under federal or state
environmental laws; or
o environmental conditions, such as the growth of bacteria and toxic
mold in heating and ventilation systems or on walls, will not occur
at the Combined Company's properties and pose a threat to human
health.
The Combined Company will be subject to compliance with the Americans With
Disabilities Act and fire and safety regulations which could require the
Combined Company to make significant capital expenditures.
All of the Target REITs' properties are required to comply with the
Americans With Disabilities Act, and the regulations, rules and orders that may
be issued thereunder (the "ADA"). The ADA has separate compliance requirements
for "public accommodations" and "commercial facilities," but generally requires
that buildings be made accessible to persons with disabilities. Compliance with
ADA requirements might require, among other things, removal of access barriers
and noncompliance could result in the imposition of fines by the U.S.
government, or an award of damages to private litigants. In addition, the
Combined Company will be required to operate its properties in compliance with
fire and safety regulations, building codes and other land use regulations, as
they may be adopted by governmental agencies and bodies and become applicable to
the Combined Company's properties. Compliance with such requirements may require
the Combined Company to make substantial capital expenditures, which
expenditures would reduce cash otherwise available for distribution to its
stockholders.
20
The Combined Company may lose capital investment or anticipated profits if an
uninsured event occurs.
The Combined Company will carry or its tenants carry comprehensive
liability, fire and extended coverage with respect to each of the properties
owned by the Combined Company, with policy specification and insured limits
customarily carried for similar properties. There are, however, certain types of
losses, such as from wars, terrorism, pollution or earthquakes, that may be
either uninsurable or not economically insurable (although the properties
located in California all have earthquake insurance). Should an uninsured
material loss occur, the Combined Company could lose both its capital invested
in the property and anticipated profits.
The FSP Stockholders may experience greater risks relating to diversification of
portfolios following the Mergers.
The assets and liabilities of the Target REITs and of FSP Corp. will be
combined in the Mergers. As a result of the Mergers, the geographic diversity of
the properties in which FSP Stockholders will own an interest will change.
However, because the market for real estate may vary widely from one region of
the country to another, the change in geographic diversity may expose FSP
Stockholders to different and greater risks than those to which they are
presently exposed.
21
THE MERGERS
The information contained in this Proxy Statement with respect to the
Mergers is qualified in its entirety by reference to the Merger Agreement by and
among FSP Corp. and the Target REITs, a copy of which is set forth as Appendix A
hereto and incorporated herein by reference.
Overview
FSP Corp. entered into the Merger Agreement, dated January 14, 2003, among
FSP Corp. and the Target REITs. Following the consummation of the Mergers, FSP
Corp. will be the sole stockholder of the Target REITs.
The Merger Agreement provides that the Mergers will be effected at the
time of the filing of the Certificates of Merger with the Secretary of State of
the State of Delaware and with the State Department of Assessment and Taxation
of the State of Maryland or at another date as may be specified in the
Certificates of Merger. On the Effective Date, FSP Corp. will acquire by merger
each Target REIT. The Target REIT Stockholders will be issued shares of FSP
Common Stock in an offering exempt from registration under Section 4(2) of the
Securities Act and Rule 506 of Registration D promulgated thereunder. The FSP
Board expects that the Effective Date will be on or about April 1, 2003. The
Mergers will not require any federal or state regulatory approvals.
The Parties
FSP Corp. FSP Corp. is a Maryland corporation that operates in a manner
intended to qualify as a real estate investment trust for federal income tax
purposes. It is the successor to the FSP Partnership. On January 1, 2002, the
Conversion became effective. Pursuant to the Conversion, the FSP Partnership
ceased to exist, FSP Corp. succeeded to the business of the FSP Partnership and
each unit of both general and limited partnership interests in the FSP
Partnership was converted into one share of FSP Common Stock. As a result of the
Conversion, FSP Corp. now holds, directly and indirectly, 100% of the interest
in three former subsidiaries of the FSP Partnership: FSP Investments, FSP
Property Management, and FSP Holdings.
FSP Investments acts as a real estate investment firm and broker/dealer
with respect to (a) Sponsored Entities, some of which were Sponsored
Partnerships and some of which are Sponsored REITs, (b) the acquisition of real
estate by the Sponsored Entities and (c) the sale of equity interests in the
Sponsored Entities. FSP Investments derives revenue from commissions received in
connection with the sale of equity interests in the Sponsored Entities. FSP
Investments also derives revenue from fees paid by the Sponsored Entities for
the services of FSP Investments in identifying, inspecting and negotiating to
purchase real properties on behalf of the Sponsored Entities. FSP Investments is
a registered broker/dealer with the Commission and is a member of the National
Association of Securities Dealers, Inc. FSP Corp. has made an election to treat
FSP Investments as a "taxable REIT subsidiary" for federal income tax purposes.
22
FSP Property Management asset manages each Sponsored Entity and provides
property management services or property accounting services to eight Sponsored
Entities. FSP Property Management receives fee income from those Sponsored
Entities that have not been acquired by FSP Corp. FSP Property Management does
not receive any rental income.
FSP Holdings is the general partner of each Sponsored Partnership.
Prior to the Conversion, the FSP Partnership owned, directly or
indirectly, 100% of the interest in 17 Sponsored Partnerships, each of which
owns real property. As a result of the Conversion, FSP Corp. is now the sole
limited partner of each such Sponsored Partnership and now owns, directly or
indirectly, 100% of the interest in the 17 Sponsored Partnerships. Reference in
this Proxy Statement to FSP Corp.'s properties means the real properties owned
by these 17 Sponsored Partnerships.
FSP Corp. has two principal sources of revenue:
o Investment banking income consisting of brokerage commissions and
other related fees paid to FSP Investments in connection with the
organization and offering of Sponsored Entities and loan origination
fees paid in connection with loans to Sponsored Entities.
o Rental income from the real properties it owns.
The principal executive offices of FSP Corp. are located at 401 Edgewater
Place, Suite 200, Wakefield, Massachusetts 01880, and FSP Corp.'s telephone
number is (781) 557-1300. FSP Corp. leases its executive offices.
The Target REITs
Each Target REIT is a privately-held real estate investment trust formed
as a corporation under the laws of the State of Delaware for the purpose of
acquiring, developing and operating a single real property.
Forest Park. Forest Park holds an office building in Charlotte, North
Carolina.
The Gael. The Gael holds an apartment complex in Houston, Texas.
Goldentop. Goldentop holds a research and development/office building in
San Diego, California.
Centennial. Centennial holds "flex" office buildings in Colorado Springs,
Colorado.
Meadow Point. Meadow Point holds an office building in Chantilly,
Virginia.
Timberlake. Timberlake holds office buildings in Chesterfield, Missouri.
Federal Way. Federal Way holds office buildings in Federal Way,
Washington.
23
Fair Lakes. Fair Lakes holds an office building in Fairfax, Virginia.
Northwest Point. Northwest Point holds an office building in Elk Grove
Village, Illinois.
Timberlake East. Timberlake East holds an office building in Chesterfield,
Missouri.
Merrywood. Merrywood holds an apartment complex in Katy, Texas.
Plaza Ridge I. Plaza Ridge I holds an office building in Herndon,
Virginia.
Park Ten. Park Ten holds an office building in Houston, Texas.
The principal executive offices of the Target REITs are located at 401
Edgewater Place, Suite 200, Wakefield, Massachusetts 01880, and the telephone
number if (781) 557-1300. FSP Corp. leases the executive offices to the Target
REITs.
Effect of the Mergers on Certain FSP Stockholders
The following table sets forth certain information showing beneficial
ownership of FSP Common Stock as of January 1, 2003, on a pro forma basis, as
adjusted to reflect the issuance of approximately 25,000,091 shares of FSP
Common Stock in the Mergers, by (i) each person known by FSP Corp. to own more
than 5% of the outstanding shares of FSP Common Stock, each director of FSP
Corp. and (iii) all directors and executive officers as a group as follows:
Number of Percentage of
Shares Outstanding FSP
Beneficially Common Stock
Owned After After
Consummation of Consummation of
Mergers(1)(2) the Mergers (3)
------------- ---------------
Barry Silverstein.......................... 5,300,766.38 10.68%(4)
Dennis J. McGillicuddy..................... 2,583,493.58 5.21%
George J. Carter........................... 775,531.33 1.56%
Richard R. Norris.......................... 264,395.99 *
Barbara J. Corinha......................... 25,522.71 *
Janet P. Notopoulos........................ 12,574.59 *
All current directors and executive
officers as a group (8 persons)............ 9,464,498.99 19.07%
----------
* Less than 1%.
(1) Beneficial ownership of FSP Common Stock is determined in accordance with
the rules of the Commission, and includes shares for which the holder has sole
or shared voting or investment power. FSP Corp. does not have any outstanding
stock options or other securities convertible into FSP Common Stock. The
inclusion herein of shares as beneficially owned does not constitute an
admission of beneficial ownership.
24
(2) See Notes to table entitled "Beneficial Ownership of Voting Stock" on page
91 of this Proxy Statement.
(3) Based upon approximately 49,630,337 shares of FSP Common Stock which will be
issued and outstanding after the consummation of the Mergers pursuant to the
Merger Agreement.
(4) The FSP Board has exempted Mr. Silverstein from the Ownership Limit of 9.8%
of Equity Securities of FSP Corp. to the extent that Mr. Silverstein's ownership
exceeds the Ownership Limit as a result of the consummation of the Mergers. See
"Description of FSP Corp. Capital Stock - Ownership Limit."
As of the date of this Proxy Statement, FSP Corp. has no commitments to
issue any capital stock to any of the persons listed above except as
contemplated by the Merger Agreement. The FSP Board has exempted from the
application of Section 3-602 of the MGCL (business combinations with interested
stockholders and special voting requirements for such transactions) any business
combination between FSP Corp. and any entity the syndication of which has been
sponsored by FSP Corp., to the extent that Section 3-602 of the MGCL would
otherwise be applicable by virtue of Mr. Silverstein being an "interested
stockholder" (as the term is defined in Section 3-601 of the MGCL).
Votes Required
FSP Corp. The affirmative vote of the holders of a majority of the shares
of FSP Common Stock present in person or represented by proxy and voting at the
Meeting is required to approve the Merger Agreement, providing for the Mergers
and the issuance of the Merger Consideration.
The executive officers and directors of FSP Corp. hold an aggregate of
3,707,977.01 shares of FSP Common Stock. The executive officers and directors
have indicated that they intend to vote their respective shares in favor of the
Merger Agreement.
The Target REITs. The affirmative vote of the holders of a majority of the
Target Stock in each of the Target REITs is also required to effectuate the
respective Mergers. Each Target REIT will solicit the vote of its Target REIT
Stockholders separately.
Barry Silverstein and Dennis J. McGillicuddy, each a director of FSP
Corp., own an aggregate of 601.25 and 229 shares of Target Stock, respectively.
Such shares of Target Stock will convert into 4,130,961.11 and 1,586,343.29
shares of FSP Common Stock, respectively, upon consummation of the Mergers.
Messrs. Silverstein and McGillicuddy have indicated that they intend to vote
their respective shares of Target Stock in favor of the Merger Agreement.
Board Approvals
The FSP Board has voted to approve the Merger Agreement, providing for the
Mergers and the issuance of the Merger Consideration.
25
The Target Boards have each voted to approve the Merger Agreement,
providing for the Mergers and the issuance of the Merger Consideration.
Accounting Treatment
The Mergers will be treated as a purchase pursuant to Statement of
Financial Accounting Standards No.141 "Business Combinations". Because FSP Corp.
believes that the fair value of the net assets or the appraised value of the
properties, of the Target REITs acquired is more readily determinable than the
fair market value of the consideration being given by FSP Corp. in connection
with the Mergers, the net assets of the Target REITs will be recorded at their
combined fair values. The financial statements of the Combined Company will
reflect the combined operations of FSP Corp. and the Target REITs from the date
of consummation of the Mergers.
Interests of Certain Persons in the Mergers
A number of conflicts of interest are inherent in the relationships among
the Target REITs, the Target Boards, FSP Corp., the FSP Board and their
respective affiliates. These conflicts of interest include, among others:
o George J. Carter, the President, Chief Executive Officer and a
director of FSP Corp., is the President and a director of each
Target REIT;
o Barry Silverstein and Dennis J. McGillicuddy, each a director of FSP
Corp., own an aggregate of 601.25 and 229 shares of Target Stock,
respectively. Such shares of Target Stock will convert into
4,130,961.11 and 1,586,343.29 shares of FSP Common Stock,
respectively, upon consummation of the Mergers;
o Richard R. Norris, an Executive Vice President and a director of FSP
Corp., is also a director and an Executive Vice President of each
Target REIT;
o Barbara J. Corinha, Vice President, Chief Operating Officer and a
director of FSP Corp. is also Vice President, Chief Operating
Officer, Treasurer, Secretary and a director of each Target REIT;
o Janet P. Notopoulos, Vice President and a director of FSP Corp., is
also a Vice President of each Target REIT; and
o R. Scott MacPhee and William W. Gribbell, each an Executive Vice
President of FSP Corp., is also each a director and an Executive
Vice President of each Target REIT.
Except as described above, no director or executive officer of FSP Corp.
who has served in such capacity since January 1, 2000, nor any associate of any
of the foregoing persons, has any direct or indirect substantial interest in the
Mergers. No affiliate of FSP Corp. and the Target REITs (other than each other)
has any direct or indirect material interest in the Mergers.
26
Material United States Federal Income Tax Considerations
The Mergers are intended to qualify as reorganizations within the meaning
of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code").
It is a condition to the closing of the Mergers that FSP Corp. shall have
received an opinion from Hale and Dorr LLP to the effect that the Mergers should
be treated for United States federal income tax purposes as reorganizations
within the meaning of Section 368(a) of the Code and confirming in all material
respects that, as of the Closing Date, the discussion set forth under the
heading "Material United States Federal Income Tax Considerations" in the Proxy
Statement and the Consent Solicitation/Offering Memorandum, including any
opinions expressed therein, to the extent that it involves matters of law, is
accurate. If the Mergers qualify as reorganizations, there will be no United
States federal income tax consequences to FSP Corp. as a result of the Mergers.
Timing and Effectiveness of the Mergers
The Effective Date of the Mergers is expected to occur on or about April
1, 2003.
Comparison of Ownership Rights
The consummation of the Mergers will not change the existing rights of FSP
Stockholders, although FSP Stockholders will experience immediate and
substantial dilution.
Market Information
There is no established public trading market for FSP Common Stock. The
fair market value of FSP Common Stock as determined by the FSP Board was $14.75
per share as of December 20, 2002.
As of January __, 2003, there were [740] holders of record of FSP Common
Stock. This computation is based upon the number of record holders reflected in
the corporate records of FSP Corp.
FSP Corp. has declared a dividend of $___ per share of FSP Common Stock
payable to stockholders of record as of January __, 2003. Set forth below are
the distributions per unit of limited partnership interest (each, a "FSP Unit")
that the FSP Partnership or dividends per share of FSP Common Stock that FSP
Corp., as the case may be, made in each quarter since the quarter ended March
31, 2000.
Distribution Amount Per FSP Unit
or Dividend Amount Per Share of
Quarter Ended FSP Common Stock
------------- ----------------
3/31/00 $0.23
6/30/00 $0.24
9/30/00 $0.25
12/31/00 $0.26
3/31/01 $0.27
6/30/01 $0.28
9/30/01 $0.29
12/31/01 $0.30
3/31/02 $0.31
6/30/02 $0.31
9/30/02 $0.31
12/31/02 $0.31
27
While not guaranteed, FSP Corp. expects that cash dividends on FSP Common
Stock comparable to FSP Corp.'s most recent quarterly dividend will continue to
be paid in the future.
Equity Compensation Plan Information
The following table provides information about FSP Common Stock that may
be issued under all of FSP Corp.'s equity compensation plans as of January 1,
2003. FSP Corp. only has one equity compensation plan, the 2002 Stock Incentive
Plan. FSP Corp.'s stockholders approved this plan in May 2002.
(c)
Number of Securities
Available for Future
Issuance
(a) (b) Under Equity Compensation
Number of Securities to be Weighted-Average Exercise Plans (Excluding
Issued Upon Exercise of Price of Outstanding Securities
Outstanding Options, Options, Reflected in Column
Plan Category Warrants and Rights(1)(2) Warrants and Rights (a)(1)(2)
-------------------------- --------------------------- ------------------------- -----------------------
Equity Compensation Plans
Approved by Security Holders ..... None(3) N/A 1,956,001.46
Equity Compensation Plans Not
Approved by Security Holders ..... None N/A N/A
----------- -------------- -------------
Total ............................ None N/A 1,956,001.46
=========== ============== =============
(1) The number of shares is subject to adjustments in the event of stock splits
and other similar events.
(2) The 2002 Stock Incentive Plan provides for the granting of awards consisting
of shares of FSP Common Stock without reference to vesting periods.
(3) An aggregate of 43,998.54 shares of FSP Common Stock were issued to R. Scott
MacPhee, an Executive Vice President of FSP Corp. and an Executive Vice
President of each Target REIT, in July 2002 under the 2002 Stock Incentive Plan.
28
Independent Accountants
It is expected that a representative of PricewaterhouseCoopers LLP, FSP
Corp.'s independent accountants, will be present at the Meeting and will be
available to respond to appropriate questions from FSP Stockholders and to make
a statement if he or she desires to do so.
In September 2002, Fair Lakes consented to an assignment of its lease with
PricewaterhouseCoopers LLP to International Business Machines Corporation, but
PricewaterhouseCoopers LLP remains obligated for payments under the lease.
PricewaterhouseCoopers LLP has informed FSP Corp. that if the Merger between FSP
Corp. and Fair Lakes is consummated, PricewaterhouseCoopers LLP will no longer
be considered "independent" in connection with providing auditing services to
FSP Corp. At that time, FSP Corp. will have to either release
PricewaterhouseCoopers LLP from its obligation under the lease or choose another
independent accountant.
Expenses of the Mergers
The expenses payable by FSP Corp. in connection with the Mergers are
estimated to be $900,000.
BACKGROUND AND REASONS FOR THE MERGERS
History of FSP Corp. and the Target REITs
FSP Corp., a Maryland corporation, is the successor to the FSP
Partnership. Pursuant to the Conversion, the FSP Partnership ceased to exist,
FSP Corp. succeeded to the business of the FSP Partnership. As a result of the
Conversion, FSP Corp. now holds, directly and indirectly, 100% of the interest
in three former subsidiaries of the FSP Partnership: FSP Investments, FSP
Property Management, and FSP Holdings.
FSP Investments acts as a real estate investment firm and broker/dealer
with respect to (a) the organization of investment vehicles which are Sponsored
Entities, some of which were Sponsored Partnerships and some of which are
Sponsored REITs, (b) the acquisition of real estate by the Sponsored Entities
and (c) the sale of equity interests in the Sponsored Entities.
FSP Property Management asset manages each Sponsored Entity and provides
property management services or property accounting services to eight Sponsored
Entities. FSP Property Management receives fee income from those Sponsored
Entities that have not been acquired by FSP Corp. FSP Property Management does
not receive any rental income.
FSP Holdings acts as the general partner of each Sponsored Partnership.
Between April 1999 and December 2002, FSP Investments consummated the
offering of 16 Sponsored REITs. Thirteen of these Sponsored REITs are the Target
REITs. Set forth below is information regarding each of the existing Sponsored
Partnerships, each of which has been acquired by FSP Corp., and the Target
REITs.
29
SPONSORED PARTNERSHIPS
Percentage of
Rentable
Total Gross Square Feet
Proceeds of Leased as of
Name Offering Property Location Property Type 9/30/02
---- -------- ----------------- ------------- -------
Essex $12,300,000 Houston, Texas Apartments 93%
Reata 13,000,000 Houston, Texas Apartments over 95%
One Technology Drive 10,925,000 Peabody, Massachusetts Warehouse/Distribution Ctr. 100%
North Andover 10,000,000 North Andover, Massachusetts Office 97%
Weslayan Oaks 5,400,000 Houston, Texas Apartments over 95%
Park Seneca 9,000,000 Charlotte, North Carolina Office 79%
Santa Clara 8,700,000 Santa Clara, California Office 100%
Piedmont Center 13,500,000 Greenville, South Carolina Office 68%
Silverside Plantation 21,800,000 Baton Rouge, Louisiana Apartments over 95%
Hillview Center 6,100,000 Milpitas, California Office/R&D 100%
Telecom Business Center 18,450,000 San Diego, California Office/R&D 100%
Southfield Centre 18,500,000 Southfield, Michigan Office 85%
Blue Ravine 7,000,000 Folsom, California Office 100%
Bollman Place 7,000,000 Savage, Maryland Warehouse/Distribution Ctr. 100%
Austin N.W. 12,300,000 Austin, Texas Office 100%
Gateway Crossing 24,000,000 Columbia, Maryland Flex Office 94%
Lyberty Way 11,125,000 Westford, Massachusetts Office 100%
30
TARGET REITS
Percentage of
Rentable
Total Gross Square Feet
Proceeds of Leased as of
Name Offering Property Location Property Type 9/30/02
---- -------- ----------------- ------------- -------
Forest Park $7,800,000 Charlotte, North Carolina Office 87%
The Gael 21,250,000 Houston, Texas Apartments 94%
Goldentop 23,150,000 San Diego, California R&D/Office 100%
Centennial 15,800,000 Colorado Springs, Colorado Flex Office 100%
Meadow Point 25,750,000 Chantilly, Virginia Office 100%
Timberlake 51,500,000 Chesterfield, Missouri Office 100%
Federal Way 20,000,000 Federal Way, Washington Office 100%
Fair Lakes 48,000,000 Fairfax, Virginia Office 100%
Northwest Point 37,250,000 Elk Grove Village, Illinois Other 100%
Timberlake East 25,000,000 Chesterfield, Missouri Office 92%
Merrywood 20,600,000 Katy, Texas Apartments 95%
Plaza Ridge I 40,000,000 Herndon, Virginia Office 100%
Park Ten 27,500,000 Houston Texas Office 100%
TOTAL: $572,700,000
Each of the Target REITs holds its property on an unleveraged basis, and
each has paid dividends from property operations to its investors in every
quarter since inception.
Background of the Mergers
At a meeting of the FSP Board on July 19, 2002, the management of FSP
Corp. presented a report on operating expenses, including the expenses of
managing the Sponsored REITs. Messrs. Silverstein and McGillicuddy, who were
attending their first meeting of the FSP Board, noted that FSP Corp.'s
predecessor, the FSP Partnership, had acquired Sponsored Entities; they inquired
whether an acquisition by FSP Corp. of Sponsored Entities would be feasible and
whether such an acquisition might cause a reduction in the percentage that
operating expenses constitute of revenue, an increase in FSP Corp.'s revenue
stream from rental income and/or might produce other benefits.
As a result of these inquiries, management of FSP Corp. began to analyze
the potential benefits of acquiring the Target REITs and in late July instructed
its counsel, Hale and Dorr LLP, to explore the feasibility of such an
acquisition. Hale and Dorr LLP reported in August that such an acquisition was
feasible. FSP Corp. engaged A.G. Edwards to advise it on the reasonableness of
the methodology to be used by management in recommending the amount of merger
consideration if a transaction were to be proposed.
31
Those members of FSP Corp.'s management who are also members of the Target
REIT Boards began to analyze the potential benefits of a merger transaction to
the Target REITs and indicated that they would entertain an acquisition
proposal. The Target REIT Boards engaged the Appraisers to furnish the
Appraisals.
In late August the management of FSP Corp. and the management of the
Target REITs (who are the same persons) reached an agreement on a methodology to
value the proposed transaction. On October 1, 2002, A.G. Edwards delivered its
report to the management of FSP Corp.
On December 16, 2003, Messers. Carter, McGillicuddy, Norris and
Silverstein met in Sarasota, Florida to discuss the proposed transaction. Mses.
Corinha and Notopolulos determined that their presence was not needed at this
meeting as each one had intimate knowledge of the proposed transaction due to
their respective roles as executive officers of FSP Corp. Moreover, no formal
vote of the FSP Board was scheduled to be taken at this meeting. During the
course of the day-long meeting, Messrs. McGillicuddy, Silverstein and Norris
asked numerous questions of Mr. Carter relating to the anticipated benefits of
the proposed transaction, the proposed detriments of the proposed transaction,
the valuation methodology used by FSP Corp.'s management to arrive at the Merger
Consideration and the report prepared by A.G. Edwards. Messrs. Carter,
McGillicuddy, Norris and Silverstein engaged in several discussions of these
matters during the course of the meeting.
From December 17, 2002 through January 9, 2003, the members of the FSP
Board discussed the proposed transaction via telephone and e-mail with each
other and members of FSP Corp.'s management.
In late December the management of FSP Corp. and the Target REITs reached
agreement on the amount of Merger Consideration that would be paid and the terms
of the Merger Agreement.
At a telephonic meeting of the FSP Board held on January 10, 2003, Mr.
Carter presented an analysis of the anticipated benefits of the proposed
transaction and reviewed the methodology used in ariving at the amount of the
Merger Consideration. Mr. Carter also reviewed the conclusions of the report
prepared by A.G. Edwards. Representatives of Hale and Dorr LLP reviewed with the
FSP Board the material terms of the Merger Agreement and the FSP Board's
fiduciary duties. After considering these presentations and the report from A.G.
Edwards and after engaging in further discussions of the benefits and detriments
of the proposed transactions, the FSP Board unanimously voted to approve the
Merger Agreement and the transactions contemplated thereby, determined that the
Mergers, taken as a whole, are fair to the FSP Stockholders and resolved to
recommend that the FSP Stockholders vote to approve the Mergers. All persons
participating on the call could hear each other at all times.
Following this meeting, the Target Boards executed unanimous written
consents of directors in lieu of a meeting, whereby each Target Board
unanimously approved the Merger Agreement and the transactions contemplated
thereby, determined that the Mergers, taken as a whole, were fair to its Target
REIT and resolved to recommend that the Target REIT Stockholders of its Target
REIT vote to approve the Mergers.
32
Reasons for the Mergers
FSP Corp. The FSP Board unanimously determined that the Merger Agreement,
providing for the Mergers and the issuance of FSP Common Stock in exchange for
Target Stock, is fair to, and in the best interests of, FSP Corp. and the FSP
Stockholders. No director affiliated with the Target REITs abstained from
voting.
The decision was based on several potential benefits of the Mergers that
the FSP Board believes will contribute to the success of the Combined Company.
These potential benefits include:
o The Combined Company's real estate portfolio will be substantially
larger and more diverse both geographically and by tenant business
than that of FSP Corp., reducing the dependence of an investment in
the Combined Company on the performance of a smaller group of
assets.
o The Combined Company's business will generate a greater percentage
of its revenues from rentals from real properties and a lesser
percentage from real estate investment banking/brokerage activities,
constituting a more stable income stream than that currently
received by FSP Corp.
o The Combined Company's larger portfolio of real estate may produce
economies of scale, increase its purchasing power relating to goods
and services and reduce the percentage that expenses constitute of
gross revenue.
o The Combined Company's increased asset base should give FSP Corp.
the flexibility to increase its $50,000,000 line of credit, enabling
the Combined Company to finance the acquisition of real property for
itself or to provide larger loans to Sponsored Entities or to
finance their acquisition of real property.
o The Combined Company's larger portfolio of real properties and
larger equity capitalization should increase the likelihood that the
Combined Company may eventually be able to provide liquidity for its
equity investors through the public markets.
The FSP Board reviewed a number of factors in evaluating the Merger
Agreement, providing for the Mergers and the issuance of the Merger
Consideration, including, but not limited to, the following: (i) management's
view of the financial condition, results of operations and business of FSP Corp.
and each of the Target REITs before and after giving effect to the Mergers, (ii)
the differences and similarities between the business and operating strategies
of FSP Corp. and each of the Target REITs, (iii) historical financial
information concerning the real estate properties owned by FSP Corp. and each of
the Target REITs, (iv) current conditions in the REIT market generally, (v) the
consideration the Target REIT Stockholders would receive in the Mergers, (vi)
the belief that the terms of the Merger Agreement are reasonable, (vii) the
impact of the Mergers on the FSP Stockholders, potential investors and
employees, (viii) the advice received by the FSP Board from A.G. Edwards that it
believes the methodology used by the FSP Board to estimate hypothetical values
of FSP Corp. and the Combined Company is not unreasonable and (ix) the
Appraisals obtained by each Target REIT.
33
The FSP Board also identified and considered a number of potentially
negative factors in its deliberations concerning the Merger Agreement, providing
for the Merger and the issuance of the Merger Agreement, including the
following: (i) conflicts of interest inherent between the directors and officers
of FSP Corp. and the directors and officers of the Target REITs, (ii) the risks
that the benefits sought to be achieved by the Mergers may not be realized,
(iii) the immediate and substantial dilution of voting power and percentage
ownership to the FSP Stockholders and (iv) the possibility that the real estate
holdings of the Target REITs would decline in value.
The FSP Board concluded, however, that, on balance, the potential benefits
of the Mergers to FSP Corp. and the FSP Stockholders outweighed the associated
risks. The discussion of the information and factors considered by the FSP Board
is not intended to be exhaustive. In view of the variety of factors considered
in connection with its evaluation of the Merger Agreement, providing for the
Mergers and the issuance of the Merger Consideration, the FSP Board did not find
it practicable to, and did not quantify or otherwise assign relative weight to,
the specific factors considered in reaching its determination.
The affirmative vote of the holders of a majority of the shares of FSP
Common Stock present in person or represented by proxy and voting at the Meeting
is required to approve the Merger Agreement.
The FSP Board believes that the Merger Agreement is in the best interests
of FSP Corp. and the FSP Stockholders and recommends a vote FOR approval of the
Merger Agreement.
The Target REITs. The Target Boards each unanimously concluded that the
Merger Agreement, providing for the Merger and the issuance of the Merger
Consideration is fair to, and in the best interests of, the Target REITs and the
Target REIT Stockholders.
The decision to approve the Merger Agreement is based upon the Target
Boards' respective beliefs that (i) the Merger Consideration being offered for
the Target Stock constitutes fair consideration for the Target Stock, (ii) the
reduced dependence on the performance of investment in a particular asset would
reduce the risk to the Target REIT Stockholders of a decline in a particular
real estate market, (iii) the Target REITs' real estate holdings complement
those of FSP Corp., and (iv) the Mergers would provide Target REIT Stockholders
with an equity interest in a company whose stock is registered under the
Exchange Act, which may in the future provide the Target REIT Stockholders with
liquidity for their investment.
The decision of the individual Target Boards to approve the Merger
Agreement resulted from such Target Board's careful consideration of a range of
strategic alternatives, including the continuation of such Target REIT, the
liquidation of such Target REIT and the creation or support of a secondary
market for the Target Stock of such Target REIT through limited cash tender
offers or repurchase programs sponsored by such Target REIT. The Target Boards
considered a number of factors in evaluating the Mergers, including the
34
following: (i) the Appraisals obtained by each Target REIT, (ii) identifying the
strategic alternative that would provide the greatest value to the Target REIT
Stockholders, (iii) the potential for a future market for FSP Common Stock, (iv)
the relative likelihood of completing the Mergers, (v) the relative risks to the
respective Target REITs' business if the Mergers were not completed and (vi) a
review of the current and prospective business environment for REITs.
The Target Boards also considered a number of potentially negative factors
in their deliberations concerning the Mergers, including: (i) conflicts of
interest inherent between the directors and officers of FSP Corp. and the
directors and officers of the Target REITs, (ii) the risk that the Mergers might
not be consummated, (iii) the lack of a public market for FSP Common Stock, (iv)
the increased risk to the value of the Target REIT Stockholders' investment
given that the Combined Company's revenues would be derived from a greater
number of real estate properties and (v) the risk that the benefits sought to be
achieved by the Mergers would not be realized.
Each Target Board concluded, however, that, on balance, the potential
benefits of the Mergers to its Target REIT and its Target REIT Stockholders
outweighed the associated risks. The discussion of the information and factors
considered by the Target Boards is not intended to be exhaustive. In view of the
variety of factors considered in connection with its evaluation of the Merger
Agreement and the Merger Consideration, the Target Boards did not find it
practicable to, and did not, quantify or otherwise assign relative weight to the
specific factors considered in reaching its determination.
Consequences if Mergers not Completed
If the Mergers are not completed, FSP Corp. and the Target REITs will
continue to operate as separate legal entities with their own assets and
liabilities. There will be no change in their investment objectives, policies
and restrictions.
35
THE MERGER AGREEMENT
The following is a summary of the material provisions of the Merger
Agreement, a copy of which is set forth as Appendix A to this Proxy Statement
and is incorporated herein by reference.
The Mergers
Subject to the terms and conditions of the Merger Agreement, on the
Effective Date FSP Corp. will acquire by merger each Target REIT. The FSP Board
expects that the Effective Date will be on or about April 1, 2003.
The following chart sets forth the number of shares of FSP Common Stock to
be received as Merger Consideration on the Effective Date by Target REIT
Stockholders for each share of Target Stock of the respective Target REIT. FSP
Corp. will issue the Merger Consideration to Target REIT Stockholders in private
placements, exempt from registration under Section 4(2) of the Securities Act
and Rule 506 of Regulation D promulgated thereunder.
Shares of FSP Total Shares of FSP
Common Stock Common Stock
Total Number of Issuable in Exchange Issuable to Target
Shares of Target for Each Share of REIT
Target REIT Stock Outstanding Target Stock Stockholders
--------------- ----------------- -------------------- -------------------
Forest Park 78 7,299.59 569,368.02
The Gael 212.50 6,975.59 1,482,312.88
Goldentop 231.50 7,302.58 1,690,547.27
Centennial 158 6,905.56 1,091,078.48
Meadow Point 257.50 6,983.25 1,798,186.88
Timberlake 515 6,787.12 3,495,366.80
Federal Way 200 6,779.66 1,355,932.00
Fair Lakes 480 6,805.36 3,266,572.80
Northwest Point 372.50 6,779.66 2,525,423.35
Timberlake East 250 6,830.85 1,707,712.50
Merrywood 206 6,854.51 1,412,029.06
Plaza Ridge I 400 6,822.03 2,728,812.00
Park Ten 275 6,824.54 1,876,748.50
36
Consummation of the Mergers is subject to a number of conditions and will
not occur unless, among other things, holders of a majority of the shares of
Target Stock of each Target REIT vote to approve the Mergers.
The following table sets forth the value ascribed to each Target REIT for
purposes of the Merger Consideration.
Forest Park $ 8,398,178.30
The Gael $21,864,114.98
Goldentop $24,935,572.23
Centennial $16,093,407.58
Meadow Point $26,523,256.48
Timberlake $51,556,660.30
Federal Way $19,999,997.00
Fair Lakes $48,181,948.80
Northwest Point $37,249,994.41
Timberlake East $25,188,759.38
Merrywood $20,827,428.64
Plaza Ridge I $40,249,977.00
Park Ten $27,682,040.38
Representations and Warranties
In the Merger Agreement, FSP Corp. has made various representations and
warranties to each Target REIT, including representations and warranties
relating to (i) the due organization of FSP Corp. and its authority to enter
into the Merger Agreement, (ii) the absence of the need (except as specified)
for third-party or governmental consents to the Mergers, (iii) the Mergers'
nonviolation of laws and material agreements, (iv) FSP Corp.'s capitalization,
(v) the due authorization of the FSP Common Stock to be issued in the Mergers,
(vi) financial statements, (vii) required filings with the SEC, (viii) taxes,
(ix) full disclosure and (x) the absence of material litigation.
37
In addition, each Target REIT has made various representations and
warranties to FSP Corp., including (i) the due organization of the Target REIT,
(ii) its authority to enter into the Merger Agreement, (iii) the absence of the
need (except as specified) for third-party or governmental consents to its
Merger and its Merger's nonviolation of laws and material agreements, (iv)
financial statements, (v) full disclosure, (vi) the absence of defaults under
material agreements, (vii) the absence of material litigation, (viii) title to
assets and properties and the absence of environmental liabilities, (ix) taxes,
(x) the leases of its real property and (xi) its qualification as a real estate
investment trust for federal income tax purposes.
Covenants
Each of the parties has agreed to use its reasonable best efforts to take
all actions necessary to consummate the transactions contemplated by the Merger
Agreement. FSP Corp. has agreed that the FSP Board will recommend that FSP
Stockholders vote in favor of the Merger Agreement. Each Target REIT has agreed
that its respective Target Board will recommend that its respective Target REIT
Stockholders vote in favor of the Merger Agreement.
The executive officers and directors of FSP Corp. hold an aggregate of
3,707,977.01 shares of FSP Common Stock. The executive officers and directors
have indicated that they intend to vote all of their respective shares in favor
of the Merger Agreement.
Barry Silverstein and Dennis J. McGillicuddy, each a director of FSP
Corp., own an aggregate of 601.25 and 229 shares of Target Stock, respectively.
Such shares of Target Stock will convert into 4,130,961.11 and 1,586,343.29
shares of FSP Common Stock, respectively, upon consummation of the Mergers.
Messrs. Silverstein and McGillicuddy have indicated that they intend to vote
their respective shares of Target Stock in favor of the Merger Agreement.
Conduct of Business Pending the Effective Date
Each Target REIT and FSP Corp. has agreed that, prior to the Effective
Date or the earlier termination of the Merger Agreement, it will carry on its
business in the ordinary course in substantially the same manner as previously
conducted and will use its reasonable efforts to preserve intact its present
business organization and goodwill, maintain permits, licenses and
authorizations and preserve its relationship with third parties. The Merger
Agreement permits each Target REIT and FSP Corp. to declare prior to the
Effective Date, consistent with past custom and practice, dividends to the
pre-Merger Target REIT Stockholders or pre-Merger FSP Stockholders, as the case
may be, in respect of each entity's operating results for periods prior to the
Effective Date. Pursuant to the Merger Agreement, FSP Corp. has assumed the
obligation to pay any dividends declared but not paid by the Target REITs prior
to the consummation of the Mergers.
Conditions Precedent to the Mergers
The respective obligations of each party to effect the Mergers are subject
to the fulfillment on or before the Effective Date of the following conditions:
38
(a) the approval of the Merger Agreement and the Mergers by the
affirmative vote of the holders of a majority of the shares of FSP Common Stock
present in person or represented by proxy and voting at the Meeting;
(b) the approval of the Merger Agreement and the Mergers by the
affirmative vote of the holders of a majority of Target Stock of each Target
REIT;
(c) FSP Corp. must reasonably believe that the number of Target REIT
Stockholders who are Non-Accredited Investors does not exceed 35 and that each
such Non-Accredited Investor has, either alone or with his/her/its purchase
representative, such knowledge and experience in business and financial matters
that he/she/it is capable of evaluating the merits and risks of FSP Common
Stock;
(d) the parties must receive all necessary consents, waivers, approvals,
authorizations or orders required to be obtained and the making of all filings
required to be made by any of the parties for the authorization, execution and
delivery of the Merger Agreement and the consummation of the transactions
contemplated thereby on or before (and remaining in effect at) the Effective
Date;
(e) there shall not have occurred any material adverse change in the
overall business or prospects of any of the Target REITs or FSP Corp. or in the
tax or other regulatory provisions applicable to the Target REITs, FSP Corp. or
the Combined Company, and the FSP Board shall not have become aware of any facts
that, in its reasonable judgment, have or may have a material adverse effect on
the Target REITs and FSP Corp., taken as a whole, the Mergers or the value of
the Combined Company;
(f) receipt, on or prior to the Effective Date, by FSP Corp. of an opinion
from FSP Corp's outside legal counsel, Hale and Dorr LLP, to the effect that the
Mergers should be treated for federal income tax purposes as reorganizations
within the meaning of Section 368(a) of the Internal Revenue Code and confirming
that in all material respects, as of the Closing Date, the discussion set forth
under "Material United States Federal Income Tax Considerations", including any
opinions expressed therein, to the extent that it involves matters of law, is
accurate;
(g) delivery by the President and Chief Executive Officer of FSP Corp. and
the President of each of the Target REITs of certificates to the effect that
there have been no material adverse changes in the financial condition of such
entity prior to the consummation of the Mergers;
(h) there having been no statute, rule, order, or regulation enacted or
issued by the United States or any State thereof, or by a court, which prohibits
the consummation of the Mergers; and
(i) the representations of each of FSP Corp. and the Target REITs set
forth in the Merger Agreement shall be true and complete in all material
respects as of the Closing Date.
The conditions described in clauses (c), (d), (e) and (g) above may be
waived by the FSP Board in whole or in part if, in the opinion of the FSP Board,
such waiver does not materially affect the terms of the transaction. Certain of
the conditions to the consummation of the Mergers are beyond the control of FSP
Corp., the Target REITs and the Target Boards; consequently, there can be no
assurance that the Mergers will occur.
39
Termination
The Merger Agreement may be terminated, and the Mergers may be abandoned,
at any time before the Effective Date, notwithstanding approval of the Merger
Agreement by the FSP Stockholders and/or Target REIT Stockholders.
(a) by the mutual written consent of FSP Corp. and each Target REIT;
(b) by either FSP Corp. or any Target REIT if the Mergers have not been
consummated by July 31, 2003 (which date may be extended by mutual agreement of
the parties); or
(c) by either FSP Corp. or any Target REIT if the conditions to the
Mergers set forth in the Merger Agreement are not satisfied or waived.
If a material casualty occurs with respect to the property owned by a
particular Target REIT, the FSP Board has the right to terminate the Merger
Agreement with respect to that Target REIT and to consummate the Mergers with
the remaining Target REITs.
Effect of Termination
If the Merger Agreement is terminated, there will be no liability or
obligation on the part of any party thereto or its respective affiliates,
partners, directors or officers, except for payment of expenses each party is
liable for and to the extent that such termination results from the willful
breach of a party thereto of any of its representations, warranties, covenants
or agreements made in or pursuant to the Merger Agreement.
40
FAIRNESS OF THE MERGERS
Conclusions of the FSP Board
The FSP Board believes that the terms of the Merger Agreement, when
considered as a whole, are fair to FSP Corp. and the FSP Stockholders and the
Merger Consideration offered in exchange for the Target Stock constitutes fair
consideration for the interests of the Target REIT Stockholders. The FSP Board
believes that the perceived benefit analysis of the proposed Mergers is fair and
reasonable. This section discusses the factors upon which the FSP Board has
based its conclusions as to the fairness of the Merger Agreement and the Merger
Consideration and should be carefully reviewed by you. The FSP Board did not
find it practicable to, and did not attempt to, quantify the relative importance
of these factors, but has, where appropriate, noted which of the factors support
or detract from its belief as to the fairness of the Merger Agreement and the
Merger Consideration to FSP Corp. and FSP Stockholders.
Determination of Merger Consideration
The FSP Board believes that the methods used to determine the Merger
Consideration are fair to FSP Corp. and FSP Stockholders. The FSP Board,
however, has significant conflicts of interest; consequently, the determination
of the Merger Consideration was not the product of arms'-length negotiation. In
addition, because there is no public market for the stock of FSP Corp., the
Target REITs or the Combined Company, the relative values of the companies can
only be estimated. Because of these circumstances, the FSP Board concluded that
there was no mechanical formula that it could apply to determine the Merger
Consideration. The FSP Board considered the factors set forth below and
exercised its reasonable judgment to determine an amount of Merger Consideration
that it believes is fair to the FSP Stockholders and will be acceptable to a
majority of both the FSP Stockholders and the Target REIT Stockholders of each
Target REIT. In concluding that the Merger Consideration is fair, the FSP Board
relied in part on the advice provided by A.G. Edwards that the methodology
(which did not involve the application of a specific formula) used by FSP Corp's
management to estimate hypothetical values is not unreasonable. The FSP Board
recognizes there are alternative methods to value the proposed Mergers. The FSP
Board determined, in good faith and after taking into account FSP Corp.'s status
as a REIT, the most reasonable method was to use the "enterprise" or "on-going
concern" method. This method, which uses a CAD (or cash available for
distribution) multiple, is a commonly accepted valuation approach used by
comparable companies with publicly traded securities. In determining the
allocation of the Merger Consideration among the stockholders of the Target
REITs, the FSP Board and FSP Corp.'s management took the Appraisals into
consideration, but used the Appraisals only as guides in making the allocation.
Fairness of the Merger Consideration
Valuation of the FSP Common Stock and the Combined Company. The FSP Board
estimated relative values of FSP Corp. and the various Target REITs based upon
its current knowledge and understanding of the financial condition of FSP Corp.
and the Target REITs, respectively, and on its reasonable judgment of the
benefits expected to accrue to FSP Corp. following consummation of the Mergers.
The management of FSP Corp. submitted to the FSP Board a "Valuation Overview"
(attached hereto as Appendix D) setting forth a range of possible values for FSP
41
Corp. and the Combined Company. The FSP Board first estimated a value for FSP
Corp. prior to the consummation of the Mergers. This estimated value was
approximately $363.3 million. This estimated value was derived, in part, from
the assets and liabilities of FSP Corp., its expected CAD, the application of
multiples to CAD commonly used in valuing REITs and the limited liquidity of FSP
Common Stock. Although the FSP Board did not apply a mechanical formula in
determining this estimated value, this value equates to a multiple of
approximately 10.9 of projected 2003 CAD and includes a discount for lack of
liquidity. From this estimated value, the FSP Board calculated a FSP Common
Stock per share value of $14.75.
The FSP Board then estimated a value for FSP Corp. following consummation
of the Mergers. This estimated value was approximately $732 million. This
estimated value was derived, in part, from the assets and liabilities of the
Combined Company, its expected CAD, the application of multiples to CAD commonly
used to value REITs and the limited liquidity of FSP Common Stock. Although the
FSP Board did not apply a mechanical formula in determining this estimated
value, this value equates to a multiple of approximately 11.6 of projected 2003
CAD and includes a discount for lack of liquidity. The FSP Board determined
that, based on the same set of assumptions, the Combined Company merited a
greater CAD multiple than FSP Corp. because the Combined Company would have a
higher relative percentage of rental revenue as opposed to transactional revenue
and such rental revenue backed by real estate assets is generally more stable
than transactional revenue.
The FSP Board then calculated the difference between the estimated value
of FSP Corp. prior to the consummation of the Mergers and the estimated value of
FSP Corp. following the consummation of the Mergers to be approximately $368.8
million. The number of shares of FSP Common Stock issuable to Target REIT
Stockholders as Merger Consideration, therefore, is approximately 25,000,091
which is equal to the approximately $368.8 million estimated value differential
divided by the $14.75 per share current estimated value of FSP Corp.
A.G. Edwards advised the FSP Board that it believes the methodology used
by the FSP Board to estimate hypothetical values of FSP Corp. and the Combined
Company is not unreasonable. According to A.G. Edwards, the estimated values for
FSP Corp. and the Combined Company fall within a range of an "implied
hypothetical enterprise value" of FSP Corp. and the Target REITs using the FSP
Board's methodology. A.G. Edwards issued the FSP Board a report on its findings.
This report is attached to this Proxy Statement as Appendix C.
Because the FSP Board has significant conflicts of interest, the Merger
Consideration was not the product of arms'-length negotiations. In addition,
because there is no public market for FSP Corp., the Target REITs or the
Combined Company, the relative values of FSP Corp. and the various Target REITs
can only be estimates. The values ascribed to FSP Corp., the Target REITs and
the Combined Company are the best estimated values according to the reasonable
judgment of the FSP Board.
Allocation of Merger Consideration. In allocating the approximately $368.8
million of Merger Consideration among the Target REITs, the FSP Board and FSP
Corp.'s management took into consideration the Appraisals obtained by the Target
REITs and prepared by third party independent appraisers to establish the
estimated values of the Target REITs' real estate assets. The FSP Board and FSP
Corp.'s management also considered the amount of cash held by each Target REIT.
Finally, the FSP Board and FSP Corp.'s management considered the nature and
42
quality of the tenants at each Target REIT's property, the projected expirations
of leases and the property type (whether it was an office building or a
residential apartment building) and location of the property held by each Target
REIT. The FSP Board and FSP Corp.'s management used the Appraisals as guides to
the relative value of the Target REITs but not as absolute determinants.
Instead, the FSP Board and FSP Corp.'s management each exercised its reasonable
judgment to estimate the relative contributions made by each Target REIT to the
estimated $368.8 million increase in the value of FSP Corp. as a result of the
Mergers and allocated the Merger Consideration among the Target REITs on the
basis of such estimated relative contributions.
Negative Factors Considered. The FSP Board identified and considered a
number of potentially negative factors in its deliberations concerning the
Merger Agreement, including the following: (i) conflicts of interest inherent
between the directors and officers of FSP Corp. and the directors and officers
of the Target REITs, (ii) the risks that the benefits sought to be achieved by
the Mergers may not be realized, (iii) the immediate and substantial dilution in
voting power and percentage ownership to the FSP Stockholders and (iv) the
possibility that the real estate holdings of the Target REITs would decline in
value. The FSP Board concluded, however, that, on balance, the potential benefit
of the Mergers to FSP Corp. and the FSP Stockholders outweighed the associated
risks.
Fairness in View of Conflicts of Interest. The members of the FSP Board
have significant conflicts of interest in connection with the Mergers, and no
unaffiliated representatives were appointed to negotiate the terms of the
Mergers on behalf of FSP Corp. In particular, Barry Silverstein and Dennis J.
McGillicuddy own an aggregate of 601.25 and 229 shares of Target Stock,
respectively. Such shares of Target Stock will convert into 4,130,961.11 and
1,586,343.29 shares of FSP Common Stock, respectively, upon consummation of the
Mergers. Messrs. Silverstein and McGillicuddy also currently own, however,
1,148,878.50 and 990,325.75 shares of FSP Common Stock, respectively. In
addition, Messrs. Carter and Norris and Ms. Corinha are directors of each Target
REIT and owe a fiduciary duty to the Target REIT Stockholders, and Ms.
Notopoulos is an executive officer of each Target REIT. The FSP Board concluded
that retaining independent representatives was not necessary nor cost effective,
in part because there are no members of the FSP Board that do not have conflicts
of interest in connection with the Mergers and under Maryland law the FSP Board
does not have the power to delegate the determination of whether to approve and
adopt the Merger Agreement and the Mergers contemplated thereby. This decision
was also based, in part, upon the receipt of the advice from A.G. Edwards
regarding the methodology used to value FSP Corp. and the Combined Company.
Finally, the decision was also based, in part, on the fact that the provision of
asset management services by FSP Corp. to the Target REITs has given the FSP
Board the opportunity to become familiar with the properties and operations of
the Target REITs and, hence, has provided the FSP Board with substantial context
in which to its exercise its reasonable judgment. No fees or other compensation
will be payable to the members of the FSP Board in connection with the Mergers,
although Messrs. Silverstein and McGillicuddy will participate in the Merger
Consideration to the extent of their ownership of Target Stock. The FSP Board
believes that its determination regarding the fairness of the Mergers was based
upon the proper exercise of its fiduciary duty, unaffected by these conflicts of
interest.
43
ADVICE OF FINANCIAL ADVISORS AND APPRAISALS
Advice of A.G. Edwards
A.G. Edwards advised the FSP Board that it believes the methodology used
by the FSP Board to estimate hypothetical values of FSP Corp. and the Combined
Company is not unreasonable. In conducting its review, A.G. Edwards analyzed, to
the extent it deemed necessary, financial projections of FSP Corp. and the
Target REITs, publicly traded securities of companies with operations comparable
to those of FSP Corp. and the Target REITs, attributes of FSP Corp. having both
negative and positive impacts on FSP Corp's valuation, as well as other
financial studies and analyses related to general economic, market and monetary
conditions. FSP Corp. provided A.G. Edwards with historical and forecasted
financial information describing FSP Corp. Such information was not audited,
reviewed or compiled by an independent certified public accounting firm and A.G.
Edwards takes no responsibility for the accuracy of such information. Forecasted
financial information was prepared by FSP Corp. and A.G. Edwards was not asked
to consider, nor did it consider, the reasonableness of the assumptions on which
such forecasts were based.
In particular, A.G. Edwards received the "Valuation Overview" prepared by
FSP Corp, and attached to this Proxy Statement as Appendix D. A.G. Edwards
concluded that the methodology techniques used in the valuation overview, the
range of multiples applied to CAD and the range of discounts applied for lack of
marketability were not unreasonable. The estimated hypothetical value ranges
contained in the valuation overview (a range of estimated hypothetical value for
FSP Corp. of $328 million to $416 million and a range of estimated hypothetical
value for the Combined Company of $642 million to $815 million) represent
analysis considering value as of the date specified, do not reflect any changes
in value that may have occurred after that date, are subject to certain
assumptions and may not represent the true worth or realizable value of FSP
Corp. or the Combined Company.
A.G. Edward has furnished a written report to the Company. This report is
attached to this Proxy Statement as Appendix C. A.G. Edwards was not engaged to
render, and its advice did not constitute, nor is it expressing: (i) an
independent valuation opinion or appraisal report (as defined in ASA Business
Valuation Standards (revised January 1995)) of FSP Corp. or the Target REITs or
(ii) an opinion as to the fairness of the consideration offered in the Mergers
to the Target REIT Stockholders. In preparing either a valuation opinion or
appraisal or in rendering a fairness opinion, certain additional extrinsic
analyses, tasks and judgments necessarily must be undertaken and completed. Such
analyses would include additional due diligence and analytical procedures as
outlined in A.G. Edwards' full report, attached as Appendix C to this Proxy
Statement. Had such analyses and tasks been undertaken and completed, they may
or may not have yielded results similar to the results from the methodology
techniques used in the valuation overview. A.G. Edwards has not been requested
to undertake, nor has A.G. Edwards undertaken, any of these foregoing analyses.
In addition, A.G. Edwards does not express any qualitative assessment of the
methodology techniques used in the valuation overview compared to other
methodology techniques that might be used to value FSP Corp. or the Target
REITs, nor does A.G. Edwards' written report address the merits of the
underlying decision by FSP Corp. to engage in the Mergers.
44
Consistent with the scope of A.G. Edwards' engagement, FSP Corp. imposed
no limitations as to A.G. Edwards' review.
FSP Corp. obtained the services of A.G. Edwards because A.G. Edwards has a
national reputation for providing businesses with comprehensive capital raising
and financial advisory services and has extensive experience with all types of
real estate securities. FSP Corp. has agreed to pay A.G. Edwards a fee in the
amount of $125,000 for its services, together with reimbursement of
out-of-pocket expenses. Payment of this amount is not contingent on the closing
of the Mergers. During the past two years, A.G. Edwards has received from FSP
Corp. an aggregate of $300,000 for services performed for FSP Corp., together
with reimbursement of out-of-pocket expenses.
Appraisals of the Target REITs' Properties
The Target Boards engaged several third-party independent appraisers as
set forth in the table below (collectively, the "Appraisers"), to appraise the
real estate owned by each of the Target REITs respectively, each of which has
delivered a written summary of its analysis, based upon the review, analysis,
scope and limitations described therein, as to the fair market value of a
particular Target REIT's property as of the date set forth in the table below,
respectively (together, the "Appraisals"). The Target Boards selected the
Appraisers to provide the Appraisals because of their experience and reputation
in connection with real estate assets. In addition, the Target Boards desired to
take advantage of the cost efficiencies associated with having the same party
provide each Appraisal as provided the appraisal obtained by each Target REIT in
connection with acquiring its property. The Target Boards imposed no limitations
on the scope of the Appraisers' appraisals. The Target REITs have made the
Appraisals available to FSP Corp. and have allowed the FSP Board to rely on the
Appraisals. The FSP Board took the Appraisals into consideration and used them
as guides in allocating the Merger Consideration among the Target REITs.
Set forth below is certain information regarding the Appraisals. These
appraised values are for the property owned by the respective Target REIT as of
the date of the Appraisal. While the FSP Board took the Appraisals into
consideration when allocating the Merger Consideration among the Target REITS,
the Merger Consideration reflects the increase in value to FSP Corp. that is
expected be produced by the consummation of the Mergers.
45
---------------------------------------------------------------------------------------------------------------------------
Sum of Fair Market
Value set forth in
Appraisal and Estimated
Cash Reserve Balances
as of September 30,
Target REIT Appraiser 2002(1) Date of Appraisal
----------- --------- ------- -----------------
---------------------------------------------------------------------------------------------------------------------------
Forest Park Fortenberry Lambert, Inc. $7,980,000 September 3, 2002
---------------------------------------------------------------------------------------------------------------------------
The Gael Abbot & Associates, Inc. $19,475,000 August 23, 2002
---------------------------------------------------------------------------------------------------------------------------
Goldentop D.F. Davis Real Estate, Inc. $23,650,000 September 4, 2002
---------------------------------------------------------------------------------------------------------------------------
Centennial Dyco Real Estate, Inc. $14,120,000 September 5, 2002
---------------------------------------------------------------------------------------------------------------------------
Meadow Point The Robert Paul Jones Company, Ltd. $23,600,000 September 3, 2002
---------------------------------------------------------------------------------------------------------------------------
Timberlake Dinan Real Estate Advisors, Inc. $44,025,000 August 26, 2002
---------------------------------------------------------------------------------------------------------------------------
Federal Way Shorett KMS Valuation Advisory Group $17,050,000 September 4, 2002
---------------------------------------------------------------------------------------------------------------------------
Fair Lakes The Robert Paul Jones Company $41,200,000 September 3, 2002
---------------------------------------------------------------------------------------------------------------------------
Northwest Point Integra Realty Resources $31,650,000(2) October 1, 2002
---------------------------------------------------------------------------------------------------------------------------
Timberlake East Dinan Real Estate Advisors, Inc. $21,675,000 September 16, 2002
---------------------------------------------------------------------------------------------------------------------------
Merrywood (3) Patrick O'Connor & Associates, LP $18,000,000 March 13, 2002
---------------------------------------------------------------------------------------------------------------------------
Plaza Ridge I (3) The Robert Paul Jones Company $34,525,000 April 3, 2002
---------------------------------------------------------------------------------------------------------------------------
Park Ten (3) Patrick O'Connor & Associates, LP $23,750,000 June 6, 2002
---------------------------------------------------------------------------------------------------------------------------
46
(1) Amounts are rounded to the nearest $25,000.
(2) The Appraiser provided a range of values for this Target REIT.
(3) These Appraisals were obtained during the due diligence period prior to
acquisition of the properties by the Target REITs.
The applicable Target REITs obtained appraisals for the properties owned
by Merrywood, Plaza Ridge I and Park Ten during the due diligence period in 2002
prior to acquisition of the properties. No new appraisals were ordered by the
respective Target Boards for these properties because the respective Target
Boards did not believe that there had been material changes in the buildings or
real estate markets since the time of the last appraisals, each of which had
been prepared within the last twelve calendar months.
The material assumptions, qualifications and limitations to the Appraisals
are described below.
Summary of Methodology. At the request of the Target Boards, the
Appraisers updated their original appraisals for the purchase of the properties
held by the Target REITs and, where appropriate, revised their assumptions to
reflect the changed conditions in the market or property. Appraisers typically
use three approaches in valuing real property: the cost approach, the income
approach and the sales comparison approach. The type and age of a property,
market conditions and the quantity and quality of data affect the applicability
of each approach in a specific appraisal situation. The value estimated by the
cost approach incorporates separate estimates of the value of the unimproved
site and the value of improvements, less observed physical wear and tear and
functional or economic obsolescence. The income approach estimates a property's
capacity to produce income through an analysis of the rental market, operating
expenses and net income. Net income may then be processed into a value through
either direct capitalization or discounted cash flow analysis, or a combination
of these two methods. The sales comparison approach involves a comparative
analysis of the subject property with other similar properties that have sold
recently or that are currently offered for sale in the market. Nearly all the
Appraisers considered or used all three of the approaches to value in their
original appraisals.
The Appraisers analyzed the individual properties of each Target REIT
(other than Merrywood, Plaza Ridge I and Park Ten) by (i) reviewing each
property's historical operating statements, (ii) reviewing and relying on
specific information regarding prospective changes in rents and expenses for
each property provided by the applicable Target REIT, (iii) developing
information from a variety of sources about market conditions for each
individual property (including relevant information about general market
conditions and the city, state and neighborhood in which the property is
located) and (iv) considering the projected cash flow for each property.
Representatives of the Appraisers performed site inspections on all properties
during August 2002 and September 2002. In the course of these site visits, the
Appraisers inspected the physical facilities, obtained current rental and
percentage of leased space information, gathered information on competing
properties and the local market, visited primary competing properties and
interviewed each local property manager or assistant manager concerning
performance of the subject property and other factors.
47
In conducting the Appraisals, the Appraisers also interviewed and relied
upon the Target Boards, executive management and property management personnel
to obtain information relating to the condition of each property, including any
deferred maintenance, capital budgets, status of ongoing or newly planned
property additions, reconfigurations, improvements and other factors affecting
the physical condition of the property improvements.
The Appraisers also interviewed property management personnel responsible
for the properties and the Target REITs' executive management personnel to
discuss competitive conditions, area economic and development trends affecting
the properties, historical and budgeted operating revenues and expenses and
occupancies. The Appraisers also reviewed historical operating statements and
2002 operating budgets for the subject properties.
To define the percentage of leased space, rental rate and expense
escalators to be used in developing property operating projections, the
Appraisers reviewed the acquisition criteria and projection parameters in use in
the marketplace by major investors, owners and operators of the applicable
property types. Further, the Appraisers considered various sources in local
markets to identify recent sales of similar properties and derive certain
valuation indicators. Sources for data concerning such transactions included
local appraisers, property owners, real estate brokers, tax assessors and real
estate research firms.
FSP Corp. will make each of the Appraisals available for inspection and
copying by the FSP Stockholders or their representatives who have been so
designated in writing at the principal executive offices of FSP Corp. during
regular business hours.
Conclusions as to Value
Assumptions, Limitations and Qualifications of Property Appraisals. The
Appraisers utilized certain assumptions to determine the appraised value of the
properties under the income approach and the sales comparison approach. The
Appraisals reflect the Appraisers' valuation of the real estate of the Target
REITs as of their respective dates, in the context of the information available
on such date. Events occurring after the date of an Appraisal and before the
closing of the Mergers could affect the properties or assumptions used in
preparing the real estate appraisals. The Appraisers have no obligation to
update the Appraisals on the basis of subsequent events.
Compensation and Material Relationships. The Appraisers have been paid
fees in the aggregate amount of $36,640 to prepare the Appraisals. The fees for
the Appraisals were negotiated between the Target Boards and the Appraisers and
payment thereof is not dependent upon completion of the Mergers. The respective
Appraisers were previously engaged to appraise the properties of the Target
REITs prior to their acquisition. Moreover, during the past three years, the
Appraisers received an aggregate of $70,650 for appraisals obtained by each
Target REIT in connection with the initial acquisition of such Target REITs
property.
48
CONFLICTS OF INTEREST
A number of conflicts of interest are inherent in the relationships among
the Target REITs, the Target Boards, FSP Corp. and the FSP Board. Certain of
these conflicts of interest are summarized below.
Common Composition of Directors and Officers
Each executive officer and four directors of FSP Corp. are directors
and/or executive officers of each Target REIT. Barry Silverstein and Dennis J.
McGillicuddy, each a director of FSP Corp., own an aggregate of 601.25 and 229
shares of Target Stock, respectively. Such shares of Target Stock will convert
into 4,130,961.11 and 1,586,343.29 shares of FSP Common Stock, respectively,
upon consummation of the Mergers. Each Target Board and the FSP Board have
independent obligations to ensure that such Target REIT's or FSP Corp.'s
participation, respectively, in the Merger Agreement and the determination of
the Merger Consideration is fair and equitable, without regard to whether the
Merger Agreement and the determination of the Merger Consideration are fair and
equitable to the other participants (including the other Target REITs). The FSP
Board and each Target Board have sought to discharge faithfully their respective
obligations to FSP Corp. and the applicable Target REIT; however, FSP
Stockholders should consider that the executive officers and three of the
directors of FSP Corp. serve in a similar capacity with respect to each Target
REIT. Accordingly, the terms of the Merger Agreement and the amount of the
Merger Consideration were not the product of arms'-length negotiations. If FSP
Corp. had a separate board of directors with executive officers who did not
serve in similar capacities for any of the Target REITs and directors who did
not own Target Stock, these persons would have had an independent perspective
which might have led them to advocate positions during the negotiation and
structuring of the Merger Agreement and the determination of the Merger
Consideration different than those taken by the FSP Board.
The conflicts of interest inherent in the relationships among the Target
REITs, the Target Boards, FSP Corp., the FSP Board and their respective
affiliates are as follows:
o George J. Carter, the President, Chief Executive Officer and a
director of FSP Corp., is the President and a director of each
Target REIT;
o Barry Silverstein and Dennis J. McGillicuddy, each a director of FSP
Corp., own an aggregate of 601.25 and 229 shares of Target Stock,
respectively. Such shares of Target Stock will convert into
4,130,961.11 and 1,586,343.29 shares of FSP Common Stock,
respectively, upon consummation of the Mergers;
o Richard R. Norris, an Executive Vice President and a director of FSP
Corp., is also a director and an Executive Vice President of each
Target REIT;
o Barbara J. Corinha, Vice President, Chief Operating Officer,
Treasurer, Secretary and a director of FSP Corp. is also Vice
President, Chief Operating Officer, Treasurer, Secretary and a
director of each Target REIT;
49
o Janet P. Notopoulos, Vice President and a director of FSP Corp., is
also a Vice President of each Target REIT; and
o Each of R. Scott MacPhee and William W. Gribbell, each an Executive
Vice President of FSP Corp., is also each a director and an
Executive Vice President of each Target REIT.
Ownership of FSP Stock
The executive officers and directors of FSP Corp. hold an aggregate of
3,707,977.01 shares of FSP Common Stock. The executive officers and directors
have indicated that they intend to vote all of their respective shares in favor
of the Merger Agreement.
Consequences of Merger with Fair Lakes
In September 2002, FSP Fair Lakes consented to an assignment of its lease
with PricewaterhouseCoopers LLP to International Business Machines Corporation,
but PricewaterhouseCoopers LLP remains obligated for payments under the lease.
PricewaterhouseCoopers LLP has informed FSP Corp. that if the Merger between FSP
Corp. and Fair Lakes is consummated, PricewaterhouseCoopers LLP will no longer
be considered "independent" in connection with providing auditing services to
FSP Corp. At that time, FSP Corp. will have to either release
PricewaterhouseCoopers LLP from its obligation under the lease or choose another
independent accountant.
50
SELECTED FINANCIAL INFORMATION OF FSP CORP.
The following selected financial information is derived from the
historical consolidated financial statements of the FSP Partnership and FSP
Corp. This information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
pages 66 to 84 of this Proxy Statement and with the FSP Partnership's and FSP
Corp.'s consolidated financial statements and related notes thereto included
elsewhere in this Proxy Statement.
Nine Months Ended
Year Ended December 31, September 30,
----------------------------------------------------- -------------------
2001 2000 1999 1998 1997 2002 2001
-------- -------- -------- -------- -------- -------- --------
(In thousands, except per unit or
share amounts)
Operating Data:
Total Revenue ........................ $ 54,557 $ 34,793 $ 18,048 $ 11,555 $ 7,203 $ 40,043 $ 37,585
Net Income (loss) .................... 25,368 8,914 1,139 (1,675) 272 18,693 16,001
Basic and diluted net income
(loss) per limited and
general partnership unit/share ..... 1.03 0.47 0.09 (0.88) 0.14 0.76 0.65
Distributions declared per
unit/share outstanding (1) ......... 1.18 1.02 0.86 1.05 0.79 0.93 0.84
As of
As of December 31, September 30,
----------------------------------------------------- -------------------
2001 2000 1999 1998 1997 2002 2001
-------- -------- -------- -------- -------- -------- --------
Balance Sheet Data (at period end):
Total assets ......................... $204,117 $219,923 $190,486 $ 95,886 $ 66,117 $252,717 $204,117
Total liabilities .................... 4,354 19,280 28,821 1,294 1,639 56,536 4,354
Minority interests in
consolidated entities .............. -- 63 78,090 89,593 56,304 -- --
Total shareholders'/partners'
capital ............................ 199,763 200,580 83,575 4,999 8,174 196,181 199,763
(1) As a result of the Conversion, each FSP Partnership Unit was converted
into one share of FSP Common Stock.
The 2000 and 1999 financial statements reflect the merger of 17 Sponsored
Partnerships. Prior to the applicable merger, the Partnership owned a
controlling general partner interest in the 17 Sponsored Partnerships--See Note
4 to the consolidated financial statements of FSP Corp. and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
pages 66 to 84 of this Proxy Statement.
51
SELECTED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following pro forma financial information has been prepared based upon
certain pro forma adjustments to the historical consolidated financial
statements of FSP Corp. The pro forma balance sheets have are presented as if
the Mergers occurred as of September 30, 2002. The pro forma statements of
operations for the nine months ended September 30, 2002 and for the year ended
December 31, 2001 are presented as if the Mergers occurred at the beginning of
the period presented.
The pro forma consolidated financial statement data are not necessarily
indicative of what the Combined Company's actual financial position or results
of operations would have been as of the date or for the periods indicated, nor
do they purport to represent the Combined Company's financial position or
results of operations as of or for any future period. The pro forma consolidated
financial statement data should be read in conjunction with all financial
statements and pro forma financial statements included elsewhere herein.
52
Pro Forma Consolidated Balance Sheets
September 30, 2002
(Unaudited)
Historical Historical Post Merger
(in thousands) (FSP Corp.) (The Target REITs) Adjustments Pro Forma
======================================================================================================
Assets:
Real estate investments, net $ 174,531 $ 294,537 $ 13,188(d,f) 482,256
Assets held for syndication 51,500 -- -- 51,500
Cash and cash equivalents 21,841 26,305 (900)(f) 47,246
Restricted cash 486 505 -- 991
Tenant rent receivables, net 2,416 2,044 -- 4,460
Deposits and other assets, net 1,678 1,011 -- 2,689
Office computers and furniture, net 65 -- -- 265
------------------------------------------------------------------------------------------------------
Total assets $ 252,717 $ 324,402 $ 12,288 $ 589,407
======================================================================================================
Liabilities and Owners' Capital
Liabilities:
Bank note payable $ 50,000 $ -- $ -- $ 50,000
Accounts payable and accrued expenses 4,618 5,804 14,763(j) 25,185
Accrued compensation 1,432 -- -- 1,432
Tenant security deposits 486 505 -- 991
------------------------------------------------------------------------------------------------------
Total liabilities 56,536 6,309 14,473 77,608
------------------------------------------------------------------------------------------------------
Owners' capital:
Preferred Stock, $.0001 par value -- -- -- --
Common Stock, $.0001 par value 2 -- 3(h) 5
Additional paid in capital 192,743 333,455 17,840(h,j) 508,538
Retained earnings (deficit) 3,436 (15,362) 15,362 3,436
------------------------------------------------------------------------------------------------------
Total owners' capital 196,181 318,093 (2,475) 526,562
------------------------------------------------------------------------------------------------------
Total liabilities and owners' capital $ 252,717 $ 324,402 $ 12,288 $ 589,407
======================================================================================================
See accompanying notes to consolidated pro forma financial statements
53
Pro Forma Consolidated Statements of Operations
(Unaudited)
For the nine months ended
September 30, 2002
-----------------------------------------------------------
Historical Historical Post Merger
(in thousands, except per share amounts) (FSP Corp.) (The Target REITs) Adjustments Pro Forma
=====================================================================================================
Revenue:
Rental income $ 20,035 $ 33,223 $ --(i) $ 53,258
Syndication fees 9,890 -- 7,355(i) 2,355
Transaction fees 9,203 -- 7,065 2,138
Interest and other income 915 269 (370)(g) 814
-----------------------------------------------------------------------------------------------------
Total revenue 40,043 33,492 14,970 58,565
-----------------------------------------------------------------------------------------------------
Expenses:
Selling, general and administrative 4,093 -- -- 4,093
Commissions 4,910 -- -- 4,910
Stock issued as compensation 604 -- -- 604
Rental operating expenses 4,857 5,974 (370)(g) 4,093
Depreciation and amortization 3,515 5,215 335(e) 10,461
Real estate taxes and insurance 2,307 4,184 -- 7,065
Interest expense 647 7,142 (7,065)(i) 724
-----------------------------------------------------------------------------------------------------
Total expenses 20,933 22,515 7,100 36,348
-----------------------------------------------------------------------------------------------------
Net income before taxes 19,110 10,977 (7,870) 22,217
Taxes on income 417 -- -- 417
-----------------------------------------------------------------------------------------------------
Net income $ 18,693 $ 10,977 $ 7,870 $ 21,800
=====================================================================================================
Weighted average shares outstanding,
basic and diluted 24,623 3,636(h) 21,364(c,h) 49,623
=====================================================================================================
Basic and diluted net income per unit /
share $ 0.76 $ 0.44
=====================================================================================================
See accompanying notes to consolidated pro forma financial statements
54
Pro Forma Consolidated Statements of Operations
(Unaudited)
For the year ended
December 31, 2001
----------------------------------------------------------
Historical Historical Post Merger
(in thousands, except per share amounts) (FSP Corp.) (The Target REITs) Adjustments Pro Forma
=========================================================================================================
Revenues:
Rental income $ 26,765 $ 16,815 $ -- $ 43,580
Syndication fees 13,000 -- 11,642(i) 1,358
Transaction fees 12,701 -- 11,301(i) 1,391
Interest and other income 1,981 279 (140)(g) 2,120
---------------------------------------------------------------------------------------------------------
Total revenues 54,447 17,094 23,092 48,449
---------------------------------------------------------------------------------------------------------
Expenses:
Selling, general and administrative 5,229 -- -- 5,229
Commissions 6,525 -- -- 6,525
Units issued as compensation 1,744 -- -- 1,744
Rental operating expenses 7,026 2,949 (140)(g) 9,835
Depreciation and amortization 4,797 2,824 300(e) 7,921
Real estate taxes and insurance 2,900 1,961 -- 4,861
Interest expense 818 9,401 (9,401)(i) 818
---------------------------------------------------------------------------------------------------------
Total expenses 29,039 17,135 (9,241) 36,933
---------------------------------------------------------------------------------------------------------
Net income (loss) before minority interests 25,408 (41) 13,851 11,516
Minority interests in consolidated entites 40 -- -- 40
---------------------------------------------------------------------------------------------------------
Net income (loss) $ 25,368 $ (41) $(13,851) $ 11,476
=========================================================================================================
Weighted average units/shares
outstanding, basic and diluted 24,512 2,505 7,330 31,842
=========================================================================================================
Basic and diluted net income per unit /
share $ 1.03 $ 0.36
=========================================================================================================
See accompanying notes to consolidated pro forma financial statements
55
Notes to Consolidated Pro Forma Financial Statements
(Unaudited)
Organization and Operations
FSP Corp. is a corporation formed under the laws of the State of Maryland.
FSP Corp. has two principal sources of revenue: investment banking income
consisting of brokerage commissions, property acquisition, loan origination and
other fees in connection with the organization and offering of interests in
entities organized to own real property; and rental income from real property.
The Target REITs' principal source of revenue is rental income from real
property.
Basis of Presentation
The following pro forma financial information has been prepared based upon
certain pro forma adjustments to the historical consolidated financial
statements of FSP Corp. The pro forma balance sheets are presented as if the
Mergers occurred as of September 30, 2002. The pro forma statements of
operations for the nine months ended September 30, 2002 and for the year ended
December 31, 2001 are presented as if the Mergers occurred at the beginning of
the period presented.
The data provided in the "Historical (FSP Corp.)" columns are derived from
the information provided in the financial statements of FSP Corp. that are
included in this Proxy Statement.
The data provided in the "Historial (the Target REITs)" columns are
derived from the information provided in the financial statements of the Target
REITs that are included in this Proxy Statement. The operations of four Target
REITs that were organized in 2002 include the operations of their predecessor
and to show nine months of operations in the pro forma Consolidated Statements
of Operations for the nine months ended September 30, 2002. Five Target REITs
were organized in 2001. These five Target REITs show operations from the date
the REIT was organized and reflect less than twelve months operations in the pro
forma Consolidated Statements of Operations for the Year Ended December 31,
2001.
For financial accounting purposes, the Mergers will be treated as purchase
of assets pursuant to which each Target REIT's assets and liabilities will be
recorded on FSP Corp.'s books at their fair market value as of the Effective
Date.
Assumptions
Certain assumptions regarding the operations of FSP Corp. have been made
in connection with the preparation of the pro forma financial information. These
assumptions are as follows:
(a) FSP Corp. and each of the Target REITs have elected to be, and are
qualified as, a real estate investment trust for federal income tax
purposes. Each entity has met the various income, asset and
distribution tests; therefore, no federal income tax liabilities
have been incurred on real estate operations.
56
(b) FSP Corp. has a subsidiary which is not in the business of real
estate operations. That subsidiary has elected to be a taxable real
estate investment trust subsidiary (TRS) as of January 1, 2002 and
is subject to federal income taxes at regular tax rates. The taxes
on income shown in the pro forma statements for the nine months
ended September 30, 2002 are the taxes on income incurred by the
TRS. There are no material items that would cause a deferred tax
asset or a deferred tax liability.
(c) FSP Corp. converted from a partnership into a corporation effective
January 1, 2002. Partnership units were converted to shares of
common stock on a one-to-one basis. Pro forma net income per share
has been calculated using the weighted average number of
units/shares outstanding during the pro forma periods.
(d) At the Effective Time, for each Target REIT, any difference between
the appraised value of the property and the historical cost of the
property ("step-up") is recorded as an increase in real estate
investments, net. Other assets and liabilities are recorded at their
historical costs, which approximates fair market value. Depreciation
and amortization for the Target REITs is based on a preliminary
allocation of the purchase price to real estate investments and
other assets. The allocation is subject to change as additional
information is obtained.
(e) Depreciation expense is adjusted for the increase in the step-up in
value of the buildings and improvements.
(f) Expenses of the Mergers are estimated at $900,000 and are reflected
as paid in the nine months ended September 30, 2002 and are
capitalized to real estate investments.
(g) Management fees from FSP Corp. to the Target REITs have been
eliminated from income and expenses.
(h) Approximately 25,000,091 shares of common stock will be issued in
connection with the Mergers and the shares of preferred stock owned
by the Target REIT Stockholders will be eliminated.
(i) Syndication and transaction fees charged by FSP Corp. to the Target
REITs that are associated with the syndication of five Target REITs
in 2001 and four Target REITs in 2002 have been eliminated in the
pro forma financial statements.
(j) Dividends declared by the Target REITs in October 2002 are reflected
as accrued expense at September 30, 2002.
57
Comparative Per Unit/Share Data
We have summarized below the per unit/share information for FSP Corp. on
an historical basis and on a pro forma basis after giving effect to the proposed
merger. The pro forma information gives effect to the Mergers as a purchase and
the acquired assets and liabilities are recorded at their fair market value. You
should read this information in conjunction with FSP Corp.'s historical
financial statements in this Proxy Statement and the pro forma financial
information included in the section titled "Selected Pro Forma Consolidated
Financial Data."
For the year ended For the nine months ended
December 31, 2001 September 30, 2002
------------------------- ------------------------
Historical Post Merger Historical Post Merger
Per unit/share: (FSP Corp.) Pro forma (FSP Corp.) Pro Forma
=========================================================================================
Net income(1) $ 1.03 $ 0.51 $ 0.76 $ 0.44
Distributions declared(1) $ 1.14 $ 1.21 $ 0.93 $ 0.92
Book Value(2) $ 8.12 N/A $ 7.97 $ 10.31
-----------------------------------------------------------------------------------------
Weighted average units/shares
outstanding, basic and diluted 24,512,000 31,842,000 24,623,000 49,623,000
Units/shares outstanding at
end of period 24,586,000 39,356,000 24,630,000 49,630,000
-----------------------------------------------------------------------------------------
(1) The pro forma net income per share and distributions paid per share data
for the year ended December 31, 2001 and the nine-month period ended
September 30, 2002 have been prepared as if the Merger had occurred on
January 1, 2001 and January 1, 2002, respectively.
(2) Book value per share of Common Stock was calculated by using the
shareholders' equity as reflected in the historical and pro forma
financial statements divided by the number of shares of Common Stock
outstanding at the end of the period.
58
COMPARATIVE PER SHARE/UNIT DATA
The following tables present (a) the basic and diluted net income per
share and book value per share data for each of FSP Corp. and the Target REITs
on a historical basis, (b) the historical basic and diluted net income per share
and book value per share for the Combined Company on a pro forma basis and (c)
the historical basic and diluted net income per share and book value per share
for the Target REITs on an equivalent pro forma combined basis. Under FSP Corp.
equivalent pro forma combined below, FSP Corp. and the Target REITs show the
effect of the Mergers from the perspective of an owner of shares of FSP Common
Stock. The unaudited pro forma combined financial data are not necessarily
indicative of the operating results that would have been achieved had the
transaction been in effect as of the beginning of the periods and should not be
construed as representative of future operations.
We calculate historical book value per share by dividing shareholders'
equity by the number of shares of common stock (or preferred stock, in the case
of the Target REITs) outstanding at the end of each period.
We calculate pro forma combined--per Combined Company's share book value
by dividing pro forma shareholders' equity by the pro forma number of shares of
FSP Common Stock which would have been outstanding had the Mergers been
consummated as of each balance sheet date. For the purposes of the pro forma
combined net income per share and book value per share data. FSP Corp.'s
historical financial data for the year ended December 31, 2001 and nine months
ended September 30, 2002 have been combined with the Target REITs' financial
data for the year ended December 31, 2001 and the nine months ended September
30, 2002, respectively.
--------------------------------------------------------------------------------
At and For the At and For the
Year Ended Nine Months Ended
December 31, 2001 September 30, 2002
--------------------------------------------------------------------------------
FSP Corp.--Historical:
--------------------------------------------------------------------------------
Basic net income per share.............. $1.03 $0.76
--------------------------------------------------------------------------------
Diluted net income per share............ $1.03 $0.76
--------------------------------------------------------------------------------
Book value per share.................... $8.12 $7.97
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Target REITs--Historical:
--------------------------------------------------------------------------------
Forest Park
--------------------------------------------------------------------------------
Basic net income per share.............. $5,513 $5,256
--------------------------------------------------------------------------------
Diluted net income per share............ $5,513 $5,256
--------------------------------------------------------------------------------
Book value per share.................... $88,474 $89,872
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
The Gael
--------------------------------------------------------------------------------
Basic net income per share.............. $4,729 $3,694
--------------------------------------------------------------------------------
Diluted net income per share............ $4,729 $3,694
--------------------------------------------------------------------------------
Book value per share.................... $84,221 $84,165
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Goldentop
--------------------------------------------------------------------------------
Basic net income per share.............. $7,391 $5,257
--------------------------------------------------------------------------------
Diluted net income per share............ $7,391 $5,257
--------------------------------------------------------------------------------
Book value per share.................... $87,153 $88,359
--------------------------------------------------------------------------------
59
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Centennial
--------------------------------------------------------------------------------
Basic net income per share.............. $7,392 $5,310
--------------------------------------------------------------------------------
Diluted net income per share............ $7,392 $5,310
--------------------------------------------------------------------------------
Book value per share.................... $86,753 $87,810
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Meadow Point
--------------------------------------------------------------------------------
Basic net income per share.............. $1,573 $6,113
--------------------------------------------------------------------------------
Diluted net income per share............ $1,573 $6,113
--------------------------------------------------------------------------------
Book value per share.................... $87,410 $89,456
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Timberlake
--------------------------------------------------------------------------------
Basic net income (loss) per share....... $(274) $4,850
--------------------------------------------------------------------------------
Diluted net income (loss) per share..... $(274) $4,850
--------------------------------------------------------------------------------
Book value per share.................... $87,134 $88,103
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Federal Way
--------------------------------------------------------------------------------
Basic net income (loss) per share....... $(4,030) $4,990
--------------------------------------------------------------------------------
Diluted net income (loss) per share..... $(4,030) $4,990
--------------------------------------------------------------------------------
Book value per share.................... $85,285 $86,235
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Fair Lakes
--------------------------------------------------------------------------------
Basic net income (loss) per share....... $(4,354) $5,790
--------------------------------------------------------------------------------
Diluted net income (loss) per share..... $(4,354) $5,790
--------------------------------------------------------------------------------
Book value per share.................... $85,619 $87,342
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Northwest Point
--------------------------------------------------------------------------------
Basic net income (loss) per share....... $(5,460) $5,525
--------------------------------------------------------------------------------
Diluted net income (loss) per share..... $(5,460) $5,525
--------------------------------------------------------------------------------
Book value per share.................... $86,030 $87,570
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Timberlake East
--------------------------------------------------------------------------------
Basic net income (loss) per share....... --- $(48)
--------------------------------------------------------------------------------
Diluted net income (loss) per share..... --- $(48)
--------------------------------------------------------------------------------
Book value per share.................... --- $87,244
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Merrywood
--------------------------------------------------------------------------------
Basic net income (loss) per share....... --- $(2,330)
--------------------------------------------------------------------------------
Diluted net income (loss) per share..... --- $(2,330)
--------------------------------------------------------------------------------
Book value per share.................... --- $86,854
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Plaza Ridge I
--------------------------------------------------------------------------------
Basic net income (loss) per share....... --- $(3,283)
--------------------------------------------------------------------------------
Diluted net income (loss) per share..... --- $(3,283)
--------------------------------------------------------------------------------
Book value per share.................... --- $87,670
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Park Ten
--------------------------------------------------------------------------------
Basic net income (loss) per share....... --- $(1,367)
--------------------------------------------------------------------------------
Diluted net income (loss) per share..... --- $(1,367)
--------------------------------------------------------------------------------
Book value per share.................... --- $86,905
--------------------------------------------------------------------------------
60
--------------------------------------------------------------------------------
Pro forma combined--Per Combined Company share:
--------------------------------------------------------------------------------
Basic net income per share................ $0.51 $0.59
--------------------------------------------------------------------------------
Diluted net income per share.............. $0.51 $0.59
--------------------------------------------------------------------------------
Book value per share...................... --- $10.61
--------------------------------------------------------------------------------
DESCRIPTION OF FSP CORP.
Business
History
FSP Corp. is a Maryland corporation that operates in a manner intended to
qualify as a real estate investment trust for federal income tax purposes. It is
the successor to the FSP Partnership. The FSP Partnership was originally formed
as a Massachusetts general partnership in January 1997 as the successor to a
Massachusetts general partnership that was formed in 1981. On January 1, 2002,
the Conversion became effective. Pursuant to the Conversion, the FSP Partnership
ceased to exist, FSP Corp. succeeded to the business of the FSP Partnership and
each unit of both general and limited partnership interests in the FSP
Partnership was converted into one share of FSP Common Stock. As a result of the
Conversion, FSP Corp. now holds, directly and indirectly, 100% of the interest
in three former subsidiaries of the FSP Partnership: FSP Investments, FSP
Property Management, and FSP Holdings.
Organization
FSP Investments acts as a real estate investment firm and broker/dealer
with respect to (a) the organization of investment vehicles which are typically
syndicated through private placements exempt from registration under the
Securities Act, some of which were Sponsored Partnerships and some of which are
Sponsored REITs, (b) the acquisition of real estate by the Sponsored Entities
and (c) the sale of equity interests in the Sponsored Entities. FSP Investments
derives revenue from commissions received in connection with the sale of equity
interests in the Sponsored Entities. FSP Investments also derives revenue from
fees paid by the Sponsored Entities for the services of FSP Investments in
identifying, inspecting and negotiating to purchase real properties on behalf of
the Sponsored Entities. FSP Investments is a registered broker/dealer with the
Commission and is a member of the National Association of Securities Dealers,
Inc. FSP Corp. has made an election to treat FSP Investments as a "taxable REIT
subsidiary" for federal icome tax purposes.
On April 1, 1997, FSP Holdings acquired the general partnership interest
in four Sponsored Partnerships (the "Prior Entities"), each of which had been
organized by the executive officers of the general partner of the FSP
Partnership prior to the formation of the FSP Partnership while they were
employed by another entity. Between June 1997 and June 2000, FSP Investments
completed the offerings of limited partnership interests in 14 Sponsored
61
Partnerships. The sole general partner of each of the Sponsored Partnerships is
FSP Holdings. Between June 2000 and December 31, 2002, FSP Investments completed
the offerings of preferred stock in 15 Sponsored REITs. Effective January 1,
2001, one of the original 14 Sponsored Partnerships converted from a Sponsored
Partnership to a Sponsored REIT. This Sponsored REIT, along with 12 of the other
15 Sponsored REITs, comprise all of the Target REITs. Accordingly, as of
December 31, 2002, there were 33 Sponsored Entities, of which 17 were Sponsored
Partnerships and 16 were Sponsored REITs. FSP Corp. expects that future
Sponsored Entities will be Sponsored REITs.
Each Sponsored Entity sold its equity interests only to "accredited
investors'" within the meaning of Regulation D under the Securities Act. The
Sponsored Entities (other than a Prior Entity that conducted its offering
pursuant to a registration statement on Form S-11) conducted their offerings
pursuant to exemptions from registration under Section 4(2) of the Securities
Act and Rule 506 of Regulation D promulgated thereunder. The Sponsored Entities
issued equity interests for aggregate gross cash proceeds of $690,300,000. Each
Sponsored Entity holds a single real property.
Pursuant to mergers effective January 1, 1999, January 1, 2000 and October
1, 2000, respectively, the FSP Partnership acquired all limited partners'
interest in the 17 Sponsored Partnerships. In connection with these mergers, the
FSP Partnership issued units of the FSP Partnership to the limited partners of
the Sponsored Partnerships. The mergers that were effective January 1, 1999 were
approved by a vote of limited partners of the FSP Partnership. Neither the FSP
Partnership governing documents nor applicable state law required the approval
of the limited partners of the FSP Partnership for the mergers that were
effective January 1, 2000 and October 1, 2000. Each merger was approved by a
vote of the limited partners of the applicable Sponsored Partnerships. Pursuant
to the mergers, limited partners in the Sponsored Partnerships exchanged an
interest in a finite-life entity for an interest in an infinite-life entity. As
a result of the mergers, FSP Holdings is the sole general partner of each
Sponsored Partnership that was acquired and the FSP Partnership was the sole
limited partner of each such Sponsored Partnership.
Prior to the Conversion, the FSP Partnership owned, directly or
indirectly, 100% of the interest in the 17 Sponsored Partnerships, each of which
owns real property. As a result of the Conversion, FSP Corp. is now the sole
limited partner of each such Sponsored Partnership and now owns, directly or
indirectly, 100% of the interest in the 17 Sponsored Partnerships. Reference in
this Proxy Statement to "FSP Corp.'s properties" means the real properties owned
by these 17 Sponsored Partnerships. None of FSP Corp.'s properties has a book
value in excess of 10% of FSP Corp.'s total assets or had gross revenues for the
most recent fiscal year that accounted for more than 10% of FSP Corp's gross
revenues for such year. The FSP Board believes that each of FSP Corp.'s
properties is adequately covered by insurance given the current conditions in
the insurance markets. Terrorism insurance was excluded from FSP Corp's master
policy as of April 2002.
FSP Property Management asset manages each Sponsored Entity and provides
property management services or property accounting services to eight Sponsored
Entities. FSP Property Management receives fee income from those Sponsored
62
Entities that have not been acquired by FSP Corp. FSP Property Management does
not receive any rental income.
FSP Holdings acts as the sole general partner of each Sponsored
Partnership.
Investment Objectives
FSP Corp. has two principal sources of revenue:
o investment banking income consisting of brokerage commissions and
other related fees paid to FSP Investments in connection with the
organization and offering of Sponsored Entities and loan origination
fees paid in connection with loans to Sponsored Entities.
o rental income from the real properties it owns.
FSP Corp.'s investment objective is to increase the cash available for
distribution to its stockholders by increasing its revenue from investment
banking services and rental income. FSP Corp. expects that, through FSP
Investments, it will continue to organize and cause the offering of Sponsored
REITs in the future and that it will continue to derive investment banking
income from such activities. FSP Corp. also expects that in the future it will
acquire additional real properties. FSP Corp. may sell from time to time the
real properties it owns as market conditions warrant (although to date it has
only sold vacant land) and either distribute the proceeds to its stockholders or
retain some or all of such proceeds for investment in real properties or other
corporate activities. FSP Corp. may acquire real properties in any geographic
area of the United States and of any property type. Of the 17 properties FSP
Corp. owns, four are apartment complexes, 11 are office buildings and two are
industrial; four of these properties are located in Texas, three properties are
located in Massachusetts, three properties are located in northern California,
two properties are located in Maryland, and one property is located in each of
southern California, Louisiana, Michigan, North Carolina and South Carolina. FSP
Corp. has no restrictions on the percentage of its assets that may be invested
in any one real property. FSP Corp. acquires its properties primarily for their
rental income and seeks to manage its properties with a goal of increasing their
value.
FSP Corp. relies on the following principles in selecting real properties
for acquisition by a Sponsored Entity or FSP Corp.:
o Buying investment properties at a price which produces value for
investors and avoiding overpaying for real estate merely to outbid
competitors.
o Buying properties in excellent locations with substantial
infrastructure in place around them and avoiding investing in
locations where the construction of such infrastructure is
speculative.
o Buying properties that are well-constructed and designed to appeal
to a broad base of users and avoiding properties where quality has
been sacrificed to cost savings in construction or which appeal only
to a narrow group of users.
63
o Aggressively managing, maintaining and upgrading a property and
refusing to neglect or undercapitalize management, maintenance and
capital improvement programs.
o Having the ability to hold properties through down cycles and
avoiding over-leveraging properties and placing them at risk of
foreclosure.
FSP Corp. has a revolving line of credit with Citizens Bank that provides
for borrowings of up to $50,000,000. FSP Corp. has drawn on this line of credit,
and intends to draw on this line of credit in the future, to obtain funds for
the purpose of making interim mortgage loans to Sponsored Entities. FSP Corp.'s
policy is to cause these loans to be secured by a first mortgage of the real
property (which may be of any type) owned by the Sponsored Entity. FSP Corp.
makes these loans to enable a Sponsored Entity to acquire real property prior to
the consummation of the offering of its equity interests, and the loan is repaid
out of the offering proceeds. FSP Corp. has no restriction on the percentage of
its assets that may be invested in any single mortgage.
Policies
FSP Corp.'s policy is not to invest in the securities of other common
stock issuers except short-term investments in money market funds and similar
securities and the holding of a nominal interest in Sponsored REITs for the
purpose of facilitating the organization and operation of such Sponsored REITs.
FSP Corp. does not expect to receive any material amounts of revenue from its
nominal interest in any Sponsored REITs.
FSP Corp.'s policy is not to issue senior securities, borrow money (except
as described above), make loans to other persons (except as described above),
invest in the securities of other issuers for the purpose of exercising control,
underwrite the securities of other issuers (except that FSP Investments expects
to continue to sell interests in Sponsored Entities on a best efforts basis in
offerings exempt from registration under the Securities Act). FSP Corp. expects
that it will engage in the purchase and sale of real estate investments as
market conditions warrant. FSP Corp. may repurchase or otherwise reacquire its
securities.
Any of FSP Corp.'s policies may be changed at any time by the FSP Board.
Competition
With respect to its investment banking and brokerage business, FSP Corp.
faces competition for the investment dollars of potential purchasers of the
Sponsored Entities from every other kind of investment, including stocks, bonds,
mutual funds and other real-estate related investments, including other REITs.
Some of FSP Corp.'s competitors have significantly more resources than FSP Corp.
and are able to advertise their investment products. Because the offerings of
the Sponsored Entities are made pursuant to an exemption from registration under
the Securities Act, FSP Investments may not advertise the Sponsored Entities or
otherwise engage in any general solicitation of investors to purchase interests
in the Sponsored Entities.
64
With respect to its real estate investments, FSP Corp. faces competition
in each of the markets where the properties are located. As of September 30,
2002, 12 of FSP Corp.'s 17 properties had a percentage of leased space in excess
of 95% and five properties had percentages of leased space ranging from 68-94%.
Employees
Prior to the Conversion, the general partner of the FSP Partnership was
FSP General Partner LLC, a Massachusetts limited liability company (the "FSP
General Partner"). The members of the FSP General Partner and their respective
ownership interests therein were George J. Carter (33.94%), R. Scott MacPhee
(30.66%), Richard R. Norris (21.40%), William W. Gribbell (11.36%), Barbara J.
Corinha (1.60%), Melissa G. Mucciaccio (0.67%), Janet P. Notopoulos (0.26%) and
Patricia A. McMullen (0.11%). The FSP General Partner had no other business
other than acting as general partner of the FSP Partnership. Prior to the
Conversion, the executive officers of the FSP General Partner devoted all of
their business activities to the FSP Partnership and its subsidiaries. The
former executive officers of the FSP General Partner are now the current
executive officers of FSP Corp. and they devote all of their business activities
to FSP Corp. and its subsidiaries.
FSP Corp. had 31 employees as of December 31, 2002.
Legal Proceedings
From time to time, FSP Corp. is subject to legal proceedings and claims
that arise in the ordinary course of its business. Although occasional adverse
decisions (or settlements) may occur, FSP Corp. believes that the final
disposition of such matters will not have a material adverse effect on FSP
Corp.'s financial position, cash flows or results of operations.
65
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with FSP Corp.'s
financial statements and notes thereto appearing elsewhere in this Proxy
Statement. Historical results and percentage relationships set forth in the
consolidated financial statements contained in the financial statements,
including trends which might appear, should not be taken as necessarily
indicative of future operations.
Overview
FSP Corp. operates in two business segments: investment banking services
and rental operations. The first of these segments involves the provision of
real estate investment and broker/dealer services that include: (a) the
organization of Sponsored REITs in 2002, 2001 and 2000 and Sponsored
Partnerships in 2000 and prior years, which were syndicated through private
placements; (b) the acquisition of real estate on behalf of the Sponsored
Entities; and (c) the sale of preferred stock in Sponsored REITs or limited
partnership interests in the Sponsored Partnerships. The second segment involves
the ownership of real property. The following table summarizes property owned by
the FSP Partnership and the Sponsored Partnerships for the three years ended
December 31, 2001, 2000 and 1999 and the nine months ended September 30, 2002
and 2001.
December 31, September 30,
----------------------------------- -----------------------
2001 2000 1999(1) 2002 2001
--------- --------- --------- --------- ----------
Residential
Number of Properties ....... 4 4 4 4 4
Number of Apartment Units .. 642 642 642 642 642
Commercial
Number of Properties ....... 13 13 12 13 13
Square Footage ............. 1,433,300 1,433,300 1,328,500 1,433,300 1,433,300
(1) Includes properties owned by nine Sponsored Partnerships that were
subsequently acquired by the FSP Partnership in 2000.
As described in Note 4 to FSP Corp.'s financial statements, the FSP
Partnership consummated three series of mergers. As described above, FSP Corp.
operates in two segments, real estate operations and broker/dealer and real
estate investment services. Prior to the consummation of the first series of
mergers, the FSP Partnership operated in the segment of broker/dealer and real
estate investment services. The first series of mergers added the real estate
operations of certain Sponsored Partnerships to the FSP Partnership business.
The nature of the FSP Partnership business was not changed by the second and
third series of mergers.
The mergers were accounted for as a purchase, whereby the assets and
liabilities of the Sponsored Partnerships were recorded at their fair values and
transaction costs were capitalized. In each merger the FSP Partnership acquired
the minority interests in the Sponsored Partnerships. None of the merged
66
Sponsored Partnerships was subject to debt financing and no debt was assumed or
created at the time of the merger. The investors of the merged entities
exchanged their interests for an interest in the FSP Partnership. There were no
cash payments and no contingent payments.
The acquisitions have affected FSP Corp. in two ways: the real estate
portfolio is more diverse, both geographically and with respect to property type
and by tenant business; and FSP Corp. has a larger borrowing capacity.
The following table sets forth the identity of each merged Sponsored
Partnership, the date of its merger and the estimated value ascribed to that
partnership without giving effect to the merger.
Estimated Value at
Merged Sponsored Partnership Merger Date Merger Date (in thousands)
---------------------------- ----------- --------------------------
Essex Lane January 1, 1999 $11,339
FSP Apartment Properties January 1, 1999 12,691
One Technology January 1, 1999 11,989
FSP North Andover January 1, 1999 9,919
FSP Weslayan Oaks January 1, 1999 5,760
FSP Park Seneca January 1, 1999 10,126
FSP Santa Clara January 1, 1999 7,938
FSP Piedmont January 1, 1999 12,435
FSP Silverside January 1, 2000 19,063
FSP Hillview January 1, 2000 5,328
FSP Telecom January 1, 2000 16,814
FSP Southfield Centre October 1, 2000 16,412
FSP Blue Ravine October 1, 2000 6,475
FSP Bollman Place October 1, 2000 6,035
FSP Austin N.W. October 1, 2000 11,403
FSP Gateway Crossing October 1, 2000 20,870
FSP Lyberty Way October 1, 2000 10,612
During 2001 and 2000, the FSP Partnership retained 100% of the common
stock in six and three Sponsored REITs, respectively, for nominal consideration
in connection with the organization and syndication of such Sponsored REITs.
Additionally, as discussed above, the FSP Partnership's general partner interest
in one Sponsored Partnership was exchanged for the common stock in a newly
formed Sponsored REIT, in connection with this Sponsored Partnership's
reorganization from a limited partnership to a REIT on January 1, 2001. FSP
Corp.'s cost of its investment in the Sponsored REITs approximates its share of
the underlying equity in the net assets of the REITs. FSP Corp.'s share of the
Sponsored REITs' earnings, after deducting preferred stock dividends paid or
accrued, was not material for the nine months ended September 30, 2002 or for
years ended December 31, 2001 and 2000. There were no Sponsored REITs in 1999.
67
Each Sponsored REIT was organized to acquire real estate property using
the proceeds raised through a private offering of its preferred stock. The
Sponsored REITs do not contemplate having any long-term financing. The Sponsored
REITs issued both common stock and preferred stock. The common stock is
ultimately owned solely by FSP Corp. and the preferred stock is owned by
unaffiliated investors. Following consummation of the offerings, the preferred
shareholders in each of the Sponsored REITs are entitled to 100% of the
Sponsored REIT's cash distributions. As a common shareholder, FSP Corp. has no
rights to the Sponsored REIT's regular cash distributions. However, upon
liquidation of a Sponsored REIT, FSP Corp. will be entitled to its percentage
interest in any proceeds after the preferred shareholders have recovered their
investment. FSP Corp.'s percentage interest in each Sponsored REIT is less than
0.1%. The affirmative vote of the holders of a majority of the Sponsored REIT's
preferred stockholders is required for any actions involving merger, sale of
property, amendment to charter or issuance of additional capital stock,
including Mergers as contemplated by the Merger Agreement. In addition, all of
the Sponsored REITs allow the holders of more than 50% of the outstanding
preferred shares to remove, without cause, and replace one or more members of
that Sponsored REIT's board of directors.
Critical Accounting Policies.
Basis of Presentation. The consolidated financial statements of FSP Corp.
include the accounts of the FSP Partnership (as predecessor to FSP Corp.), 17
Sponsored Partnerships and wholly and majority-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation. Prior to the mergers, FSP Holdings was the general partner and
owned a 5% interest in each of the Sponsored Partnerships. As the general
partner, FSP Holdings had the exclusive rights and powers to manage and control
the business of each Sponsored Partnership without the consent or approval of
the limited partners. The limited partners in the Sponsored Partnerships could
not elect to replace the general partner, except for cause. Accordingly, prior
to the mergers, the accounts of the Sponsored Partnerships have been
consolidated into the FSP Partnership's financial statements under the
principles of accounting applicable to investments in subsidiaries in accordance
with SOP 78-9.
Real Estate and Depreciation.
Real estate assets are stated at the lower of cost or fair value, as
appropriate, less accumulated depreciation.
Costs related to property acquisition and improvements are capitalized.
Typical capital items include new roofs, site improvements, various exterior
building improvements and major interior renovations. Funding for capital
improvements typically is provided by cash set aside at the time the property
was purchased.
Routine replacements and ordinary maintenance and repairs that do not
extend the life of the asset are expensed as incurred. Typical expense items
include residential interior painting, landscaping, minor carpet replacements
and residential appliances. Funding for repairs and maintenance items typically
68
is provided by cash flows from operating activities. Depreciation is computed
using the straight line method over the assets' estimated useful lives as
follows:
Category Years
-------- -----
Buildings:
Residential 27
Commercial 39
Building Improvements 15-39
Furniture and equipment 5-7
FSP Corp. evaluates its assets used in operations by identifying
indicators of impairment and by comparing the sum of the estimated undiscounted
future cash flows for each asset to the asset's carrying value. When indicators
of impairment are present and the sum of the undiscounted future cash flows is
less than the carrying value of such asset, an impairment loss is recorded equal
to the difference between the asset's current carrying value and its fair value
based on discounting its estimated future cash flows. At September 30, 2002, no
such indicators of impairment were identified.
Revenue Recognition.
Rental income for Commercial Properties -- FSP Corp. has retained
substantially all of the risks and benefits of ownership of its commercial
properties and accounts for its leases as operating leases. Rental income from
leases, which include scheduled increases in rental rates during the lease term,
is recognized on a straight-line basis. FSP Corp. does not have any percentage
rent arrangements with its commercial property tenants. Reimbursable common area
maintenance charges are included in rental income in the period earned.
Rental income for Residential Apartments -- FSP Corp.'s residential
property leases are generally for terms of one year or less. Rental income from
tenants of residential apartment properties is recognized in the period earned.
Rent concessions, including free rent and leasing commissions are charged as a
reduction of rental revenue.
Investment Banking Services -- Syndication fees ranging from 6% to 8% of
the gross offering proceeds from the sale of securities in Sponsored Entities
are generally recognized upon an investor closing; at that time FSP Corp. has
provided all required services, the fee is fixed and collected, and no further
contingencies exist. Commission expense ranging from 3% to 4% of the gross
offering proceeds is recorded in the period the related syndication fee is
earned.
Investment Banking Services -- Transaction fees are generally recognized
upon the final investor closing of a Sponsored REIT. The final investor closing
is the last admission of investors into a Sponsored REIT; at that time, required
funds have been received from the investors, charges relating to the syndication
have been paid or accrued, continuing investment and continuing involvement
criteria have been met, and legal and economic rights have been transferred.
Third party transaction-related costs are deferred and later expensed to match
69
revenue recognition. Internal expenses are expensed as incurred. FSP Corp.
follows the requirements as set forth by Statement of Financial Accounting
Standards No. 66 "Accounting for Sales of Real Estate" and Statement of Position
92-1 "Accounting for Real Estate Syndication Income" and revenue is recognized
provided the criteria for sale accounting in SFAS 66 are met.
Recent Accounting Standards
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations," which addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This Statement requires that
the fair value of a liability for an asset retirement obligation be recognized
in the period in which it is incurred if a reasonable estimate of the fair value
can be made. The associated asset retirement costs are capitalized as part of
the carrying amount of the long-lived asset. This Statement will be effective at
the beginning of 2003. FSP Corp. has reviewed the provisions of SFAS 143 and
believes that the impact of adoption will not be material to its financial
position, results of operations and cash flows.
In October 2001, the FASB issued SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets". This Statement supersedes SFAS No.
121 and requires that long-lived assets that are to be disposed of by sale be
measured at the lower of book value or fair value less costs to sell. SFAS No.
144 retains the fundamental provisions of SFAS 121 for (a) recognition and
measurement of the impairment of long-lived assets to be held and used, and (b)
measurement of long-lived assets to be disposed of by sale, but broadens the
definition of what constitutes a discontinued operation and how the results of a
discontinued operation are to be measured and presented. This Statement became
effective at the beginning of 2002. With the exception of reclassifying the
operations of certain real estate assets considered "held for sale" (and for
which no significant continuing involvement exists) to "Discontinued operations,
net of tax" in the consolidated statement of income, the impact of adoption is
not expected to have a material impact on FSP Corp.'s financial position and
cash flows. FSP Corp. has one real estate asset that it considers "held for
syndication" at September 30, 2002.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FAS Nos. 4, 44,
and 64, Amendment of FAS 13, and Technical Corrections". This Statement rescinds
FASB No. 4, "Reporting Gains and Losses from Extinguishment of Debt", and an
amendment of that Statement, FASB No. 64, "Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements". This Statement amends FASB No. 13,
"Accounting for Leases". This Statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings or
describe their applicability under changed conditions. This statement will be
effective for FSP Corp.'s fiscal year ending December 31, 2003. FSP Corp. has
reviewed the provisions of FASB 145 and believes that the impact of adoption
will not be material to its financial position, results of operations and cash
flows.
70
In July 2002, the FASB issued SFAS No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities". This statement will be effective
January 1, 2003. SFAS No. 146 replaces current accounting literature and
requires the recognition of costs associated with exit or disposal activities
when they are incurred rather than at the date of a commitment to an exit or
disposal plan. FSP Corp. does not anticipate that the adoption of this statement
will have a material effect on its financial statements.
On November 25, 2002, the FASB issued FASB Interpretation No. 45 ("FIN
45") "Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, an Interpretation of
FASB Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34".
FIN 45 clarifies the requirements of SFAS No. 5 "Accounting for Contingencies",
relating to a guarantors accounting for, and disclosure of, the issuance of
certain types of guarantees. FSP Corp. does not anticipate that the adoption of
this statement will have a material effect on its financial statements.
Financing and Other Commitments
FSP Corp. has a revolving line of credit agreement with Citizens Bank
providing for borrowings at FSP Corp.'s election up to $50.0 million. Borrowings
under the line of credit bear interest at either the bank's base rate or a
variable LIBOR rate, as defined. There were $50.0 million in borrowings by FSP
Corp. outstanding under the line of credit at September 30, 2002. FSP Corp. is
in compliance with all bank covenants required by this line of credit. The line
of credit matures on February 23, 2003. It is FSP Corp.'s intention to seek to
renew the line of credit when it matures.
FSP Corp. arranged for Citizens Bank to provide a line of credit for FSP
Corp.'s senior officers in the maximum aggregate amount of $3.0 million. The
borrowings under this line of credit are for the purpose of paying income taxes
on equity interests in FSP Corp. issued to such senior officers as compensation.
Loans under this line of credit have a term of one year and bear interest at the
bank's prime rate plus 50 basis points. Loans of $1,803,000 in the aggregate
were outstanding to senior officers at September 30, 2002. Each borrower has
secured the loan by pledging shares of FSP Common Stock having an aggregate fair
market value at the time of the loan of no less than twice the principal amount
of the loan. FSP Corp. initially agreed to purchase from Citizens Bank any loan
on which the borrower defaults. Following the purchase of the loan, FSP Corp.
would have the same rights as Citizens Bank, including the right to foreclose on
the pledged stock. In order to comply with the Sarbanes-Oxley Act of 2002, FSP
Corp. has informed Citizens Bank and its senior officers that it will no longer
agree to guarantee any future loans. As of December 31, 2002, all repurchase
agreements have been terminated and FSP Corp. has no obligation relating to such
loans from Citizens to Bank to senior officers.
FSP Corp.'s commercial rental operations include the leasing of office
buildings and industrial properties subject to leases with terms greater than
one year. The leases thereon expire at various dates through 2012. Approximate
future minimum rental income on non-cancelable operating leases as of September
30, 2002 are (in thousands): 2002 - $3,854; 2003 - $13,307; 2004 -$9,957; 2005 -
$5,898; 2006 - $3,336; and $12,207 thereafter.
71
FSP Corp. leases its corporate office space under a six-year operating
lease that commenced in June 1999. The lease includes a base annual rent and
additional rent for FSP Corp.'s share of taxes and operating costs. Approximate
future minimum lease payments at September 30, 2002 are (in thousands): 2002 -
$50; 2003 - $203; 2004 - $209; and 2005 - $97.
Investments in Non-Consolidated Entities
FSP Corp. typically retains a minimal common stock ownership interest in
Sponsored REITs that it has organized. These ownership interests have virtually
no economic benefit or risk. At December 31, 2001 and 2000, FSP Corp. had
ownership interests in ten and four Sponsored REITs, respectively. At September
30, 2002, FSP Corp. had ownership interests in 16 Sponsored REITs. Thirteen of
these Sponsored REITs comprise the Target REITs. During 1999 and 2000, FSP Corp.
acquired 100% of the non-owned interests of certain Sponsored Partnerships
(through a series of mergers) that it had previously organized.
Summarized financial information for the Sponsored REITs is as follows:
(unaudited) December 31, September 30,
-------------------- --------------------
2001 2000 2002 2001
-------- -------- -------- --------
(in thousands)
Balance Sheet Data:
Real estate, net $222,232 $ 56,565 $337,439 $193,022
Other assets 19,048 5,058 35,270 15,071
Total liabilities 6,755 1,950 6,514 43,223
Shareholders equity 234,525 59,673 366,195 164,870
Operating Data:
Rental revenues $ 19,816 $ 2,778 $ 31,542 $ 11,713
Other revenues 354 117 551 250
Operating and maintenance
Expenses 5,973 948 9,326 3,577
Depreciation and amortization 3,191 574 4,802 2,058
Interest expense 9,916 2,298 8,937 4,479
-------- -------- -------- --------
Net income (loss) $ 1,090 $ (925) $ 9,028 $ 1,849
======== ======== ======== ========
There were no Sponsored REITs in 1999.
Results of Operations
The following table shows the variance in dollars for FSP Corp.'s
operations between the nine months ended September 30, 2002 and 2001 and years
ended December 31, 2001 and 2000 and the years ended December 31, 2000 and 1999.
72
Variance
For the Nine
Months
Ended September 30,
-------------------
2002 and 2001
-------------------
Revenue
Rental Operations
Rental income .............................................. $ (199)
Transaction income ......................................... 3,707
Interest income ............................................ (229)
-------
Total rental operations revenue ......................... 3,279
-------
Investment Services
Syndication income ......................................... 894
Transaction income ......................................... (1,680)
Interest income ............................................ (35)
-------
Total investment services income ........................ (821)
-------
Total revenue .............................................. 2,458
-------
Expenses
Rental Operations
Selling, general and administrative ........................ (352)
Rental operating expenses .................................. (517)
Depreciation and amortization .............................. (165)
Real estate taxes and insurance ............................ (28)
Interest expense ........................................... 6
-------
Total rental operations expenses ........................ (1,056)
-------
Investment Services Expenses
Selling, general and administrative ........................ 1,065
Commissions ................................................ 412
Partnership units issued as compensation ................... (1,140)
Depreciation and amortization .............................. 108
-------
Total investment services expenses ...................... 445
-------
Total Expenses ................................................ (611)
=======
Income applicable to minority interests ....................... (40)
Taxes on income ............................................... 417
-------
Net income .................................................... $ 2,692
=======
73
Variance in Dollars
-------------------------------
For the Year Ended December 31,
-------------------------------
2001 and 2000 2000 and 1999
------------- -------------
(in thousands)
Revenue
Rental Revenue
Rental ...................................... $ 1,331 $ 9,119
Interest and other .......................... 184 771
Investment Services Revenue
Syndication Fees ............................ 8,964 3,592
Transaction Fees ............................ 9,163 3,193
Interest .................................... 12 70
-------- --------
TOTAL REVENUE .................................. 19,654 16,745
-------- --------
Expenses
Rental Expenses
Selling, general and administrative ......... 1,302 (1,137)
Rental operating expenses ................... 537 2,060
Depreciation and amortization ............... 196 1,350
Real estate taxes and insurance ............. 427 1,025
Interest .................................... (42) 561
Investment Services Expenses
Selling, general and administrative ......... 854 1,621
Commissions ................................. 3,103 788
Units issued as compensation ................... (556) 2,300
Depreciation and amortization ............... (12) 32
-------- --------
TOTAL EXPENSES ................................. 5,809 8,600
-------- --------
Minority interests ............................. (2,609) 370
Net income ..................................... $ 16,454 $ 7,775
======== ========
Comparison of the nine months Ended September 30, 2002 to the nine months ended
September 30, 2001.
Revenue
Total revenues during the nine months ended September 30, 2002 increased
$2.4 million to $40.0 million compared to $37.6 million for the nine months
ended September 30, 2001. This increase is primarily attributable to the
syndication of five Sponsored REITs (with aggregate proceeds of $146.5 million)
in 2002 as compared to four Sponsored REITs (with aggregate proceeds of $117.9
million) for the comparable period in 2001.
For the nine months ended September 30, 2002 revenues from rental
operations increased by $3.3 million. This increase is primarily attributable to
increased transaction income of $3.7 million due to transaction fees earned on
the increase in gross syndication proceeds and an increase in the rate charged
for loan fees, offset by a decrease in rental income of $0.3 million, and
decreased interest income of $0.2 million. Investment services revenues
decreased $0.8 million primarily attributable to a decrease in transaction fees
74
of $1.7 million due to a decrease in the rate charged for acquisition fees on
syndication proceeds, offset by an increase of $0.9 million of syndication fees
charged on the syndication proceeds.
Expenses
Total expenses during the nine months ended September 30, 2002 decreased
$0.6 million to $20.9 million compared to $21.5 million for the three months
ended September 30, 2001. This is primarily attributable to an increase in
investment services expenses of $0.4 million which was more than offset by a
decrease in rental expenses of $1.0 million. The primary factors in the increase
in investment services expenses were the increased costs of $1.5 million
relating to syndication of the Sponsored REITs in the period less the decrease
in the expense relating to stock issued as compensation of $1.1 million. The
decrease in rental expenses by $1.0 million was due to increased vacancies which
resulted in a lowering of rental costs in all major categories.
There was no income related to minority interest in 2002.
There were no taxes on income in 2001.
Comparison of the year ended December 31, 2001 to the year ended December 31,
2000
Revenue
Total revenues increased $19.6 million, or 56%, to $54.4 million for the
year ended December 31, 2001, as compared to $34.8 million for the year ended
December 31, 2000. Income from rental operations was $26.7 million for the year
ended December 31, 2001.
The increase in rental income of $1.3 million, or 5.2%, compared to the
year ended December 31, 2000, is attributable to:
o the acquisition of one commercial property in 2000, which
contributed revenue for a full year in 2001, as compared with a
partial year in 2000, resulting in $0.5 million in incremental
revenues;
o increased revenues of approximately $0.8 million as a result of rent
increases on existing properties.
The increase in investment services income (syndication and transaction
fees) of $18.1 million, or 239%, compared to the year ended December 31, 2000,
is attributable to the syndication of six Sponsored REITs (with aggregate gross
proceeds of $203.1 million) in 2001 compared to the syndication of three
Sponsored REITs (with aggregate gross proceeds of $60.2 million) in 2000. The
revenue associated with the syndication of three Sponsored Partnerships in 2000
with aggregate gross proceeds of $47.4 million has been eliminated in the
consolidated statements of income.
75
The increase in interest and other income of $0.2 million, or 11%,
compared to the year ended December 31, 2000 is attributable to interest earned
on higher cash balances, cash equivalents and marketable securities in 2001
compared to 2000.
Expenses
Total expenses increased $5.8 million, or 25%, to $29.0 million for the
year ended December 31, 2001, as compared to $23.2 million for the year ended
December 31, 2000.
The increase in selling, general and administrative expenses of $2.2
million, or 70%, compared to the year ended December 31, 2000, is attributable
to the extra costs associated with the syndication of six Sponsored REITs in
2001 (with aggregate gross proceeds of $203.1 million) compared to the
syndication of six Sponsored Entities in 2000 (with aggregate gross proceeds of
$107.6 million) as follows:
o increased payroll and related expenses of $1.5 million;
o increased consulting and professional fees of approximately $0.6
million;
o increased other costs of approximately $0.1 million.
The increase in commission expense of $3.1 million or 91%, compared to the
year ended December 31, 2000 is attributable to the increase of syndication
proceeds of approximately $95 million in 2001 as described above.
The increase in rental expenses of $0.5 million, or 8.3%, compared to the
year ended December 31, 2000, is primarily attributable to the acquisition of
one commercial property in 2000, which incurred costs for a full year in 2001,
as compared with a partial year in 2000.
The increase in depreciation and amortization expenses of $0.2 million, or
4%, compared to the year ended December 31, 2000, is primarily attributable to
the acquisition of one commercial property in 2000, which incurred a full year
of depreciation and amortization expense in 2001, as compared with a partial
year in 2000.
The increase in real estate taxes and insurance expenses of $0.4 million,
or 17%, compared to the year ended December 31, 2000, is primarily attributable
to:
o the acquisition of one commercial property in 2000, which incurred
costs for a full year in 2001, as compared with a partial year in
2000, resulting in approximately $0.1 million in incremental
expenses;
o tax rate increases on the existing properties of approximately $0.3
million.
The decrease in interest expense of $42 thousand, or 5%, compared to the
year ended December 31, 2000, is primarily attributable to lower interest rates
in 2001.
76
The decrease in minority interest expense of $2.6 million for the year
ended December 31, 2001 compared to the minority interest for the year ended
December 31, 2000 is a result of the mergers completed during the year ended
December 31, 2000, as described in Note 4 to FSP Corp.'s financial statements.
Comparison of the year ended December 31, 2000 to the year ended December 31,
1999
Revenue
Total revenues increased $16.8 million, or 92.8%, to $34.8 million for the
year ended December 31, 2000, as compared to $18.0 million for the year ended
December 31, 1999. Income from rental operations was $25.4 million for the year
ended December 31, 2000.
The increase in rental income of $9.1 million, or 55.9%, compared to the
year ended December 31, 1999, is attributable to:
o the acquisition of seven commercial properties in 1999, which
contributed revenue for a full year in 2000, as compared with a
partial year in 1999, resulting in $8.0 million in incremental
revenues;
o the acquisition of one commercial property in 2000, which
contributed revenue for a partial year in 2000, as compared with no
revenue in 1999, resulting in approximately $0.6 million in
incremental revenues;
o increased revenue of approximately $0.5 million as a result of rent
increases and other miscellaneous fees on existing properties.
The increase in investment services income (syndication and transaction
fees) of $6.8 million, or 859%, compared to the year ended December 31, 1999, is
attributable to the syndication of three REITs in 2000 (with aggregate gross
proceeds of $60.2 million) compared to the syndication of one Sponsored Entity
in 1999 (with aggregate gross proceeds of $7.8 million).
The increase in interest and other income of $0.8 million, or 89.1%,
compared to the year ended December 31, 1999 is attributable to interest earned
on higher cash balances, cash equivalents and marketable securities and higher
average yields in 2000 compared to 1999.
Expenses
Total expenses increased $8.6 million, or 53.0%, to $23.2 million for the
year ended December 31, 2000, as compared to $14.6 million for the year ended
December 31, 1999.
The increase in selling, general and administrative expenses of $0.5
million, or 24%, compared to the year ended December 31, 1999, is attributable
to the extra costs associated with the syndication of six Sponsored Entities
(with aggregate gross proceeds of $107.6 million) in 2000 compared with the
syndication of six Sponsored Entities (with aggregate gross proceeds of $64.9
million) in 1999 as follows:
77
o increased payroll and related expenses of $0.7 million;
o offset by decreased other costs of approximately $0.2 million.
The increase in other real estate operating expenses of $2.1 million, or
46.5%, compared to the year ended December 31, 1999, is primarily attributable
to the acquisition of seven commercial properties in 1999, which incurred costs
for a full year in 2000, as compared with a partial year in 1999.
The increase in commission expense of $0.8 million, or 19%, compared to
the year ended December 31, 1999 is attributable to the syndication of six
Sponsored Entities (with aggregate gross proceeds of $107.6 million) in 2000
compared with the syndication of six Sponsored Entities (with aggregate gross
proceeds of $64.9 million) in 1999 as follows:
The increase in depreciation and amortization expenses of $1.3 million or
44.8%, compared to the year ended December 31, 1999, is primarily attributable
to:
o the acquisition of seven commercial properties in 1999, which
incurred depreciation and amortization expenses for a full year in
2000, as compared with a partial year in 1999, resulting in $1.2
million in incremental expenses;
o the acquisition of one commercial property in 2000, which incurred
depreciation and amortization expenses for a partial year in 2000,
as compared with no costs in 1999, resulting in approximately $0.1
million in incremental costs;
The increase in real estate taxes and insurance expenses of $1.0 million
or 70.8%, compared to the year ended December 31, 1999, is primarily
attributable to:
o the acquisition of seven commercial properties in 1999, which
incurred costs for a full year in 2000, as compared with a partial
year in 1999, resulting in approximately $0.8 million in incremental
expenses;
o tax rate increases on the existing properties of approximately $0.2
million.
The increase in interest expense of $0.6 million, or 187.6%, compared to
the year ended December 31, 1999, is primarily attributable to the syndication
of three REITs in 2000 compared to the syndication of one unconsolidated
Sponsored Partnership in 1999.
The increase in minority interest expense of $0.4 million for the year
ended December 31, 2000 compared to the minority interest for the year ended
December 31, 1999 is a result of the mergers completed during the year ended
December 31, 2000.
78
Trends and Uncertainties
Rental Operations
During the first six months of 2002, the apartment properties in Houston
and Baton Rouge had to struggle to maintain occupancy and to raise rents in the
face of the Enron and Andersen layoffs, but there was no material decrease in
occupancy, and rents increased slightly. However, during the third and fourth
quarters of the year, the occupancy and rents declined, in part due to seasonal
variations. In addition to the decline in overall market conditions, individual
properties may suffer in the coming quarters as newly constructed competition in
the neighborhood start to lease new units.
During 2002, office vacancy rates in all of FSP Corp.'s major markets
continued to increase, making it harder to increase rents or lease vacancies as
they occurred. Unless there is a turnaround in the general economy in early
2003, these conditions are likely to remain, and vacancies may increase along
with increased costs to lease the vacant space; such as concessions, free rent
and other incentives. When the economy does recover, it is likely to recover
unevenly with certain industry segments and geographic areas improving before
others. Because of the diversity of FSP Corp.'s portfolio and the long-term
nature of its office leases, the financial impact of any recovery or further
deterioration may be slow to materialize and is difficult to predict.
During 2002, FSP Corp. had mixed success in leasing vacancies that
occurred due to normal lease expirations and as a result of unexpected vacancies
that arose because of tenant bankruptcies. In some markets, such as Greenville,
South Carolina and Charlotte, North Carolina, space that became vacant in 2001
is still partially vacant, and while new leases have been made, other tenants
continue to contract or leave as their leases expire. In contrast, an early
lease renewal was negotiated with the major tenant at the Southfield, Michigan
property, and a new tenant leased most of a floor in the same building, even
though market conditions in the area are softer than previous years.
There were no material lease expirations in 2002 except for a lease for
99,000 square feet, which expired on November 30, 2002, and was not renewed. FSP
Corp. is actively marketing the space to potential users but has not leased the
space and cannot predict when a tenant for the space will be found. The only
year in which more than 10% of FSP Corp.'s square footage has leases expiring is
2004, during which leases with respect to more than 20% of FSP Corp.'s office
square footage will expire. However, tenants whose leases are not scheduled to
expire in the near future may go bankrupt, as they did in 2001 and 2002, and add
to the vacancies, or leases scheduled to expire in 2004 may be renegotiated
earlier. The future of some publicly traded companies, such as XO
Communications, Ltd. and Lucent Technologies, has been the subject of public
speculation, but both tenants are currently leasing their space and paying rent.
Lucent has notified FSP Corp. that it is considering subletting its space, but
Lucent is and would still be liable for the rent under any subletting or
assignment of the lease. During the second quarter, XO Communications, Ltd., the
guarantor of the lease at Telecom Business Center, filed for bankruptcy
protection under Chapter 11. As of December 31, 2002, the tenant, XO of
California, was current on its rent.
79
Real estate taxes are expected to increase in 2003 as municipalities try
to compensate for lost revenue by raising tax rates or by taxing commercial
property more heavily. Where possible, FSP Corp. intends to protest and file for
tax abatements. However, it is not certain that those efforts will be
successful.
Insurance costs and deductibles have increased, and coverages have been
eliminated across the real estate industry. When FSP Corp.'s policy was renewed
in April 2002, its rates increased and coverage for terrorism was excluded from
its master policy. FSP Corp. explored obtaining terrorism insurance for all of
its properties before the new terrorism insurance bill was signed, but did not
find it to be economically reasonable to do so, given the nature of the
portfolio which does not contain high profile buildings or buildings in central
business districts. As a result of the new terrorism bill, as of November 26,
2002, FSP Corp. obtained foreign terrorism insurance at a nominal cost. FSP
Corp. is investigating the financial feasibility of obtaining domestic terrorism
insurance in 2003. FSP Corp. intends to continue to investigate ways to keep the
properties adequately insured at economically reasonable rates until the
insurance markets return to a more normal state.
In the course of owning and operating real estate, the potential exists
for FSP Corp. to dispose of one or more properties in its portfolio. Market
conditions in specific geographic locations could present FSP Corp. with the
opportunity to realize significant capital appreciation in an asset's value. FSP
Corp. maintains close attention to market conditions in all geographic locations
where its properties are located.
Sale of Weslayan Oaks
An agreement to sell an apartment property (Weslayan Oaks) was signed in
September 2002. The closing is scheduled for January 2003. If the sale
contemplated by the agreement does not take place, FSP Corp. does not intend to
actively market the property.
Proposed Sale of Vacant Land in Southfield, Michigan
An offer to sell a parcel of vacant land in Southfield, Michigan was
accepted in December 2002, but the purchase and sale agreement has not been
negotiated or signed.
Investment Services
Unlike FSP Corp.'s real estate business, which provides a rental revenue
stream which is ongoing and recurring in nature, FSP Corp.'s investment banking
business is transactional in nature. Trends in 2002 were below expectations in
terms of the quantity, both in the number of transactions and equity raised, of
Sponsored REITs completed. Future business in this area is unpredictable.
FSP Corp.'s acquisition executives are reporting some of the largest
spreads between bid and ask prices for properties that they have seen in FSP
Corp.'s history. Differing views of the strength and timing of a national
economic recovery as well as low interest rate carrying costs on debt-financed
properties are all contributing to this situation. Without the ability to
acquire properties at attractive prices, FSP Corp.'s investment banking
activities may suffer.
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Further, FSP Corp. continues to rely solely on its in-house investment
executives to access interested investors who have capital to place in an
illiquid position for an indefinite period of time. While FSP Corp. continues to
expand its in-house sales force, uncertainties always exist as to whether it is
capable, either through FSP Corp.'s existing client base or through new
prospective clients, of providing the amount of investment capital to achieve
future performance objectives. Further setbacks in the stock market or the
general economy could have negative effects, and while the tragic events of
September 11, 2001 did not disrupt FSP Corp.'s transactional business unit
significantly, further terrorist attacks, if they occur, may have a chilling
effect on the willingness of investors to purchase interests in future Sponsored
Entities.
Liquidity and Capital Resources as of September 30, 2002
Cash and cash equivalents were $21.8 million and $24.3 million at
September 30, 2002 and December 31, 2001, respectively. This decrease of $2.5
million is attributable to $51.0 million used for investing activities offset by
$21.4 million provided by operating activities and $27.1 million provided by
financing activities.
Operating Activities
The cash provided by FSP Corp.'s operating activities of $21.4 million is
primarily attributable to net income of $18.7 million plus the add-back of $4.1
million from non-cash activity less a $1.4 million net change in operating
assets and liabilities.
Investing Activities
FSP Corp.'s cash used for investing activities of $51.0 million is
primarily attributable to the $50.0 million increase in assets held for
syndication and $1.0 million for the purchase of real estate assets, office
computers and furniture.
Financing Activities
FSP Corp.'s cash provided by financing activities of $27.1 million is
attributable to $50.0 million of proceeds from a bank note payable offset by
$22.9 million of distributions to shareholders.
Liquidity and Capital Resources as of December 31, 2001
Cash and cash equivalents were $24.4 million and $13.7 million at December
31, 2001 and December 31, 2000, respectively. This 78% increase of $10.6 million
is attributable to $33.4 million generated by operating activities and $21.8
million generated by investing activities, partially offset by $44.5 million
used by financing activities.
Operating Activities
FSP Corp.'s cash provided by operating activities of $33.4 million is
primarily attributable to $32.0 million from operations, after addback of $6.6
million from non-cash expenses of which $4.8 million relates to depreciation and
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amortization and $1.7 million relates to equity based compensation, and to $1.5
million from the increase in accounts payable and accrued expenses, partially
offset by a net change in other operating assets and liabilities of $0.1
million.
Investing Activities
FSP Corp's cash provided by investing activities of $21.8 million is
attributable to the decrease in investment of $16.7 million as a result of
repayment of a mortgage loan by a Sponsored REIT and $5.3 million as a result of
the redemption of marketable securities plus proceeds of $0.4 million received
on the sale of land, offset by the purchase of $0.7 million of property and
equipment.
Financing Activities
FSP Corp.'s cash used by financing activities of $44.5 million is
attributable to repayments of the line of credit of $16.5 million and cash
distributions to partners of $27.9 million.
Liquidity and Capital Resources as of December 31, 2000
Cash and cash equivalents were $13.7 million and $18.5 million at December
31, 2000 and 1999, respectively. This 25.9% decrease of $4.8 million is
attributable to $31.1 million used in investing activities partially offset by
$14.5 million provided by operating activities and $11.7 million provided by
financing activities.
Investing Activities
FSP Corp.'s cash used in investing activities of $31.1 million is
primarily attributable to:
o $16.7 million relating to advances to a Sponsored REIT which were
subsequently repaid in February 2001;
o $9.9 million for the purchase of property and equipment, partially
offset by proceeds of $0.9 million from the sale of land; and
o $5.3 million for the purchase of marketable securities.
Operating Activities
FSP Corp.'s cash provided by operating activities of $14.5 million is
primarily attributable to $18.5 million from operations, after addback of $9.5
million from non-cash expenses of which $4.6 million relates to depreciation and
amortization, $2.3 million relates to equity based compensation, and $2.5
million relates to minority interests.
The cash provided by operating activities is partially offset by $2.5
million from the decrease in accounts payable and accrued expenses and by $1.5
million from an aggregate net decrease in other operating assets and
liabilities.
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Financing Activities
FSP Corp.'s cash provided by financing activities of $11.7 million is
attributable to capital contributions of $39.8 million from the issuance of
partnership units in connection with the acquisition by merger of three of the
merged entities and borrowings under the line of credit of $16.5 million.
The cash provided by financing activities is partially offset by
repayments of the line of credit of $23.5 million and cash distributions to
partners of $21.0 million.
Sources and Uses of Funds
FSP Corp.'s principal demands for liquidity are cash for operations,
dividends to equity holders, debt repayments and expense associated with
indebtedness. As of September 30, 2002 FSP Corp. had approximately $56.5 million
in liabilities of which $50.0 million is a bank note payable. FSP Corp. has no
permanent, long-term debt. In the near term, liquidity is generated from funds
from ongoing real estate operations and transaction fees and commissions
received in connection with the sale of shares in Sponsored REITs.
FSP Corp. maintains an unsecured line of credit through Citizens Bank. FSP
Corp. has entered into a Master Promissory Note and Loan Agreement which
provides for a revolving line of credit of up to $50 million. Borrowings under
the loan bear interest at either the bank's base rate or a variable LIBOR rate.
FSP Corp. typically uses the unsecured line of credit to provide each
newly-formed Sponsored REIT with the funds to purchase a property. FSP Corp.'s
loan agreement with the bank includes customary restrictions on property liens
and requires compliance with various financial covenants. Financial covenants
include maintaining minimum cash balances in operating accounts, tangible net
worth of at least $140 million and compliance with other various debt and income
ratios. FSP Corp. was in compliance with all covenants as of September 30, 2002.
FSP Corp. had $50.0 million of borrowings under its revolving credit facility as
of September 30, 2002.
FSP Corp., subsequent to December 31, 2001, has utilized, its line of
credit for interim financing in connection with the acquisition of real estate
by newly-formed Sponsored REITs. As of September 30, 2002, $50 million was
outstanding under the Citizens Bank line of credit. This amount was repaid in
full on December 23, 2002.
FSP Corp.'s real properties generate rental income to cover the ordinary,
annual operating expenses of the properties and to fund distributions to equity
holders. As of September 30, 2002, the rental income covered the expenses for
each of FSP Corp.'s real properties. In addition to rental income, FSP Corp.
maintains cash reserves that may be used to fund extraordinary expenses or major
capital expenses. The cash reserves were set aside when the Sponsored
Partnerships that the FSP Partnership acquired were originally syndicated and
are replenished from property operations as necessary. The cash reserves as of
September 30, 2002 are in excess of the known needs for extraordinary expenses
or capital improvements for the real properties for the next year. There are no
external restrictions on these reserves, and they may be used for any corporate
purpose.
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Although there is no guarantee FSP Corp. will be able to obtain the funds
necessary for its future growth, FSP Corp. anticipates generating funds from
continuing real estate operations and from fees and commissions from the sale of
shares in newly-formed Sponsored REITs. With adequate reserves in place to cover
extraordinary expenses or capital improvements, FSP Corp. believes that it has
adequate funds for future needs. FSP Corp.'s ability to maintain or increase its
level of distributions to stockholders, however, depends upon the level of
interest on the part of investors in purchasing shares of Sponsored REITs and
the level of rental income from FSP Corp.'s real properties.
For risks related to FSP Corp.'s operations and properties, see "Risk
Factors" beginning on page 13 of this Proxy Statement.
Related Party Transactions
FSP Corp. typically retains a non-controlling common stock ownership
interest in Sponsored REITs that it has organized. These ownership interests
have virtually no economic benefit or risk. At December 31, 2001 and 2000, FSP
Corp. had ownership interests in ten and four Sponsored REITs, respectively. At
December 31, 2002, FSP Corp. had ownership interests in 16 Sponsored REITs.
Thirteen of these 16 Sponsored REITs comprise the Target REITs. During 1999 and
2000, FSP Corp. acquired 100% of the non-owned interests of certain Sponsored
Partnerships (through a series of mergers) that it had previously organized.
Neither FSP Corp. nor any other related entity has an obligation to acquire the
non-owned interests in any previously syndicated Sponsored REIT. FSP Corp. will
be the sole stockholder of each Target REIT following consummation of the
Mergers.
At the request of FSP Corp., certain officers and directors of FSP Corp.
serve as officers and directors of Sponsored REITs. All of FSP Corp.'s revenue
from investment banking services derives from transactions involving the
Sponsored REITs. The terms of the commissions and fees paid by the Sponsored
REITs to FSP Corp. and the terms of the mortgage loans made by FSP Corp. to the
Sponsored REITs accordingly were not the product of arms-length negotiations.
FSP Corp., however, believes that such terms are no less favorable to FSP Corp.
than it could have obtained from third parties in arms-length negotiations.
FSP Corp. has an arrangement for Citizens Bank to provide loans to FSP
Corp.'s senior officers for the purpose of paying income taxes on the issuance
to them of shares of FSP Common Stock as compensation. Each borrower has secured
the loan by pledging shares of FSP Common Stock having an aggregate fair market
value at the time of the loan of no less than twice the principal amount of the
loan. FSP Corp. initially agreed to purchase from Citizens Bank any such loan on
which the borrower defaults. Following the purchase of the loan, the FSP
Partnership would have the same rights as Citizens Bank, including the right to
foreclose on the pledged stock. As of September 30, 2002, aggregate loans to
senior officers in the amount of $1,803,000 were outstanding. In order to comply
with the Sarbanes-Oxley Act of 2002, FSP Corp. has informed Citizens Bank and
its senior officers that it will no longer guarantee any future loans. As of
December 31, 2002, all repurchase agreements have been terminated and FSP Corp.
has no obligation relating to such loans from Citizens to Bank to senior
officers.
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DESCRIPTION OF FSP CORP. CAPITAL STOCK
The following summary description of the capital stock of FSP Corp. is
qualified in its entirety by reference to the Articles of Organization and the
Bylaws of FSP Corp.
General
The authorized capital stock of FSP Corp. consists of 180,000,000 shares
of Common Stock and 20,000,000 shares of Preferred Stock, $0.0001 par value per
share (the "Preferred Stock"). Upon the consummation of the Mergers,
approximately 49,630,338 shares of FSP Common Stock will be issued and
outstanding, and no shares of Preferred Stock will be issued and outstanding.
FSP Common Stock
All shares of FSP Common Stock issued in the Mergers will be duly
authorized, fully paid and nonassessable. Subject to the preferential rights of
any shares of Preferred Stock hereinafter designated by the FSP Board, holders
of shares of FSP Common Stock will be entitled to receive dividends on the stock
if, as and when authorized and declared by the FSP Board out of assets legally
available therefor and to share ratably in the assets of FSP Corp. legally
available for distribution to its stockholders in the event of its liquidation,
dissolution or winding-up after payment of, or adequate provision for payment
of, all known debts and liabilities of FSP Corp. FSP Corp. intends to pay
regular quarterly dividends.
Each outstanding share of FSP Common Stock entitles the holder thereof to
one vote on all matters submitted to a vote of stockholders, including the
election of directors and, except as otherwise required by law or except as
provided with respect to any other class or series of stock, the holders of
shares of FSP Common Stock will possess the exclusive voting power. There is no
cumulative voting in the election of directors, which means that the holders of
a majority of the outstanding shares of FSP Common Stock can elect all of the
directors then standing for election and the holders of the remaining shares
will not be able to elect any directors. Holders of shares of FSP Common Stock
have no conversion, sinking fund or preemptive rights to subscribe for any
securities of FSP Corp.
Shares of FSP Common Stock will have equal dividend, distribution,
liquidation and other rights and will have no preference or exchange rights.
Pursuant to the Maryland General Corporation Law (the "MGCL"), a
corporation generally cannot dissolve, amend its charter, merge, sell all or
substantially all of its assets, engage in a share exchange or consolidate
unless approved by the holders of at least two-thirds of the shares of stock
entitled to vote on the matter unless a lesser percentage (but not less than a
majority of all of the votes to be cast on the matter) is set forth in the
corporation's charter. The Articles provide that FSP Corp. may amend the
Articles, merge, sell all or substantially all of its assets, engage in a share
exchange or consolidate, with the approval of the holders of a majority of the
shares of stock entitled to vote on the matter.
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Preferred Stock
The FSP Board may authorize from time to time, without further action by
the stockholders, the issuance from time to time of shares of Preferred Stock in
one or more separately designated classes. The FSP Board may set the
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends or other distributions, qualifications and terms and
conditions of redemption of the shares of each class of Preferred Stock. The FSP
Board could authorize the issuance of shares of Preferred Stock with terms and
conditions which could have the effect of discouraging a takeover or other
transaction in which holders of some, or a majority of, shares of FSP Common
Stock might receive a premium for their shares of FSP Common Stock over the
then-prevailing market price of those shares of FSP Common Stock.
Ownership Limits
In order for FSP Corp. to maintain its qualification as a real estate
investment trust, among other things, not more than 50% in value of FSP Corp.'s
outstanding shares of FSP Common Stock and Preferred Stock (the "Equity
Securities") may be owned, directly or indirectly, by five or fewer individuals
(as defined in the Code to include certain entities). To ensure this standard,
the Articles of FSP Corp. provide that holders of Equity Securities cannot
beneficially or constructively own (as defined in the Articles) more than 9.8%
of the number of shares or value of the outstanding Equity Securities of FSP
Corp. (the "Ownership Limit") and that no stockholder will be able to transfer
or acquire shares that would result in the outstanding equity shares of FSP
Corp. being beneficially owned by fewer than 100 persons.
Any transfer of shares of Equity Securities that would (i) cause any
person to beneficially or constructively own shares of Equity Securities in
excess of the Ownership Limit, (ii) result in the shares of Equity Securities
being owned by fewer than 100 persons, (iii) result in the FSP Corp. being
"closely held' within the meaning of section 856(h) of the Code, or (iv)
otherwise cause FSP Corp. to fail to qualify as a real estate investment trust,
shall be null and void, and the intended transferee will acquire no rights to
the shares of Equity Securities.
The restriction on transferability and ownership described in (i) above
will not apply if the FSP Board, in its sole and absolute discretion, waives the
application of the Ownership Limit to a person subject to such limit, provided
that (A) the FSP Board obtains such representations and undertakings from such
person and any other person as the FSP Board may deem appropriate and (B) such
person agrees in writing that any violation or attempted violation of such
representations or undertakings or any other action which is contrary to the
restrictions imposed by the Articles will result in the treatment, to the extent
necessary to cure such violation or action, of the Equity Shares owned by such
person as Excess Shares (as defined below).
If any purported transfer of Equity Securities or other event resulting in
an increase in any holder's percentage interest in Equity Securities would cause
a purported transferee or holder to be in violation of the Ownership Limit or
would cause FSP Corp. to be disqualified as a real estate investment trust, then
the purported transferee or holder (the "Prohibited Owner") shall not acquire or
shall cease to own, as the case may be, such number of shares in excess of the
Ownership Limit (the "Excess Shares"). Any Excess Shares will be transferred
86
automatically to a trust, the beneficiary of which will be one or more qualified
charitable organizations selected by FSP Corp. Such automatic transfer shall be
deemed to be effective as of the close of business on the business day prior to
the date of such violative transfer or event.
FSP Corp. will appoint the trustee of the trust (who will be unaffiliated
with FSP Corp. and any Prohibited Owner). The trustee will be required to
designate one or more persons who could own such Excess Shares without violating
the Ownership Limit or causing FSP Corp. to be disqualified as a company
("Permitted Transferees") and to use best efforts to sell such Excess Shares to
such Permitted Transferees.
Excess Shares held in the trust shall be deemed to have been offered for
sale to FSP Corp., or its designee, at a price per share equal to the lesser of
(i) in the case of Excess Shares resulting from a purchase, the price per share
in the transaction that resulted in such purchase or, in the case of Excess
Shares resulting from any event other than a purchase, the market price on the
date of such event or (ii) the market price on the date FSP Corp., or its
designee, accepts such offer. FSP Corp. will have the right to accept such offer
for a period ending upon the sale by the trustee to one or more Permitted
Transferees.
All certificates representing shares of Equity Securities will bear a
legend referring to the restrictions described above.
FSP Corp. is required to keep such records as will disclose the actual
ownership of its outstanding shares of Equity Securities. Accordingly, to enable
FSP Corp. to comply with such record keeping requirements, each record and
beneficial owner of Equity Securities will, upon demand, be required to disclose
to FSP Corp. in writing such information as FSP Corp. may request in order to
determine FSP Corp.'s status as a real estate investment trust, to comply with
the requirements of any taxing authority or governmental agency and to ensure
compliance with the Ownership Limit.
The ownership limitations described above could have the effect of
delaying, deferring or preventing a change of control of FSP Corp. in which
holders of FSP Common Stock might receive a premium for their shares over the
then prevailing market price.
Unregistered Shares
The shares of FSP Common Stock to be issued as Merger Consideration have
not been registered under the Securities Act, and FSP Corp. has no present plan
to effect such registration. Accordingly, the shares of FSP Common Stock to be
issued as Merger Consideration must be held indefinitely unless they are
subsequently registered under the Securities Act or unless an exemption from
such registration is available pursuant to the rules of the Commission.
Redemption
The Articles provide that on an annual basis FSP Corp. will use its best
efforts to redeem any shares of FSP Common Stock from holders desiring to sell
them. Any holder wishing to take advantage of this opportunity must so request
no later than July 1 of any year for a redemption that would be effective the
following January 1. The purchase price paid by FSP Corp. will be 90% of the
87
fair market value of the shares purchased, as determined by the FSP Board in its
sole and absolute discretion after consultation with an adviser selected by the
FSP Board.
FSP Corp. will not redeem any shares of FSP Common Stock pursuant to this
provision if:
o FSP Corp. is insolvent or the redemption would render FSP Corp.
insolvent;
o The redemption would impair the capital or operations of FSP Corp.;
o The redemption would contravene any provision of federal or state
securities laws;
o The redemption would result in FSP Corp.'s failing to qualify as a
real estate investment trust; or
o The FSP Board determines that the redemption would otherwise not be
in the best interests of FSP Corp.
If FSP Corp. is unable to purchase any shares of FSP Common Stock offered
for redemption, FSP Corp. will use its best efforts to arrange for a purchase by
a third party or parties, each of whom must be an accredited investor within the
meaning of Regulation D and must have a pre-existing relationship with FSP Corp.
In addition, FSP Corp. will have the right to satisfy its obligation to effect
redemption by arranging for a purchase by such a third party or parties at the
redemption price.
FSP Corp. has no obligations to redeem shares of FSP Common Stock during
any period that the FSP Common Stock is listed for trading on a national
securities exchange or the NASDAQ National Market System.
Classification of the FSP Board
The Bylaws provide that the number of directors of FSP Corp. shall be as
set forth in the Articles or as may be established by the FSP Board but may not
be fewer than one. Any vacancy will be filled, at any regular meeting or at any
special meeting called for that purpose, by a majority of the directors then in
office. FSP Stockholders may elect a director to fill a vacancy on the FSP Board
which results from the removal of a director.
Pursuant to the terms of the Articles, the directors are divided into
three classes. One class holds office for a term expiring at the annual meeting
of stockholders to be held in 2003, another class holds office for a term
expiring at the annual meeting of stockholders to be held in 2004 and another
class holds office for a term expiring at the annual meeting of stockholders to
be held in 2005. As the term of each class expires, directors in that class will
be elected for a term of three years. FSP Corp. believes that classification of
the FSP Board will help to assure the continuity and stability of FSP Corp.'s
business strategies and policies as determined by the FSP Board.
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The classified director provision could have the effect of making the
removal of incumbent directors more time-consuming and difficult, which could
discourage a third party from making a tender offer or otherwise attempting to
obtain control of FSP Corp., even though such an attempt might be beneficial to
FSP Corp. and FSP Stockholders. At least two annual meetings of stockholders,
instead of one, will generally be required to effect a change in a majority of
the FSP Board. Thus, the classified board provision could increase the
likelihood that incumbent directors will retain their positions. Further,
holders of shares of FSP Common Stock will have no right to cumulative voting
for the election of directors. Consequently, at each annual meeting of
stockholders, the holders of a majority of shares of FSP Common Stock will be
able to elect all of the successors of the class of directors whose term expires
at that meeting.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FSP Corp. was not a party to derivative financial instruments at or during
the year ended December 31, 2001. FSP Corp. was not a party to derivative
financial instruments at or during the nine months ended September 30, 2002.
FSP Corp. borrows from time to time upon its line of credit. These
borrowings bear interest at a variable rate. As of September 30, 2002, $50
million was outstanding under the line of credit. FSP Corp. uses the funds it
draws on its line of credit only for the purpose of making interim mortgage
loans to Sponsored REITs. These mortgage loans bear interest at the same
variable rate payable by FSP Corp. under its line of credit. Therefore, FSP
Corp. believes that it has mitigated its interest rate risk with respect to its
borrowings.
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CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
On October 11, 2001, the FSP Partnership (the predecessor to FSP Corp.)
dismissed BDO Seidman, LLP as its independent certified public accountant. The
reports of BDO Seidman on the FSP Partnership's financial statements for the
fiscal years ended December 31, 2000 and 1999 did not contain an adverse opinion
or a disclaimer of opinion, and were not qualified or modified as to
uncertainty, audit scope or accounting principles. During the fiscal years ended
December 31, 2000 and 1999 and any subsequent interim period preceding the
dismissal, there were (i) no disagreements with BDO Seidman on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements, if not resolved to the satisfaction of
BDO Seidman, would have caused it to make reference to the subject matter of the
disagreements in connection with its reports and (ii) no reportable events as
defined in Regulation S-K Item 304(a)(1)(iv). The executive officers of the FSP
General Partner, the general partner of the FSP Partnership, approved the change
of accountants.
The FSP Partnership solicited proposals from various accounting firms and
following review of such proposals engaged PricewaterhouseCoopers LLP to act as
the FSP Partnership's independent certified public accountants effective October
11, 2001. During the fiscal years ended December 31, 2000 and 1999 and any
subsequent interim period preceding the engagement, the FSP Partnership did not
consult PricewaterhouseCoopers regarding the application of accounting
principles to a specified transaction, either completed or proposed, or the type
of audit opinion that might be rendered on the FSP Partnership's financial
statements, or any matter that was the subject of a disagreement or a reportable
event.
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BENEFICIAL OWNERSHIP OF VOTING STOCK
The following table sets forth the beneficial ownership of FSP's Common
Stock as of January 1, 2003 (1) by each director, (2) by each of the executive
officers named in the Summary Compensation Table set forth below (the "Named
Executive Officers") and (3) by all current directors and executive officers as
a group. To FSP Corp.'s knowledge, no person or group beneficially owns more
than five percent of the FSP Common Stock.
Number of
Shares Percentage of
Beneficially Outstanding
Owned(1) Common Stock(2)
------------ ---------------
Barry Silverstein(3) .................... 1,148,878.50 4.66%
Dennis J. McGillicuddy(4)................ 990,325.75 4.02%
George J. Carter(5)...................... 775,239.35 3.15%
Richard R. Norris(6)..................... 262,231.13 1.06%
R. Scott MacPhee......................... 372,160.10 1.51%
William W. Gribbell...................... 129,470.35 *
Barbara J. Corinha....................... 25,376.72 *
Janet P. Notopoulos...................... 12,282.61 *
All current directors and executive
officers as a group (8 persons).......... 3,715,965.01 15.09%
----------
* Less than 1%.
(1) FSP Corp. does not have any outstanding stock options or other securities
convertible into FSP Common Stock. Each person has sole investment and
voting power with respect to the shares indicated as beneficially owned,
except as otherwise noted. The inclusion herein of shares as beneficially
owned does not constitute an admission of beneficial ownership.
(2) Based upon approximately 24,630,247 shares outstanding as of January 1,
2003.
(3) Comprised of shares held by Silverstein Investments Limited Partnership
III, JMB Family Limited Partnership and MSTB Family Limited Partnership.
Mr. Silverstein is a limited partner of Silverstein Investments Limited
Partnership III and is the General Partner of JMB Family Limited
Partnership and MSTB Family Limited Partnership. Mr. Silverstein has power
to vote all shares held by these partnerships.
(4) Comprised of shares held by McGillicuddy Investments Limited Partnership
III and McGillicuddy Family Limited Partnership. Mr. McGillicuddy is a
limited partner of McGillicuddy Investments Limited Partnership III and is
the General Partner of McGillicuddy Family Limited Partnership and a
limited partner through McGillicuddy Investments Limited Partnership III.
Mr. McGillicuddy has power to vote all shares held by these partnerships.
(5) Comprised of shares held by Mr. Carter and his spouse, Judith I Carter,
with whom Mr. Carter shares investment and voting power.
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(6) Includes 248,580.13 shares of FSP Common Stock owned by the Richard R.
Norris Living Trust and 7,988 shares of FSP Common Stock owned by the
Karen C. Norris Living Trust, which Mr. Norris may be deemed to
beneficially own. Also includes 5,663.50 shares of FSP Common Stock owned
by Gretchen D. Norris as to which Mr. Norris has power of attorney but as
to which Mr. Norris disclaims beneficial ownership. Mr. Norris has power
to vote all shares other than 7,988 shares of FSP Common Stock held by the
Karen C. Norris Living Trust.
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EXECUTIVE COMPENSATION
Summary Compensation
The following Summary Compensation Table sets forth certain information
concerning the compensation for each of the last three fiscal years of (1) the
Chief Executive Officer (the "CEO") of FSP Corp. as of December 31, 2001 and (2)
the four most highly compensated executive officers (other than the CEO) whose
total annual salary and bonus exceeded $100,000 and who were serving as
executive officers at the end of 2001 (collectively, the "Named Executive
Officers").
Annual Compensation(1)
-------------------------------------------
Other
Fiscal Annual All Other
Name and Principal Position Year Salary Bonus Compensation(2) Compensation(3)
--------------------------- ---- ------ ----- --------------- ---------------
George J. Carter..................... 2001 $120,000 $ 39,652 -- $ 815,585(4)
President and Chief Executive Officer 2000 $120,000 $ 40,746 -- $1,703,770(5)
1999 $120,000 $ 80,000 -- $ 6,000(6)
Richard R. Norris.................... 2001 -- $ 21,428 $2,298,737 $ 448,436(7)
Executive Vice President 2000 -- $ 5,453 $1,545,750 $ 233,190(8)
1999 -- -- $ 849,330 $ 6,000(6)
R. Scott MacPhee..................... 2001 -- $ 11,023 $2,202,483 $ 232,196(9)
Executive Vice President 2000 -- $ 4,329 $ 981,338 $ 186,360(10)
1999 -- -- $ 849,553 $ 6,000(6)
William W. Gribbell.................. 2001 -- $ 7,021 $ 898,993 $ 152,274(11)
Executive Vice President 2000 -- $ 2,176 $ 701,358 $ 96,680(12)
1999 -- -- $ 404,822 $ 6,000(6)
Barbara J. Corinha................... 2001 $ 60,000 $192,974 -- $ 66,500(13)
Vice President, Chief Operating Officer, 2000 $ 60,000 $161,200 -- $ 56,000(14)
Treasurer and Secretary 1999 $ 50,000 $125,000 -- $ 6,000(6)
(1) Amounts reported represent annual compensation paid to the Named Executive
Officers by the FSP Partnership, FSP Corp.'s predecessor.
(2) Consists of brokerage commissions paid by FSP Investments in respect of
the sale of securities of Sponsored REITs and Sponsored Partnerships.
(3) The FSP Partnership issued FSP Units to all executive officers in April
2000 and July 2001, valued at $10 per FSP Unit and $11.50 per FSP Unit,
respectively, as part of their annual compensation. The valuations of $10
and $11.50 per FSP Unit were determined in good faith by the FSP General
Partner, the general partner of the FSP Partnership. The value of $10 had
been ascribed to each FSP Unit in connection with certain mergers that
were effective January 1, 2000 in which the FSP Partnership acquired
several of the limited partnerships whose offerings FSP Investments had
previously sponsored, and no material changes in the financial condition
or results of the FSP Partnership had occurred between that date and April
1, 2000. The value of $11.50 per FSP Unit was determined by the general
partner based on the value ascribed to each FSP Unit in connection with
93
certain mergers that were effective October 1, 2000 in which the FSP
Partnership acquired several of the limited partnerships whose offerings
FSP Investments had previously sponsored, and no material changes in the
financial condition or results of the FSP Partnership had occurred between
that date and July 1, 2001.
(4) Includes $800,000 in FSP Units, a $6,500 FSP Partnership contribution to a
Simple IRA plan and $9,085 of life insurance.
(5) Includes $1,697,770 in FSP Units and a $6,000 FSP Partnership contribution
to a Simple IRA plan.
(6) Represents a FSP Partnership contribution to a Simple IRA plan.
(7) Includes $423,320 in FSP Units, a $6,500 FSP Partnership contribution to a
Simple IRA plan and $9,616 of life insurance.
(8) Includes $227,190 in FSP Units and a $6,000 FSP Partnership contribution
to a Simple IRA plan.
(9) Includes $222,400 in FSP Units, a $6,500 FSP Partnership contribution to a
Simple IRA plan and $3,296 of life insurance.
(10) Includes $180,360 in FSP Units and a $6,000 FSP Partnership contribution
to a Simple IRA plan.
(11) Includes $145,280 in FSP Units, a $6,500 FSP Partnership contribution to a
Simple IRA plan and $494 of life insurance.
(12) Includes $90,680 in FSP Units and a $6,000 FSP Partnership contribution to
a Simple IRA plan.
(13) Includes $60,000 in FSP Units and a $6,500 FSP Partnership contribution to
a Simple IRA plan.
(14) Includes $50,000 in FSP Units and a $6,000 FSP Partnership contribution to
a Simple IRA plan.
Option Grants, Option Exercises and Holdings
No options or stock appreciation rights ("SARs") were granted to any of
the Named Executive Officers during 2001. FSP Corp. does not have any
outstanding stock options or SARs, and therefore, there were no stock options or
SARs exercised by any of the Named Executive Officers during 2001.
In July 2002, FSP Corp. issued 43,998.54 shares of FSP Common Stock to R.
Scott MacPhee, an Executive Vice President of FSP Corp. and an Executive Vice
President of each Target REIT, pursuant to FSP Corp.'s 2002 Stock Incentive
Plan. All other executive officers of FSP Corp., including executive officers
94
who are also members of the FSP Board, who were also eligible for grants of
stock awards requested that they not be considered for such grants due to the
current economic climate and FSP Corp.'s current challenges in meeting those
challenges for the remainder of fiscal 2002.
Certain Relationships and Related Transactions
Messrs. Carter, MacPhee, Norris and Gribbell and Mses. Corinha and
Notopoulos, each of whom is an executive officer of FSP Corp., serve, at the
request of FSP Corp., as executive officers and, except for Ms. Notopoulos,
directors of each of the Sponsored REITs. None of such persons receives any
remuneration from the Sponsored REITs for such service.
FSP Investments, a wholly owned subsidiary of FSP Corp., provides
syndication and real estate acquisition advisory services for the Sponsored
REITs. Fees from Sponsored REITs for property acquisition services amounted to
approximately $3,082,000 for the year ended December 31, 2001 and $777,000 for
the nine months ended September 30, 2002. Sales commissions earned from the sale
of Sponsored REIT preferred shares amounted to approximately $13,000,000 for the
year ended December 31, 2001 and $9,890,000 for the nine months ended September
30, 2002.
During 2001 and the first nine months of 2002, FSP Corp. provided interim
financing for the purchase of certain Sponsored REIT properties prior to
completion of the Sponsored REITs' private equity offerings. The Sponsored REITs
paid FSP Corp. financing commitment fees of approximately $9,618,000 for the
year ended December 31, 2001 and $8,424,000 for the nine months ended September
30, 2002. Interest income earned from the Sponsored REITs amounted to
approximately $549,000 for the year ended December 31, 2001 and $779,300 for the
nine months ended September 30, 2002. The interest rate charged by FSP Corp. to
the Sponsored REITs is equal to the interest rate paid by FSP Corp. to Citizens
Bank for borrowings under its line of credit. Therefore, FSP Corp. does not
realize any significant profit from interest on the loans. All loans to
Sponsored REITs were evidenced by promissory notes and were paid in full upon
closing of the applicable Sponsored REIT's private equity offering during 2001
or 2002. In addition, one loan which was made to a Sponsored REIT during 2000
and was outstanding at December 31, 2000, was paid in full during 2001. The
following table summarizes these interim financing transactions:
95
Total
Financing Amount
Original Commitment Interest Outstanding
Principal Average Fees Income as of
Date Amount of Interest Earned by Earned by Date of December
of Loan Note Rate FSP Corp. FSP Corp. Repayment 31, 2002
------- ---- ---- --------- --------- --------- --------
12/14/00 $16,500,000 8.93% $669,500 $56,116 02/01/01 $0
03/02/01 $21,000,000 8.42% $965,625 $76,758 03/30/01 $0
05/24/01 $42,150,000 6.57% $1,931,250 $128,362 06/28/01 $0
09/13/01 $16,000,000 6.58% $1,150,000 $15,665 09/17/01 $0
09/14/01 $39,000,000 6.22% $2,760,000 $227,227 11/01/01 $0
12/04/01 $30,150,000 5.56% $2,141,875 $44,806 12/14/01 $0
03/1/02 $20,360,000 4.75% $1,437,500 $8,059 3/6/02 $0
04/23/02 $17,000,000 4.75% $1,184,500 $18,371 5/1/02 $0
05/22/02 $32,250,000 4.75% $2,300,000 $96,960 6/27/02 $0
06/3/02 $22,300,000 4.75% $1,581,250 $78,123 8/1/02 $0
8/26/02 $26,000,000 4.75% $1,920,500 $28,886 9/3/02 $0
9/29/02 $51,500,000 4.50% $3,657,000 $240,445 12/23/02 $0
Total asset management fee income from the Sponsored REITs amounted to
approximately $150,000 for the year ended December 31, 2001and $283,000 for the
nine months ended September 30, 2002. Asset management fees are approximately 1%
of collected rents for both periods.
Aggregate fees charged to the Sponsored REITs amounted to approximately
$26,399,000 for the year ended December 31, 2001 and $19,280,000 for the nine
months ended September 30, 2002.
FSP Corp. has arranged for Citizens Bank to provide a line of credit for
FSP Corp.'s senior officers in the maximum aggregate amount of $3,000,000. The
borrowings under this line of credit are for the purpose of paying income taxes
on equity interests in FSP Corp. issued to such senior officers as compensation.
Loans under this line of credit have a term of one year and bear interest at the
bank's prime rate plus 50 basis points. Loans of $1,803,000 in the aggregate
were outstanding to senior officers at September 30, 2002. Each borrower has
secured the loan by pledging shares of FSP's Common Stock having an aggregate
fair market value at the time of the loan of no less than twice the principal
amount of the loan. FSP Corp. initially agreed to purchase from Citizens Bank
any loan on which the borrower defaults. Following the purchase of the loan, FSP
Corp. would have the same rights as Citizens Bank, including the right to
foreclose on the pledged stock or to recover the outstanding amount of the loan
from the officer/borrower. In order to comply with the Sarbanes-Oxley Act of
2002, FSP Corp. has informed Citizens Bank and its senior officers that it will
no longer agree to guarantee any future loans. As of December 31, 2002, all
repurchase agreements have been terminated and FSP Corp. has no obligation
relating to such loans from Citizens to Bank to senior officers.
Mr. Carter's son, Jeffrey B. Carter, is Director of Acquisitions for FSP
Investments. During 2001, he received total compensation (including salary, cash
bonus and contribution to a Simple IRA plan) of $181,200. For the nine months
96
ended September 30, 2002, he received total compensation of $201,250.
Mr. Norris's son, Adam R. Norris, is a sales assistant for FSP
Investments. During 2001, he received total compensation (including salary, cash
bonus and contribution to a Simple IRA plan) of $187,551. For the nine months
ended September 30, 2002, he received total compensation of $196,820.
Employment Agreements
FSP Corp. is not a party to any employment agreement with any of the Named
Executive Officers.
Compensation of Directors
None of FSP Corp.'s directors receives compensation for his or her
services as a director. FSP Corp. reimburses Messrs. McGillicuddy and
Silverstein for expenses incurred by them in connection with attendance at Board
meetings.
97
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names, ages and positions of all
Directors and Executive Officers of FSP Corp. as of December 15, 2002.
Name Age Position
---- --- --------
George J. Carter (5) 54 President, Chief Executive Officer and
Director
Barbara J. Corinha (1),(2),(4) 46 Vice President, Chief Operating
Officer, Treasurer, Secretary and
Director
R. Scott MacPhee 45 Executive Vice President
Richard R. Norris (5) 59 Executive Vice President and Director
William W. Gribbell 43 Executive Vice President
Janet Prier Notopoulos (1),(3) 55 Vice President and Director
Barry Silverstein (2),(4) 69 Director
Dennis J. McGillicuddy (2),(3) 61 Director
----------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
(3) Class I Director
(4) Class II Director
(5) Class III Director
George J. Carter, age 54, is President, Chief Executive Officer and a
Director of FSP Corp. and is responsible for all aspects of the business of FSP
Corp. and its affiliates, with special emphasis on the evaluation, acquisition
and structuring of real estate investments. Prior to the Conversion, he was
President of the General Partner and was responsible for all aspects of the
business of the FSP Partnership and its affiliates. From 1992 through 1996 he
was President of Boston Financial Securities, Inc. ("Boston Financial"). Prior
to joining Boston Financial, Mr. Carter was owner and developer of Gloucester
Dry Dock, a commercial shipyard in Gloucester, Massachusetts. From 1979 to 1988,
Mr. Carter served as Managing Director in charge of marketing of First Winthrop
Corporation, a national real estate and investment banking firm headquartered in
Boston, Massachusetts. Prior to that, he held a number of positions in the
brokerage industry including those with Merrill Lynch & Co. and Loeb Rhodes &
Co. Mr. Carter is a graduate of the University of Miami (B.S.). Mr. Carter is a
NASD General Securities Principal (Series 24) and holds a NASD Series 7 general
securities license.
Barbara J. Corinha, age 46, is the Vice President, Chief Operating
Officer, Treasurer, Secretary and a Director of FSP Corp. In addition, Ms.
Corinha has as her primary responsibility, together with Mr. Carter, the
management of all operating business affairs of FSP Corp. and its affiliates.
Prior to the Conversion, Ms. Corinha was the Vice President, Chief Operating
98
Officer, Treasurer and Secretary of the General Partner. From 1993 through 1996,
she was Director of Operations for the private placement division of Boston
Financial. Prior to joining Boston Financial, Ms. Corinha served as Director of
Operations for Schuparra Securities Corp. and as the Sales Administrator for
Weston Financial Group. From 1979 through 1986, Ms. Corinha worked at First
Winthrop Corporation in administrative and management capacities; including
Office Manager, Securities Operations and Partnership Administration. Ms.
Corinha attended Northeastern University and the New York Institute of Finance.
Ms. Corinha is a NASD General Securities Principal (Series 24). She also holds
other NASD supervisory licenses including Series 4 and Series 53, and a NASD
Series 7 general securities license.
R. Scott MacPhee, age 45, is an Executive Vice President of FSP Corp. and
has as his primary responsibility the direct equity placement of the Sponsored
Entities. Prior to the Conversion, Mr. MacPhee was an Executive Vice President
of the General Partner. From 1993 through 1996 he was an executive officer of
Boston Financial. From 1985 to 1993 Mr. MacPhee worked at Winthrop Financial
Associates. Mr. MacPhee attended American International College. Mr. MacPhee
holds a NASD Series 7 general securities license.
Richard R. Norris, age 59, is an Executive Vice President and a Director
of FSP Corp. and has as his primary responsibility the direct equity placement
of the Sponsored Entities. Prior to the Conversion, Mr. Norris was an Executive
Vice President of the General Partner. From 1993 through 1996 he was an
executive officer of Boston Financial. From 1983 to 1993 Mr. Norris worked at
Winthrop Financial Associates. Prior to that, he worked at Arthur Young &
Company (subsequently named Ernst & Young through a merger). Mr. Norris is a
graduate of Bowdoin College (B.A.) and Northeastern University (M.S.). Mr.
Norris holds a NASD Series 7 general securities license.
William W. Gribbell, age 43, is an Executive Vice President of FSP Corp.
and has as his primary responsibility the direct equity placement of the
Sponsored Entities. Prior to the Conversion, Mr. Gribbell was an Executive Vice
President of the General Partner. From 1993 through 1996 he was an executive
officer of Boston Financial. From 1989 to 1993 Mr. Gribbell worked at Winthrop
Financial Associates. Mr. Gribbell is a graduate of Boston University (B.A.).
Mr. Gribbell holds a NASD Series 7 general securities license.
Janet Prier Notopoulos, age 55, is a Vice President and a Director of FSP
Corp. and President of FSP Property Management LLC and has as her primary
responsibility the oversight of the management of the real estate assets of FSP
Corp. and its affiliates. Prior to the Conversion, Ms. Notopoulos was a Vice
President of the General Partner. Prior to joining Franklin Street Partners in
1997, Ms. Notopoulos was a real estate and marketing consultant for various
clients. From 1975 to 1983, she was Vice President of North Coast Properties,
Inc., a Boston real estate investment company. Between 1969 and 1973, she was a
real estate paralegal at Goodwin, Procter & Hoar. Ms. Notopoulos is a graduate
of Wellesley College (B.A.) and the Harvard School of Business Administration
(M.B.A).
Barry Silverstein, age 69, is a Director and a member of the Compensation
Committee. Mr. Silverstein took his law degree from Yale University in 1957 and
subsequently held positions as attorney/officer/director of various
privately-held manufacturing companies in Chicago, Illinois. After selling those
99
interests in 1964, he moved to Florida to manage his own portfolio and to teach
at the University of Florida Law School. In 1968, Mr. Silverstein became the
principal founder and shareholder in Coaxial Communications, a cable television
company. Initially operating in small, rural communities in the southeast,
Coaxial expanded its operations to Columbus, Ohio, the suburbs of Cincinnati,
Ohio, and St. Paul, Minnesota, as well as smaller systems in West Virginia,
Kentucky and Illinois. In 1998 and 1999, Coaxial sold its cable systems, and Mr.
Silverstein retired from the cable television business.
Dennis McGillicuddy, age 61, is a Director and the Chairman of the
Compensation Committee. Mr. McGillicuddy graduated from the University of
Florida with a B.A. degree and in 1966 he graduated from the University of
Florida Law School with a J.D. degree. In 1968, Mr. McGillicuddy joined Barry
Silverstein in founding Coaxial Communications, a cable television company.
Initially operating in small, rural communities in the southeast, Coaxial
expanded its operations to Columbus, Ohio, the suburbs of Cincinnati, Ohio, and
St. Paul, Minnesota, as well as smaller systems in West Virginia, Kentucky and
Illinois. In 1998 and 1999, Coaxial sold its cable systems, and Mr. McGillicuddy
retired from the cable television business. Mr. McGillicuddy has served on the
boards of various charitable organizations. He is currently president of the
Board of Trustees of Florida Studio Theater, a professional non-profit theater
organization. Also, Mr. McGillicuddy is an officer and board member of The
Florida Winefest and Auction Inc., a Sarasota-based charity, which provides
funding for programs of local charities that deal with disadvantaged children
and their families.
Each of the above executive officers other than Ms. Notopoulos began
working for the FSP Partnership at its inception in 1997. Ms. Notopoulos was
employed as a consultant by the FSP Partnership commencing in March 1997 and
became a full-time employee on January 1, 1998.
There are no family relationships among any of the executive officers and
directors.
NO DISSENTERS' APPRAISAL RIGHTS
FSP Stockholders who object to the Mergers will have no dissenters'
appraisal rights under state law.
100
BUSINESS AND PROPERTIES OF THE Target REITs
Each Target REIT was formed for the purpose of acquiring, developing and
operating its property. The principal investment objectives of the Target REITs
are to provide their Target REIT Stockholders with regular quarterly cash
distributions; to obtain long-term appreciation in the value of their property;
and to preserve and protect their Target REIT Stockholders' capital. The Target
REITs share executive offices with FSP Corp. Each Target Board believes the
property owned by its related Target REIT is adequately covered by insurance.
The following table sets forth the average percentage of leased space and
average rent per square foot for each property owned by the Target REITs for the
years ended December 31, 1999, 2000 and 2001 (to the extent applicable) and the
nine months ended September 30, 2002 .
Weighted Annual Average
Rent/Net Rentable
Target REIT Percentage of Leased Space Square Foot
----------- -------------------------- -----------
Forest Park
--------------------------------------------------------------------------------
December 31, 1999 65.3% $6.19
December 31, 2000 88.1% $10.78
December 31, 2001 88.1% $13.90
September 30, 2002 87.1% $13.85
--------------------------------------------------------------------------------
The Gael
--------------------------------------------------------------------------------
December 31, 2000 97.6% $0.00
December 31, 2001 98.6% $13.78
September 30, 2002 94.1% $14.19
--------------------------------------------------------------------------------
Goldentop
--------------------------------------------------------------------------------
December 31, 2000 100% $17.13
December 31, 2001 100% $17.25
September 30, 2002 100% $16.96
--------------------------------------------------------------------------------
Centennial
--------------------------------------------------------------------------------
December 31, 2000 100% $14.37
December 31, 2001 100% $16.41
September 30, 2002 100% $16.46
--------------------------------------------------------------------------------
101
Meadow Point
--------------------------------------------------------------------------------
December 31, 2001 100% $25.84
September 30, 2002 100% $27.51
--------------------------------------------------------------------------------
Timberlake
--------------------------------------------------------------------------------
December 31, 2001 100% $25.72
September 30, 2002 100% $25.91
--------------------------------------------------------------------------------
Federal Way
--------------------------------------------------------------------------------
December 31, 2001 100% $14.65
September 30, 2002 100% $14.52
--------------------------------------------------------------------------------
Fair Lakes
--------------------------------------------------------------------------------
December 31, 2001 100% $29.88
September 30, 2002 100% $30.97
--------------------------------------------------------------------------------
Northwest Point
--------------------------------------------------------------------------------
December 31, 2001 100% $26.86
September 30, 2002 100% $30.56
--------------------------------------------------------------------------------
Timberlake East
--------------------------------------------------------------------------------
September 30, 2002 92.2% $25.56
--------------------------------------------------------------------------------
Merrywood
--------------------------------------------------------------------------------
September 30, 2002 94.7% $11.62
--------------------------------------------------------------------------------
Plaza Ridge I
--------------------------------------------------------------------------------
September 30, 2002 100% $32.40
--------------------------------------------------------------------------------
Park Ten
--------------------------------------------------------------------------------
September 30, 2002 100% $22.86
--------------------------------------------------------------------------------
The following table sets forth for each property owned by the Target REITs
(other than The Gael and Merrywood, which own apartment complexes), the number
of tenants leasing 10% or more of the rentable square feet, the nature of the
business of such tenant and the principal businesses, occupations and
professions carried on in the property:
102
-----------------------------------------------------------------------------------------------------------
Number of
Tenants
Leasing 10%
or More of Principal Businesses Carried
Target REIT Space Nature of Tenants' Business on in the Property
-----------------------------------------------------------------------------------------------------------
Forest Park Two Humanitarian organization Fundraising and disaster relief
efforts, though no logistic efforts
are performed on the property
-----------------------------------------------------------------------------------------------------------
Wireless telephone service provider General office and sales use
-----------------------------------------------------------------------------------------------------------
Goldentop One Defense contractor Research and development
-----------------------------------------------------------------------------------------------------------
Centennial Two Provider of computing and imaging Accounting and financial
solutions for business and home administration
-----------------------------------------------------------------------------------------------------------
Hearing aid manufacturing and related Hearing aid manufacturing
services
-----------------------------------------------------------------------------------------------------------
Meadow Point One Information technology product and Information technology consulting
services provider services on a contract basis
-----------------------------------------------------------------------------------------------------------
Timberlake Two Reinsurance General administration of
reinsurance business
-----------------------------------------------------------------------------------------------------------
Provider of software products and Providing consulting and
services to communications companies information technology services to
communications companies and
general office administration
-----------------------------------------------------------------------------------------------------------
Federal Way One Forest products Forest products
-----------------------------------------------------------------------------------------------------------
Fair Lakes One Consulting services Professional services
-----------------------------------------------------------------------------------------------------------
Northwest Point One Communications and electronics Research, development and
manufacture of electronics for
automobile system suppliers
-----------------------------------------------------------------------------------------------------------
Timberlake East Four Provider of computer software and Consulting, sales and administration
consulting
-----------------------------------------------------------------------------------------------------------
Provider of application management Research and development of
solutions applications software and general
office administration
-----------------------------------------------------------------------------------------------------------
Reinsurance General office and sales use for
reinsurance business
-----------------------------------------------------------------------------------------------------------
Securities broker Retail securities brokerage and
financial consulting
-----------------------------------------------------------------------------------------------------------
103
-----------------------------------------------------------------------------------------------------------
Number of
Tenants
Leasing 10%
or More of Principal Businesses Carried
Target REIT Space Nature of Tenants' Business on in the Property
-----------------------------------------------------------------------------------------------------------
Plaza Ridge I Two Project management and systems Research, development and sales of
engineering information systems and contract
administration
-----------------------------------------------------------------------------------------------------------
Engineering and information systems Engineering consulting firm
-----------------------------------------------------------------------------------------------------------
Park Ten Two Oil and gas design and project Design, development and management
management; home construction of offshore oil structures, on
shore production facilities and
pipelines
-----------------------------------------------------------------------------------------------------------
Home construction Development of affordable luxury
housing
-----------------------------------------------------------------------------------------------------------
The following table sets forth, for each tenant leasing 10% or more of the
space in the properties owned by the Target REITs, the principal provisions of
their leases (other than The Gael and Merrywood, which own apartment complexes):
104
Current Base
Rent Per
Target REIT Tenant Annum Expiration Date Renewal Options
------------------------------------------------------------------------------------------------------------------------------------
Forest Park American Red Cross $630,479 February 28, 2009 Three 5-year options to renew at fair market
rent
------------------------------------------------------------------------------------------------------------------------------------
CELLCO, DBA Verizon $150,371 February 28, 2009 One 5-year option to extend
------------------------------------------------------------------------------------------------------------------------------------
Goldentop Northrop Grumman $2,057,052 June 30, 2007 Three 5-year options to renew at 95% of fair
market rent
------------------------------------------------------------------------------------------------------------------------------------
Centennial Hewlett-Packard $1,121,706 February 28, 2010 Three 3-year options to renew
------------------------------------------------------------------------------------------------------------------------------------
Starkey Laboratories, Inc. $172,463 June 30, 2004 One 5-year option to renew
------------------------------------------------------------------------------------------------------------------------------------
Meadow Point CACI, Inc. - Federal $3,176,238 November 30, 2009 Two 5-year options to renew at 95% of fair
market rent
------------------------------------------------------------------------------------------------------------------------------------
Timberlake Reinsurance Group of America, $2,144,533 August 31, 2009 Two 5-year options to renew, right of first
Inc. offer to purchase building
------------------------------------------------------------------------------------------------------------------------------------
AMDOCS, Inc. $3,011,982 May 31, 2006 Two 5-year options to renew
------------------------------------------------------------------------------------------------------------------------------------
Federal Way Weyerhaeuser Company $1,682,207 September 13, 2006 Two 5-year options to renew
------------------------------------------------------------------------------------------------------------------------------------
Fair Lakes International Business $3,876,743 December 31, 2009 Two 5-year options to renew
Machines Corporation
------------------------------------------------------------------------------------------------------------------------------------
Northwest Point Motorola $2,955,130 March 31, 2010 Two options to extend the term for either
three or five years
------------------------------------------------------------------------------------------------------------------------------------
105
Current Base
Rent Per
Target REIT Tenant Annum Expiration Date Renewal Options
------------------------------------------------------------------------------------------------------------------------------------
Timberlake East Computer Associates $619,245 May 31, 2005 Two 3-year options to renew at 95% of fair
International, Inc. market value
------------------------------------------------------------------------------------------------------------------------------------
Quest Software, Inc. $628,144 October 31, 2006 One 5-year option to renew
------------------------------------------------------------------------------------------------------------------------------------
Reinsurance Group of America, $375,599 August 31, 2009 Two 5-year options to renew
Inc.
------------------------------------------------------------------------------------------------------------------------------------
Prudential Securities $361,107 December 31, 2010 One 5-year options to renew at 95% of fair
Incorporated market value
------------------------------------------------------------------------------------------------------------------------------------
Plaza Ridge I Scitor Corporation $2,943,120 June 30, 2012 Two 5-year options to renew
------------------------------------------------------------------------------------------------------------------------------------
Juniper Networks, Inc. $1,740,494 April 13, 2009 One 5-year options to renew
------------------------------------------------------------------------------------------------------------------------------------
Park Ten Mustang Engineering, L.P. $2,791,777 February 28, 2007 Two 5-year options to renew
------------------------------------------------------------------------------------------------------------------------------------
TMI, Inc. aka Trendmaker Homes $430,559 April 30, 2010 Two 5-year options to renew at 95% of fair
market value
------------------------------------------------------------------------------------------------------------------------------------
106
The following table sets forth for each property owned by the Target REITs
(other than The Gael and Merrywood, which own apartment complexes) a schedule of
lease expirations for each of the ten years beginning with 2003:
--------------------------------------------------------------------------------
Number of Percentage of
Lease Total Square Total Annual Annual Gross
Target REIT Expirations Feet Contract Rent Rent
--------------------------------------------------------------------------------
Forest Park
--------------------------------------------------------------------------------
2003
--------------------------------------------------------------------------------
2004
--------------------------------------------------------------------------------
2005 One 13,975 $ 150,371 19%
--------------------------------------------------------------------------------
2006
--------------------------------------------------------------------------------
2007
--------------------------------------------------------------------------------
2008
--------------------------------------------------------------------------------
2009 One 40,005 $ 630,479 81%
--------------------------------------------------------------------------------
2010
--------------------------------------------------------------------------------
2011
--------------------------------------------------------------------------------
2012
--------------------------------------------------------------------------------
Goldentop
--------------------------------------------------------------------------------
2003
2004
2005
2006
2007 One 141,405 $ 2,057,052 100%
2008
2009
2010
2011
2012
--------------------------------------------------------------------------------
Centennial
--------------------------------------------------------------------------------
2003
2004 Two 19,860 $ 265,523 19%
2005
2006
2007
2008
2009
2010 One 90,900 $ 1,121,706 81%
2011
2012
--------------------------------------------------------------------------------
107
--------------------------------------------------------------------------------
Meadow Point
--------------------------------------------------------------------------------
2003
2004
2005
2006
2007
2008 One 132,897 $ 3,176,238 99%
2009
2010 One 1,953 $ 30,779 1%
2011
2012
--------------------------------------------------------------------------------
Timberlake
--------------------------------------------------------------------------------
2003
2004 Two 4,102 $ 110,918 2%
2005
2006 One 112,259 $ 3,011,982 57%
2007
2008
2009 One 116,361 $ 2,144,533 41%
2010
2011
2012
--------------------------------------------------------------------------------
Federal Way
--------------------------------------------------------------------------------
2003
2004
2005
2006 One 117,227 $ 1,682,207 100%
2007
2008
2009
2010
2011
2012
--------------------------------------------------------------------------------
108
--------------------------------------------------------------------------------
Fair Lakes
--------------------------------------------------------------------------------
2003
2004
2005
2006
2007
2008
2009 One 210,613 $ 3,876,743 100%
2010
2011
2012
--------------------------------------------------------------------------------
Northwest Point
--------------------------------------------------------------------------------
2003
2004
2005
2006
2007
2008
2009
2010 One 176,848 $ 2,955,130 100%
2011
2012
--------------------------------------------------------------------------------
Timberlake East
--------------------------------------------------------------------------------
2003
2004
2005 Three 39,222 $ 987,249 39%
2006 One 24,877 $ 628,144 25%
2007 One 4,182 $ 193,346 8%
2008
2009 One 20,107 $ 375,599 15%
2010 One 14,381 $ 361,107 14%
2011
2012
--------------------------------------------------------------------------------
109
--------------------------------------------------------------------------------
Plaza Ridge I
--------------------------------------------------------------------------------
2003
2004
2005
2006
2007
2008
2009 One 48,280 $ 1,740,494 37%
2010
2011
2012 One 109,736 $ 2,943,120 63%
--------------------------------------------------------------------------------
Park Ten
--------------------------------------------------------------------------------
2003
--------------------------------------------------------------------------------
2004
--------------------------------------------------------------------------------
2005 Two 6,807 $ 151,307 4%
--------------------------------------------------------------------------------
2006 One 26,885 $ 588,513 17%
--------------------------------------------------------------------------------
2007 One 100,625 $ 2,202,681 66%
--------------------------------------------------------------------------------
2008
--------------------------------------------------------------------------------
2009
--------------------------------------------------------------------------------
2010 One 20,026 $ 430,559 13%
--------------------------------------------------------------------------------
2011
--------------------------------------------------------------------------------
2012
--------------------------------------------------------------------------------
Both apartment properties held by the Gael and Merrywood are located
within the greater Houston market, and are exposed to the general economic
conditions in that submarket, such as the negative effects of the Enron and
Arthur Andersen investigations or the positive effects of increases in oil
prices, as well as the construction of new competition in the submarket.
110
SELECTED FINANCIAL INFORMATION FOR TARGET REITS
The following selected financial information is derived from the
historical financial statements of the individual Target REITs. This information
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" on pages 66 to 84 of this Proxy
Statement and with the Target REITs financial statements and related notes
thereto included elsewhere in this Proxy Statement.
COMBINED
Nine Months Ended
Year Ended December 31, September 30,
----------------------------------------------------- -------------------
2001 2000 1999 1998 1997 2002 2001
-------- -------- -------- -------- -------- -------- --------
(unaudited)
(In thousands, except per share amounts)
Operating Data:
Total Revenues................. $17,094 $ 2,893 $ 344 N/A N/A $ 33,492 $ 9,807
Net Income (loss).............. (41) (927) 169 N/A N/A 10,977 993
Basic and diluted net income
(loss) per share............. N/M N/M N/M N/A N/A N/M N/M
N/M -- Not meaningful
As of
As of December 31, September 30,
----------------------------------------------------- -------------------
2001 2000 1999 1998 1997 2002 2001
-------- -------- -------- -------- -------- -------- --------
Balance Sheet Data (at period end):
Total assets................... $241,972 $ 61,623 7,241 N/A N/A $324,402 $208,093
Total liabilities.............. 6,562 1,949 63 N/A N/A 6,309 43,223
Total stockholder's equity..... 235,410 59,674 7,718 N/A N/A 324,402 164,810
111
FOREST PARK
Nine Months Ended
Year Ended December 31, September 30,
----------------------------------------------------- -------------------
2001 2000 1999 1998 1997 2002 2001
-------- -------- -------- -------- -------- -------- --------
(unaudited)
(In thousands, except per share amounts)
Operating Data:
Total Revenues .................... $ 885 $ 729 $ 344 N/A N/A $ 650 $ 659
Net Income (loss) ................. 508 394 169 N/A N/A 410 356
Basic and diluted net income
(loss) per share ................ 6,511 5,051 2,168 N/A N/A 5,256 4,564
As of
As of December 31, September 30,
----------------------------------------------------- -------------------
2001 2000 1999 1998 1997 2002 2001
-------- -------- -------- -------- -------- -------- --------
Balance Sheet Data (at period end):
Total assets ...................... $ 7,079 $ 7,207 7,241 N/A N/A $ 7,075 $ 7,114
Total liabilities ................. 178 201 63 N/A N/A 65 67
Total stockholder's equity ........ 6,901 7,006 7,718 N/A N/A 7,010 7,047
THE GAEL
Nine Months Ended
Year Ended December 31, September 30,
----------------------------------------------------- -------------------
2001 2000 1999 1998 1997 2002 2001
-------- -------- -------- -------- -------- -------- --------
(unaudited)
(In thousands, except per share amounts)
Operating Data:
Total Revenues .................... $ 2,627 $ 1,061 N/A N/A N/A $ 2,013 $ 1,935
Net Income (loss) ................. 1,006 (461) N/A N/A N/A 785 741
Basic and diluted net income
(loss) per share ................ 4,732 (2,172) N/A N/A N/A 3,694 3,487
As of
As of December 31, September 30,
----------------------------------------------------- -------------------
2001 2000 1999 1998 1997 2002 2001
-------- -------- -------- -------- -------- -------- --------
Balance Sheet Data (at period end):
Total assets ...................... $18,420 $19,400 N/A N/A N/A 18,356 19,034
Total liabilities ................. 523 955 N/A N/A N/A 471 515
Total stockholder's equity ........ 17,897 18,445 N/A N/A N/A 17,885 18,519
112
CENTENNIAL
Nine Months Ended
Year Ended December 31, September 30,
----------------------------------------------------- -------------------
2001 2000 1999 1998 1997 2002 2001
-------- -------- -------- -------- -------- -------- --------
(unaudited)
(In thousands, except per share amounts)
Operating Data:
Total Revenues .................... $ 1,854 $ 419 N/A N/A N/A $ 1,380 $ 1,265
Net Income (loss) ................. 1,168 (478) N/A N/A N/A 839 750
Basic and diluted net income
(loss) per share ................ 7,391 (3,025) N/A N/A N/A 5,310 4,747
As of
As of December 31, September 30,
----------------------------------------------------- -------------------
2001 2000 1999 1998 1997 2002 2001
-------- -------- -------- -------- -------- -------- --------
Balance Sheet Data (at period end):
Total assets ...................... $14,222 $14,083 N/A N/A N/A 14,003 14,117
Total liabilities ................. 515 226 N/A N/A N/A 129 168
Total stockholder's equity ........ 13,707 13,857 N/A N/A N/A 13,874 13,949
GOLDENTOP
Nine Months Ended
Year Ended December 31, September 30,
----------------------------------------------------- -------------------
2001 2000 1999 1998 1997 2002 2001
-------- -------- -------- -------- -------- -------- --------
(unaudited)
(In thousands, except per share amounts)
Operating Data:
Total Revenues .................... $ 2,493 $ 685 N/A N/A N/A $ 1,820 $ 1,888
Net Income (loss) ................. 1,711 (382) N/A N/A N/A 1,217 1,312
Basic and diluted net income
(loss) per share ................ 7,390 (1,649) N/A N/A N/A 5,257 5,667
As of
As of December 31, September 30,
----------------------------------------------------- -------------------
2001 2000 1999 1998 1997 2002 2001
-------- -------- -------- -------- -------- -------- --------
Balance Sheet Data (at period end):
Total assets ...................... $20,701 $20,933 N/A N/A N/A 20,556 20,843
Total liabilities ................. 525 568 N/A N/A N/A 100 106
Total stockholder's equity ........ 20,176 20,366 N/A N/A N/A 20,456 20,737
113
MEADOW POINT
Nine Months Ended
Year Ended December 31, September 30,
----------------------------------------------------- -------------------
2001 2000 1999 1998 1997 2002 2001
-------- -------- -------- -------- -------- -------- --------
(unaudited)
(In thousands, except per share amounts)
Operating Data:
Total Revenues .................... $ 2,825 N/A N/A N/A N/A $ 2,805 $ 1,751
Net Income (loss) ................. 418 N/A N/A N/A N/A 1,574 (127)
Basic and diluted net income
(loss) per share ................ 1,625 N/A N/A N/A N/A 6,113 (493)
As of
As of December 31, September 30,
----------------------------------------------------- -------------------
2001 2000 1999 1998 1997 2002 2001
-------- -------- -------- -------- -------- -------- --------
Balance Sheet Data (at period end):
Total assets ...................... $23,417 N/A N/A N/A N/A 23,515 23,393
Total liabilities ................. 909 N/A N/A N/A N/A 480 460
Total stockholder's equity ........ 22,508 N/A N/A N/A N/A 23,035 22,933
TIMBERLAKE
Nine Months Ended
Year Ended December 31, September 30,
----------------------------------------------------- -------------------
2001 2000 1999 1998 1997 2002 2001
-------- -------- -------- -------- -------- -------- --------
(unaudited)
(In thousands, except per share amounts)
Operating Data:
Total Revenues .................... $ 3,686 N/A N/A N/A N/A $ 4,554 $ 1,975
Net Income (loss) ................. (51) N/A N/A N/A N/A 2,498 (1,139)
Basic and diluted net income
(loss) per share ................ (99) N/A N/A N/A N/A 4,850 (2,212)
As of
As of December 31, September 30,
----------------------------------------------------- -------------------
2001 2000 1999 1998 1997 2002 2001
-------- -------- -------- -------- -------- -------- --------
Balance Sheet Data (at period end):
Total assets ...................... $45,983 N/A N/A N/A N/A 46,000 46,369
Total liabilities ................. 1,109 N/A N/A N/A N/A 627 545
Total stockholder's equity ........ 44,874 N/A N/A N/A N/A 45,373 45,824
114
FAIR LAKES
Nine Months Ended
Year Ended December 31, September 30,
----------------------------------------------------- -------------------
2001 2000 1999 1998 1997 2002 2001
-------- -------- -------- -------- -------- -------- --------
(unaudited)
(In thousands, except per share amounts)
Operating Data:
Total Revenues .................... $ 1,844 N/A N/A N/A N/A $ 4,942 $ 255
Net Income (loss) ................. (2,002) N/A N/A N/A N/A 2,779 206
Basic and diluted net income
(loss) per share ................ (4,170) N/A N/A N/A N/A 5,790 429
As of
As of December 31, September 30,
----------------------------------------------------- -------------------
2001 2000 1999 1998 1997 2002 2001
-------- -------- -------- -------- -------- -------- --------
Balance Sheet Data (at period end):
Total assets ...................... $42,306 N/A N/A N/A N/A 42,276 41,257
Total liabilities ................. 1,209 N/A N/A N/A N/A 352 40,959
Total stockholder's equity ........ 41,097 N/A N/A N/A N/A 41,294 298
FEDERAL WAY
Nine Months Ended
Year Ended December 31, September 30,
----------------------------------------------------- -------------------
2001 2000 1999 1998 1997 2002 2001
-------- -------- -------- -------- -------- -------- --------
(unaudited)
(In thousands, except per share amounts)
Operating Data:
Total Revenues .................... $ 521 N/A N/A N/A N/A $ 1,296 $ 79
Net Income (loss) ................. (791) N/A N/A N/A N/A 998 (1,106)
Basic and diluted net income
(loss) per share ................ (3,953) N/A N/A N/A N/A 4,990 (5,530)
As of
As of December 31, September 30,
----------------------------------------------------- -------------------
2001 2000 1999 1998 1997 2002 2001
-------- -------- -------- -------- -------- -------- --------
Balance Sheet Data (at period end):
Total assets ...................... $17,634 N/A N/A N/A N/A 17,264 17,166
Total liabilities ................. 578 N/A N/A N/A N/A 17 19
Total stockholder's equity ........ 17,056 N/A N/A N/A N/A 17,247 17,147
115
NORTHWEST
Nine Months Ended
Year Ended December 31, September 30,
----------------------------------------------------- -------------------
2001 2000 1999 1998 1997 2002 2001
-------- -------- -------- -------- -------- -------- --------
(unaudited)
(In thousands, except per share amounts)
Operating Data:
Total Revenues .................... $ 358 N/A N/A N/A N/A $ 4,083 N/A
Net Income (loss) ................. (2,008) N/A N/A N/A N/A 2,058 N/A
Basic and diluted net income
(loss) per share ................ (5,390) N/A N/A N/A N/A 5,525 N/A
As of
As of December 31, September 30,
----------------------------------------------------- -------------------
2001 2000 1999 1998 1997 2002 2001
-------- -------- -------- -------- -------- -------- --------
Balance Sheet Data (at period end):
Total assets ...................... $33,359 N/A N/A N/A N/A 34,398 N/A
Total liabilities ................. 1,313 N/A N/A N/A N/A 1,777 N/A
Total stockholder's equity ........ 32,046 N/A N/A N/A N/A 32,621 N/A
TIMBERLAKE EAST
Nine Months Ended
Year Ended December 31, September 30,
----------------------------------------------------- -------------------
2001 2000 1999 1998 1997 2002 2001
-------- -------- -------- -------- -------- -------- --------
(unaudited)
(In thousands, except per share amounts)
Operating Data:
Total Revenues .................... N/A N/A N/A N/A N/A $ 2,431 N/A
Net Income (loss) ................. N/A N/A N/A N/A N/A (12) N/A
Basic and diluted net income
(loss) per share ................ N/A N/A N/A N/A N/A N/C N/A
As of
As of December 31, September 30,
----------------------------------------------------- -------------------
2001 2000 1999 1998 1997 2002 2001
-------- -------- -------- -------- -------- -------- --------
Balance Sheet Data (at period end):
Total assets ...................... N/A N/A N/A N/A N/A 22,493 N/A
Total liabilities ................. N/A N/A N/A N/A N/A 682 N/A
Total stockholder's equity ........ N/A N/A N/A N/A N/A 21,811 N/A
116
MERRYWOOD
Nine Months Ended
Year Ended December 31, September 30,
----------------------------------------------------- -------------------
2001 2000 1999 1998 1997 2002 2001
-------- -------- -------- -------- -------- -------- --------
(unaudited)
(In thousands, except per share amounts)
Operating Data:
Total Revenues .................... N/A N/A N/A N/A N/A $ 2,012 N/A
Net Income (loss) ................. N/A N/A N/A N/A N/A (480) N/A
Basic and diluted net income
(loss) per share ................ N/A N/A N/A N/A N/A N/C N/A
As of
As of December 31, September 30,
----------------------------------------------------- -------------------
2001 2000 1999 1998 1997 2002 2001
-------- -------- -------- -------- -------- -------- --------
Balance Sheet Data (at period end):
Total assets ...................... N/A N/A N/A N/A N/A 18,348 N/A
Total liabilities ................. N/A N/A N/A N/A N/A 456 N/A
Total stockholder's equity ........ N/A N/A N/A N/A N/A 17,892 N/A
PLAZA RIDGE I
Nine Months Ended
Year Ended December 31, September 30,
----------------------------------------------------- -------------------
2001 2000 1999 1998 1997 2002 2001
-------- -------- -------- -------- -------- -------- --------
(unaudited)
(In thousands, except per share amounts)
Operating Data:
Total Revenues .................... N/A N/A N/A N/A N/A $ 2,774 N/A
Net Income (loss) ................. N/A N/A N/A N/A N/A (1,313) N/A
Basic and diluted net income
(loss) per share ................ N/A N/A N/A N/A N/A N/C N/A
As of
As of December 31, September 30,
----------------------------------------------------- -------------------
2001 2000 1999 1998 1997 2002 2001
-------- -------- -------- -------- -------- -------- --------
Balance Sheet Data (at period end):
Total assets ...................... N/A N/A N/A N/A N/A 35,803 N/A
Total liabilities ................. N/A N/A N/A N/A N/A 735 N/A
Total stockholder's equity ........ N/A N/A N/A N/A N/A 35,068 N/A
117
PARK TEN
Nine Months Ended
Year Ended December 31, September 30,
----------------------------------------------------- -------------------
2001 2000 1999 1998 1997 2002 2001
-------- -------- -------- -------- -------- -------- --------
(unaudited)
(In thousands, except per share amounts)
Operating Data:
Total Revenues .................... N/A N/A N/A N/A N/A $ 2,732 N/A
Net Income (loss) ................. N/A N/A N/A N/A N/A (376) N/A
Basic and diluted net income
(loss) per share ................ N/A N/A N/A N/A N/A N/C N/A
As of
As of December 31, September 30,
----------------------------------------------------- -------------------
2001 2000 1999 1998 1997 2002 2001
-------- -------- -------- -------- -------- -------- --------
Balance Sheet Data (at period end):
Total assets ...................... N/A N/A N/A N/A N/A 24,319 N/A
Total liabilities ................. N/A N/A N/A N/A N/A 421 N/A
Total stockholder's equity ........ N/A N/A N/A N/A N/A 23,898 N/A
118
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF TARGET REITS
The following discussion should be read in conjunction with the Target
REITs' financial statements and notes thereto appearing elsewhere in this Proxy
Statement. Historical results and percentage relationships set forth in the
respective Target REIT Financial Statements should not be taken as necessarily
indicative of future operations.
Results of Operations
The following tables show the variance in dollars between the nine months
ended September 30, 2002 and 2001 and years ended December 31, 2001 and 2000 and
the years ended December 31, 2000 and 1999 for the Target REITs on a combined
basis.
Variance in Thousands of Dollars
For the Nine Months
Ended September 30
2002 and 2001
--------------------------------
Revenue
Rental Income .............................. $23,606 $ 40
Interest Income ............................ 79 (28)
--------------------------------
TOTAL REVENUE ................................. 23,685 12
================================
Expenses
Rental operating expenses .................. $ 4,295 $ (236)
Depreciation and amortization .............. 3,610 (199)
Real estate taxes and insurance ............ 2,928 95
Interest expense ........................... 2,868 (44)
--------------------------------
TOTAL EXPENSES ................................ 13,701 (384)
================================
Net Income .................................... $ 9,984 $ (352)
================================
119
Variance in Thousands of Dollars
For the Year Ended December 31,
--------------------------------
2002 and 2001 2000 and 1999
-------------- --------------
(in thousands)
Rental Revenue
Rental ..................................... $14,038 $ 2,468
Interest ................................... 162 82
--------------------------------
TOTAL REVENUE ................................. 14,200 2,550
================================
Expenses
Rental operating expenses .................. 2,955 488
Depreciation and amortization .............. 1,663 517
Real estate taxes and insurance ............ 1,594 344
Interest expense ........................... 7,102 2,297
--------------------------------
TOTAL EXPENSES ................................ $13,314 $ 3,646
--------------------------------
Net Income .................................... $ 886 $(1,096)
================================
Comparison of the nine months Ended September 30, 2002 to the nine months ended
September 30, 2001.
Revenue
Total revenues increased $23.7 million, to $33.5 million for the nine
months ended September 30, 2002, as compared to $9.8 million for the nine months
ended September 30 2001.
The increase in rental income of $23.6 million, compared to the nine
months ended September 30, 2001, is attributable to:
o four Target REITs which were organized in 2002, which contributed
revenue for various periods in 2002, as compared with no revenue
year in 2001, resulting in $9.8 million in incremental revenues;
o five Target REITs which were organized in 2001, which contributed
revenue for a full nine months in 2002, as compared to only various
periods of the comparable period in 2001, resulting in $13.5 million
in incremental revenues;
o four Target REITs which were in operation for both periods,
resulting in $0.2 increased revenues, primarily from increased rents
to new tenants.
120
Expenses
Total expenses increased $13.7 million for the nine months ended September
30, 2002, compared to the same period in 2001. The increase for the nine months
is attributable to the $4.3 million increase in rental operating expenses; $3.6
million increase in depreciation and amortization; $2.9 million increase in real
estate taxes and insurance; and $2.9 million increase in interest expense.
The increase in rental operations expenses of $4.3 million, compared to
the nine months ended September 30, 2001, is attributable to:
o four Target REITs which were organized in 2002, which incurred
expenses for various periods in 2002, as compared with no expenses
in 2001, resulting in $2.2 million in incremental expenses;
o five Target REITs which were organized in 2001, which incurred
expenses for a full nine months in 2002, as compared to only various
periods of the comparable period in 2001, resulting in $2.0 million
in incremental expenses;
o the four Target REITs which were in operation for both periods, had
no significant change in expenses.
The increase in depreciation and amortization expenses of $3.6 million,
compared to the nine months ended September 30, 2001, is attributable to:
o four Target REITs which were organized in 2002, which incurred
expenses for various periods in 2002, as compared with no expenses
in 2001, resulting in $1.6 million in incremental expenses;
o five Target REITs which were organized in 2001, which incurred
expenses for a full nine months in 2002, as compared to only various
periods of the comparable period in 2001, resulting in $2.0 million
in incremental expenses;
o the four Target REITs which were in operation for both periods, had
no significant change in expenses.
The increase in real estate tax and insurance expenses of $2.9 million,
compared to the nine months ended September 30, 2001, is attributable to:
o four Target REITs which were organized in 2002, which incurred
expenses for various periods in 2002, as compared with no expenses
in 2001, resulting in $1.2 million in incremental expenses;
o five Target REITs which were organized in 2001, which incurred
expenses for a full nine months in 2002, as compared to only various
periods of the comparable period in 2001, resulting in $1.7 million
in incremental expenses;
121
o the three Target REITs which were in operation for both periods, had
no significant change in expenses.
Interest expense is typically incurred when the REIT is organized and
borrows funds to acquire the real estate. After the REIT is syndicated the loan
is repaid. None of the Target REITs have had to borrow funds after the original
real estate loan has been repaid. The increase in interest expenses of $2.9
million, compared to the nine months ended September 30, 2001, is attributable
to:
o four Target REITs which were organized in 2002, which incurred
interest expense in 2002, as compared with no expenses in 2001,
resulting in $7.1 million in incremental expenses;
o offset by $4.2 million of interest expense incurred by five Target
REITs which were organized in 2001, which incurred no expenses in
2002, but did incur interest expense in 2001;
o the three Target REITs which were in operation for both periods did
not incur any interest expense.
Comparison of the year ended December 31, 2001 to the year ended December 31,
2000
Revenue
Total revenues increased $14.2 million, to $17.1 million for the year
ended December 31, 2001, as compared to $2.9 million for the year ended December
31, 2000. The increase in rental income of $14.0 million, compared to the year
ended December 31, 2001, is attributable to:
o five Target REITs which were organized in 2001, which contributed
revenue for various periods in 2001, as compared to no revenue for
the comparable period in 2000, resulting in $9.1 million in
incremental revenues;
o three Target REITs which were organized in 2000, which contributed
revenue for a full year in 2001, as compared to various periods for
the comparable period in 2000, resulting in $4.7 million in
incremental revenues;
o one Target REIT which were in operation for both periods, resulting
in $0.2 million increased revenues as a result of a lease of vacant
space.
Expenses
Total expenses increased $13.3 million for the year ended December 31,
2001, compared to the same period in 2000. The increase for the twelve months is
attributable to the $2.9 million increase in rental operating expenses; $1.7
million increase in depreciation and amortization; $1.6 million increase in real
estate taxes and insurance; and $7.1 million increase in interest expense.
122
The increase in rental operations expenses of $2.9 million, compared to
the year ended December 31, 2000, is attributable to:
o five Target REITs which were organized in 2001, which incurred
expenses for various periods in 2001, as compared to incurring no
expenses for the comparable period in 2000, resulting in $2.4
million in incremental expenses;
o three Target REITs which were organized in 2000, which incurred
expenses for a full year in 2001, as compared to various periods for
the comparable period in 2000, resulting in $0.5 million in
increased expenses;
o one Target REIT, which was in operation for both periods, had no
significant change in expenses.
The increase in depreciation and amortization expenses of $1.7 million,
compared to the year ended December 31, 2000, is attributable to:
o five Target REITs which were organized in 2001, which incurred
expenses for various periods in 2001, as compared to incurring no
expenses for the comparable period in 2000, resulting in $0.9
million in incremental expenses;
o three Target REITs which were organized in 2000, which incurred
expenses for a full year in 2001, as compared to various periods for
the comparable period in 2000, resulting in $0.8 million in
increased expenses;
o one Target REIT, which was in operation for both periods, had no
signicant change in expenses.
The increase in real estate tax and insurance expenses of $1.6 million,
compared to the nine months ended September 30, 2001, is attributable to:
o five Target REITs which were organized in 2001, which incurred
expenses for various periods in 2001, as compared to incurring no
expenses for the comparable period in 2000, resulting in $0.9
million in incremental expenses;
o three Target REITs which were organized in 2000, which incurred
expenses for a full year in 2001, as compared to various periods for
the comparable period in 2000, resulting in $0.7 million in
increased expenses;
o one Target REIT, which was in operation for both periods, had no
significant change in expenses.
Interest expense is typically incurred when the REIT is organized and
borrows funds to acquire the real estate. After the REIT is syndicated the loan
is repaid. None of the Target REITs have had to borrow funds after the original
real estate loan has been repaid. The increase in interest expenses of $7.1
million, compared to the year ended December 31, 2000, is attributable to:
123
o five Target REITs which were organized in 2001, which incurred
interest expense in 2001, as compared with no expenses in 2000,
resulting in $9.4 million in incremental expenses;
o offset by $2.3 million of interest expense incurred by three Target
REITs which were organized in 2000, which incurred no expenses in
2001, but did incur interest expense in 2000;
o the one Target REIT which were in operation for both periods did not
incur any interest expense.
Comparison of the year ended December 31, 2000 to the year ended December 31,
1999
Total revenues increased $2.6 million, to $2.9 million for the year ended
December 31, 2000, as compared to $0.3 million for the year ended December 31,
1999. The increase in rental income of $2.5 million, compared to the year ended
December 31, 1999, is attributable to:
o three Target REITs which were organized in 2000, which contributed
revenue for various periods in 2000, as compared to no revenue for
the comparable period in 1999, resulting in $2.1 million in
incremental revenues;
o one Target REIT which was organized in 1999, which contributed
revenue for a full year in 2000, as compared to about six months for
the comparable period in 1999, resulting in $0.4 million in
increased revenue;
Expenses
Total expenses increased $3.6 million for the year ended December 31,
2000, compared to the same period in 1999. The increase for the twelve months is
attributable to the $0.5 million increase in rental operating expenses; $0.5
million increase in depreciation and amortization; $0.3 million increase in real
estate taxes and insurance; and $2.3 million increase in interest expense.
The increase in rental operations expenses of $0.5 million, compared to
the year ended December 31, 2000, is attributable to:
o three Target REITs which were organized in 2000, which incurred
expenses for various periods in 2000, as compared to incurring no
expenses for the comparable period in 1999, resulting in $0.4
million in incremental expenses;
o one Target REIT which was organized in 1999, which incurred expenses
for a full year in 2000, as compared to about six months for the
comparable period in 1999, resulting in $0.1 million in increased
expenses;
The increase in depreciation and amortization expenses of $0.5 million,
compared to the year ended December 31, 2000, is attributable to:
124
o five Target REITs which were organized in 2000, which incurred
expenses for various periods in 2000, as compared to incurring no
expenses for the comparable period in 1999, resulting in $0.4
million in incremental expenses;
o one Target REIT which was organized in 1999, which incurred expenses
for a full year in 2001, as compared to about six months for the
comparable period in 1999, resulting in $0.1million in increased
expenses;
The increase in real estate tax and insurance expenses of $0.3 million,
compared to the three years ended December 31, 1999, is attributable to:
o three Target REITs which were organized in 2000, which incurred
expenses for various periods in 2000, as compared to incurring no
expenses for the comparable period in 1999, resulting in $0.3
million in incremental expenses;
o the one Target REIT which was organized in 1999, which incurred
expenses for a full year in 2000, as compared to about six months
for the comparable period in 1999, resulting in $0.1 million in
increased expenses;
Interest expense is typically incurred when the REIT is organized and
borrows funds to acquire the real estate. After the REIT is syndicated the loan
is repaid. None of the Target REITs have had to borrow funds after the original
real estate loan has been repaid. The increase in interest expenses of $2.3
million, compared to the year ended December 31, 2000, is attributable to:
o three Target REITs which were organized in 2001, which incurred
interest expense in 2001, as compared with no expenses in 2000,
resulting in $2.3 million in incremental expenses;
o the one Target REIT which was organized in 1999 incurred minimal
interest expense. Approximately $0.1 million in financing fees were
capitalized as organizational costs.
Trends and Uncertainties
All real estate markets have been weaker in 2002 along with the general
economy, and it is uncertain when the real estate markets will improve or if
they will get worse in 2003. Each of the Target REITs will be affected by the
economic conditions in its submarket as leases expire, or if tenants go
bankrupt. Most of the Target REITs, however, have medium to long term leases
with one or two creditworthy tenants occupying the majority of the leased space,
providing most of the office Target REITs have less exposure to current and
short term market conditions. However, in the current economy, even large
tenants with strong credit are looking to cut costs, and those cuts in tenant's
operating expenses or staff may decrease ancillary office income, such as fees
received for additional services. Some tenants have cut staff and have excess
space, and they have asked the respective Target REIT to consider allowing
subletting or to accept termination fees. Existing leases do not require the
landlord to do so, and management of the Target REITs will only approve those
subleases or accept those termination offers when the proposal is in the best
economic interest of the Target REIT.
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Real estate taxes and insurance costs are expected to increase, but all of
the office leases pass through most of the operating expenses of the property,
including insurance, real estate taxes, and utility costs, to the tenants. Where
leases with base stops are the market custom, when new leases are written, the
increased costs of taxes, insurance, and utilities are absorbed by the landlord
for the base year. If the base rents in the market do not increase to cover the
increases in those base year expenses, then net income from the properties will
decrease.
Both The Gael and Merrywood properties are located within the greater
Houston market, and are exposed to the general economic conditions in that
submarket, such as the negative effects of Enron and Arthur Andersen or the
positive effects of increases in oil prices, as well as the construction of new
competition in the submarket.
In September 2002, Fair Lakes consented to an assignment of its lease with
PricewaterhouseCoopers LLP to International Business Machines Corporation, but
PricewaterhouseCoopers LLP remains obligated for payments under the lease.
PricewaterhouseCoopers LLP has been informed by the SEC that if the Merger
between FSP Corp. and Fair Lakes is approved, PricewaterhouseCoopers LLP will
have a conflict of interest which would cause it to no longer be considered
"independent" in connection with providing auditing services to FSP Corp. At
that time, FSP Corp. will have to either release PricewaterhouseCoopers LLP from
its obligation under the lease or choose another independent accountant.
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MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a general summary of the material United States federal
income tax considerations associated with the Mergers and with the ownership of
the FSP Common Stock. The following summary is not exhaustive of all possible
tax considerations. Moreover, the summary contained herein does not address all
aspects of taxation that may be relevant to particular FSP Stockholders in light
of their personal tax circumstances, or to certain types of stockholders subject
to special treatment under federal income tax laws, including insurance
companies, tax-exempt organizations (except to the extent discussed in Section 5
below under the heading "Taxation of Tax-Exempt Shareholders"), financial
institutions, broker-dealers, and foreign corporations and persons who are not
citizens or residents of the United States (except to the extent discussed in
Section 6 below under the heading "Taxation of Non-U.S. Shareholders").
The statements in this summary are based upon, and qualified in their
entirety by, current provisions of the Internal Revenue Code of 1986, as amended
(the "Code"), existing, temporary, and currently-proposed Treasury Regulations
promulgated under the Code, existing administrative rulings and practices of the
Internal Revenue Service, and judicial decisions. No assurance can be given that
future legislative, administrative, or judicial actions or decisions, which may
be retroactive in effect, will not affect the accuracy of any of the statements
in this summary.
EACH FSP STOCKHOLDER IS URGED TO CONSULT HIS, HER, OR ITS OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO THE STOCKHOLDER OF THE MERGERS AND OF
THE OWNERSHIP AND SALE OF STOCK IN AN ENTITY ELECTING TO BE TAXED AS A REAL
ESTATE INVESTMENT TRUST, INCLUDING FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX
CONSEQUENCES, AS WELL AS POTENTIAL CHANGES IN THE APPLICABLE TAX LAWS.
1. Certain Tax Risks Relating to the Mergers
The Mergers entail certain tax risks which, if realized, may cause the
Combined Company to fail to qualify as a real estate investment trust (a "REIT")
in the year of the Mergers or in any subsequent year, or may result in
substantial penalties (excise taxes) being imposed upon the Combined Company. As
a result of the Mergers, for example:
o the Combined Company may, directly or indirectly, improperly own 10%
or more of a tenant from which the Combined Company collects rent
causing the rent received from such tenant to fail to qualify as
rents from real property, as described below under "3. Tax
Consequences of REIT Election - Taxation of the Combined Company -
Requirements for Taxation as a Real Estate Investment Trust - Income
Tests".
o the Combined Company may improperly own (i) more than 10% of the
outstanding voting securities of any issuer, or (ii) more than 10%
of the value of the securities of any issuer causing the Combined
Company to fail to satisfy the Asset Tests, as described below under
"3. Tax Consequences of REIT Election - Taxation of the Combined
Company - Requirements for Taxation as a Real Estate Investment
Trust - Asset Tests".
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o the Combined Company would be disqualified as a REIT if any of the
Target REITs did not qualify as a REIT and, as a result, had any
undistributed "earnings and profits" at the time of the Mergers.
If the Combined Company fails to qualify as a real estate investment
trust, the Combined Company could be disqualified from treatment as a real
estate investment trust in the year in which such failure occurred and for the
next four taxable years and, consequently, would be taxed as a regular
corporation during such years. The penalties that may result from the Mergers
are described below under "3. Tax Consequences of REIT Election - Taxation of
FSP - General."
2. Tax Consequences of the Mergers.
Assuming no material changes in the applicable federal income tax laws
prior to the Effective Date, Hale and Dorr LLP will issue an opinion based upon
certain factual representations made by FSP Corp. and the Target REITs that the
Mergers will be treated as reorganizations within the meaning of Section 368(a)
of the Code. If the Mergers qualify as reorganizations, there should be no
United States federal income tax consequences to the Combined Company as a
result of the Mergers.
There should be no United States federal income tax consequences of the
Mergers to the FSP Stockholders, except as described under "Certain Risks
Related to the Mergers".
3. Tax Consequences of REIT Election
Introduction
The Combined Company has elected under Section 856 of the Code to be taxed
as a real estate investment trust. Following the Mergers, subject to the risks
described herein, the Combined Company intends to continue to be taxed as a
REIT.
Taxation of the Combined Company
General
If the Combined Company continues to qualify as a real estate investment
trust, it generally will not be subject to federal corporate income taxes on its
net income to the extent that the income is currently distributed to its
shareholders ("Shareholders"). The benefit of this tax treatment is that it
substantially eliminates the "double taxation" resulting from the taxation at
both the corporate and Shareholder levels that generally results from owning
stock in a corporation. Accordingly, income earned by the Combined Company
generally will be subject to taxation solely at the Shareholder level upon a
distribution from the Combined Company. The Combined Company will, however, be
required to pay certain federal income taxes, including in the following
circumstances:
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o the Combined Company will be subject to federal income tax at
regular corporate rates on taxable income, including net capital
gain, that the Combined Company does not distribute to Shareholders
during, or within a specified time period after, the calendar year
in which such income is earned.
o the Combined Company will be subject to the "alternative minimum
tax" on its undistributed items of tax preference.
o the Combined Company will be subject to a 100% tax on net income
from certain sales or other dispositions of property that it holds
primarily for sale to customers in the ordinary course of business
("prohibited transactions").
o if the Combined Company fails to satisfy the 75% gross income test
or the 95% gross income test, both described below, but nevertheless
qualifies as a real estate investment trust, the Combined Company
will be subject to a 100% tax on an amount equal to (i) the gross
income attributable to the greater of the amount by which the
Combined Company fails the 75% or 95% gross income test multiplied
by (ii) a fraction intended to reflect the Combined Company's
profitability.
o if the Combined Company fails to distribute during the calendar year
at least the sum of (i) 85% of its real estate investment trust
ordinary income for such year, (ii) 95% of its real estate
investment trust capital gain net income for such year, and (iii)
any undistributed taxable income from prior periods, the Combined
Company will pay a 4% excise tax on the excess of such required
distribution over the amount actually distributed to its
Shareholders.
o the Combined Company may elect to retain and pay income tax on some
or all of its long-term capital gain, as described below.
o the Combined Company may be subject to a 100% excise tax on
transactions with its taxable REIT subsidiary that are not conducted
on an arm's-length basis.
Requirements for Qualification as a Real Estate Investment Trust
Introduction
In order to qualify as a real estate investment trust for federal income
tax purposes a REIT must elect (or have elected, and have not revoked its
election) to be treated as a REIT and must satisfy certain statutory tests
relating to, among other things, (i) the sources of its income, (ii) the nature
of its assets, (iii) the amount of its distributions, and (iv) the ownership of
its stock. The Combined Company has elected to be treated as a REIT and has
endeavored to satisfy the tests for REIT qualification.
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A real estate investment trust may own a "qualified REIT subsidiary." A
qualified REIT subsidiary is a corporation, all of the capital stock of which is
owned by a real estate investment trust, and for which subsidiary no election
has been made to treat it as a "taxable REIT subsidiary" (as discussed below). A
corporation that is a qualified REIT subsidiary is not treated as a corporation
separate from its parent real estate investment trust for federal income tax
purposes. All assets, liabilities, and items of income, deduction, and credit of
a qualified REIT subsidiary are treated as the assets, liabilities, and items of
income, deduction and credit of the parent real estate investment trust. Thus,
in applying the requirements described herein, any qualified REIT subsidiary of
the Combined Company's will be ignored, and all assets, liabilities and items of
income, deduction and credit of such subsidiary will be treated as the assets,
liabilities, and items of income deduction and credit of the Combined Company.
In the event that the Combined Company becomes a partner in a partnership,
the Combined Company will be deemed to own its proportionate share (based upon
its share of the capital of the partnership) of the assets of the partnership
and will be deemed to be entitled to the income of the partnership attributable
to such share. In addition, the assets and income of the partnership attributed
to the Combined Company shall retain their same character as in the hands of the
partnership for purposes of determining whether the Combined Company satisfies
the income and asset tests described below.
A real estate investment trust may own up to 100% of the stock of one or
more taxable REIT subsidiaries. A taxable REIT subsidiary may earn income that
would not be qualifying income, as described below, if earned directly by the
parent real estate investment trust. Both the subsidiary and the parent real
estate investment trust must jointly elect to treat the subsidiary as a taxable
REIT subsidiary. Overall, not more than 20% of the value of a REIT's assets may
consist of securities of one or more taxable REIT subsidiaries. A taxable REIT
subsidiary will pay tax at regular corporate rates on any income that it earns.
There is a 100% excise tax imposed on transactions involving a taxable REIT
subsidiary and its parent real estate investment trust that are not conducted on
an arm's-length basis. The Combined Company and FSP Investments have made an
election to treat FSP Investments as a taxable REIT subsidiary. FSP Investments
pays corporate income tax on its taxable income and its after tax net income
will be available for distribution to the Combined Company.
Income Tests
General. The Combined Company must satisfy annually two tests regarding
the sources of its gross income in order to maintain its real estate investment
trust status. First, at least 75% of the Combined Company's gross income,
excluding gross income from certain "dealer" sales, for each taxable year
generally must consist of defined types of income that the Combined Company
derives, directly or indirectly, from investments relating to real property or
mortgages on real property or temporary investment income (the "75% Gross Income
Test"). Qualifying income for purposes of the 75% Gross Income Test generally
includes:
o "rents from real property" (as defined below);
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o interest from debt secured by mortgages on real property or on
interests in real property;
o dividends or other distributions on, and gain from the sale of,
shares in other real estate investment trusts;
o gain from the sale or other disposition of real property;
o amounts (other than amounts the determination of which depends in
whole or in part on the income or profits of any person) received as
consideration for entering into agreements to make loans secured by
mortgages on real property or on interests in real property or
agreements to purchase or lease real property; and
o certain income from temporary investment of recently raised capital.
Second, at least 95% of the Combined Company's gross income, excluding
gross income from certain "dealer" sales, for each taxable year generally must
consist of income that is qualifying income for purposes of the 75% gross income
test, as well as dividends, other types of interest, and gain from the sale or
disposition of stock or securities (the "95% Gross Income Test").
Rents from Real Property. Rent that the Combined Company receives from
real property that it owns and leases to tenants will qualify as "rents from
real property" if the following conditions are satisfied:
o First, the rent must not be based, in whole or in part, on the
income or profits of any person. An amount will not fail to qualify
as rent from real property solely by reason of being based on a
fixed percentage (or percentages) of sales and receipts.
o Second, neither the Combined Company nor any direct or indirect
owner of 10% or more of its Stock may own, actually or
constructively, 10% or more of the tenant from which the Combined
Company collects the rent.
o Third, all of the rent received under a lease will not qualify as
rents from real property unless the rent attributable to the
personal property leased in connection with the real property
constitutes no more than 15% of the total rent received under the
lease.
o Finally, the Combined Company generally must not operate or manage
its real property or furnish or render services to its tenants,
other than through an "independent contractor" who is adequately
compensated and from whom the Combined Company does not derive
revenue. The Combined Company may provide services directly,
however, if the services are "usually or customarily rendered" in
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connection with the rental of space for occupancy only and are not
otherwise considered rendered "primarily for the occupant's
convenience." In addition, the Combined Company may render, other
than through an independent contractor, a de minimis amount of
"non-customary" services to the tenants of a property as long as the
Combined Company's income from such services does not exceed 1% of
its gross income from the property.
Although no assurances can be given that either of the Gross Income Tests
will be satisfied in any given year, the Combined Company anticipates that its
operations will allow it to meet each of the 75% Gross Income Test and the 95%
Gross Income Test. Such belief is premised in large part on the Combined
Company's expectation that substantially all of the amounts received by the
company with respect to its properties will qualify as "rents from real
property." Shareholders should be aware, however, that there are a variety of
circumstances, as described above, in which rent received from a tenant will not
be treated as rents from real property.
Failure to Satisfy Gross Income Tests. If the Combined Company fails to
satisfy either or both of the 75% or 95% Gross Income Tests for any taxable
year, the Combined Company may nevertheless qualify as a real estate investment
trust for that year if it is eligible for relief under certain provisions of the
federal income tax laws. Those relief provisions generally will be available if:
o the Combined Company's failure to meet the gross income test was due
to reasonable cause and not due to willful neglect;
o the Combined Company attaches a schedule of the sources of its
income to its federal income tax return; and
o any incorrect information on the schedule is not due to fraud with
intent to evade tax.
It is not possible to state whether, in all circumstances, the Combined
Company would be entitled to the benefit of the above relief provisions.
Furthermore, as discussed above under "3. Tax Consequences of REIT Election -
Taxation of the Combined Company- General," even if the relief provisions apply,
the Combined Company would incur a 100% tax on the gross income attributable to
the greater of the amounts by which it fails the 75% and 95% Gross Income Tests,
multiplied by a fraction that reflects the Combined Company's profitability.
Asset Tests
The Combined Company also must satisfy the following four tests relating
to the nature of its assets at the close of each quarter of its taxable year.
o First, at least 75% of the value of the Combined Company's total
assets must consist of cash or cash items, including receivables,
government securities, "real estate assets," or qualifying temporary
investments (the "75% Asset Test");
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o Second, no more than 25% of the value of the Combined Company's
total assets may be represented by securities other than those that
are qualifying assets for purposes of the 75% Asset Test (the "25%
Asset Test");
o Third, of the investments included in the 25% Asset Test, the value
of the securities of any one issuer (other than a "taxable REIT
subsidiary") that the Combined Company owns may not exceed 5% of the
value of the Combined Company's total assets, and the Combined
Company may not own 10% or more of the total combined voting power
or 10% or more of the total value of the securities of any issuer
(other than a "taxable REIT subsidiary"); and
o Fourth, while the Combined Company may own up to 100% of the stock
of a corporation that elects to be treated as a "taxable REIT
subsidiary" for federal income tax purposes, at no time may the
total value of the Combined Company's stock ownership of one or more
taxable REIT subsidiaries exceed 20% of the value of the Combined
Company's gross assets.
The Combined Company intends to operate so that it will not acquire any
assets that would cause it to violate the asset tests. If, however, the Combined
Company should fail to satisfy any of the asset tests at the end of a calendar
quarter, it would not lose its real estate investment trust status if (i) the
Combined Company satisfied the asset tests at the end of the close of the
preceding calendar quarter, and (ii) the discrepancy between the value of the
Combined Company's assets and the asset test requirements arose from changes in
the market values of the Combined Company's assets and was not wholly or partly
caused by the acquisition of one or more nonqualifying assets. If the Combined
Company did not satisfy the condition described in clause (ii) of the preceding
sentence, it could still avoid disqualification as a real estate investment
trust by eliminating any discrepancy within 30 days after the close of the
calendar quarter in which the discrepancy arose.
Distribution Requirements
Each taxable year, the Combined Company must distribute dividends to its
Shareholders in an amount at least equal to:
o 90% of the Combined Company's "real estate investment trust taxable
income," computed without regard to the dividends paid deduction and
the Combined Company's net capital gain or loss; and
o certain items of noncash income.
The Combined Company must make such distributions in the taxable year to
which they relate, or in the following taxable year if the Combined Company
declares the distribution before it timely files its federal income tax return
for such year and pays the distribution on or before the first regular
distribution date after such declaration. Further, if the Combined Company fails
to meet the 90% distribution requirement as a result of an adjustment to its tax
returns by the Internal Revenue Service, the Combined Company may, if the
deficiency is not due to fraud with intent to evade tax or a willful failure to
file a timely tax return, and if certain other conditions are met, retroactively
cure the failure by paying a deficiency dividend (plus interest) to its
Shareholders.
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The Combined Company will be subject to federal income tax on its taxable
income, including net capital gain that it did not distribute to its
Shareholders. Furthermore, if the Combined Company fails to distribute during a
calendar year, or, in the case of distributions with declaration and record
dates falling within the last three months of the calendar year, by the end of
the January following such calendar year, at least the sum of:
o 85% of the Combined Company's real estate investment trust ordinary
income for such year;
o 95% of the Combined Company's real estate investment trust capital
gain income for such year; and
o any of the Combined Company's undistributed taxable income from
prior periods,
the Combined Company will be subject to a 4% nondeductible excise tax on the
excess of such required distribution over the amount actually distributed. If
the Combined Company elects to retain and pay income tax on the net capital gain
that it receives in a taxable year, the Combined Company will be deemed to have
distributed any such amount for the purposes of the 4% excise tax described in
the preceding sentence.
The Combined Company intends to make distributions to holders of its
Common Stock in a manner that will allow it to satisfy the distribution
requirements described above. It is possible that, from time to time, the
Combined Company's pre-distribution taxable income may exceed its cash flow and
that the Combined Company may have difficulty satisfying the distribution
requirements. The Combined Company intends to monitor closely the relationship
between its pre-distribution taxable income and its cash flow and intends to
borrow funds or liquidate assets in order to overcome any cash flow shortfalls
if necessary to satisfy the distribution requirements imposed by the Code. It is
possible, although unlikely, that the Combined Company may decide to terminate
its real estate investment trust status as a result of any such cash shortfall.
Such a termination would have adverse tax consequences to the stockholders. See
"3. Tax Consequences of REIT Election - Taxation of the Combined Company -
General".
Recordkeeping Requirements
The Combined Company must maintain records of information specified in
applicable Treasury Regulations in order to maintain its qualification as a real
estate investment trust. In addition, in order to avoid a monetary penalty, the
Combined Company must request on an annual basis certain information from its
Shareholders designed to disclose the actual ownership of the Combined Company's
outstanding Stock. The Combined Company intends to comply with these
recordkeeping requirements.
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Ownership Requirements
For the Combined Company to qualify as a real estate investment
trust, shares of the Combined Company must be held by a minimum of 100 persons
for at least 335 days in each taxable year after the Combined Company's first
taxable year. Further, at no time during the second half of any taxable year
after the Combined Company's first taxable year may more than 50% of the
Combined Company's shares be owned, actually or constructively, by five or fewer
"individuals" (which term is defined for this purpose to include certain
tax-exempt entities including pension trusts). The Common Stock will be held by
100 or more persons. The Combined Company intends to continue to comply with
these ownership requirements. Also, the Combined Company's Charter contains
ownership and transfer restrictions designed to prevent violation of these
requirements.
Failure to Qualify
If the Combined Company failed to qualify as a real estate investment
trust in any taxable year, and no relief provisions applied, the Combined
Company would be subject to federal income tax, including any applicable
alternative minimum tax, on its taxable income at regular corporate rates. In
calculating the Combined Company's taxable income in a year in which it did not
qualify as a real estate investment trust, the Combined Company would not be
able to deduct amounts paid out to its Shareholders. In fact, the Combined
Company would not be required to distribute any amounts to its Shareholders in
such taxable year. In such event, to the extent of the Combined Company's
current and accumulated earnings and profits, all distributions to Shareholders
would be taxable as ordinary income. Moreover, subject to certain limitations
under the Code, corporate Shareholders might be eligible for the dividends
received deduction. Unless the Combined Company qualified for relief under
specific statutory provisions, the Combined Company would be disqualified from
taxation as a real estate investment trust for the four taxable years following
the year in which it ceased to qualify as a real estate investment trust. The
Combined Company cannot predict whether, in all circumstances, it would qualify
for such statutory relief.
4. Taxation of Taxable U.S. Shareholders
As used herein, the term "Taxable U.S. Shareholder" means a Shareholder
that, for United States federal income tax purposes, is:
o a citizen or resident of the United States;
o a corporation, partnership, or other entity created or organized in
or under the laws of the United States or any state or political
subdivision thereof;
o an estate the income of which from sources without the United States
is includible in gross income for United States federal income tax
purposes regardless of its connection with the conduct of a trade or
business within the United States; or
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o any trust with respect to which (i) a United States court is able to
exercise primary supervision over the administration of such trust,
and (ii) one or more United States persons have the authority to
control all substantial decisions of the trust.
For any taxable year in which the Combined Company qualifies as a real
estate investment trust, amounts distributed to Taxable U.S. Shareholders will
be taxed as follows.
Distributions Generally
Distributions made to the Combined Company's Taxable U.S. Shareholders out
of current or accumulated earnings and profits (and not designated as a capital
gain dividend) will be taken into account by such Shareholder as ordinary income
and will not, in the case of a corporate Taxable U.S. Shareholder, be eligible
for the dividends received deduction. To the extent that the Combined Company
makes a distribution with respect to the FSP Common Stock that is in excess of
its current or accumulated earnings and profits, the distribution will be
treated by a Taxable U.S. Shareholder first as a tax-free return of capital,
reducing the Taxable U.S. Shareholder's tax basis in the FSP Common Stock, and
any portion of the distribution in excess of the Shareholder's tax basis in the
FSP Common Stock will then be treated as gain from the sale of such stock.
Dividends declared by the Combined Company in October, November, or December of
any year payable to a Taxable U.S. Shareholder of record on a specified date in
any such month shall be treated as both paid by the Combined Company and
received by Shareholders on December 31 of such year, provided that the dividend
is actually paid by the Combined Company during January of the following
calendar year. Taxable U.S. Shareholders may not include on their federal income
tax returns any of the Combined Company's tax losses.
Capital Gain Dividends
Dividends to Taxable U.S. Shareholders that properly are designated by the
Combined Company as capital gain dividends will be treated by such Shareholders
as long-term capital gain, to the extent that such dividends do not exceed the
Combined Company's actual net capital gain, without regard to the period for
which the Taxable U.S. Shareholders have held the FSP Common Stock. Taxable U.S.
Shareholders that are corporations may be required, however, to treat up to 20%
of particular capital gain dividends as ordinary income. Capital gain dividends,
like regular dividends from a real estate investment trust, are not eligible for
the dividends received deduction for corporations.
Retained Capital Gains
A real estate investment trust may elect to retain, rather than
distribute, its net long-term capital gain received during the tax year. To the
extent designated in a notice from the Combined Company to its Taxable U.S.
Shareholders, the Combined Company will pay the income tax on such gains and
Taxable U.S. Shareholders must include their proportionate share of the
undistributed net long-term capital gain so designated in their income for the
tax year. Each Taxable U.S. Shareholder will be deemed to have paid its share of
the tax paid by the Combined Company, which tax will be credited or refunded to
such Taxable U.S. Shareholder.
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Passive Activity Loss and Investment Interest Limitations
Distributions, including deemed distributions of undistributed net
long-term capital gain, from the Combined Company and gain from the disposition
of FSP Common Stock will not be treated as passive activity income, and
therefore Taxable U.S. Shareholders who are subject to the passive loss
limitation rules of the Code will not be able to apply any passive activity
losses against such income. Distributions from the Combined Company, to the
extent they do not constitute a return of capital, generally will be treated as
investment income for purposes of the investment income limitation on
deductibility of investment interest. However, net capital gain from the
disposition of FSP Common Stock or capital gain dividends, including deemed
distributions of undistributed net long-term capital gains, generally will be
excluded from investment income.
Sale of FSP Common Stock
Upon the sale of FSP Common Stock, a Taxable U.S. Shareholder generally
will recognize gain or loss equal to the difference between the amount realized
on such sale and the holder's tax basis in the stock sold. To the extent that
the FSP Common Stock is held as a capital asset by the Taxable U.S. Shareholder,
the gain or loss will be a long-term capital gain or loss if the stock has been
held for more than a year, and will be a short-term capital gain or loss if the
stock has been held for a shorter period. In general, however, any loss upon a
sale of the FSP Common Stock by a Taxable U.S. Shareholder who has held such
stock for six months or less (after applying certain holding period rules) will
be treated as a long-term capital loss to the extent that distributions from the
Combined Company were required to be treated as long-term capital gain by that
holder.
5. Taxation of Tax-Exempt Shareholders
Tax-exempt entities, including qualified employee pension and profit
sharing trusts and individual retirement accounts (collectively, "Exempt
Organizations"), generally are exempt from federal income taxation. Exempt
Organizations are subject to tax, however, on their unrelated business taxable
income ("UBTI"). UBTI is defined as the gross income derived by an Exempt
Organization from an unrelated trade or business, less the deductions directly
connected with that trade or business, subject to certain exceptions. While many
investments in real estate generate UBTI, the Internal Revenue Service has
issued a ruling that dividend distributions from a real estate investment trust
to an exempt employee pension trust do not constitute UBTI, provided that the
shares of the real estate investment trust are not otherwise used in an
unrelated trade or business of the exempt employee pension trust. Based on that
ruling, amounts distributed to Exempt Organizations generally should not
constitute UBTI. However, if an Exempt Organization finances its acquisition of
FSP Common Stock with debt, a portion of its income from the Combined Company
will constitute UBTI pursuant to the "debt-financed property" rules.
In addition, in certain circumstances, a pension trust that owns more than
10% of the stock of the Combined Company will be required to treat a percentage
of the dividends paid by the Combined Company as UBTI based upon the percentage
of the Combined Company's income that would constitute UBTI to the Shareholder
if received directly by it. This rule applies to a pension trust holding more
than 10% (by value) of the FSP Common Stock only if (i) the percentage of the
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income from the Combined Company that is UBTI (determined as if the Combined
Company were a pension trust) is at least 5% and (ii) the Combined Company is
treated as a "pension-held REIT." The Combined Company does not expect to
receive significant amounts of income that would be considered UBTI if received
directly by a pension trust and does not expect to qualify as a "pension-held
REIT."
6. Taxation of Non-U.S. Shareholders
General
The rules governing United States federal income taxation of nonresident
alien individuals, foreign corporations, foreign partnerships, foreign trusts
and certain other foreign stockholders (collectively, "Non-U.S. Shareholders")
are complex and no attempt is made herein to provide more than a general summary
of such rules. This discussion does not consider the tax rules applicable to all
Non-U.S. Shareholders and, in particular, does not consider the special rules
applicable to U.S. branches of foreign banks or insurance companies or certain
intermediaries. NON-U.S. SHAREHOLDERS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS
TO DETERMINE THE IMPACT OF FEDERAL, STATE, LOCAL AND FOREIGN TAX LAWS WITH
REGARD TO THE MERGER AND THE OWNERSHIP OF THE FSP COMMON STOCK, INCLUDING ANY
REPORTING AND WITHHOLDING REQUIREMENTS.
Ordinary Dividends
General
Distributions to Non-U.S. Shareholders that are not attributable to gain
from sales or exchanges by the Combined Company of United States real property
interests and are not designated by the Combined Company as capital gain
dividends (or deemed distributions of retained capital gains) will be treated as
ordinary dividends to the extent that they are made out of current or
accumulated earnings and profits of the Combined Company. Any portion of a
distribution in excess of current and accumulated earnings and profits of the
Combined Company will not be taxable to a Non-U.S. Shareholder to the extent
that such distribution does not exceed the adjusted basis of the Shareholder in
the FSP Common Stock, but rather will reduce the adjusted basis of such stock.
To the extent that the portion of the distribution in excess of current and
accumulated earnings and profits exceeds the adjusted basis of a Non-U.S.
Shareholder for the FSP Common Stock, such excess generally will be treated as
gain from the sale or disposition of the stock and will be taxed as described
below.
Withholding
Dividends paid to Non-U.S. Shareholders may be subject to U.S. withholding
tax. If an income tax treaty does not apply and the Non-U.S. Shareholder's
investment in the FSP Common Stock is not effectively connected with a trade or
business conducted by the Non-U.S. Shareholder in the United States (or if a tax
treaty does apply and the investment in the FSP Common Stock is not attributable
138
to a United States permanent establishment maintained by the Non-U.S.
Shareholder), ordinary dividends (i.e., distributions out of current and
accumulated earnings and profits) will be subject to a U.S. withholding tax at a
30% rate, or, if an income tax treaty applies, at a lower treaty rate. Because
the Combined Company generally cannot determine at the time that a distribution
is made whether or not it will be in excess of earnings and profits, the
Combined Company intends to withhold on the gross amount of each distribution at
the 30% rate (or lower treaty rate) (other than distributions subject to the 35%
FIRPTA withholding rules described below). To receive a reduced treaty rate, a
Non-U.S. Shareholder must furnish the Combined Company or its paying agent with
a duly completed Form W-8BEN (or authorized substitute form) certifying such
holder's qualification for the reduced rate. Generally, a Non-U.S. Shareholder
will be entitled to a refund from the Internal Revenue Service to the extent the
amount withheld by the Combined Company from a distribution exceeds the amount
of United States tax owed by such Shareholder.
In the case of a Non-U.S. Shareholder that is a partnership or a trust,
the withholding rules for a distribution to such a partnership or trust will be
dependent on numerous factors, including (1) the classification of the type of
partnership or trust, (2) the status of the partner or beneficiary, and (3) the
activities of the partnership or trust. Non-U.S. Shareholders that are
partnerships or trusts are urged to consult their tax advisors regarding the
withholding rules applicable to them based on their particular circumstances.
If an income tax treaty does not apply, ordinary dividends that are
effectively connected with the conduct of a trade or business within the U.S. by
a Non-U.S. Shareholder (and, if a tax treaty applies, ordinary dividends that
are attributable to a United States permanent establishment maintained by the
Non-U.S. Shareholder) are exempt from U.S. withholding tax. In order to claim
such exemption, a Non-U.S. Shareholder must provide the Combined Company or its
paying agent with a duly completed Form W-8ECI (or authorized substitute form)
certifying such holder's exemption. However, ordinary dividends exempt from U.S.
withholding tax because they are effectively connected or are attributable to a
United States permanent establishment maintained by the Non-U.S. Shareholder
generally are subject to U.S. federal income tax on a net income basis at
regular graduated rates. In the case of Non-U.S. Shareholders that are
corporations, any effectively connected ordinary dividends or ordinary dividends
attributable to a United States permanent establishment maintained by the
Non-U.S. Shareholder may, in certain circumstances, be subject to an additional
branch profits tax at a 30% rate, or lower rate specified by an applicable
income tax treaty.
Capital Gain Dividends
General
For any year in which the Combined Company qualifies as a real estate
investment trust, distributions that are attributable to gain from sales or
exchanges by the Combined Company of United States real property interests will
be taxed to a Non-U.S. Shareholder under the provisions of the Foreign
Investment in Real Property Tax Act of 1980 ("FIRPTA"). Under FIRPTA,
distributions attributable to gain from sales of United States real property are
taxed to a Non-U.S. Shareholder as if such gain were effectively connected with
a United States trade or business. Non-U.S. Shareholders thus would be taxed at
the regular capital gain rates applicable to Taxable U.S. Shareholders (subject
139
to the applicable alternative minimum tax and a special alternative minimum tax
in the case of nonresident alien individuals). Distributions subject to FIRPTA
also may be subject to a 30% branch profits tax in the hands of a corporate
Non-U.S. Shareholder not otherwise entitled to treaty relief or exemption.
Withholding
Under FIRPTA, the Combined Company is required to withhold 35% of any
distribution that is designated as a capital gain dividend or which could be
designated as a capital gain dividend. Moreover, if the Combined Company
designates previously made distributions as capital gain dividends, subsequent
distributions (up to the amount of the prior distributions so designated) will
be treated as capital gain dividends for purposes of FIRPTA withholding.
Sale of FSP Common Stock
A Non-U.S Shareholder generally will not be subject to United States
federal income tax under FIRPTA with respect to gain recognized upon a sale of
FSP Common Stock, provided that the Combined Company is a
"domestically-controlled REIT." A domestically-controlled REIT generally is
defined as a real estate investment trust in which at all times during a
specified testing period less than 50% in value of the stock was held directly
or indirectly by non-U.S. persons. Although currently it is anticipated that the
Combined Company will be a domestically-controlled REIT, and, therefore, that
the sale of FSP Common Stock will not be subject to taxation under FIRPTA, there
can be no assurance that the Combined Company will, at all relevant times, be a
domestically-controlled REIT. If the gain on the sale of FSP Common Stock were
subject to taxation under FIRPTA, a Non-U.S. Shareholder would be subject to the
same treatment as Taxable U.S. Shareholders with respect to such gain (subject
to the applicable alternative minimum tax and a special alternative minimum tax
in the case of nonresident alien individuals). In addition, a purchaser of FSP
Common Stock from a Non-U.S. Shareholder subject to taxation under FIRPTA
generally would be required to deduct and withhold a tax equal to 10% of the
amount realized by a Non-U.S. Shareholder on the disposition. Any amount
withheld would be creditable against the Non-U.S. Shareholder's FIRPTA tax
liability.
Even if gain recognized by a Non-U.S. Shareholder upon the sale of FSP
Common Stock is not subject to FIRPTA, such gain generally will be taxable to
such Shareholder if:
o an income tax treaty does not apply and the gain is effectively
connected with a trade or business conducted by the Non-U.S.
Shareholder in the United States (or, if an income tax treaty
applies and the gain is attributable to a United States permanent
establishment maintained by the Non-U.S. Shareholder), in which
case, unless an applicable treaty provides otherwise, a Non-U.S.
Shareholder will be taxed on his or her net gain from the sale at
regular graduated U.S. federal income tax rates. In the case of a
Non-U.S. Shareholder that is a corporation, such Shareholder may be
subject to an additional branch profits tax at a 30% rate, unless an
applicable income tax treaty provides for a lower rate and the
Shareholder demonstrates its qualification for such rate; or
140
o the Non-U.S. Shareholder is a nonresident alien individual who holds
the FSP Common Stock as a capital asset and was present in the
United States for 183 days or more during the taxable year (as
determined under the Code) and certain other conditions apply, in
which case the Non-U.S. Shareholder will be subject to a 30% tax on
capital gains.
Estate Tax Considerations
The value of FSP Common Stock owned, or treated as owned, by a
Non-U.S. Shareholder who is a nonresident alien individual at the time of his or
her death will be included in the individual's gross estate for United States
federal estate tax purposes, unless otherwise provided in an applicable estate
tax treaty.
7. Information Reporting and Backup Withholding
The Combined Company is required to report to its Shareholders and to the
Internal Revenue Service the amount of distributions paid during each tax year,
and the amount of tax withheld, if any. These requirements apply even if
withholding was not required with respect to payments made to a Shareholder. In
the case of Non-U.S. Shareholders, the information reported may also be made
available to the tax authorities of the Non-U.S. Shareholder's country of
residence, if an applicable income tax treaty so provides.
Backup withholding generally may be imposed at a rate of 30% (the rate is
scheduled to decrease to 29% in 2004, and 28% in 2006) on certain payments to a
Shareholder unless the Shareholder (i) furnishes certain information, or (ii) is
otherwise exempt from backup withholding.
A Shareholder who does not provide the Combined Company with his or her
correct taxpayer identification number also may be subject to penalties imposed
by the IRS. In addition, the Combined Company may be required to withhold a
portion of capital gain distributions to any Shareholders who fail to certify
their non-foreign status to the Combined Company
Shareholders should consult their own tax advisors regarding their
qualification for an exemption from backup withholding and the procedure for
obtaining an exemption. Backup withholding is not an additional tax. Rather, the
amount of any backup withholding with respect to a distribution to a Shareholder
will be allowed as a credit against such holder's United States federal income
tax liability and may entitle the Shareholder to a refund, provided that the
required information is furnished to the Internal Revenue Service.
In general, backup withholding and information reporting will not apply to
a payment of the proceeds of the sale of FSP Common Stock by a Non-U.S.
Shareholder by or through a foreign office of a foreign broker effected outside
of the United States; provided, however, that foreign brokers having certain
connections with the United States may be obligated to comply with the backup
withholding and information reporting rules. Information reporting (but not
backup withholding) will apply, however, to a payment of the proceeds of a sale
of FSP Common Stock by foreign offices of certain brokers, including foreign
offices of a broker that:
141
o is a United States person;
o derives 50% or more of its gross income for certain periods from the
conduct of a trade or business in the United States; or
o is a "controlled foreign corporation" for United States tax
purposes.
Information reporting will not apply in the above cases if the broker has
documentary evidence in its records that the holder is a Non-U.S. Shareholder
and certain conditions are met, or the Non-U.S. Shareholder otherwise
establishes an exemption.
Payment to or through a United States office of a broker of the proceeds
of a sale of FSP Common Stock is subject to both backup withholding and
information reporting unless the Shareholder certifies in the manner required
that he or she is a Non-U.S. Shareholder and satisfies certain other
qualifications under penalties of perjury or otherwise establishes an exemption.
8. State and Local Tax
The discussion herein concerns only the United States federal income tax
treatment likely to be accorded to the Combined Company and its Shareholders. No
consideration has been given to the state and local tax treatment of such
parties. The state and local tax treatment may not conform to the federal
treatment described above. As a result, a Shareholder should consult his or her
own tax advisor regarding the specific state and local tax consequences of the
Merger and ownership and sale of FSP Common Stock in the Combined Company.
142
LEGAL MATTERS
Hale and Dorr LLP, Boston, Massachusetts, will deliver opinions to the
effect that (i) upon consummation of the Mergers, the shares of FSP Common Stock
in the Combined Company offered pursuant to the Merger Agreement will be validly
issued, fully paid and nonassessable and (ii) the Mergers should be treated for
federal income tax purposes as tax-free transactions and the discussion under
"Material United States Federal Income Tax Considerations", to the extent it
involves matters of law, is accurate in all material respects.
By Order of the FSP Board,
/s/ Barbara J. Corinha
Barbara J. Corinha, Secretary
____ __, 2003
The FSP Board hopes that stockholders will attend the meeting. Whether or
not you plan to attend, you are urged to complete, date, sign and return the
enclosed Proxy in the accompanying envelope. Prompt response will greatly
facilitate arrangements for the meeting and your cooperation will be
appreciated. FSP Stockholders who attend the meeting may vote their stock
personally even though they have sent in their proxies.
143
Index to Financial Statements
Entity Period covered Page
------ -------------- ----
FSP Corp. Nine months ended September 30, 2002 F-2
Six months ended June 30, 2002 F-17
Three months ended March 31, 2002 F-30
Year ended December 31, 2001 F-41
Year ended December 31, 2000 F-74
Forest Park Nine months ended September 30, 2002 F-95
Year ended December 31, 2001 F-101
Year ended December 31, 2000 F-110
Period from date of inception to December 31, 1999 F-120
The Gael Nine months ended September 30, 2002 F-131
Year ended December 31, 2001 F-137
Period from date of inception to December 31, 2000 F-146
Goldentop Nine months ended September 30, 2002 F-156
Year ended December 31, 2001 F-162
Period from date of inception to December 31, 2000 F-171
Centennial Nine months ended September 30, 2002 F-181
Year ended December 31, 2001 F-187
Period from date of inception to December 31, 2000 F-196
Meadow Point Nine months ended September 30, 2002 F-206
Period from date of inception to December 31, 2001 F-213
Timberlake Nine months ended September 30, 2002 F-222
Period from date of inception to December 31, 2001 F-228
Federal Way Nine months ended September 30, 2002 F-237
Period from date of inception to December 31, 2001 F-243
Fair Lakes Nine months ended September 30, 2002 F-252
Period from date of inception to December 31, 2001 F-258
Northwest Point Nine months ended September 30, 2002 F-267
Period from date of inception to December 31, 2001 F-273
Timberlake East Nine months ended September 30, 2002 F-283
Merrywood Nine months ended September 30, 2002 F-292
Plaza Ridge I Nine months ended September 30, 2002 F-301
Park Ten Nine months ended September 30, 2002 F-310
Supplemental information
Target REITs Schedule III as of December 31, 2001 F-319
F-1
Franklin Street Properties Corp.
Quarterly Report
September 30, 2002
Page
----
Index to Financial Statements
Consolidated Balance Sheets as of September 30, 2002
and December 31, 2001.................................... F-3
Consolidated Statements of Income for the nine months
ended September 30, 2002 and 2001........................ F-4
Consolidated Statements of Cash Flows for the nine
months ended September 30, 2002 and 2001................. F-5
Notes to the Consolidated Financial Statements........... F-6
F-2
Franklin Street Properties Corp.
Consolidated Balance Sheets
(unaudited)
September 30, December 31,
(in thousands, except share, unit and par value amounts) 2002 2001
======================================================================================================
(REIT) (Limited Partnership)
Assets:
Real estate investments, at cost:
Land $ 39,560 $ 39,560
Buildings and improvements 154,689 153,632
Fixtures and equipment 930 920
------------------------------------------------------------------------------------------------------
195,179 194,112
Less accumulated depreciation 20,648 17,419
------------------------------------------------------------------------------------------------------
Real estate investments, net 174,531 176,693
Real estate assets held for syndication 51,500 --
Cash and cash equivalents 21,841 24,357
Restricted cash 486 495
Tenant rent receivables, net of allowance for doubtful accounts of
$357 and $210, respectively 2,416 1,434
Prepaid expenses and other assets, net 1,678 741
Office computers and furniture, net of accumulated
depreciation of $358 and $215, respectively 265 397
------------------------------------------------------------------------------------------------------
Total Assets $252,717 $ 204,117
======================================================================================================
Liabilities and Stockholders' Equity/Partners' Capital:
Liabilities:
Bank note payable $ 50,000 $ --
Accounts payable and accrued expenses 4,618 2,112
Accrued compensation 1,432 1,747
Tenant security deposits 486 495
------------------------------------------------------------------------------------------------------
Total Liabilities 56,536 4,354
------------------------------------------------------------------------------------------------------
Commitments and Contingencies:
Stockholders' Equity/Partners' Capital:
Preferred Stock, $.0001 par value, 20,000,000 shares
authorized, none issued or outstanding $ -- $ --
Common Stock, $.0001 par value, 180,000,000 shares
authorized, 24,630,247 shares issued and outstanding 2 --
Additional paid-in capital 192,743 --
Limited partnership units, 23,637,750 units issued
and outstanding -- 203,348
General partnership units, 948,499 units issued and
outstanding -- (3,585)
Retained earnings 3,436 --
------------------------------------------------------------------------------------------------------
Total Stockholders' Equity/Partners' Capital 196,181 199,763
------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity/Partners' Capital $252,717 $ 204,117
======================================================================================================
See accompanying notes to consolidated financial statements.
F-3
Franklin Street Properties Corp.
Consolidated Statements of Income
(Unaudited)
For the For the
Three Months Nine Months
Ended Ended
September 30, September 30,
----------------------- -----------------------
(in thousands, except per share/unit amounts) 2002 2001 2002 2001
====================================================================================================================
(REIT) (Limited Partnership) (REIT) (Limited Partnership)
Revenue:
Rental $ 6,676 $ 6,915 $20,035 $20,234
Syndication fees 4,153 2,765 9,890 8,996
Transaction fees 3,865 1,305 9,203 7,176
Interest and other 473 317 915 1,179
--------------------------------------------------------------------------------------------------------------------
Total revenue 15,167 11,302 40,043 37,585
--------------------------------------------------------------------------------------------------------------------
Expenses:
Selling, general and administrative 1,190 1,396 4,093 3,380
Commissions 2,075 1,382 4,910 4,498
Stock/units issued as compensation 604 186 604 1,744
Rental operating expenses 1,660 1,941 4,857 5,374
Depreciation and amortization 1,202 1,148 3,515 3,572
Real estate taxes and insurance 796 919 2,307 2,335
Interest 297 247 647 641
Total expenses 7,824 7,219 20,933 21,544
--------------------------------------------------------------------------------------------------------------------
Income before minority interests 7,343 4,083 19,110 16,041
Income applicable to minority interests -- -- -- 40
Income before taxes 7,343 4,083 19,110 16,001
Taxes on income 216 -- 417 --
--------------------------------------------------------------------------------------------------------------------
Net income $ 7,127 $ 4,083 $18,693 $16,001
====================================================================================================================
Allocation of net income to:
Common Shareholders $ 7,127 $ -- $18,693 $ --
Limited Partners -- 3,925 -- 15,380
General Partner -- 158 -- 621
--------------------------------------------------------------------------------------------------------------------
$ 7,127 $ 4,083 $18,693 $16,001
====================================================================================================================
Weighted average number of shares/units outstanding,
respectively, basic and diluted 24,623 24,586 24,598 24,487
====================================================================================================================
Net income per share and per limited and general
partnership unit, respectively, basic and diluted $ 0.29 $ 0.17 $ 0.76 $ 0.65
====================================================================================================================
See accompanying notes to consolidated financial statements.
F-4
Franklin Street Properties Corp.
Consolidated Statements of Cash Flows
(Unaudited)
For the
Nine months
Ended
September 30,
-----------------------
(in thousands) 2002 2001
===========================================================================================================
(REIT) (Limited Partnership)
Cash flows from operating activities:
Net income $ 18,693 $ 16,001
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,515 3,572
Stock/units issued as compensation 604 1,744
Gain on sale of land -- (11)
Minority interests -- 40
Changes in operating assets and liabilities:
Decrease (increase) in restricted cash 9 (8)
(Increase) decrease in tenant rent receivables (982) 300
Increase in prepaid expenses and other assets, net (1,080) (204)
Increase in accounts payable and accrued expenses 962 2,083
(Decrease) increase in accrued compensation (315) 626
(Decrease) increase in tenant security deposits (9) 8
-----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 21,397 24,151
-----------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets, office computers and furniture (1,078) (257)
Change in real estate assets held for syndication (49,956) 935
Proceeds received on sale of land -- 449
Proceeds from marketable securities -- 4,227
-----------------------------------------------------------------------------------------------------------
Net cash (used for) provided by investing activities (51,034) 5,354
-----------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Distributions to stockholders/partners (22,879) (20,527)
Distributions to minority interest holders -- (103)
Proceeds from bank note payable 50,000 15,682
Repayments of bank note payable -- (16,500)
-----------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities 27,121 (21,448)
-----------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (2,516) 8,057
Cash and cash equivalents, beginning of period 24,357 13,718
-----------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 21,841 $ 21,775
===========================================================================================================
Supplemental disclosure of non-cash investing activity:
Capital expenditures included in accounts payable and accrued expenses $ 1,544 $ --
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 647 $ 641
Income taxes $ 390 $ --
See accompanying notes to consolidated financial statements.
F-5
Franklin Street Properties Corp.
Notes to Consolidated Financial Statements
(Unaudited)
1. Organization, Properties, Basis of Presentation and Recent Accounting
Pronouncements
Organization
Franklin Street Properties Corp. (the "Company") was formed as a Massachusetts
limited partnership (the "Partnership") on February 4, 1997. Through June 30,
2001 the Partnership owned a 99% interest in FSP Investments LLC ("FSP
Investments") and a 99% interest in FSP Property Management LLC ("FSP Property
Management"). Effective July 1, 2001, a wholly-owned subsidiary of the
Partnership purchased the remaining 1% ownership interest in FSP Investments and
1% ownership interest in FSP Property Management for an aggregate purchase price
of approximately $32,000.
In December 2001, the limited partners of the Partnership approved the
conversion of the Partnership from a partnership into a corporation. The
conversion was effective January 1, 2002, and was accomplished as a tax-free
reorganization by merging the Partnership with and into a wholly owned
subsidiary, Franklin Street Properties Corp., with the subsidiary as the
surviving entity. In 2002, the Company elected to be taxed as a real estate
investment trust ("REIT").
As a part of the conversion, all of the Partnership's outstanding units were
converted on a one-for-one basis into 24,586,249 shares of common stock of the
Company. The conversion is being accounted for as a reorganization of affiliated
entities, with assets and liabilities recorded at their historical costs.
The Company operates in two business segments: rental operations and investment
services. FSP Investments provides real estate investment and broker/dealer
services. FSP Investments' services include: (i) the organization of REITs (the
"Sponsored REITs") which are syndicated through private placements; (ii) the
acquisition of real estate on behalf of the Sponsored REITs; and (iii) the sale
through best efforts of private placements of preferred stock in Sponsored
REITs.
Properties
As of September 30, 2002, December 31, 2001 and September 30, 2001, excluding
assets held for syndication, the Company owned a portfolio of four residential
real estate properties (consisting of approximately 642 apartment units) and 13
commercial properties (consisting of approximately 1,433,300 square feet of
rentable space).
Basis of Presentation
The consolidated financial statements of the Company include all the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
balances and transactions have been eliminated. These financial statements
should be read in conjunction with the Company's financial statements and notes
thereto contained in the Company's annual report on Form 10-K for its fiscal
year ended December 31, 2001.
The accompanying interim financial statements are unaudited; however, the
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information and in conjunction with the rules and regulations of the Securities
and Exchange Commission. Accordingly, they do not include all of the disclosures
required by accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of management, all
adjustments (consisting solely of normal recurring matters) necessary for a fair
presentation of the financial statements for these interim periods have been
included. The results of operations for the interim periods are not necessarily
indicative of the results to be obtained for other interim periods or for the
full fiscal year.
Certain prior-year balances have been reclassified in order to conform to the
current-year presentation.
Recent Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations," which addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This Statement requires that
the fair value of a liability for an asset retirement obligation be recognized
in the period in which it is incurred if a reasonable estimate of the fair value
can be made. The associated asset retirement costs are capitalized as part of
the carrying amount of the long-lived asset. This Statement will be effective at
the beginning of 2003. The Company has reviewed the provisions of SFAS 143 and
believes that the impact of adoption will not be material to its financial
position, results of operations and cash flows.
F-6
Franklin Street Properties Corp.
Notes to Consolidated Financial Statements
(Unaudited)
1. Organization, Properties, Basis of Presentation and Recent Accounting
Pronouncements (continued)
Recent Accounting Pronouncements (continued)
In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets". This Statement supersedes SFAS No. 121 and
requires that long-lived assets that are to be disposed of by sale be measured
at the lower of book value or fair value less costs to sell. SFAS No. 144
retains the fundamental provisions of SFAS 121 for (a) recognition and
measurement of the impairment of long-lived assets to be held and used, and (b)
measurement of long-lived assets to be disposed of by sale, but broadens the
definition of what constitutes a discontinued operation and how the results of a
discontinued operation are to be measured and presented. This Statement was
effective at the beginning of 2002. With the exception of reclassifying the
operations of certain real estate assets considered "held for syndication" (and
for which no significant continuing involvement exists) to "Discontinued
operations, net of tax" in the consolidated statement of income, the impact of
adoption is not expected to have a material impact on the Company's financial
position, results of operations and cash flows. The Company has one real estate
asset that it considers "held for syndication" at September 30, 2002.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FAS Nos. 4, 44, and
64, Amendment of FAS 13, and Technical Corrections". This Statement rescinds
FASB No. 4, "Reporting Gains and Losses from Extinguishment of Debt", and an
amendment of that Statement, FASB No. 64, "Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements". This Statement amends FASB No. 13,
"Accounting for Leases". This Statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings or
describe their applicability under changed conditions. This statement will be
effective for the Company's fiscal year ending December 31, 2003. The Company
has reviewed the provisions of FASB 145 and believes that the impact of adoption
will not be material to its financial position, results of operations and cash
flow.
In July 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities". This statement will be effective January 1, 2003.
SFAS No. 146 replaces current accounting literature and requires the recognition
of costs associated with exit or disposal activities when they are incurred
rather than at the date of a commitment to an exit or disposal plan. The Company
does not anticipate that the adoption of this statement will have a material
effect on the Company's financial statements.
On November 25, 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45")
"Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, an Interpretation of FASB
Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34". FIN
45 clarifies the requirements of SFAS No. 5 "Accounting for Contingencies",
relating to a guarantors accounting for, and disclosure of, the issuance of
certain types of guarantees. The Company does not anticipate that the adoption
of this statement will have a material effect on the Company's financial
statement.
2. Investment Services Activity
During the three months ended September 30, 2002, two Sponsored REITs, FSP Park
Ten Corp. and FSP Montague Business Center Corp., acquired office buildings in
Houston, Texas and San Jose, California, respectively. The Company sold on a
best efforts basis, through private placements, approximately $60.9 million in
preferred stock in these Sponsored REITs. The Company recorded approximately
$4.2 million and $3.9 million of syndication fee and transaction fee revenues,
respectively, as a result of these transactions.
The Company has in the past acquired by merger entities similar to the Sponsored
REITs. The Company's business model for growth includes the potential
acquisition by merger in the future of Sponsored REITs. However, the Company has
no obligation to acquire or to offer to acquire any Sponsored REIT. In addition,
any offer (and the related terms and conditions) that might be made in the
future to acquire any Sponsored REIT would require: the approval of the boards
of directors of the Company and the Sponsored REIT; and the approval of the
shareholders of the Sponsored REIT; and likely would require the approval of the
shareholders of the Company.
F-7
Franklin Street Properties Corp.
Notes to Consolidated Financial Statements
(Unaudited)
3. Real Estate Assets Held For Syndication
Real estate assets held for syndication represents the assets of a Sponsored
REIT which was owned 99% by the Company and 1% by an officer of the Company at
September 30, 2002. The Company intends to syndicate, on a best efforts basis,
through a private placement approximately $63.6 million in preferred stock in
the Sponsored REIT.
Following the anticipated syndication of the preferred stock in the fourth
quarter of 2002, the Company will own 99% of the common stock in the sponsored
REIT, which represents less than a 1% ownership interest in the Sponsored REIT.
Additionally, the Company anticipates earning a fee of approximately 1% of gross
rental revenue, as defined, for services rendered in connection with the ongoing
asset management of the property. Accordingly, as the Company anticipates having
significant continuing involvement following the syndication, as defined in FAS
144, syndication and transaction fees and related expenses from the syndication
will be recorded in continuing operations.
The assets owned by the Sponsored REIT, FSP Addison Circle Corp., were purchased
on September 30, 2002, are located in Addison, Texas and are comprised
principally of land and an office building totaling $51,500,000. The purchase
was primarily funded by a bank note payable of $50 million.
The results of operations for FSP Addison Circle Corp. for the three months
ended September 30, 2002 were not material.
F-8
Franklin Street Properties Corp.
Notes to Consolidated Financial Statements
(Unaudited)
4. Related Party Transactions and Investments in Non-consolidated Entities
The Company has arranged for Citizens Bank to provide a line of credit for the
Company's senior officers in the maximum aggregate amount of $3 million. The
borrowings under this line of credit are for the purpose of paying income taxes
on equity interests in the Company issued to such senior officers as
compensation. Loans under this line of credit have a term of one year and bear
interest at the bank's prime rate plus 50 basis points. Each borrower has
secured the loan by pledging shares of the Company's Common Stock having an
aggregate fair market value at the time of the loan of no less than twice the
principal amount of the loan. In the three months ended September 30, 2002 a
senior officer of the Company repaid $275,000 of outstanding borrowings.
Borrowings of $1,803,000, which are not reflected in the consolidated balance
sheets, were outstanding to senior officers of the Company at September 30, 2002
and $1,625,000 at December 31, 2001. The Company has agreed to purchase from
Citizens Bank any such loan on which the borrower defaults. Following the
purchase of the loan, the Company would have the same rights as Citizens Bank,
including the right to foreclose on the pledged stock or to recover the
outstanding amount of the loan from the officer/borrower. In order to comply
with the Sarbanes-Oxley Act of 2002, the Company has informed Citizens Bank and
its senior officers that it will no longer agree to guarantee any such loans
made in the future. The existing repurchase agreements will terminate on
February 23, 2003.
The Company typically retains a non-controlling common stock ownership interest
in Sponsored REITs that it has organized. These ownership interests have
virtually no economic benefit or risk. At September 30, 2002, December 31, 2001,
and September 30, 2001 the Company had ownership interests in sixteen, ten and
five Sponsored REITs, respectively. During 1999 and 2000, the Company acquired
100% of the non-owned interests of 17 limited partnerships (through a series of
mergers) that it had previously organized.
Summarized financial information for the Sponsored REITs is as follows
(unaudited):
September 30, December 31,
2002 2001
------------- ------------
(in thousands)
Balance Sheet Data:
Real estate, net $337,439 $222,232
Other assets 35,270 19,048
Total liabilities 6,514 6,755
Shareholders' equity 366,195 234,525
For the three months ended For the nine months ended
September 30, September 30,
2002 2001 2002 2001
------- ------- ------- -------
(in thousands)
Operating Data:
Rental revenue $12,838 $ 5,204 $31,542 $11,713
Other revenue 334 78 551 250
Operating and maintenance expenses 2,540 1,498 9,326 3,577
Depreciation and amortization 2,200 1,378 4,802 2,058
Interest expense and commitment fees 4,893 3,240 8,937 4,479
------- ------- ------- -------
Net income (loss) $ 3,539 $ (834) $ 9,028 $ 1,849
======= ======= ======= =======
The Company provided syndication and real estate acquisition advisory services
for the Sponsored REITs in 2002 and 2001. For the three months ended September
30, 2002 and 2001, respectively, syndication fees were approximately $4.2
million and $2.8 million, and transaction fees were approximately $3.9 million
and $1.3 million. For the nine months ended September 30, 2002 and 2001,
respectively, syndication fees were approximately $9.9 million and $9.0 million,
and transaction fees were approximately $9.2 million and $7.2 million.
F-9
Franklin Street Properties Corp.
Notes to Consolidated Financial Statements
(Unaudited)
4. Related Party Transactions and Investments in Non-consolidated Entities
(continued)
Asset management fee income charged by the Company to the Sponsored REITs
amounted to approximately $172,000 and $72,000 for the three months ended
September 30, 2002 and 2001, respectively, and $389,000 and $109,000 for the
nine months ended September 30, 2002 and 2001, respectively, and is included in
"Interest and other" in the Consolidated Statements of Income. Management fees
range from 1% to 5% of collected rents and the applicable contracts are
cancelable with 30 days notice.
5. Bank note payable
On September 30, 2002, $50 million was outstanding under the Company's $50
million unsecured line of credit (the "Loan Agreement"). Borrowings under the
Loan Agreement bear interest at a rate of either the bank's base rate or a
variable LIBOR rate, as defined, which was 4.75% per annum at September 30,
2002. There were no borrowings outstanding under the Loan Agreement at December
31, 2001. The Loan Agreement matures on February 23, 2003.
6. Net Income Per Share/Partnership Unit
The Company follows SFAS No. 128, "Earnings per Share," which specifies the
computation, presentation and disclosure requirements for the Company's net
income per share/unit. Basic net income per share/unit is computed by dividing
net income by the weighted average number of Company shares/units outstanding
during the period. Diluted net income per share/unit reflects the potential
dilution that could occur if securities or other contracts to issue shares/units
were exercised or converted into shares/units. There were no potential dilutive
shares/units outstanding at September 30, 2002 and 2001.
The denominator used for calculating basic and diluted net income per share/unit
is as follows:
Three Months Nine Months
Ended Ended
September 30, September 30,
-------------------------- --------------------------
2002 2001 2002 2001
---- ---- ---- ----
Weighted average number of shares outstanding:
Common shares 24,622,914 -- 24,598,470 --
Limited partnership units -- 23,637,748 -- 23,538,745
General partnership units -- 948,499 -- 948,499
-------------------------- --------------------------
24,622,914 24,586,247 24,598,470 24,487,244
========================== ==========================
F-10
Franklin Street Properties Corp.
Notes to Consolidated Financial Statements
(Unaudited)
7. Business Segments
The Company operates in two business segments: rental operations and investment
services (including real estate acquisition, financing and broker/dealer
services). The Company has identified these segments because this discrete
information is the basis upon which management makes decisions regarding
resource allocation and performance assessment. The accounting policies of the
reportable segments are the same as those described in the "Significant
Accounting Policies" set forth in Note 2 to the Company's audited financial
statements included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2001. The Company's segments are located in the United States
of America.
The Company evaluates the performance of its reportable segments based on Cash
Available for Distribution ("CAD") as management believes that CAD represents
the most accurate measure of the reportable segment's activity and is the basis
for distributions paid to equity holders. The Company defines CAD as: net income
as computed in accordance with accounting principles generally accepted in the
United States of America ("GAAP"); plus certain non-cash items included in the
computation of net income (depreciation and amortization, certain non-cash
compensation expenses and straight line rent adjustments); plus investment
services proceeds received from controlled partnerships; plus the net proceeds
from the sale of land; less purchases of property and equipment ("Capital
Expenditures") and payments for deferred leasing commissions, plus proceeds from
cash reserves established at the acquisition date of the property. Depreciation
and amortization, non-cash compensation and straight line rents are an
adjustment to CAD, as these are non-cash items included in net income. Capital
Expenditures, payments of deferred leasing commissions and the proceeds from
(payments to) the funded reserve are an adjustment to CAD, as they represent
cash items not reflected in income. CAD should not be considered as an
alternative to net income (determined in accordance with GAAP), as an indicator
of the Company's financial performance, nor as an alternative to cash flows from
operating activities (determined in accordance with GAAP), nor as a measure of
the Company's liquidity, nor is it necessarily indicative of sufficient cash
flow to fund all of the Company's needs. Other real estate companies may define
CAD in a different manner. It is at the Company's discretion to retain a portion
of CAD for operational needs. We believe that in order to facilitate a clear
understanding of the results of the Company, CAD should be examined in
connection with net income and cash flows from operating, investing and
financing activities in the consolidated financial statements.
CAD by business segment is as follows (in thousands):
Rental Investment Intercompany
Operations Services Total Eliminations Consolidated
---------- -------- ----- ------------ ------------
Three Months Ended March 31, 2001
Net Income $ 4,059 $ 1,900 $ 5,959 $ 43 $ 6,002
Depreciation and amortization 1,306 10 1,316 (43) 1,273
Non-cash compensation expense -- 29 29 -- 29
Straight line rent (66) -- (66) -- (66)
Capital expenditures (21) (55) (76) -- (76)
Payment of deferred leasing commission (25) -- (25) -- (25)
Proceeds of funded reserves 25 -- 25 -- 25
------- ------- ------- ---- -------
Cash Available for Distribution $ 5,278 $ 1,884 $ 7,162 $ -- $ 7,162
======= ======= ======= ==== =======
Three Months Ended June 30, 2001
Net Income $ 3,915 $ 1,958 $ 5,873 $ 43 $ 5,916
Depreciation and amortization 1,184 10 1,194 (43) 1,151
Straight line rent (161) -- (161) -- (161)
Capital expenditures (60) (25) (85) -- (85)
------- ------- ------- ---- -------
Cash Available for Distribution $ 4,878 $ 1,943 $ 6,821 $ -- $ 6,821
======= ======= ======= ==== =======
F-11
Franklin Street Properties Corp.
Notes to Consolidated Financial Statements
(Unaudited)
7. Business Segments (continued)
CAD by business segment is as follows (in thousands):
Rental Investment Intercompany
Operations Services Total Eliminations Consolidated
---------- -------- ----- ------------ ------------
Three Months Ended September 30, 2001
Net Income $ 5,024 $ (985) $ 4,039 $ 44 $ 4,083
Depreciation 1,181 11 1,192 (44) 1,148
Straight line rent (144) -- (144) -- (144)
Non-cash compensation -- 1,715 1,715 -- 1,715
Capital expenditures (24) (72) (96) -- (96)
Proceeds from sale of land 449 -- 449 -- 449
Proceeds from funded reserves 105 -- 105 -- 105
-------- ------- -------- ----- --------
Cash Available for Distribution $ 6,591 $ 669 $ 7,260 $ -- $ 7,260
======== ======= ======== ===== ========
Nine Months Ended September 30, 2001
Net Income $ 12,998 $ 2,873 $ 15,871 $ 130 $ 16,001
Depreciation 3,671 31 3,702 (130) 3,572
Straight line rent (371) -- (371) -- (371)
Non-cash compensation -- 1,744 1,744 -- 1,744
Capital expenditures (105) (152) (257) -- (257)
Proceeds from funded reserves 105 -- 105 -- 105
Proceeds from sale of surplus land (net) 449 -- 449 -- 449
-------- ------- -------- ----- --------
Cash Available for Distribution $ 16,747 $ 4,496 $ 21,243 $ -- $ 21,243
======== ======= ======== ===== ========
Three Months Ended March 31, 2002
Net Income $ 4,432 $ (378) $ 4,054 $ 43 $ 4,097
Depreciation and amortization 1,118 71 1,189 (43) 1,146
Straight line rent (54) -- (54) -- (54)
Capital expenditures (546) (2) (548) -- (548)
Proceeds from funded reserves 538 -- 538 -- 538
-------- ------- -------- ----- --------
Cash Available for Distribution $ 5,488 $ (309) $ 5,179 $ -- $ 5,179
======== ======= ======== ===== ========
Three Months Ended June 30, 2002
Net Income $ 6,443 $ 982 $ 7,425 $ 44 $ 7,469
Depreciation and amortization 1,174 37 1,211 (44) 1,167
Straight line rent (961) -- (961) -- (961)
Capital expenditures (187) (8) (195) -- (195)
Payment of deferred leasing commissions (531) -- (531) -- (531)
Proceeds from funded reserves 1,460 -- 1,460 -- 1,460
-------- ------- -------- ----- --------
Cash Available for Distribution $ 7,398 $ 1,011 $ 8,409 $ -- $ 8,409
======== ======= ======== ===== ========
F-12
Franklin Street Properties Corp.
Notes to Consolidated Financial Statements
(Unaudited)
7. Business Segments (continued)
Three Months Ended September 30, 2002
Net Income $ 6,497 $ 586 $ 7,083 $ 44 $ 7,127
Depreciation and amortization 1,215 31 1,246 (44) 1,202
Straight line rent (20) -- (20) -- (20)
Non-cash compensation -- 604 604 -- 604
Capital expenditures (335) -- (335) -- (335)
Payment of deferred leasing commissions (77) -- (77) -- (77)
Proceeds from funded reserves 810 -- 810 -- 810
-------- ------- -------- ----- --------
Cash Available for Distribution $ 8,090 $ 1,221 $ 9,311 $ -- $ 9,311
======== ======= ======== ===== ========
Nine Months Ended September 30, 2002
Net Income $ 17,372 $ 1,190 $ 18,562 $ 131 $ 18,693
Depreciation and amortization 3,507 139 3,646 (131) 3,515
Straight line rent (1,035) -- (1,035) -- (1,035)
Non-cash compensation -- 604 604 -- 604
Capital expenditures (1,068) (10) (1,078) -- (1,078)
Payment of deferred leasing commissions (608) -- (608) -- (608)
Proceeds from funded reserves 2,808 -- 2,808 -- 2,808
-------- ------- -------- ----- --------
Cash Available for Distribution $ 20,976 $ 1,923 $ 22,899 $ -- $ 22,899
======== ======= ======== ===== ========
F-13
Franklin Street Properties Corp.
Notes to Consolidated Financial Statements
(Unaudited)
7. Business Segments (continued)
The following table is a summary of other financial information by business
segment (in thousands):
Rental Investment
Operations Services Total
---------- -------- -----
Three Months Ended September 30, 2002:
Revenue $ 10,475 $ 4,518 $ 14,993
Interest Income 158 16 174
Interest Expense 297 -- 297
Capital Expenditures 335 -- 335
Total assets at September 30, 2002 247,153 5,564 252,717
Three Months Ended September 30, 2001:
Revenue $ 8,159 $ 2,920 $ 11,079
Interest Income 198 25 223
Interest Expense 247 -- 247
Capital Expenditures 26 11 37
Total assets at September 30, 2001 201,496 6,685 208,181
Nine Months Ended September 30, 2002:
Revenue $ 28,997 $10,672 $ 39,669
Interest Income 324 50 374
Interest Expense 647 -- 647
Capital Expenditures 1,068 10 1,078
Total assets at September 30, 2002 247,153 5,564 252,717
Nine Months Ended September 30, 2001:
Revenue $ 25,072 $11,456 $ 36,528
Interest Income 970 87 1,057
Interest Expense 641 -- 641
Capital Expenditures 105 152 257
Total assets at September 30, 2001 201,496 6,685 208,181
F-14
Franklin Street Properties Corp.
Notes to Consolidated Financial Statements
(Unaudited)
8. Cash Dividends
The Company declared and paid dividends as follows (in thousands, except per
share amounts):
Dividends Per Total
Quarter Paid Share Dividends
------------ ------------- ---------
First Quarter of 2002 $ .31 $ 7,622
Second Quarter of 2002 .31 7,622
Third Quarter of 2002 .31 7,635
-------
$22,879
=======
9. Income Taxes
The Company has elected to be taxed as a REIT under the Internal Revenue Code of
1986, as amended (the "Code"). As a REIT, the Company generally is entitled to a
tax deduction for dividends paid to its shareholders, thereby effectively
subjecting the distributed net income of the Company to taxation at the
shareholder level only. The Company must comply with a variety of restrictions
to maintain its status as a REIT. These restrictions include the type of income
it can earn, the type of assets it can hold, the number of shareholders it can
have and the concentration of their ownership, and the amount of the Company's
income that must be distributed annually.
One such restriction is that the Company generally cannot own more than 10% of
the voting power or value of the securities of any one issuer unless the issuer
is itself a REIT or a "taxable REIT subsidiary" ("TRS"). In the case of TRSs,
the Company's ownership of securities in all TRSs generally cannot exceed 20% of
the value of all of the Company's assets and, when considered together with
other non-real estate assets, cannot exceed 25% of the value of all of the
Company's assets. Effective January 1, 2001, a subsidiary of the Company has
elected to be treated as a TRS. As a result, it will be required to pay taxes on
its net income like any other taxable corporation.
Income taxes are recorded based on the future tax effects of the difference
between the tax and financial reporting bases of the Company's assets and
liabilities. In estimating future tax consequences, potential future events are
considered except for potential changes in income tax law or in rates.
The income tax expense reflected in the consolidated statement of income relates
only to the taxable REIT subsidiary. The expense differs from the amounts
computed by applying the Federal statutory rate of 35% to income before income
taxes as follows:
For the
Nine Months
Ended
September 30, 2002
------------------
(in thousands)
Federal income tax expense at statutory rate $ 562
Increase (decrease) in taxes resulting from:
State income taxes, net of federal impact 89
Other (234)
-------
$ 417
=======
F-15
Franklin Street Properties Corp.
Notes to Consolidated Financial Statements
(Unaudited)
9. Income Taxes (continued)
Other consists primarily of the tax benefit on cash bonuses accrued in 2001 but
paid in 2002. Due to the conversion from a partnership into a corporation the
bonus is treated as a permanent tax difference.
No deferred income taxes were provided as there were no temporary differences
between the financial reporting basis and the tax basis of the taxable REIT
subsidiary.
Prior to the REIT conversion on January 1, 2002, no provision or benefit was
made for federal or state income taxes in the consolidated financial statements
of the Partnership. Partners were required to report on their individual tax
returns their allocable share of income, gains, losses, deductions and credits
of the Partnership.
10. Employee Benefit Plan
On May 20, 2002, the stockholders of the Company approved the 2002 Stock
Incentive Plan (the "Plan"). The Plan is an equity-based incentive compensation
plan, and provides for the grants of up to a maximum of 2,000,000 shares of the
Company's common stock ("Awards"). All of the Company's employees, officers,
directors, consultants and advisors are eligible to be granted awards. Awards
under the Plan are made at the discretion of the Company's Board of Directors,
and have no vesting requirements. The Company has granted 43,998 shares under
the Plan as of September 30, 2002 to Mr. R. Scott MacPhee, an officer of the
Company. The shares were valued at $13.73 per share.
Upon granting an Award, the Company will recognize compensation cost equal to
the fair market value of the Company's common stock, as determined by the
Company's Board of Directors, on the date of the grant.
11. Subsequent Events
The Company declared a dividend of $0.31 per share on October 18, 2002 to
shareholders of record as of October 18, 2002.
F-16
Franklin Street Properties Corp.
Quarterly Report
June 30, 2002
Page
----
Index to Financial Statements
Consolidated Balance Sheets as of June 30, 2002 and
December 31, 2001 ....................................... F-18
Consolidated Statements of Income for the six months
ended June 30, 2002 and 2001 ............................ F-19
Consolidated Statements of Cash Flows for the six months
ended June 30, 2002 and 2001 ............................ F-20
Notes to the Consolidated Financial Statements .......... F-21
F-17
Franklin Street Properties Corp.
Consolidated Balance Sheets
(unaudited)
June 30, December 31,
(in thousands, except share, unit and par value amounts) 2002 2001
===========================================================================================
(REIT) (Limited Partnership)
Assets:
Real estate investments, at cost:
Land $ 39,560 $ 39,560
Buildings and improvements 154,358 153,632
Fixtures and equipment 928 920
-------------------------------------------------------------------------------------------
194,846 194,112
Less accumulated depreciation 19,542 17,419
-------------------------------------------------------------------------------------------
Real estate investments, net 175,304 176,693
Real estate assets held for syndication 22,300 --
Cash and cash equivalents 20,712 24,357
Restricted cash 498 495
Tenant rent receivables, net of allowance for
doubtful accounts of $357 and $210, respectively 2,365 1,434
Prepaid expenses and other assets, net 1,276 741
Office computers and furniture, net of accumulated
depreciation of $326 and $215, respectively 296 397
-------------------------------------------------------------------------------------------
Total assets $222,751 $ 204,117
===========================================================================================
Liabilities and Stockholders' Equity/Partners' Capital:
Liabilities:
Bank note payable $ 22,300 $ --
Accounts payable and accrued expenses 2,967 2,112
Accrued compensation 900 1,747
Tenant security deposits 499 495
-------------------------------------------------------------------------------------------
Total liabilities 26,666 4,354
-------------------------------------------------------------------------------------------
Commitments and Contingencies:
Stockholders' Equity/Partners' Capital:
Preferred Stock, $.0001 par value, 20,000,000 shares
authorized, none issued or outstanding -- --
Common Stock, $.0001 par value, 180,000,000 shares
authorized, 24,586,249 shares issued and outstanding 2 --
Additional paid-in capital 192,139 --
Limited partnership units, 23,637,750 units issued
and outstanding -- 203,348
General partnership units, 948,499 units issued and
outstanding -- (3,585)
Retained earnings 3,944 --
-------------------------------------------------------------------------------------------
Total Stockholders' Equity/Partners' Capital 196,085 199,763
-------------------------------------------------------------------------------------------
Total Liabilities and Stockholders'
Equity/Partners' Capital $222,751 $ 204,117
===========================================================================================
See accompanying notes to consolidated financial statements.
F-18
Franklin Street Properties Corp.
Consolidated Statements of Income
(Unaudited)
For the For the
Three Months Six Months
Ended Ended
June 30, June 30,
------------------------------ --------------------------------
(in thousands, except per share/unit amounts) 2002 2001 2002 2001
============================================================================================================================
(REIT) (Limited Partnership) (REIT) (Limited Partnership)
Revenue:
Rental $ 6,777 $ 6,831 $13,359 $13,319
Syndication fees 3,979 3,280 5,737 6,231
Transaction fees 3,884 3,069 5,338 5,871
Interest and other 249 316 442 862
----------------------------------------------------------------------------------------------------------------------------
Total revenue 14,889 13,496 24,876 26,283
----------------------------------------------------------------------------------------------------------------------------
Expenses:
Selling, general and administrative 1,379 1,841 2,903 3,513
Commissions 1,989 1,640 2,835 3,116
Partnership units issued as compensation -- -- -- 29
Rental operating expenses 1,607 2,022 3,197 3,433
Depreciation and amortization 1,167 1,151 2,313 2,424
Real estate taxes and insurance 786 698 1,511 1,416
Interest 291 209 350 394
----------------------------------------------------------------------------------------------------------------------------
Total expenses 7,219 7,561 13,109 14,325
----------------------------------------------------------------------------------------------------------------------------
Income before minority interests 7,670 5,935 11,767 11,958
Income applicable to minority interests -- 19 -- 40
Income before taxes 7,670 5,916 11,767 11,918
Taxes on income 201 -- 201 --
Net income $ 7,469 $ 5,916 $11,566 $11,918
============================================================================================================================
Allocation of net income to:
Common Shareholders $ 7,469 $ -- $11,566 $ --
Limited Partners -- 5,686 -- 11,455
General Partner -- 230 -- 463
----------------------------------------------------------------------------------------------------------------------------
$ 7,469 $ 5,916 $11,566 $11,918
============================================================================================================================
Weighted average number of shares/units outstanding,
respectively, basic and diluted 24,586 24,437 24,586 24,437
============================================================================================================================
Net income per share and per limited and general
partnership unit, respectively, basic and diluted $ 0.30 $ 0.24 $ 0.47 $ 0.49
============================================================================================================================
See accompanying notes to consolidated financial statements.
F-19
Franklin Street Properties Corp.
Consolidated Statements of Cash Flows
(Unaudited)
For the
Six months
Ended
June 30,
--------------------------------
(in thousands) 2002 2001
====================================================================================================
(REIT) (Limited Partnership)
Cash flows from operating activities:
Net income $ 11,566 $ 11,918
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,313 2,424
Partnership units issued as compensation -- 29
Gain on sale of land -- (11)
Minority interests -- 40
Changes in operating assets and liabilities:
Increase in restricted cash (3) (16)
(Increase) decrease in tenant rent receivables (931) 432
Increase in prepaid expenses and other assets, net (614) (83)
Increase in accounts payable and accrued expenses 854 2,516
(Decrease) increase in accrued compensation (847) 202
Increase in tenant security deposits 4 16
----------------------------------------------------------------------------------------------------
Net cash provided by operating activities 12,342 17,467
----------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets, office computers and furniture (743) (161)
Change in real estate assets held for syndication (22,300) 16,500
Proceeds received on sale of land -- 449
Proceeds from marketable securities -- 4,321
----------------------------------------------------------------------------------------------------
Net cash (used for) provided by investing activities (23,043) 21,109
----------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Distributions to stockholders/partners (15,244) (13,440)
Distributions to minority interest holders -- (51)
Proceeds from bank note payable 22,300 --
Repayments of bank note payable -- (16,500)
----------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities 7,056 (29,991)
----------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (3,645) 8,585
Cash and cash equivalents, beginning of period 24,357 13,718
----------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 20,712 $ 22,303
====================================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 350 $ 394
Income taxes -- --
See accompanying notes to consolidated financial statements.
F-20
Franklin Street Properties Corp.
Notes to Consolidated Financial Statements
(Unaudited)
1. Organization, Properties, Basis of Presentation, and Recent Accounting
Pronouncements
Organization
Franklin Street Properties Corp. (the "Company") was formed as a Massachusetts
limited partnership (the "Partnership") on February 4, 1997. Through June 30,
2001 the Partnership owned a 99% interest in FSP Investments LLC ("FSP
Investments") and a 99% interest in FSP Property Management LLC ("FSP Property
Management"). Effective July 1, 2001, a wholly-owned subsidiary of the
Partnership purchased the remaining 1% ownership interest in FSP Investments and
1% ownership interest in FSP Property Management for an aggregate purchase price
of approximately $32,000.
In December 2001, the limited partners of the Partnership approved the
conversion of the Partnership from a partnership into a corporation. The
conversion was effective January 1, 2002, and was accomplished as a tax-free
reorganization by merging the Partnership with and into a wholly owned
subsidiary, Franklin Street Properties Corp., with the subsidiary as the
surviving entity. In 2002, the Company elected to be taxed as a real estate
investment trust ("REIT").
As a part of the conversion, all of the Partnership's outstanding units were
converted on a one-for-one basis into 24,586,249 shares of common stock of the
Company. The conversion is being accounted for as a reorganization of affiliated
entities, with assets and liabilities recorded at their historical costs.
The Company operates in two business segments: rental operations and investment
services. FSP Investments provides real estate investment and broker/dealer
services. FSP Investments' services include: (i) the organization of REITs (the
"Sponsored REITs") which are syndicated through private placements; (ii) the
acquisition of real estate on behalf of the Sponsored REITs; and (iii) the sale
through best efforts of private placements of preferred stock in Sponsored
REITs.
Properties
As of June 30, 2002, December 31, 2001 and June 30, 2001, excluding assets held
for syndication, the Company owned a portfolio of four residential real estate
properties (consisting of approximately 642 apartment units) and 13 commercial
properties (consisting of approximately 1,433,200 square feet of rentable
space).
Basis of Presentation
The consolidated financial statements of the Company include all the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
balances and transactions have been eliminated. These financial statements
should be read in conjunction with the Company's financial statements and notes
thereto contained in the Company's annual report on Form 10-K for its fiscal
year ended December 31, 2001.
The accompanying interim financial statements are unaudited; however, the
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information and in conjunction with the rules and regulations of the Securities
and Exchange Commission. Accordingly, they do not include all of the disclosures
required by accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of management, all
adjustments (consisting solely of normal recurring matters) necessary for a fair
presentation of the financial statements for these interim periods have been
included. The results of operations for the interim periods are not necessarily
indicative of the results to be obtained for other interim periods or for the
full fiscal year.
Certain prior-year balances have been reclassified in order to conform to the
current-year presentation.
Recent Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations," which addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This Statement requires that
the fair value of a liability for an asset retirement obligation be recognized
in the period in which it is incurred if a reasonable estimate of the fair value
can be made. The associated asset retirement costs are capitalized as part of
the carrying amount of the long-lived asset. This Statement will be effective at
the beginning of 2003. The Company has reviewed the provisions of SFAS 143 and
believes that the impact of adoption will not be material to its financial
position, results of operations and cash flows.
F-21
Franklin Street Properties Corp.
Notes to Consolidated Financial Statements
(Unaudited)
Recent Accounting Pronouncements (continued)
In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets". This Statement supersedes SFAS No. 121 and
requires that long-lived assets that are to be disposed of by sale be measured
at the lower of book value or fair value less costs to sell. SFAS No. 144
retains the fundamental provisions of SFAS 121 for (a) recognition and
measurement of the impairment of long-lived assets to be held and used, and (b)
measurement of long-lived assets to be disposed of by sale, but broadens the
definition of what constitutes a discontinued operation and how the results of a
discontinued operation are to be measured and presented. This Statement was
effective at the beginning of 2002. With the exception of reclassifying the
operations of certain real estate assets considered "held for sale" (and for
which no significant continuing involvement exists) to "Discontinued operations,
net of tax" in the consolidated statement of income, the impact of adoption is
not expected to have a material impact on the Company's financial position and
cash flows. The Company has one real estate asset that it considers "held for
syndication" at June 30, 2002.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FAS Nos. 4, 44, and
64, Amendment of FAS 13, and Technical Corrections". This Statement rescinds
FASB No. 4, "Reporting Gains and Losses from Extinguishment of Debt", and an
amendment of that Statement, FASB No. 64, "Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements". This Statement amends FASB No. 13,
"Accounting for Leases". This Statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings or
describe their applicability under changed conditions. This statement will be
effective for the Company's fiscal year ending December 31, 2003. The Company
has reviewed the provisions of FASB 145 and believes that the impact of adoption
will not be material to its financial position, results of operations and cash
flows.
2. Investment Services Activity
During the three months ended June 30, 2002, two Sponsored REITs, FSP Merrywood
Corp. and FSP Plaza Ridge Corp., acquired one apartment building in Katy, Texas
and one office building in Herndon, Virginia, respectively. The Company sold on
a best efforts basis, through private placements, approximately $60.6 million in
preferred stock in the Sponsored REITs. The Company recorded approximately
$4.0 million and $3.9 million of Syndication fee and Transaction fee revenues,
respectively, as a result of these transactions.
3. Real Estate Assets Held For Syndication
Real estate assets held for syndication represents the assets of a Sponsored
REIT which was owned 99% by the Company and 1% by an officer of the Company at
June 30, 2002. The Company intends to syndicate, on a best efforts basis,
through a private placement, approximately $27.5 million in preferred stock in
the Sponsored REIT. Following the anticipated syndication of the preferred stock
in the third quarter of 2002, the Company will own 100% of the common stock in
the sponsored REIT, which represents less than a 1% ownership interest.
Additionally, the Company anticipates earning a fee of approximately 1% of gross
rental revenue, as defined, for services rendered in connection with the ongoing
asset management of the property. Accordingly, as the Company anticipates having
significant continuing involvement following the syndication, as defined in FAS
144, revenues and expenses from the syndication will be recorded in continuing
operations.
The assets owned by the Sponsored REIT, FSP Park Ten Corp., were purchased June
27, 2002, for a price of $22,300,000, and are located in Houston, Texas and are
comprised principally of land and an office building.
The results of operations for the FSP Park Ten Corp. for the three and six
months ended June 30, 2002 were not material.
F-22
Franklin Street Properties Corp.
Notes to Consolidated Financial Statements
(Unaudited)
4. Related Party Transactions and Investments in Non-consolidated Entities
The Company has arranged for Citizens Bank to provide a line of credit for the
Company's senior officers in the maximum aggregate amount of $3 million. The
borrowings under this line of credit are for the purpose of paying income taxes
on equity interests in the Company issued to such senior officers as
compensation. Loans under this line of credit have a term of one year and bear
interest at the bank's prime rate plus 50 basis points. Each borrower has
secured the loan by pledging shares of the Company's Common Stock having an
aggregate fair market value at the time of the loan of no less than twice the
principal amount of the loan. Borrowings of $1,625,000 were outstanding to
senior officers of the Company at June 30, 2002, March 31, 2002 and December 31,
2001. The Company has agreed to purchase from Citizens Bank any such loan on
which the borrower defaults. Following the purchase of the loan, the Company
would have the same rights as Citizens Bank, including the right to foreclose on
the pledged stock or to recover the outstanding amount of the loan from the
officer/borrower.
The Company typically retains a non-controlling common stock ownership interest
in Sponsored REITs that it has organized. These ownership interests have
virtually no economic benefit or risk. At June 30, 2002, December 31, 2001, and
June 30, 2001 the Company had ownership interests in fourteen, ten and five
Sponsored REITs, respectively. During 1999 and 2000, the Company acquired 100%
of the non-owned interests of 17 limited partnerships (through a series of
mergers) that it had previously organized. Neither the Company nor any other
related entity has an obligation to acquire the non-owned interests in any
previously syndicated Sponsored REIT.
Summarized financial information for the Sponsored REITs is as follows:
June 30, December 31,
(unaudited) 2002 2002
--------- ------------
(in thousands)
Balance Sheet Data:
Real estate, net $ 290,718 $ 222,232
Other assets 29,460 19,048
Total liabilities 7,541 6,755
Shareholders' equity $ 312,637 $ 234,525
For the three months ended For the six months ended
June 30, June 30,
2002 2001 2002 2001
-------- -------- -------- --------
(in thousands)
Operating Data:
Rental revenues $ 10,027 $ 4,080 $ 18,704 $ 6,509
Other revenues (3) 98 217 172
Operating and maintenance expenses 2,274 1,479 6,786 2,079
Depreciation and amortization 1,306 322 2,602 680
Interest expense and commitment fees 4,039 133 4,044 1,239
-------- -------- -------- --------
Net income $ 2,405 $ 2,244 $ 5,489 $ 2,683
======== ======== ======== ========
The Company provided syndication and real estate acquisition advisory services
for the Sponsored REITs in 2002 and 2001. For the three months ended June 30,
2002 and 2001, respectively, syndication fees were approximately $4.0 million
and $3.3 million, and transaction fees were approximately $3.9 million and $3.1
million. For the six months ended June 30, 2002 and 2001, respectively,
syndication fees were approximately $5.7 million and $6.2 million, and
transaction fees were approximately $5.3 million and $5.9 million.
F-23
Franklin Street Properties Corp.
Notes to Consolidated Financial Statements
(Unaudited)
4. Related Party Transactions and Investments in Non-consolidated Entities
(continued)
Asset management fee income charged to the Sponsored REITs amounted to
approximately $80,000 and $30,000 for the three months ended June 30, 2002 and
2001, respectively, and $10,000 and $50,000 for six months ended June 30, 2002
and 2001, respectively, and is included in "Interest and other income" in the
Consolidated Statements of Income. Management fees range from 1% to 5% of
collected rents and the applicable contracts are cancelable with 30 days'
notice.
For the six months ended June 30, 2002, the Company received $15,489 of dividend
income from one of the Sponsored REITs. There were no dividends for the
corresponding period in 2001.
5. Bank note payable
On June 30, 2002, $22.3 million was outstanding under the Company's $50 million
unsecured line of credit (the "Loan Agreement"). Borrowings under the Loan
Agreement bear interest at a rate of either the bank's base rate or a variable
LIBOR rate, as defined, which was 4.75% per annum at June 30, 2002. There were
no borrowings outstanding under the Loan Agreement at March 31, 2002, December
31, 2001 or at June 30, 2001. The Loan Agreement matures on February 23, 2003.
6. Net Income Per Share/Partnership Unit
The Company follows SFAS No. 128, "Earnings per Share," which specifies the
computation, presentation and disclosure requirements for the Company's net
income per share/unit. Basic net income per share/unit is computed by dividing
net income by the weighted average number of Company shares/units outstanding
during the period. Diluted net income per share/unit reflects the potential
dilution that could occur if securities or other contracts to issue shares/units
were exercised or converted into shares/units. There were no potential dilutive
shares/units outstanding at June 30, 2002 and 2001.
The denominator used for calculating basic and diluted net income per share/unit
is as follows:
For the Three Months Ended For the Six Months Ended
June 30, June 30,
------------------------ ------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Weighted average number of shares/units
outstanding:
Common shares 24,586,249 -- 24,586,249 --
Limited partnership units -- 23,488,618 -- 23,488,409
General partnership units -- 948,499 -- 948,499
---------- ---------- ---------- ----------
24,586,249 24,437,117 24,586,249 24,436,908
========== ========== ========== ==========
F-24
Franklin Street Properties Corp.
Notes to Consolidated Financial Statements
(Unaudited)
7. Business Segments
The Company operates in two business segments: rental operations and investment
services (including real estate acquisition, financing and broker/dealer
services). The Company has identified these segments because this discrete
information is the basis upon which management makes decisions regarding
resource allocation and performance assessment. The accounting policies of the
reportable segments are the same as those described in the "Significant
Accounting Policies" set forth in Note 2 to the Company's audited financial
statements included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2001. The Company's segments are located in the United States
of America.
The Company evaluates the performance of its reportable segments based on Cash
Available for Distribution ("CAD") as management believes that CAD represents
the most accurate measure of the reportable segment's activity and is the basis
for distributions paid to equity holders. The Company defines CAD as: net income
as computed in accordance with accounting principles generally accepted in the
United States of America ("GAAP"); plus certain non-cash items included in the
computation of net income (depreciation and amortization, certain non-cash
compensation expenses and straight line rent adjustments); plus Investment
services proceeds received from controlled partnerships; plus the net proceeds
from the sale of land; less purchases of property and equipment from operating
cash. Purchases of real estate, deferred leasing commissions or other items paid
from cash reserves at the acquisition date of the property are not reflected in
the computation of CAD. CAD should not be considered an alternative to net
income (determined in accordance with GAAP), as an indicator of the Company's
financial performance, cash flows from operating activities (determined in
accordance with GAAP), nor as a measure of the Company's liquidity, nor is it
necessarily indicative of sufficient cash flow to fund all of the Company's
needs. Other real estate companies may define CAD in a different manner. It is
at the Company's discretion to retain a portion of CAD for operational needs.
Cash Available for Distribution by business segment is as follows (in
thousands):
Per
Consolidated
Rental Investment Intercompany Statement of
Operations Services Total Eliminations Income
---------- ---------- ------- ------------ ------------
Three Months Ended March 31, 2001
Net Income $ 4,059 $ 1,900 $ 5,959 $ 43 $ 6,002
Depreciation and amortization 1,306 10 1,316 (43) 1,273
Non-cash compensation expense -- 29 29 -- 29
Straight line rent (66) -- (66) -- (66)
Purchase of fixed assets (21) (55) (76) -- (76)
------- ------- ------- ------- -------
Cash Available for Distribution $ 5,278 $ 1,884 $ 7,162 $ -- $ 7,162
======= ======= ======= ======= =======
Three Months Ended June 30, 2001
Net Income $ 3,915 $ 1,958 $ 5,873 $ 43 $ 5,916
Depreciation and amortization 1,184 10 1,194 (43) 1,151
Non-cash compensation expense -- -- -- -- --
Straight line rent (161) -- (161) -- (161)
Purchase of fixed assets (60) (25) (85) -- (85)
------- ------- ------- ------- -------
Cash Available for Distribution $ 4,878 $ 1,943 $ 6,821 $ -- $ 6,821
======= ======= ======= ======= =======
F-25
Franklin Street Properties Corp.
Notes to Consolidated Financial Statements
(Unaudited)
7. Business Segments (continued)
Cash Available for Distribution by business segment is as follows (in
thousands):
Per
Consolidated
Rental Investment Intercompany Statement of
Operations Services Total Eliminations Income
---------- ---------- ------- ------------ ------------
Six Months Ended June 30, 2001
Net Income $ 7,974 $ 3,858 $ 11,832 $ 86 $ 11,918
Depreciation and amortization 2,490 20 2,510 (86) 2,424
Non-cash compensation expense -- 29 29 -- 29
Straight line rent (227) -- (227) -- (227)
Purchase of fixed assets (81) (80) (161) -- (161)
-------- -------- -------- -------- --------
Cash Available for Distribution $ 10,156 $ 3,827 $ 13,983 $ -- $ 13,983
======== ======== ======== ======== ========
Three Months Ended March 31, 2002
Net Income $ 4,432 $ (378) $ 4,054 $ 43 $ 4,097
Depreciation and amortization 1,118 71 1,189 (43) 1,146
Straight line rent (54) -- (54) -- (54)
Purchase of fixed assets (547) (1) (548) -- (548)
Proceeds from funded reserves 538 -- 538 -- 538
-------- -------- -------- -------- --------
Cash Available for Distribution $ 5,487 $ (308) $ 5,179 $ -- $ 5,179
======== ======== ======== ======== ========
Three Months Ended June 30, 2002
Net Income $ 7,067 $ 982 $ 8,049 $ (580) $ 7,469
Depreciation and amortization 1,174 37 1,211 (44) 1,167
Straight line rent (961) -- (961) -- (961)
Purchase of fixed assets (186) (9) (195) -- (195)
Increase in leasing commissions (531) -- (531) -- (531)
Proceeds from funded reserves 1,460 -- 1,460 -- 1,460
-------- -------- -------- -------- --------
Cash Available for Distribution $ 8,023 $ 1,010 $ 9,033 $ (624) $ 8,409
======== ======== ======== ======== ========
Six Months Ended June 30, 2002
Net Income $ 11,499 $ 604 $ 12,103 $ (537) $ 11,566
Depreciation and amortization 2,292 108 2,400 (87) 2,313
Straight line rent (1,015) -- (1,015) -- (1,015)
Purchase of fixed assets (733) (10) (743) -- (743)
Increase in leasing commissions (531) -- (531) -- (531)
Proceeds from funded reserves 1,998 -- 1,998 -- 1,998
-------- -------- -------- -------- --------
Cash Available for Distribution $ 13,510 $ 702 $ 14,212 $ (624) $ 13,588
======== ======== ======== ======== ========
F-26
Franklin Street Properties Corp.
Notes to Consolidated Financial Statements
(Unaudited)
7. Business Segments (continued)
The following table is a summary of other financial information by business
segment (in thousands):
Rental Investment
Operations Services Total
---------- -------- -----
Three Months Ended June 30, 2002:
Revenue $ 10,570 $ 3,960 $ 14,530
Interest Income 340 19 359
Interest Expense 291 -- 291
Capital expenditures 187 8 195
Total assets at June 30, 2002 $218,232 $ 4,519 $222,751
Three Months Ended June 30, 2001:
Revenue $ 11,057 $ 3,280 $ 13,180
Interest Income 297 -- 316
Interest Expense 209 -- 209
Capital expenditures 58 27 85
Total assets at June 30, 2001 $197,920 $ 6,733 $204,653
Six Months Ended June 30, 2002:
Revenue $ 18,697 $ 5,737 $ 24,434
Interest Income 407 35 442
Interest Expense 350 -- 350
Capital expenditures 733 10 743
Total assets at June 30, 2002 $218,232 $ 4,519 $222,751
Six Months Ended June 30, 2001:
Revenue $ 19,189 $ 6,231 $ 25,420
Interest Income 799 62 863
Interest Expense 394 -- 394
Capital expenditures 79 82 161
Total assets at June 30, 2001 $197,920 $ 6,733 $204,653
8. Cash Dividends
The Company declared and paid dividends as follows (in thousands, except per
share amounts):
Dividends Per Total
Quarter Paid Share Dividends
---------------------- ------------- ---------
First Quarter of 2002 $ .31 $ 7,622
Second Quarter of 2002 $ .31 7,622
--------
$ 15,244
========
F-27
Franklin Street Properties Corp.
Notes to Consolidated Financial Statements
(Unaudited)
9. Income Taxes.
The Company has elected to be taxed as a REIT under the Internal Revenue Code of
1986, as amended (the "Code"). As a REIT, the Company generally is entitled to a
tax deduction for dividends paid to its shareholders, thereby effectively
subjecting the distributed net income of the Company to taxation at the
shareholder level only. The Company must comply with a variety of restrictions
to maintain its status as a REIT. These restrictions include the type of income
it can earn, the type of assets it can hold, the number of shareholders it can
have and the concentration of their ownership, and the amount of the Company's
income that must be distributed annually.
One such restriction is that the Company generally cannot own more than 10% of
the voting power or value of the securities of any one issuer unless the issuer
is itself a REIT or a "taxable REIT subsidiary" ("TRS"). In the case of TRSs,
the Company's ownership of securities in all TRSs generally cannot exceed 20% of
the value of all of the Company's assets and, when considered together with
other non-real estate assets, cannot exceed 25% of the value of all of the
Company's assets. Effective January 1, 2001, a subsidiary of the Company has
elected to be treated as a TRS. As a result, it will be required to pay taxes on
its net income like any other taxable corporation.
Income taxes are recorded based on the future tax effects of the difference
between the tax and financial reporting bases of the Company's assets and
liabilities. In estimating future tax consequences, potential future events are
considered except for potential changes in income tax law or in rates.
The income tax expense reflected in the consolidated statement of income relates
only to the taxable REIT subsidiary. The expense differs from the amounts
computed by applying the Federal statutory rate of 35% to income before income
taxes as follows:
For the
Six Months
Ended
June 30, 2002
-------------
(in thousands)
Federal income tax expense at statutory rate $ 282
Increase (decrease) in taxes resulting from:
State income taxes, net of federal impact 48
Other (129)
------
$ 201
======
Other consists primarily of the tax benefit on cash bonuses accrued in 2001 but
paid in 2002. Due to the conversion from a partnership into a corporation the
bonus is treated as a permanent tax difference.
No deferred income taxes were provided as there were no temporary differences
between the financial reporting basis and the tax basis of the taxable REIT
subsidiary.
Prior to the REIT conversion on January 1, 2002, no provision or benefit was
made for federal or state income taxes in the consolidated financial statements
of the Partnership. Partners were required to report on their individual tax
returns their allocable share of income, gains, losses, deductions and credits
of the Partnership.
10. Employee Benefit Plan
On May 20, 2002, the stockholders of the Company approved the 2002 Stock
Incentive Plan (the "Plan"). The Plan is an equity-based incentive compensation
plan, and provides for the grants of up to a maximum of 2,000,000 shares of the
Company's common stock ("Awards"). All of the Company's employees, officers,
directors, consultants and advisors are eligible to be granted awards. Awards
under the Plan are made at the discretion of the Company's Board of Directors,
and have no vesting requirements. The Company has not granted any Awards under
the Plan as of June 30, 2002. Upon granting an Award, the Company will recognize
compensation cost equal to the fair market value of the Company's common stock,
as determined by the Company's Board of Directors, on the date of the grant.
F-28
Franklin Street Properties Corp.
Notes to Consolidated Financial Statements
(Unaudited)
11. Subsequent Events
The Company declared a dividend of $0.31 per share on July 19, 2002 to
shareholders of record as of July 19, 2002.
On July 19, 2002, the Company granted 43,999 shares of stock in accordance with
the Plan to Mr. R. Scott MacPhee, an officer of the Company. On July 30, 2002,
Mr. MacPhee borrowed $453,000 under the line of credit (as described in Note 4)
from Citizen's Bank, for payment of income taxes, bringing the total amount
outstanding under the line of credit by all officers to $2,078,000.
F-29
Franklin Street Properties Corp.
Quarterly Report
March 31, 2002
Page
----
Index to Financial Statements
Consolidated Balance Sheets as of March 31, 2002 and
December 31, 2001 ....................................... F-31
Consolidated Statements of Income for the three months
ended March 31, 2002 and 2001 ........................... F-32
Consolidated Statements of Cash Flows for the three
months ended March 31, 2002 and 2001 .................... F-33
Notes to the Consolidated Financial Statements .......... F-34
F-30
Franklin Street Properties Corp.
Consolidated Balance Sheets
(unaudited)
March 31, December 31,
(in thousands, except share, unit and par value amounts) 2002 2001
=========================================================================================================
(REIT) (Limited Partnership)
Assets:
Real estate investments, at cost:
Land $ 39,560 $ 39,560
Buildings and improvements 154,170 153,632
Fixtures and equipment 928 920
---------------------------------------------------------------------------------------------------------
194,658 194,112
Less accumulated depreciation 18,449 17,419
---------------------------------------------------------------------------------------------------------
Real estate investments, net 176,209 176,693
Cash and cash equivalents 19,769 24,357
Restricted cash 466 495
Tenant rent receivables, net of allowance for doubtful accounts of
$210 and $210, respectively 1,482 1,434
Prepaid expenses and other assets, net 1,045 741
Office computers and furniture, net of accumulated
depreciation of $288 and $215, respectively 326 397
---------------------------------------------------------------------------------------------------------
Total assets $199,297 $204,117
=========================================================================================================
Liabilities and Stockholders' Equity/Partners' Capital:
Liabilities:
Accounts payable and accrued expenses $ 2,143 $ 2,112
Accrued compensation 450 1,747
Tenant security deposits 466 495
---------------------------------------------------------------------------------------------------------
Total liabilities 3,059 4,354
---------------------------------------------------------------------------------------------------------
Commitments and Contingencies:
Stockholders' Equity/Partners' Capital:
Preferred Stock, $.0001 par value, 20,000,000 shares
authorized, none issued or outstanding $ -- $ --
Common Stock, $.0001 par value, 180,000,000 shares
authorized, 24,586,249 shares issued and outstanding 2 --
Additional paid-in capital 192,139 --
Limited partnership units, 23,637,750 units issued
and outstanding -- 203,348
General partnership units, 948,499 units issued and
outstanding -- (3,585)
Retained earnings 4,097 --
---------------------------------------------------------------------------------------------------------
Total Stockholders' Equity/Partners' Capital 196,238 199,763
---------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity/Partners' Capital $199,297 $204,117
=========================================================================================================
See accompanying notes to consolidated financial statements.
F-31
Franklin Street Properties Corp.
Consolidated Statements of Income
(Unaudited)
For the
Three Months
Ended
March 31,
---------------------
(in thousands, except per share/unit amounts) 2002 2001
=================================================================================================
(REIT) (Limited Partnership)
Revenues:
Rental $ 6,582 $ 6,488
Syndication fees 1,758 2,951
Transaction fees 1,454 2,802
Interest and other 193 546
-------------------------------------------------------------------------------------------------
Total revenue 9,987 12,787
-------------------------------------------------------------------------------------------------
Expenses:
Selling, general and administrative 1,525 1,672
Commissions 846 1,476
Partnership units issued as compensation - 29
Rental operating expenses 1,589 1,411
Depreciation and amortization 1,146 1,273
Real estate taxes and insurance 725 718
Interest 59 185
-------------------------------------------------------------------------------------------------
Total expenses 5,890 6,764
-------------------------------------------------------------------------------------------------
Income before minority interests 4,097 6,023
Income applicable to minority interests -- 21
Net income $ 4,097 $ 6,002
=================================================================================================
Allocation of net income to:
Common Shareholders $ 4,097 $ --
Limited Partners -- 5,769
General Partner -- 233
-------------------------------------------------------------------------------------------------
$ 4,097 $ 6,002
=================================================================================================
Weighted average number of shares/units outstanding,
basic and diluted, respectively 24,586 24,436
=================================================================================================
Net income per share and per limited and general
partnership unit, respectively, basic and diluted $ .17 $ .25
=================================================================================================
See accompanying notes to consolidated financial statements.
F-32
Franklin Street Properties Corp.
Consolidated Statements of Cash Flows
(Unaudited)
For the
Three Months
Ended
March 31,
------------------------
(in thousands) 2002 2001
=========================================================================================================
(REIT) (Limited Partnership)
Cash flows from operating activities:
Net income $ 4,097 $ 6,002
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,146 1,273
Partnership units issued as compensation -- 29
Minority interests -- 21
Changes in operating assets and liabilities:
Restricted cash 29 (10)
Tenant rent receivables (48) 232
Prepaid expenses and other assets, net (347) (178)
Accounts payable and accrued expenses 31 725
Accrued compensation (1,297) 517
Tenant security deposits (29) 10
---------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 3,582 8,621
---------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Change in investment in unconsolidated joint ventures -- 16,500
Purchase of real estate assets, office computers and furniture (548) (76)
Proceeds from marketable securities -- 2,370
---------------------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities (548) 18,794
---------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Distributions to stockholders/partners (7,622) (6,596)
Distributions to minority interest holders -- (18)
Repayments of bank note payable -- (16,500)
---------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities (7,622) (23,114)
---------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (4,588) 4,301
Cash and cash equivalents, beginning of period 24,357 13,718
---------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $19,769 $ 18,019
=========================================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 59 $ 185
Taxes -- --
See accompanying notes to consolidated financial statements.
F-33
Franklin Street Properties Corp.
Notes to Consolidated Financial Statements
(Unaudited)
1. Organization, Basis of Presentation, Properties and Recent Accounting
Pronouncements
Organization
Franklin Street Properties Corp. (the "Company") was formed as a Massachusetts
limited partnership (the "Partnership") on February 4, 1997. Through June 30,
2001 the Partnership owned a 99% interest in FSP Investments LLC ("FSP
Investments") and a 99% interest in FSP Property Management LLC ("FSP Property
Management"). Effective July 1, 2001, a wholly-owned subsidiary of the
Partnership purchased the remaining 1% ownership interest in FSP Investments and
1% ownership interest in FSP Property Management for an aggregate purchase price
of approximately $32,000.
In December 2001, the limited partners of the Partnership approved the
conversion of the Partnership from a partnership into a corporation. In 2002 the
Company elected to be taxed as a real estate investment trust ("REIT"). The
conversion was effective January 1, 2002, and was accomplished as a tax-free
reorganization by merging the Partnership with and into a wholly owned
subsidiary, Franklin Street Properties Corp., with the subsidiary as the
surviving entity.
As a part of the conversion, all of the Partnership's outstanding units were
converted on a one-for-one basis into 24,586,249 shares of common stock of the
Company. The conversion is being accounted for as a reorganization of affiliated
entities, with assets and liabilities recorded at their historical costs.
The Company operates in two business segments: rental operations and investment
services. FSP Investments provides real estate investment and broker/dealer
services. FSP Investments' services include: (i) the organization of REITs (the
"Sponsored REITs") which are syndicated through private placements; (ii) the
acquisition of real estate on behalf of the Sponsored REITs; and (iii) the sale
through best efforts of private placements of preferred stock in Sponsored
REITs.
Properties
As of March 31, 2002, December 31, 2001 and March 31, 2001 the Company owned a
portfolio of four residential real estate properties (consisting of
approximately 642 apartment units) and 13 commercial properties (consisting of
approximately 1,433,300 square feet of rentable space).
Basis of Presentation
The consolidated financial statements of the Company include all the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
balances and transactions have been eliminated. These financial statements
should be read in conjunction with the Company's financial statements and notes
thereto contained in the Company's annual report on Form 10-K for its fiscal
year ended December 31, 2001.
The accompanying interim financial statements are unaudited; however, the
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information and in conjunction with the rules and regulations of the Securities
and Exchange Commission. Accordingly, they do not include all of the disclosures
required by accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of management, all
adjustments (consisting solely of normal recurring matters) necessary for a fair
presentation of the financial statements for these interim periods have been
included. The results of operations for the interim periods are not necessarily
indicative of the results to be obtained for other interim periods or for the
full fiscal year.
Certain prior-year balances have been reclassified in order to conform to the
current-year presentation.
Recent Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations," which addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This Statement requires that
the fair value of a liability for an asset retirement obligation be recognized
in the period in which it is incurred if a reasonable estimate of the fair value
can be made. The associated asset retirement costs are capitalized as part of
the carrying amount of the long-lived asset. This Statement will be effective at
the beginning of
F-34
Franklin Street Properties Corp.
Notes to Consolidated Financial Statements
(Unaudited)
Recent Accounting Pronouncements (continued)
2003. The Company has reviewed the provisions of SFAS 143 and believes that the
impact of adoption will not be material to its financial position, results of
operations and cash flows.
In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets". This Statement supersedes SFAS No. 121 and
requires that long-lived assets that are to be disposed of by sale be measured
at the lower of book value or fair value less costs to sell. SFAS No. 144
retains the fundamental provisions of SFAS 121 for (a) recognition and
measurement of the impairment of long-lived assets to be held and used, and (b)
measurement of long-lived assets to be disposed of by sale, but broadens the
definition of what constitutes a discontinued operation and how the results of a
discontinued operation are to be measured and presented. This Statement was
effective at the beginning of 2002. With the exception of reclassifying the
operations of certain real estate assets considered "held for sale" (and for
which no significant continuing involvement exists) to "Discontinued operations,
net of tax" in the consolidated statement of income, the impact of adoption is
not expected to have a material impact on the Company's financial position and
cash flows. The Company does not have any real estate assets that it considers
"held for sale" at March 31, 2002.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FAS Nos. 4, 44, and
64, Amendment of FAS 13, and Technical Corrections". This Statement rescinds
FASB No. 4, "Reporting Gains and Losses from Extinguishment of Debt", and an
amendment of that Statement, FASB No. 64, "Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements". This Statement amends FASB No. 13,
"Accounting for Leases". This Statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings or
describe their applicability under changed conditions. This statement will be
effective for the Company's fiscal year ending December 31, 2003. The Company
has reviewed the provisions of FASB 145 and believes that the impact of adoption
will not be material to its financial position, results of operations and cash
flow.
2. Investment Service Activity
During the quarter ended March 31, 2002, a Sponsored REIT acquired an office
building in Chesterfield, Missouri. The Company sold on a best efforts basis
through a private placement approximately $25 million in preferred stock in the
Sponsored REIT. The Company recorded approximately $1,758,000 and $1,454,000 of
Syndication fee and Transaction fee revenues, respectively, as a result of this
transaction.
F-35
Franklin Street Properties Corp.
Notes to Consolidated Financial Statements
(Unaudited)
3. Related Party Transactions and Investments in Non-consolidated Entities
The Company typically retains a non-controlling common stock ownership interest
in Sponsored REITs that it has organized. These ownership interests have
virtually no economic benefit or risk. At March 31, 2002, December 31, 2001, and
March 31, 2001 the Company had ownership interests in eleven, ten and five
Sponsored REITs, respectively. During 1999 and 2000, the Company acquired 100%
of the non-owned interests of 17 limited partnerships (through a series of
mergers) that it had previously organized. Neither the Company nor any other
related entity has an obligation to acquire the non-owned interests in any
previously syndicated Sponsored REIT.
Summarized financial information for the Sponsored REITs is as follows:
March 31, December 31,
(unaudited) 2002 2001
----------- ------------
(in thousands)
Balance Sheet Data:
Real estate, net $ 241,521 $ 222,232
Other assets 23,040 19,048
Total liabilities 4,286 6,755
Shareholders' equity 260,275 234,525
For the Three Months Ended
March 31,
2002 2001
----------- ------------
(in thousands)
Operating Data:
Rental revenues $ 8,677 $ 2,429
Other revenues 220 74
Operating and maintenance expenses 4,512 600
Depreciation and amortization 1,296 358
Interest expense 5 1,106
Net income 3,084 439
The Company provided syndication and real estate acquisition advisory services
for the Sponsored REITs in 2002 and 2001. Syndication fees were approximately
$1,758,000 and $2,951,000, and transaction fees were approximately $1,454,000
and $2,802,000 for the three months ended March 31, 2002, and 2001,
respectively.
Management fee income charged to the Sponsored REITs amounted to approximately
$59,000 and $29,000 for the three months ended March 31, 2002 and 2001,
respectively, and is included in "Interest and other income" in the Consolidated
Statements of Income. Management fees range from 1% to 5% of collected rents and
the applicable contracts are cancelable with 30 days' notice.
There were no dividends received or income recognized from the Sponsored REITs
for the three months ended March 31, 2002 or 2001.
F-36
Franklin Street Properties Corp.
Notes to Consolidated Financial Statements
(Unaudited)
4. Net Income Per Share/Partnership Unit
The Company follows SFAS No. 128, "Earnings per Share," which specifies the
computation, presentation and disclosure requirements for the Company's net
income per share/ unit. Basic net income per share/unit is computed by dividing
net income by the weighted average number of Company shares/units outstanding
during the period. Diluted net income per share/unit reflects the potential
dilution that could occur if securities or other contracts to issue shares/units
were exercised or converted into shares/units. There were no potential dilutive
shares/units outstanding at March 31, 2002 and 2001.
The denominator used for calculating basic and diluted net income per share/unit
is as follows:
For the
Three Months
Ended
March 31,
-----------------------
2002 2001
Weighted average number of shares/units outstanding:
Common shares 24,586,249 --
Limited partnership units -- 23,487,988
General partnership units -- 948,499
---------- ----------
24,586,249 24,436,487
========== ==========
5. Business Segments
The Company operates in two business segments: rental operations and investment
services (including real estate acquisition, financing and broker/dealer
services). The Company has identified these segments because this discrete
information is the basis upon which management makes decisions regarding
resource allocation and performance assessment. The accounting policies of the
reportable segments are the same as those described in the "Significant
Accounting Policies" set forth in Note 2 to the Company's audited financial
statements included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2001. The Company's segments are located in the United States
of America.
The Company evaluates the performance of its reportable segments based on Cash
Available for Distribution ("CAD") as management believes that CAD represents
the most accurate measure of the reportable segment's activity and is the basis
for distributions paid to equity holders. The Company defines CAD as: net income
as computed in accordance with accounting principles generally accepted in the
United States of America ("GAAP"); plus certain non-cash items included in the
computation of net income (depreciation and amortization, certain non-cash
compensation expenses and straight line rent adjustments); plus Investment
services proceeds received from controlled partnerships; plus the net proceeds
from the sale of land; less purchases of property and equipment from operating
cash. Purchases of real estate assets from cash reserves established at the
acquisition date of the property are not reflected in the computation of CAD.
CAD should not be considered an alternative to net income (determined in
accordance with GAAP), as an indicator of the Company's financial performance,
cash flows from operating activities (determined in accordance with GAAP), nor
as a measure of the Company's liquidity, nor is it necessarily indicative of
sufficient cash flow to fund all of the Company's needs. Other real estate
companies may define CAD in a different manner.
F-37
Franklin Street Properties Corp.
Notes to Consolidated Financial Statements
(Unaudited)
5. Business Segments (continued)
CAD by business segment is as follows (in thousands):
Per
Consolidated
Rental Investment Intercompany Statement of
Three Months Ended March 31, 2002 Operations Services Total Eliminations Income
---------- -------- ----- ------------ ------
Net Income $ 4,432 $ (378) $ 4,054 $ 43 $ 4,097
Depreciation and amortization 1,118 71 1,189 (43) 1,146
Straight line rent (54) -- (54) -- (54)
Purchase of fixed assets from operating cash (9) (1) (10) -- (10)
------- ------- ------- ------- -------
Cash Available for Distribution $ 5,487 $ (308) $ 5,179 $ -- $ 5,179
======= ======= ======= ======= =======
Per
Consolidated
Rental Investment Intercompany Statement of
Three Months Ended March 31, 2001 Operations Services Total Eliminations Income
---------- -------- ----- ------------ ------
Net Income $ 4,059 $ 1,900 $ 5,959 $ 43 $ 6,002
Depreciation and amortization 1,306 10 1,316 (43) 1,273
Non-cash compensation expense -- 29 29 -- 29
Straight line rent (66) -- (24) -- (66)
Purchase of fixed assets from operating cash (21) (55) (76) -- (76)
------- ------- ------- ------- -------
Cash Available for Distribution $ 5,278 $ 1,884 $ 7,162 $ -- $ 7,162
======= ======= ======= ======= =======
The following table is a summary of other financial information by business
segment:
Rental Investment
Operations Services Total
---------- ------------ --------
(in thousands)
Three Months Ended March 31, 2002:
Revenue $ 8,127 $1,777 $ 9,904
Interest Income 67 16 83
Interest Expense 59 -- 59
Capital expenditures 546 2 548
Total assets at March 31, 2002 196,365 2,932 199,297
Three Months Ended March 31, 2001:
Revenue $ 8,132 $4,119 $ 12,251
Interest Income 502 34 536
Interest Expense 185 -- 185
Capital expenditures 21 55 76
Total assets at March 31, 2001 199,358 5,554 204,914
F-38
Franklin Street Properties Corp.
Notes to Consolidated Financial Statements
(Unaudited)
5. Business Segments (continued)
Cash Distributions
The Company declared and paid aggregate dividends of $0.31 per common share (for
a total of $7,622,000) during the three months ended March 31, 2002.
6. Income Taxes.
The Company has elected to be taxed as a REIT under the Internal Revenue Code of
1986 (the "Code"), as amended. As a REIT, the Company generally is entitled to a
tax deduction for dividends paid to its shareholders, thereby effectively
subjecting the distributed net income of the Company to taxation at the
shareholder level only. The Company must comply with a variety of restrictions
to maintain its status as a REIT. These restrictions include the type of income
it can earn, the type of assets it can hold, the number of shareholders it can
have and the concentration of their ownership, and the amount of the Company's
income that must be distributed annually.
One such restriction is that the Company generally cannot own more than 10% of
the voting power or value of the securities of any one issuer unless the issuer
is itself a REIT or a "taxable REIT subsidiary" ("TRS"). In the case of TRSs,
the Company's ownership of securities in all TRSs generally cannot exceed 20% of
the value of all of the Company's assets and, when considered together with
other non-real estate assets, cannot exceed 25% of the value of all of the
Company's assets. Effective January 1, 2001, a subsidiary of the Company has
elected to be treated as a TRS. As a result, it will be required to pay taxes on
its net income like any other taxable corporation. For the three months ended
March 31, 2002 the TRS incurred a loss for both financial statement and income
tax purposes and no tax provision or benefit is reflected in the financial
statements.
Prior to the REIT conversion on January 1, 2002, no provision or benefit was
made for Federal or state income taxes in the consolidated financial statements
of the Partnership. Partners were required to report on their individual tax
returns their allocable share of income, gains, losses, deductions and credits
of the Partnership.
7. Subsequent Event
The Company declared a dividend of $0.31 per share on May 3, 2002 to
shareholders of record as of May 3, 2002.
F-39
THIS PAGE INTENTIONALLY LEFT BLANK
F-40
Franklin Street Partners
Limited Partnership and Subsidiaries
Annual Report
December 31, 2001
Index to Consolidated Financial Statements
Reports of independent certified public accountants F-42
Consolidated financial statements:
Consolidated Balance sheets as of December 31, 2001 and 2000 F-50
Consolidated Statements of income for the years ended F-52
December 31, 2001, 2000 and 1999
Consolidated Statements of partners' capital for the years F-53
ended December 31, 2001, 2000 and 1999
Consolidated Statements of cash flows for the years ended F-54
December 31, 2001, 2000 and 1999
Notes to consolidated financial statements F-55
Financial Statement Schedule - Schedule III F-72
All other schedules for which a provision is made in the applicable accounting
resolutions of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
F-41
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
Franklin Street Partners Limited Partnership:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, partners' capital and cash flows present
fairly, in all material respects, the financial position of Franklin Street
Partners Limited Partnership and Subsidiaries (the "Partnership") at December
31, 2001, and the results of their operations and their cash flows for the year
then ended in conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the financial statement
schedule listed in the accompanying index presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Partnership's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audit. We conducted our
audit of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
March 4, 2002
F-42
Report of Independent Certified Public Accountants
To the Partners of
Franklin Street Partners Limited Partnership
Wakefield, Massachusetts
We have audited the accompanying consolidated balance sheet of Franklin Street
Partners Limited Partnership and subsidiaries as of December 31, 2000, and the
related consolidated statements of income, partners' capital and cash flows for
the years ended December 31, 2000 and 1999. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits. We did not audit
the financial statements of certain real estate partnerships, which statements
reflect total revenues of $4,794,000 for the year ended December 31, 1999. Those
statements were audited by other auditors whose reports have been furnished to
us, and our opinion, insofar as it relates to the amounts included for such real
estate partnerships, is based solely on the reports of the other auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the reports of
the other auditors for 1999 provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors for
1999, the consolidated financial statements referred to above present fairly, in
all material respects, the financial position of Franklin Street Partners
Limited Partnership and subsidiaries at December 31, 2000, and the results of
their operations and their cash flows for the years ended December 31, 2000 and
1999, in conformity with accounting principles generally accepted in the United
States of America.
/s/ BDO Seidman, LLP
Boston, Massachusetts
February 27, 2001, except Note 4
which is as of December 13, 2001
F-43
INDEPENDENT AUDITORS' REPORT
To the Partners
FSP Blue Ravine Limited Partnership
(a Massachusetts Limited Partnership)
Wakefield, Massachusetts
We have audited the accompanying balance sheet of FSP Blue Ravine Limited
Partnership (A Massachusetts Limited Partnership), as of December 31, 1999, and
the related statements of operations, changes in partners' equity and cash flows
for the period August 13, 1999 (date of inception) to December 31, 1999. These
financial statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of FSP Blue Ravine Limited
Partnership (a Massachusetts Limited Partnership) as of December 31, 1999, and
the results of its operations, and its cash flows for the period August 13, 1999
(date of inception) to December 31, 1999, in conformity with generally accepted
accounting principles.
/s/ Roy & Stevens, P.C.
Boston, Massachusetts
January 28, 2000
F-44
INDEPENDENT AUDITORS' REPORT
To the Partners
FSP Bollman Place Limited Partnership
(a Massachusetts Limited Partnership)
Wakefield, Massachusetts
We have audited the accompanying balance sheet of FSP Bollman Place
Limited Partnership (A Massachusetts Limited Partnership), as of December 31,
1999, and the related statements of operations, changes in partners' equity and
cash flows for the period September 28, 1999 (date of inception) to December 31,
1999. These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of FSP Bollman Place Limited
Partnership (a Massachusetts Limited Partnership) as of December 31, 1999, and
the results of its operations, and its cash flows for the period September 28,
1999 (date of inception) to December 31, 1999, in conformity with generally
accepted accounting principles.
/s/ Roy & Stevens, P.C.
Boston, Massachusetts
January 28, 2000
F-45
INDEPENDENT AUDITORS' REPORT
To the Partners
FSP Hillview Center Limited Partnership
(a Massachusetts Limited Partnership)
Wakefield, Massachusetts
We have audited the accompanying balance sheet of FSP Hillview Center
Limited Partnership (A Massachusetts Limited Partnership), as of December 31,
1999, and the related statements of operations, changes in partners' equity and
cash flows for the year then ended. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of FSP Hillview Center Limited
Partnership (a Massachusetts Limited Partnership) as of December 31, 1999, and
the results of its operations and cash flows for the year ended December 31,
1999, in conformity with generally accepted accounting principles.
/s/ Roy & Stevens, P.C.
Boston, Massachusetts
February 15, 2000
F-46
INDEPENDENT AUDITORS' REPORT
To the Partners
FSP Telecom Business Center Limited Partnership
(a Massachusetts Limited Partnership)
Wakefield, Massachusetts
We have audited the accompanying balance sheet of FSP Telecom Business
Center Limited Partnership (A Massachusetts Limited Partnership), as of December
31, 1999, and the related statements of operations, changes in partners' equity
and cash flow for the period February 1, 1999 (date of inception) to December
31, 1999. These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of FSP Telecom Business Limited
Partnership (a Massachusetts Limited Partnership) as of December 31, 1999, and
the results of its operations, and its cash flows for the period February 1,
1999 (date of inception) to December 31, 1999, in conformity with generally
accepted accounting principles.
/s/ Roy & Stevens, P.C.
Boston, Massachusetts
January 28, 2000
F-47
INDEPENDENT AUDITORS' REPORT
To the Partners
FSP Silverside Plantation Limited Partnership
We have audited the accompanying balance sheet of FSP SILVERSIDE
PLANTATION LIMITED PARTNERSHIP as of December 31, 1999 and the related
statements of income, changes in partners' equity, and cash flows for the year
then ended. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of FSP SILVERSIDE PLANTATION
LIMITED PARTNERSHIP as of December 31, 1999 and the results of its operations,
changes in partners' equity, and cash flows for the year then ended in
conformity with generally accepted accounting principles.
/s/ Habif, Arogeti & Wynne, LLP
Atlanta, Georgia
January 24, 2000
F-48
INDEPENDENT AUDITORS' REPORT
To the Partners
FSP Silverside Plantation Limited Partnership
We have audited the accompanying balance sheet of FSP SILVERSIDE
PLANTATION LIMITED PARTNERSHIP as of December 31, 1998 and the related
statements of income, changes in partners' equity, and cash flows for the period
October 16, 1998 [Date of Inception] to December 31, 1998. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of FSP SILVERSIDE PLANTATION
LIMITED PARTNERSHIP as of December 31, 1998 and the results of its operations,
changes in partners' equity, and cash flows for the period October 16, 1998
[Date of Inception] to December 31, 1998 in conformity with generally accepted
accounting principles.
/s/ Habif, Arogeti & Wynne, LLP
Atlanta, Georgia
January 15, 1999
F-49
Franklin Street Partners
Limited Partnership and Subsidiaries
Consolidated Balance Sheets
December 31,
----------------------------
2001 2000
===============================================================================================
(in thousands,
except unit amounts)
Assets:
Real estate assets:
Land $ 39,560 $ 39,994
Buildings and improvements 153,632 152,999
Fixtures and equipment 920 995
-----------------------------------------------------------------------------------------------
194,112 193,988
Less accumulated depreciation 17,419 12,917
-----------------------------------------------------------------------------------------------
Real estate assets, net 176,693 181,071
Cash and cash equivalents 24,357 13,718
Restricted cash 495 499
Marketable securities -- 5,322
Investment in affiliated Sponsored Entity -- 16,734
Tenant rent receivables, less allowance for doubtful accounts
of $210 and $10, respectively 1,434 1,238
Office computers and furniture, net of accumulated
depreciation of $215 and $142, respectively 397 303
Prepaid expenses and other assets, net 741 1,038
-----------------------------------------------------------------------------------------------
Total assets $ 204,117 $ 219,923
===============================================================================================
The accompanying notes are an integral part of these consolidated
financial statements.
F-50
Franklin Street Partners
Limited Partnership and Subsidiaries
Consolidated Balance Sheets
December 31,
-----------------------------
2001 2000
================================================================================================
(in thousands,
except unit amounts)
Liabilities and Partners' Capital:
Liabilities:
Bank note payable $ -- $ 16,500
Accounts payable and accrued expenses 2,112 1,575
Accrued compensation 1,747 706
Tenant security deposits 495 499
------------------------------------------------------------------------------------------------
Total liabilities 4,354 19,280
------------------------------------------------------------------------------------------------
Minority interests in consolidated entities -- 63
------------------------------------------------------------------------------------------------
Commitments and contingencies
Partners' capital (deficit):
Limited partners, 23,637,750 and 23,486,096
units issued and outstanding, respectively 203,348 204,067
General partner, 948,499 units issued and outstanding (3,585) (3,487)
------------------------------------------------------------------------------------------------
Total partners' capital 199,763 200,580
------------------------------------------------------------------------------------------------
Total liabilities and partners' capital $ 204,117 $ 219,923
================================================================================================
The accompanying notes are an integral part of these consolidated
financial statements.
F-51
Franklin Street Partners
Limited Partnership and Subsidiaries
Consolidated Statements of Income
For the Year Ended
December 31,
----------------------------------------
2001 2000 1999
==================================================================================================
(in thousands, except unit and per
partnership unit amounts)
Revenue:
Rental $ 26,765 $ 25,434 $ 16,315
Syndication fees 13,000 4,036 444
Transaction fees 12,701 3,538 345
Interest and other 1,981 1,785 944
---------------------------------------------------------------------------------------------------
Total revenue 54,447 34,793 18,048
---------------------------------------------------------------------------------------------------
Expenses:
Selling, general and administrative 5,229 3,073 2,589
Commissions 6,525 3,422 2,634
Partnership units issued as compensation 1,744 2,300 --
Rental operating expenses 7,026 6,489 4,429
Depreciation and amortization 4,797 4,613 3,231
Real estate taxes and insurance 2,900 2,473 1,448
Interest 818 860 299
---------------------------------------------------------------------------------------------------
Total expenses 29,039 23,230 14,630
---------------------------------------------------------------------------------------------------
Income before minority interests 25,408 11,563 3,418
Income applicable to minority interests 40 2,649 2,279
---------------------------------------------------------------------------------------------------
Net income $ 25,368 $ 8,914 $ 1,139
===================================================================================================
Allocation of net income to:
Limited Partners $ 24,386 $ 8,539 $ 1,049
General Partner 982 375 90
---------------------------------------------------------------------------------------------------
$ 25,368 $ 8,914 $ 1,139
===================================================================================================
Weighted average number of units outstanding, basic
and diluted 24,511,578 18,973,558 11,999,907
===================================================================================================
Basic and diluted net income per limited and
general partnership unit $ 1.03 $ .47 $ .09
===================================================================================================
The accompanying notes are an integral part of these consolidated
financial statements.
F-52
Franklin Street Partners
Limited Partnership and Subsidiaries
Consolidated Statements of Partners' Capital
Total Partners
Limited Partners General Partner Capital
----------------------- ------------------- -----------------------
Units Amount Units Amount Units Amount
=========================================================================================================================
(in thousands, except unit amounts)
Balance, December 31, 1998 952,301 $ 6,425 948,499 $ (1,426) 1,900,800 $ 4,999
Units issued in January 1, 1999
merger transaction 10,099,107 88,413 -- -- 10,099,107 88,413
Net income -- 1,049 -- 90 -- 1,139
Distributions -- (9,380) -- (1,596) -- (10,976)
-------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 11,051,408 86,507 948,499 (2,932) 11,999,907 83,575
Units issued in January 1, 2000
merger transaction 4,999,972 45,269 -- -- 4,999,972 45,269
Units issued in October 1, 2000
merger transaction 7,204,716 77,080 -- -- 7,204,716 77,080
Units issued for compensation 230,000 2,300 -- -- 230,000 2,300
Net income -- 8,539 -- 375 -- 8,914
Distributions -- (15,628) -- (930) -- (16,558)
-------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 23,486,096 204,067 948,499 (3,487) 24,434,595 200,580
Net income -- 24,386 -- 982 -- 25,368
Distributions -- (26,849) -- (1,080) -- (27,929)
Units issued for compensation 151,654 1,744 -- -- 151,654 1,744
-------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 23,637,750 $ 203,348 948,499 $ (3,585) 24,586,249 $ 199,763
=========================================================================================================================
The accompanying notes are an integral part of these consolidated
financial statements
F-53
Franklin Street Partners
Limited Partnership and Subsidiaries
Consolidated Statements of Cash Flows
For the Year Ended December 31,
--------------------------------
2001 2000 1999
===========================================================================================
(in thousands)
Cash flows from operating activities:
Net income $ 25,368 $ 8,914 $ 1,139
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,797 4,613 3,231
Partnership units issued for compensation 1,744 2,300 --
Minority interests 40 2,649 2,279
Changes in operating assets and liabilities:
Restricted cash 4 (10) (406)
Tenant rent receivables (196) (665) (389)
Prepaid expenses and other assets, net 75 (745) (260)
Accounts payable and accrued expenses 537 (2,865) 3,777
Accrued compensation 1,041 336 (142)
Tenant security deposits (4) 10 406
-------------------------------------------------------------------------------------------
Net cash provided by operating 33,406 14,537 9,635
activities
-------------------------------------------------------------------------------------------
Cash flows from investing activities:
Distributions from (investment in) affiliated 16,734 (16,734) --
Sponsored Entity
Purchase of real estate assets and office computer (733) (9,952) (77,255)
and furniture
Proceeds received on sales of land 442 927 --
Proceeds from (purchase of) marketable securities 5,322 (5,322) --
-------------------------------------------------------------------------------------------
Net cash provided by (used for) 21,765 (31,081) (77,255)
investing activities
-------------------------------------------------------------------------------------------
Cash flows from financing activities:
Distributions to partners (27,929) (16,558) (10,976)
Distributions to minority interests in consolidated (103) (4,506) (2,375)
entities
Borrowings under bank note payable -- 16,500 23,522
Repayments of bank note payable (16,500) (23,522) --
Capital contributions from minority interest holders -- 39,829 63,316
-------------------------------------------------------------------------------------------
Net cash provided by (used for) (44,532) 11,743 73,487
financing activities
-------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 10,639 (4,801) 5,867
Cash and cash equivalents, beginning of year 13,718 18,519 12,652
-------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 24,357 $ 13,718 $ 18,519
===========================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 818 $ 860 $ 299
Non-cash investing and financing activities:
In connection with the Conversion transactions described in Note 4, the
Partnership issued limited partnership units in exchange for the limited
partner minority interests in Sponsored Partnerships resulting in a
non-cash fair value step-up in the Partnership's real estate properties
totaling approximately $6,581 and $14,390 during the years ended December
31, 2000 and 1999, respectively.
The accompanying notes are an integral part of these consolidated
financial statements.
F-54
1. Organization Franklin Street Partners Limited Partnership (Franklin
Street Properties Corp. effective January 1, 2002) (the
"Partnership" or the "Company") was formed as a
Massachusetts limited partnership on February 4, 1997.
Prior to July 1, 2001 the Partnership owned a 99%
interest in FSP Investments LLC ("FSP Investments"), a
99% interest in FSP Property Management LLC ("FSP
Property Management") and 100% of FSP Holdings LLC ("FSP
Holdings"). Effective July 1, 2001, FSP Holdings
purchased the remaining 1% interest of both entities for
approximately $30,000. The Partnership also has a
non-controlling common stock interest in ten
corporations organized to operate as Real Estate
Investment Trusts ("REITs").
The Partnership operates in two business segments:
rental operations and investment services. FSP
Investments provides real estate investment and
broker/dealer services. FSP Investments' services
include: (i) the organization of REIT entities in 2000
and 2001 (the "Sponsored REITs") and limited
partnerships in and prior to 2000 (the "Sponsored
Partnerships" and, together with the Sponsored REITs,
the "Sponsored Entities"), which are syndicated through
private placements; (ii) the acquisition of real estate
on behalf of the Sponsored Entities; and (iii) the sale
of preferred stock in Sponsored REITs or limited
partnership interests in the Sponsored Partnerships. FSP
Property Management provides asset management and
property management services for the Sponsored Entities.
During 1999 and 2000, a total of 17 Sponsored
Partnerships were merged into the Partnership. Prior to
the merger transactions, FSP Holdings owned a 5%
controlling general partner interest in each of the
merged Sponsored Partnerships. Following the
consummation of the merger transactions, the Partnership
held, directly and indirectly, 100% of the partnership
interests in each of the 17 Sponsored Partnerships.
In December 2001 the limited partners of the Partnership
approved the conversion of the Partnership from a
partnership into a corporation and the subsequent
election to be taxed as a real estate investment trust
("REIT"). As a REIT, the Company is entitled to a tax
deduction for dividends paid to its shareholders,
thereby effectively subjecting the distributed net
income of the Company to taxation at the shareholder
level only, provided it annually distributes at least
90% of its taxable income and meets certain other
qualifications. The conversion, which was effective
January 1, 2002, was accomplished, as a tax-free
reorganization, by merging the Partnership with and into
a wholly owned subsidiary, Franklin Street Properties
Corp., with the subsidiary as the surviving entity. As
part of the conversion into a REIT, FSP Investments will
elect to be a taxable REIT subsidiary and will incur
income taxes at normal tax rates.
F-55
The REIT will be taxed under Sections 856 through 860 of
the Internal Revenue Code of 1986, as amended,
commencing with its taxable year ending December 31,
2002. REITs are subject to a number of organizational
and operational requirements including a requirement
that 90.0% of the taxable income be distributed to
shareholders. Provided that the REIT continues to
qualify as a real estate investment trust, it will
generally not be subject to federal income tax on
taxable income distributed to its shareholders. However,
certain of the REIT's subsidiaries may be subject to
federal income tax.
On December 17, 1999, as part of a larger bill, the
President signed into law the REIT Modernization Act
("RMA"). Effective beginning January 1, 2001, the RMA
has amended the tax rules relating to the composition of
a REIT's assets. Under prior law, a REIT was precluded
from owning more than 10.0% of the outstanding voting
securities of any one issuer, other than a wholly owned
subsidiary or another REIT. Beginning in 2001, a REIT
will also be precluded from owning more than 10.0% of
the value of all securities of any one issuer.
One exception to these restrictions is that a REIT will
be allowed to own up to 100% of the securities of a
Taxable REIT Subsidiary ("TRS") that can provide certain
non-customary services to REIT tenants and others
without disqualifying the rents that a REIT receives
from its tenants. However, no more than 20.0% of the
value of a REIT's total assets can be represented by
securities of one or more TRS's. The amount of interest
and other expenses from a TRS to a REIT will be limited
to ensure that a TRS is subject to an appropriate level
of corporate tax. The new 10.0% asset test will not
apply to certain arrangements (including third party
subsidiaries) in place on July 12, 1999, provided that a
subsidiary does not engage in a "substantial new line of
business" or acquire any "substantial asset", and a REIT
does not acquire any new securities in the subsidiary.
Under the RMA, a subsidiary will be able to convert tax
free into a TRS. The REIT anticipates electing TRS
status for certain of its subsidiaries beginning with
its taxable year ending December 31, 2002.
2. Significant
Accounting
Policies
Basis of The accompanying consolidated financial statements
Presentation include all of the accounts of the Partnership, 17
Sponsored Partnerships and majority-owned subsidiaries.
All significant intercompany accounts and transactions
have been eliminated in consolidation.
Prior to the mergers in 1999 and 2000, FSP Holdings was
the general partner and owned a 5% controlling general
partner interest in each of the Sponsored Partnerships.
FSP Holdings had the exclusive rights and powers to
manage and control the business of each Sponsored
Partnership without the consent or approval of the
limited partners. The limited partners in the Sponsored
Partnerships could not elect to replace the general
partner, except for cause. Accordingly, the Sponsored
Partnerships were accounted for under the principles of
accounting applicable to investments in subsidiaries in
accordance with SOP 78-9 and consolidated these entities
into the Partnership's financial statements.
F-56
Business Segments The Partnership follows Statement of Financial
Accounting Standards ("SFAS") No. 131 "Disclosures about
Segments of an Enterprise and Related Information,"
which established standards for the way that public
business enterprises report information about operating
segments in annual financial statements and requires
that those enterprises report selected information about
operating segments in interim financial reports issued
to shareholders.
Minority Interests Minority interests in consolidated entities ("minority
in Consolidated interests") represents the 95% limited partner interests
Entities in Sponsored Partnerships prior to the dates of merger
and, prior to July 1, 2001, the 1% interest in FSP
Investments and FSP Property Management, which was held
by an officer and member of the general partner of the
Partnership. Minority interests included in the
Partnership's consolidated statements of income
represents the minority interest holders' share of the
income of the consolidated entities. The minority
interests in the Partnership's consolidated balance
sheets reflects the original investment made by the
minority interest holders in the consolidated entities
along with their proportional share of the earnings less
cash distributions. Cash distributions paid to minority
interest holders were approximately $103,000,
$4,506,000, and $2,375,000 for the years ended December
31, 2001, 2000, and 1999, respectively.
Estimates and The Company prepares its financial statements and
Assumptions related notes in conformity with accounting principles
generally accepted in the United States of America.
These principles require management to make estimates
and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial
statements and the reported amounts of revenue and
expenses during the reporting period. Actual results
could differ from those estimates.
Reclassifications Certain balances in the 2000 and 1999 financial
statements have been reclassified to conform to the 2001
presentation.
Investments in Common stock investments in Sponsored REITs are
REITs accounted for using the equity method, as the
Partnership exercises significant influence, but does
not control these entities. Under the equity method of
accounting, the Partnership's cost is subsequently
adjusted by its share of the Sponsored REITs' earnings,
after deducting the Sponsored REITs' preferred stock
dividends paid or accrued. Equity in the losses of
Sponsored REITs is not recognized to the extent that the
investment balance would become negative. Dividends are
recognized as income after the investment balance is
reduced to zero.
F-57
There were no dividends received or income recognized,
from the Sponsored REITs for the years ended December
31, 2001 or 2000.
Real Estate and Depreciation Real estate assets are stated at
the lower of cost or fair value, as appropriate, less
accumulated depreciation.
Costs related to property acquisition and improvements
are capitalized. Typical capital items include new
roofs, site improvements, various exterior building
improvements and major interior renovations. Funding for
capital improvements typically is provided by cash set
aside at the time the property was purchased.
Routine replacements and ordinary maintenance and
repairs that do not extend the life of the asset are
expensed as incurred. Typical expense items include
interior painting, landscaping, minor carpet
replacements and residential appliances. Funding for
repairs and maintenance items typically is provided by
cash flows from operating activities. Depreciation is
computed using the straight line method over the assets'
estimated useful lives as follows:
Category Years
-------- -----
Buildings:
Residential 27
Commercial 39
Building Improvements 15-39
Furniture and equipment 5-7
The Partnership evaluates its assets used in operations
by identifying indicators of impairment and by comparing
the sum of the estimated undiscounted future cash flows
for each asset to the asset's carrying value. When
indicators of impairment are present and the sum of the
undiscounted future cash flows is less than the carrying
value of such asset, an impairment loss is recorded
equal to the difference between the asset's current
carrying value and its fair value based on discounting
its estimated future cash flows. At December 31, 2001,
no such indicators of impairment were identified.
Cash and Cash The Partnership considers all highly liquid debt
Equivalents instruments purchased with a maturity of three months or
less to be cash equivalents.
Restricted Cash Restricted cash consists of tenant security deposits.
Tenant security deposits are refunded when tenants
vacate provided that the tenant has not damaged the
property.
Marketable The Partnership accounts for investments in debt
Securities securities under the provisions of SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity
Securities". The Partnership classified its debt
securities as available-for-sale.
There were no investments in marketable securities at
December 31, 2001.
Investments in marketable securities at December 31,
2000 of $5,322,000 mature within one year. These
securities are stated at cost, which approximates fair
market value.
F-58
Concentration of Cash, cash equivalents and short-term investments are
Credit Risks financial instruments that potentially subject the
Partnership to a concentration of credit risk. The
Partnership maintains its cash balances and short term
investments principally in one bank which the
Partnership believes to be creditworthy. The Partnership
periodically assesses the financial condition of the
bank and believes that the risk of loss is minimal. Cash
balances held with various financial institutions
frequently exceed the insurance limit of $100,000
provided by the Federal Deposit Insurance Corporation.
Financial Instruments The Partnership estimates that the carrying
value of cash and cash equivalents, restricted cash,
marketable securities and the bank note payable
approximate their fair values based on their short-term
maturity and prevailing interest rates.
Prepaid Expenses Included in Prepaid expenses and other assets, net at
December 31, 2001 and 2000 is $922,000 and $932,000,
respectively, which represents external leasing and
tenant improvement costs incurred in the leasing of
commercial space. These costs are amortized on a
straight-line basis over the terms of the related lease
agreements. Amortization expense was approximately
$222,000, $146,000 and $116,000 for the years ended
December 31, 2001, 2000 and 1999, respectively.
Revenue Commercial Properties -- The Partnership has retained
Recognition substantially all of the risks and benefits of ownership
of the Partnership's commercial properties and accounts
for its leases as operating leases. Rental income from
leases, which include scheduled increases in rental
rates during the lease term, is recognized on a
straight-line basis. The Partnership does not have any
percentage rent arrangements with its commercial
property tenants. Reimbursable common area maintenance
charges are included in rental income in the period
earned.
Residential Apartments -- The Partnership's residential
property leases are generally for terms of one year or
less. Rental income from tenants of residential
apartment properties is recognized in the period earned.
Rent concessions, including free rent and leasing
commissions incurred in connection with residential
property, leases are expensed as incurred.
Investment Banking Services -- Syndication fees ranging
from 6% to 8% of the gross offering proceeds from the
sale of securities in Sponsored Entities are generally
recognized upon an investor closing; at that time the
Partnership has provided all required services, the fee
is fixed and collected, and no further contingencies
exist. Commission expense ranging from 3% to 4% of the
gross offering proceeds is recorded in the period the
related syndication fee is earned.
Investment Banking Services -- Transaction fees are
generally recognized upon the final investor closing of
a Sponsored Entity. The final investor closing is the
last admittance of investors into a Sponsored Entity; at
that time, required funds have been received from the
investors, charges relating to the syndication have been
paid or accrued, continuing investment and continuing
involvement criteria have been met, and legal and
economic rights have been transferred. Third party
transaction-related costs are deferred and later
expensed to match revenue recognition. Internal costs
are expensed as incurred.
Property and Asset Property and asset management fees, interest income and
Management Fees other income are recognized when the related services
are performed and the earnings process is complete.
F-59
The Company follows the requirements for profit
recognition as set forth by Statement of Financial
Accounting Standards No. 66 "Accounting for Sales of
Real Estate" and Statement of Position 92-1 "Accounting
for Real Estate Syndication Income".
Income Taxes No provision has been made for Federal or state
income taxes in the consolidated financial statements of
the Partnership. Partners are required to report on
their individual tax returns their allocable share of
income, gains, losses, deductions and credits of the
Partnership.
Net Income Per The Partnership follows Statement of Financial
Partnership Unit Accounting Standards No. 128 "Earnings per Share", which
specifies the computation, presentation and disclosure
requirements for the Partnership's net income per
partnership unit. Basic net income per unit is computed
by dividing net income by the weighted average number of
partnership units outstanding during period. Diluted net
income per share reflects the potential dilution that
could occur if securities or other contracts to issue
units were exercised or converted into units. There were
no potential dilutive units outstanding at December 31,
2001, 2000, and 1999. The denominator used for
calculating basic and diluted net income per unit is as
follows:
Year Ended December 31,
----------------------------------
2001 2000 1999
=======================================================
Weighted average
number of units
outstanding
Limited partners 23,563,079 18,025,059 11,051,408
General partner 948,499 948,499 948,499
-------------------------------------------------------
24,511,578 18,973,558 11,999,907
=======================================================
Recent Accounting In June 1998, the Financial Accounting Standards Board
Standards ("FASB") issued Statements of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities" as amended by SFAS
No. 137 and No. 138. The provisions of this statement
require that derivative instruments be carried at fair
value on the balance sheet. The statement continues to
allow derivative instruments to be used to hedge various
risks and sets forth specific criteria to be used to
determine when hedge accounting can be used. For
derivative instruments not accounted for as hedges,
changes in fair value are required to be recognized in
earnings. The provisions of this statement became
effective January 1, 2001. The Partnership has not
historically had derivative instruments, and this
standard has had no impact on its financial position,
results of operations and cash flows.
F-60
In June 2001, the FASB approved SFAS No. 141 "Business
Combinations" ("SFAS 141") and No. 142 "Goodwill and
Other Intangible Assets" ("SFAS 142"), effective July 1,
2001 and January 1, 2002, respectively, for the
Partnership. SFAS 141 requires that the purchase method
of accounting be used for all business combinations
initiated after June 30, 2001. The Partnership has
adopted SFAS 141; however, no combinations by the
Partnership occurred after June 30, 2001 to which this
would apply. Under SFAS 142, amortization of goodwill,
including goodwill recorded in past business
combinations, will discontinue upon adoption of this
standard. All goodwill and intangible assets will be
tested for impairment in accordance with the provisions
of the Statement. The Partnership has reviewed the
provisions of SFAS 142 and believes that the impact of
adoption will not be material to its financial position,
results of operations and cash flows.
In August 2001, the FASB issued SFAS No. 143 "Accounting
for Asset Retirement Obligations" ("SFAS 143") which
addresses financial accounting and reporting for
obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement
costs. This Statement requires that the fair value of a
liability for an asset retirement obligation be
recognized in the period in which it is incurred if a
reasonable estimate of the fair value can be made. The
associated asset retirement costs are capitalized as
part of the carrying amount of the long-lived asset.
SFAS 143 will be effective at the beginning of 2003. The
Partnership has reviewed the provisions of SFAS 143 and
believes that the impact of adoption will not be
material to its financial position, results of
operations and cash flows.
F-61
In October 2001, the FASB issued SFAS No. 144
"Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"). SFAS 144 supersedes SFAS No. 121
and requires that long-lived assets that are to be
disposed of by sale be measured at the lower of book
value or fair value less costs to sell. SFAS 144 retains
the fundamental provisions of SFAS No. 121 for (a)
recognition and measurement of the impairment of
long-lived assets to be held and used, and (b)
measurement of long-lived assets to be disposed of by
sale, but broadens the definition of what constitutes a
discontinued operation and how the results of a
discontinued operation are to be measured and presented.
SFAS 144 will be effective at the beginning of 2002.
With the exception of reclassifiying, the operations of
real estate assets considered "held for sale" to
"Discontinued operations, net of tax" in the
consolidated statement of income, the impact of adoption
of SFAS 144 will not have a material impact on the
Partnership's financial position and cash flows. The
Partnership does not have any real estate assets that it
considers "held for sale."
3. Business Segments The Partnership operates in two business segments:
rental operations and investment services (including
real estate acquisition, financing and broker/dealer
services). The Partnership has identified these segments
because this discrete information is the basis upon
which management makes decisions regarding resource
allocation and performance assessment. The accounting
policies of the reportable segments are the same as
those described in the "Significant Accounting
Policies". The Partnership's segments are located in the
United States of America. The Partnership previously
evaluated the performance of its reportable segments
based on Funds from Operations ("FFO"); however,
effective October 1, 2001 management changed its
evaluation performance measure to Cash Available for
Distribution ("CAD") as management believes that CAD
represents a more accurate measure of the reportable
segment's activity and is the basis for distributions
paid to equity holders. The Partnership defines CAD as:
net income as computed in accordance with accounting
principles generally accepted in the United States of
America ("GAAP"); plus non-cash items included in the
computation of net income (depreciation and
amortization, non-cash compensation expenses and
straight line rent adjustments);plus Investment Services
Proceeds received from controlled partnerships; plus the
net proceeds from the sale of land; less purchases of
property and equipment from operating cash. Purchases of
real estate assets from cash reserves established at the
acquisition date of the property are not reflected in
the computation of CAD. CAD should not be considered an
alternative to net income (determined in accordance with
GAAP), as an indicator of the Company's financial
performance, cash flows from operating activities
(determined in accordance with GAAP), nor as a measure
of the Company's liquidity, nor is it necessarily
indicative of sufficient cash flow to fund all of the
Company's needs. Other real estate companies may define
CAD in a different manner.
F-62
CAD by business segment is as follows (in thousands):
Rental Investment Intercompany Total
Operations Services Total Elimination Consolidated
============================================================
Year ended December 31, 2001:
Net Income $ 21,381 $ 3,987 $25,368 $ -- $ 25,368
Depreciation and amortization 4,900 71 4,971 (174) 4,797
Non-cash compensation expenses -- 1,744 1,744 -- 1,744
Straight line rent (797) -- (797) -- (797)
Proceeds from sale of surplus land 449 -- 449 -- 449
Purchase of fixed assets from operating (79) (167) (246) -- (246)
cash
---------------------------------------------------------------------------------------------------------
Cash Available for Distribution $ 25,854 $ 5,635 $31,489 $ (174) $ 31,315
=========================================================================================================
Year ended December 31, 2000:
Net Income $ 11,351 $ 2,789 $14,140 $(5,226) $ 8,914
Investment services proceeds received from
controlled partnerships (1) -- -- -- 5,226 5,226
Depreciation and amortization 4,679 83 4,762 (149) 4,613
Non cash compensation expenses -- 2,300 2,300 -- 2,300
Straight line rent (185) -- (185) -- (185)
Proceeds from sale of land 1,068 -- 1,068 -- 1,068
Purchase of fixed assets from operating (512) (135) (647) -- (647)
cash
---------------------------------------------------------------------------------------------------------
Cash Available for Distribution $ 16,401 $ 5,037 $21,438 $ (149) $21,289
=========================================================================================================
Year ended December 31, 1999:
Net Income $ 3,665 $ 5,089 $ 8,754 $(7,615) $ 1,139
Investment services proceeds received from
controlled partnerships -- -- -- 7,615 7,615
Depreciation and amortization 3,272 68 3,340 (109) 3,231
Straight line rent (102) -- (102) -- (102)
Purchase of fixed assets from operating (187) (186) (373) -- (373)
cash
---------------------------------------------------------------------------------------------------------
Cash Available for Distribution $ 6,648 $ 4,971 $11,619 $ (109) $ 11,510
=========================================================================================================
(1) The Partnership received various investment services income from the
syndication of Sponsored Partnerships. Although this income was eliminated
in the calculation of consolidated net income in accordance with GAAP, the
cash received from the Sponsored Partnerships was available for
distribution to the members of the Partnership.
F-63
The Partnership's cash distributions from operations for the years ended
December 31, 2001, 2000 and 1999 are summarized as follows:
Distribution Per Total Cash
Quarter paid Partnership Unit Distributions
========================================================
(in thousands)
Second quarter of 2001 $.28 $ 6,842
Third quarter of 2001 .29 7,087
Fourth quarter of 2001 .30 7,376
First quarter of 2002 (A) .31 7,622
--------------------------------------------------------
$1.18 $28,927
========================================================
Second quarter of 2000 $.24 $ 4,080
Third quarter of 2000 .25 4,308
Fourth quarter of 2000 .26 4,480
First quarter of 2001 .27 6,597
--------------------------------------------------------
$1.02 $19,465
========================================================
Second quarter of 1999 $.20 $ 2,400
Third quarter of 1999 .21 2,520
Fourth quarter of 1999 .22 2,640
First quarter of 2000 .23 2,760
--------------------------------------------------------
$.86 $10,320
========================================================
(A) Represents dividends declared and paid by the
Company in the first quarter of 2002.
Cash distributions per partnership unit is based on the
total outstanding units at the end of each calendar
quarter. Cash available for distribution, as determined
at the sole discretion of the general partner, is
required to be distributed to unit holders within 90
days following the end of each calendar quarter. The
cash distribution of approximately $7,622,000 for the
fourth quarter of 2001 was declared and paid in 2002.
The cash distribution of approximately $6,597,000 for
the fourth quarter of 2000 was declared and paid in the
first quarter of 2001. The cash distribution of
approximately $2,670,000 for the fourth quarter of 1999
was declared and paid in 2000.
F-64
The following table is a summary of other financial
information by business segment:
Rental Investment
Operations Services Total
========================================================
(in thousands)
December 31, 2001:
Revenue $ 26,765 $ 25,701 $ 52,466
Interest Income 1,870 111 1,981
Interest Expense 818 0 818
Capital expenditures 566 167 733
Identifiable assets 199,140 4,977 204,117
December 31, 2000:
Revenue $ 25,434 $ 7,574 $ 33,008
Interest Income 1,686 99 1,785
Interest Expense 860 -- 860
Capital expenditures 9,825 127 9,952
Identifiable assets 194,328 25,595 219,923
December 31, 1999:
Revenue $ 16,315 $ 789 $ 17,104
Interest Income 915 29 944
Interest Expense 299 0 299
Capital expenditures 77,060 195 77,255
Identifiable assets 159,324 31,162 190,486
4. Merger Transactions The merger transactions involved the exchange of the
Partnership's limited partner units for the minority
interest holder's limited partnership units in 17
Sponsored Partnerships. The Partnership has recorded the
minority interest acquisitions based on the fair value
of assets and liabilities acquired. Additionally,
transaction costs incurred in connection with the 2000
and 1999 mergers totaling approximately $453,000 and
$736,000, respectively, have been reflected as a cost of
the minority interest acquisitions. The fair market
value of the merged entities' real estate was determined
based on independent appraisals.
Effective October 1, 2000, the Partnership and six
Sponsored Partnerships consummated a series of mergers
pursuant to an Agreement and Plan of Merger (the
"October 2000 Merger"). Under the terms of the October
2000 Merger, all limited partnership interests in the
six Sponsored Partnerships outstanding on October 1,
2000 were exchanged for 7,204,716 new limited
partnership units in the Partnership. The operations of
the six merged Sponsored Partnerships consist of six
commercial rental properties.
Effective January 1, 2000, the Partnership and three
Sponsored Partnerships consummated a series of mergers
pursuant to an Agreement and Plan of Merger (the
"January 2000 Merger"). Under the terms of the January
2000 Merger, all limited partnership interests in the
three Sponsored Partnerships outstanding on January 1,
2000 were exchanged for 4,999,972 new limited
partnership units in the Partnership. The operations of
the three merged Sponsored Partnerships consist of a
residential apartment property and two commercial real
estate properties.
F-65
Effective January 1, 1999, the Partnership and eight
Sponsored Partnerships consummated a series of mergers
pursuant to an Agreement and Plan of Merger (the "1999
Merger"). Under the terms of the 1999 Merger, all
limited partnership interests in the eight Sponsored
Partnerships outstanding on January 1, 1999 were
exchanged for 10,099,107 new limited partnership units
in the Partnership. Additionally, the partnership
interests held by the Partnership's existing general
partner and limited partners were exchanged for 948,499
new general partnership units and 952,301 new limited
partnership units, respectively. The operations of the
merged Sponsored Partnerships consist of five commercial
rental properties and three residential real estate
properties.
Following the consummation of the mergers described
above, the Partnership owned, directly and indirectly,
100% of the interests in each merged Sponsored
Partnership. The merger transactions were structured as
exchanges of partnership units and no cash was involved.
The Partnership's consolidated financial statements
include the full results of operations of the merged
Sponsored Partnerships from the date of merger.
The following pro forma consolidated results of
operations are presented as if the merger transactions
had occurred at the beginning of the periods presented:
Year ended December 31, 2000 1999
========================================================
(unaudited) (in thousands,
except per unit amounts)
Revenue $34,793 $18,048
Net income 10,987 3,121
Basic and diluted net income
per limited and general
partnership unit $ 0.47 $ 0.19
5. Related Party
Transactions
Investment in The Partnership typically retains a non-controlling
Affiliated common stock ownership interest in Sponsored REITs that
Sponsored REITs it has organized. These ownership interests have
virtually no economic benefit or risk. At December 31,
2001 and 2000, the Partnership had ownership interests
in ten and four Sponsored REITs, respectively. During
1999 and 2000, the Company acquired 100% of the
non-owned interests of certain Sponsored Partnerships
(through a series of mergers) that it had previously
organized. Neither the Company nor any other related
entity has an obligation to acquire the non-owned
interests in any previously syndicated Sponsored REIT.
Summarized financial information for the Sponsored REITs
is as follows:
(unaudited)
2001 2000
---- ----
(in thousands)
Balance Sheet Data:
-------------------
Real estate, net $222,232 $56,565
Other assets 19,048 5,058
Total liabilities 6,755 1,950
Shareholders equity 234,525 59,673
F-66
2001 2000
---- ----
(in thousands)
Operating Data:
---------------
Rental revenues $19,816 $2,778
Other revenues 354 117
Operating and maintenance expenses 5,973 948
Depreciation and amortization 3,191 574
Interest expense 9,916 2,298
Net income (loss) 1,090 (925)
The Partnership's proportionate share of income prior to
syndication from these Sponsored REITs was $255,000, $0
and $0 for the years ended December 31, 2001, 2000 and
1999, respectively.
In addition to management services, the Partnership is
typically entitled to a return on funds advanced to
syndicated REITs. The Partnership recognized income of
$552,000, $402,000 and $0 for the years ended December
31, 2001, 2000 and 1999, respectively, relating to these
investments.
Sponsored Entity The Partnership has provided syndication and real estate
Fees acquisition advisory services for the Sponsored REITs in
2001 and 2000 and Sponsored Partnerships prior to July
2000. Syndication and transaction fees from
non-consolidated related entities amounted to
approximately $25,701,000, $7,574,000 and $789,000 for
the years ended December 31, 2001, 2000 and 1999,
respectively.
Management Fees Management fees charged to the Sponsored Partnerships
prior to the respective mergers have been eliminated in
the accompanying consolidated statements of income due
to the Partnership's controlling interest in a Sponsored
Partnership. Total property management fee income from
non-consolidated entities amounted to approximately
$412,000, $178,000 and $16,000 for the years ended
December 31, 2001, 2000 and 1999, respectively, and is
included in "Interest and other income" in the
Consolidated Statements of Income. Property management
fees range from 1% to 5% of collected rents and the
applicable contracts are cancelable with 30 days'
notice.
6. Bank Note Payable The Partnership has a revolving line of credit agreement
(the "Loan Agreement") with a bank providing for
borrowings at the Partnership's election up to
$50,000,000. Borrowings under the Loan Agreement bear
interest at either the bank's base rate or a variable
LIBOR rate, as defined. Borrowings outstanding under the
Loan Agreement consist of the following:
December 31, 2001 2000
========================================================
(in thousands)
Note payable, bearing interest at
the bank's base rate
(9.5% at December 31, 2000). $-- $16,500
F-67
The Loan Agreement includes restrictions on property
liens and requires compliance with various financial
covenants. Financial covenants include the maintenance
of at least $1,500,000 in operating cash accounts, a
minimum tangible net worth of $140,000,000 and
compliance with various debt and operating income
ratios, as defined in the Loan Agreement. The
Partnership was in compliance with the Loan Agreement's
financial covenants as of December 31, 2001 and 2000.
The Loan Agreement matures on February 23, 2003.
The Partnership has arranged for Citizens Bank to
provide a line of credit for the Partnership's senior
officers in the maximum aggregate amount of $3 million.
The borrowings under this line of credit are for the
purpose of paying income taxes on equity interests in
the Company issued to such senior officers as
compensation. Loans under this line of credit have a
term of one year and bear interest at the bank's prime
rate plus 50 basis points. Each borrower has secured the
loan by pledging shares of the Company's Common Stock
having an aggregate fair market value at the time of the
loan of no less than twice the principal amount of the
loan. Borrowings of $1,625,000 and $800,000 were
outstanding to senior officers of the Partnership at
December 31, 2001 and 2000 respectively. The Partnership
has agreed to purchase from Citizens Bank any such loan
on which the borrower defaults. Following the purchase
of the loan, the Partnership would have the same rights
as Citizens Bank, including the right to foreclose on
the pledged. stock.
7. Partners' Capital
General The Partnership's general partner has the exclusive
right to manage the business of the Partnership and make
certain amendments to the Partnership Agreement, without
the consent or approval of the limited partners. The
Partnership's limited partners do not take part in
management and do not have any voting rights regarding
the Partnership's operations. A majority in interest of
the limited partners, with the consent of the general
partner, may amend the Partnership Agreement, subject to
certain limitations as defined in the Partnership
Agreement. Except as provided for under certain Federal
tax provisions described in the Partnership Agreement,
net income or net losses from operations are allocated
to all partners based on their percentage interest in
the Partnership. Net profits or losses arising from a
sale or other disposition of all or any portion of the
Partnership's property or upon liquidation of the
Partnership are allocated as follows:
Net Profit -- The Partnership's net profits are
allocated first to the extent of any partner's negative
capital account balance, and thereafter in proportion
with their percentage interest in the Partnership.
Net Losses -- First to the extent of any partner's
positive capital account balance, and thereafter in
proportion with their percentage interest in the
Partnership.
The Partnership's cash distributions are allocated to
the limited partners and the general partner based on
each partner's percentage interest in the Partnership.
F-68
Equity-Based In April 2000, January 2001 and July 2001, the
Compensation Partnership issued 230,000 Units, 2,522 Units and
149,131 Units, respectively, with a fair value of
approximately $2,300,000, $29,000 and $1,715,000,
respectively, to certain officers and employees of the
Partnership in lieu of cash compensation. These
partnership units were fully vested on the date of
issuance. Equity-based compensation charges of
$1,744,000 and $2,300,000 are reported in the
accompanying consolidated statement of income for the
year ended December 31, 2001 and 2000, respectively.
General Partner On December 30, 1999, FSP General Partner LLC (the
"General Partner") was organized solely to hold the
Partnership's general partner units, which were
previously held by eight individuals. The General
Partner's financial activities consist of receiving cash
distributions from the Partnership and paying such
amounts to its members. The members of the General
Partner function as officers and/or directors of the
Partnership. The Partnership pays no fees or other
compensation to the General Partner. The General Partner
has no commitment or intent to furnish direct or
indirect financial assistance to the Partnership.
8. Federal Income Tax The difference between Partners' capital for financial
Reporting reporting purposes and for income tax purposes is
approximately as follows (in thousands):
2001 2000
---- ----
Partnership capital - financial $199,763 $200,580
reporting purposes,
Partnership's cumulative tax
reporting differences, primarily
relating to non-deductible
expenses, depreciation and other
temporary differences and the
effects of mergers (17,217) (19,090)
--------------------------------------------------------
Partners' capital -- income tax
purposes $182,546 $181,490
========================================================
The merger transactions described in Note 4 were treated
as tax-free reorganizations for income tax reporting
purposes.
9. Commitments The Partnership's commercial rental operations include
Rentals Under the leasing of office buildings and industrial
Operating Leases properties subject to leases with terms greater than one
year. The leases thereon expire at various dates through
2012. The following is a schedule of approximate future
minimum rental income on non-cancelable operating leases
as of December 31, 2001:
Year ended December 31,
========================================================
(in thousands)
2002 $15,415
2003 13,307
2004 9,957
2005 5,898
2006 3,336
Thereafter 12,207
--------------------------------------------------------
$60,120
========================================================
F-69
Certain leases provide for fixed step rent increases.
Rental revenue is recognized on the straight-line basis
over the related lease term while billings by the
Company are based on required minimum rentals in
accordance with the lease agreements. Cumulative revenue
recognized in excess of amounts billed by the Company is
$1,382,000 and $585,000 at December 31, 2001 and 2000,
respectively, and is included in tenant rent
receivables.
Office Lease The Partnership leases its corporate office space under
a six-year operating lease that commenced in June 1999.
The lease includes a base annual rent and additional
rent for the Partnership's share of taxes and operating
costs.
Future minimum lease payments are approximately as
follows (in thousands):
Year ended December 31,
========================================================
2002 $199
2003 203
2004 209
2005 97
--------------------------------------------------------
$708
========================================================
Rent expense was approximately $196,000, $184,000 and
$126,000 for the years ended December 31, 2001, 2000 and
1999, respectively, and is included in selling, general
and administration expenses in the Consolidated
Statement of Income.
Retirement Plan During 1999, the Partnership formed a retirement savings
plan for eligible employees. Under the plan, the
Partnership matches participant contributions up to
$6,500 ($6,000 in 2000) annually per participant. The
Partnership's total contribution under the plan amounted
to approximately $76,000, $53,000 and $13,000 for the
years ended December 31, 2001, 2000 and 1999,
respectively.
10. Subsequent Events
Property Purchase In connection with the purchase of a property by a
Sponsored REIT in May 2001, the Partnership obligated
itself to purchase an additional parcel of real property
within a certain amount of time if the owner offered
such property for sale to the Partnership. The Company
satisfied this obligation by causing FSP Timberlake East
Corp., a newly-organized Sponsored REIT, to purchase
this parcel on March 4, 2002.
Dividends On February 8, 2002, the Company declared a dividend of
$.30 per share of Common Stock payable to stockholders
of record as of February 8, 2002. On February 15, 2002,
the Company also declared a dividend of $.01 per share
of Common Stock payable to stockholders of record as of
February 15, 2002.
F-70
11. Quarterly Financial Information (unaudited)
2000
-----------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- -------- --------- ---------
(in thousands, except per unit data)
Revenue $ 6,404 $ 6,760 $ 10,769 $ 10,860
Income before minority interests 238 589 5,612 5,124
Income applicable to minority interests 412 1,111 1,107 19
Net income (net loss) (174) (522) 4,505 5,105
Allocation of net income (net loss) to Limited
Partners (164) (493) 4,257 4,939
Allocation of net income (net loss) to General
Partner (10) (29) 248 166
Basic and diluted net income (net loss) per
limited and general partnership unit (0.01) (0.03) 0.26 0.21
Weighted average number of units outstanding 17,000 17,230 17,230 24,436
2001
-----------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- -------- --------- ---------
(in thousands, except per unit data)
Revenue $12,787 $13,496 $11,302 $16,862
Income before minority interests 6,023 5,935 4,083 9,367
Income applicable to minority interests 21 19 0 0
Net income 6,002 5,916 4,083 9,367
Allocation of net income to Limited Partners 5,769 5,686 3,925 9,006
Allocation of net income to General Partner 233 230 158 361
Basic and diluted net income per limited and
general partnership unit 0.25 0.24 0.17 0.38
Weighted average number of units outstanding 24,436 24,437 24,586 24,586
F-71
SCHEDULE III
FRANKLIN STREET PARTNERS LIMITED PARTNERSHIP AND SUBSIDIARIES
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2001
Initial Cost
-----------------------------------
Costs
Capitalized
Encumbrances (Disposals)
Buildings & Subsequent to
Description (1) Land Improvement Acquisition
------------ ---- ----------- -------------
Residential Apartments:
Essex House, Houston, TX -- $ 2,920 $ 9,367 $ 648
Reata, Houston, TX -- 3,399 9,657 597
Weslayan Oaks, Houston, TX -- 1,658 3,990 71
Silverside Plantation, Baton Rouge, LA -- 2,000 17,082 119
Commercial Properties:
North Andover
Office Park, No. Andover, MA -- 1,311 8,136 902
Park Seneca, Charlotte, NC -- 1,915 7,817 26
Piedmont Center, Greenville, SC -- 1,449 9,839 809
4995 Patrick Henry, Santa Clara, CA -- 3,274 4,130 58
One Technology Drive, Peabody, MA -- 1,658 10,246 (450)
Hillview Center, Milpitas, CA -- 2,203 2,813 7
Telecom Business Center, San Diego, CA -- 5,035 11,363 79
Southfield Centre, Southfield, MI -- 4,344 11,455 143
Blue Ravine, Folsom, CA -- 846 5,450 22
Bollman Place, Savage, MD -- 1,585 4,121 46
Austin N.W., Austin, TX -- 708 10,494 170
10 Lyberty Way, Westford, MA -- 1,315 8,862 162
Gateway Crossing 95, Columbia, MD -- 4,453 15,931 (123)
-------- -------- -------- --------
-- $ 40,073 $150,753 $ 3,286
======== ======== ======== ========
Historical Costs
-------------------------------------------------------------
Total Costs,
Net of Depreciable Date of
Buildings & Accumulated Accumulated Life Acquisition
Description Land Improvements Total(2) Depreciation Depreciation Years (3)
----------- -------- ------------ -------- ------------ ------------ ----------- -----------
(in thousands)
Residential Apartments:
Essex House, Houston, TX $ 2,920 $ 10,015 $ 12,935 $ 2,887 $ 10,048 5-27 1993
Reata, Houston, TX 3,399 10,254 13,653 2,386 11,267 5-27 1994
Weslayan Oaks, Houston, TX 1,658 4,061 5,719 717 5,002 5-27 1997
Silverside Plantation, Baton Rouge, LA 2,021 17,180 19,201 2,010 17,191 5-27 1998
Commercial Properties:
North Andover
Office Park, No. Andover, MA 1,311 9,038 10,349 1,766 8,583 5-39 1996
Park Seneca, Charlotte, NC 1,815 7,943 9,758 781 8,977 5-39 1997
Piedmont Center, Greenville, SC 1,449 10,648 12,097 1,126 10,971 5-39 1998
4995 Patrick Henry, Santa Clara, CA 3,274 4,188 7,462 436 7,026 5-39 1997
One Technology Drive, Peabody, MA 1,658 9,796 11,454 1,383 10,071 5-39 1995
Hillview Center, Milpitas, CA 2,203 2,820 5,023 206 4,817 5-39 1999
Telecom Business Center, San Diego, CA 5,035 11,442 16,477 832 15,645 5-39 1999
Southfield Centre, Southfield, MI 4,344 11,598 15,942 673 15,269 5-39 1999
Blue Ravine, Folsom, CA 846 5,472 6,318 300 6,018 5-39 1999
Bollman Place, Savage, MD 1,585 4,167 5,752 224 5,528 5-39 1999
Austin N.W., Austin, TX 708 10,664 11,372 511 10,861 5-39 1999
10 Lyberty Way, Westford, MA 1,315 9,024 10,339 352 9,987 5-39 2000
Gateway Crossing 95, Columbia, MD 4,019 16,242 20,261 829 19,432 5-39 1999
-------- -------- -------- -------- --------
$ 39,560 $154,552 $194,112 $ 17,419 $176,693
======== ======== ======== ======== ========
(1) There are no encumbrances on the above properties.
(2) The aggregate cost for Federal Income Tax purposes is $181,606.
(3) Original date of acquisition by Sponsored Partnership.
F-72
The following table summarizes the changes in the
Partnership's real estate investments and accumulated
depreciation:
December 31,
-----------------------------
2001 2000 1999
========================================================
(in thousands)
Real estate investments,
at cost:
Balance, beginning of $193,988 $178,294 $ 86,835
period
Acquisitions -- 15,982 91,271
Improvements 566 639 188
Dispositions (442) (927) --
--------------------------------------------------------
Balance, end of period $194,112 $193,988 $178,294
========================================================
Accumulated depreciation:
Balance, beginning of $ 12,917 $ 8,526 $ 5,447
period
Depreciation 4,502 4,391 3,079
Dispositions -- -- --
--------------------------------------------------------
Balance, end of period $ 17,419 $ 12,917 $ 8,526
========================================================
F-73
Franklin Street Partners
Limited Partnership and Subsidiaries
Index to Financial Statements
December 31, 2000
Page
----
Report of independent certified public accountants........................ F-75
Consolidated Financial Statements
Balance sheets as of December 31, 2000 and December 31, 1999............ F-76
Statement of operations for the years ended December 31, 2000,
1999 and 1998 ........................................................ F-78
Statement of Partners' Capital for the years ended December 31, 2000,
1999 and 1998......................................................... F-79
Statement of cash flows for the years ended December 31, 2000, 1999
and 1998.............................................................. F-80
Notes to the financial statements....................................... F-81
F-74
Report of Independent Certified Public Accountants
To the Partners of
Franklin Street Partners Limited Partnership
Wakefield, Massachusetts
We have audited the accompanying consolidated balance sheets of Franklin Street
Partners Limited Partnership and subsidiaries as of December 31, 2000 and 1999,
and the related consolidated statements of operations, partners' capital and
cash flows for each of the three years in the period ended December 31, 2000.
These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial statements of
certain real estate partnerships, which statements reflect total assets of
$85,859,000 as of December 31, 1999 and total revenues of $4,794,000 and
$490,000 for the years ended December 31, 1999 and 1998, respectively. Those
statements were audited by other auditors whose reports have been furnished to
us, and our opinion, insofar as it relates to the amounts included for such real
estate partnerships, is based solely on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing standards
in the United States of America. Those Standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the reports of
the other auditors for 1999 and 1998 provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors for
1999 and 1998, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Franklin Street
Partners Limited Partnership and subsidiaries at December 31, 2000 and 1999, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 4 to the consolidated financial statements, the Partnership
has restated its previously reported consolidated financial statements for the
years ended December 31, 2000, 1999 and 1998 to reflect adjustments related to a
change in the accounting treatment for a series of merger transactions occurring
in 2000 and 1999.
/s/ BDO Seidman, LLP
Boston, Massachusetts
February 27, 2001, except Note 6
which is as of April 9, 2001 and Note 4
which is as of December 13, 2001
F-75
Franklin Street Partners
Limited Partnership and Subsidiaries
Consolidated Balance Sheets
December 31,
--------------------
2000 1999
================================================================================
Assets (in thousands):
Real estate investments, at cost (Notes 4 and 5):
Land $ 39,994 $ 37,678
Buildings and improvements 152,999 139,720
Fixtures and equipment 995 896
--------------------------------------------------------------------------------
193,988 178,294
Less accumulated depreciation 12,917 8,526
--------------------------------------------------------------------------------
Real estate investments, net 181,071 169,768
Cash and cash equivalents 13,718 18,519
Restricted cash 499 489
Marketable securities 5,322 --
Due from related parties (Note 6) 16,734 --
Tenant rent receivables 1,238 573
Prepaid expenses 535 624
Office computers and furniture, net of accumulated
depreciation of $142,000 and $72,000 303 239
Deposits and other assets 503 274
--------------------------------------------------------------------------------
Total assets $219,923 $190,486
================================================================================
See accompanying notes to consolidated financial statements.
F-76
Franklin Street Partners
Limited Partnership and Subsidiaries
Consolidated Balance Sheets
December 31,
----------------------
2000 1999
================================================================================
Liabilities and Partners' Capital (in thousands except units):
Liabilities:
Bank note payable (Note 7) $ 16,500 $ 23,522
Accounts payable and accrued expenses 2,281 4,810
Tenant security deposits 499 489
--------------------------------------------------------------------------------
Total liabilities 19,280 28,821
--------------------------------------------------------------------------------
Minority interests in consolidated entities 63 78,090
--------------------------------------------------------------------------------
Commitments and contingencies (Notes 6, 7, 8 and 10)
Partners' capital (deficit) (Notes 4, 8 and 9):
Limited partners, 23,486,096 and 11,051,408
units issued and outstanding 204,067 86,507
General partner, 948,499 units issued and outstanding (3,487) (2,932)
-------------------------------------------------------------------------------
Total partners' capital 200,580 83,575
-------------------------------------------------------------------------------
Total liabilities and partners' capital $ 219,923 $ 190,486
===============================================================================
See accompanying notes to consolidated financial statements.
F-77
Franklin Street Partners
Limited Partnership and Subsidiaries
Consolidated Statements of Operations
(Notes 3 and 4)
For the Years Ended
December 31,
------------------------------
2000 1999 1998
=======================================================================================
(in thousands, except per partnership unit amounts)
Revenues (Note 6):
Rental income (Note 10) $25,434 $ 16,315 $ 10,859
Investment services income 7,574 789 --
Interest and other income 1,785 944 696
---------------------------------------------------------------------------------------
Total revenues 34,793 18,048 11,555
---------------------------------------------------------------------------------------
Expenses (Note 6):
Selling, general and administrative (Notes 8 and 10) 8,795 5,223 2,575
Other real estate operating expenses 6,489 4,429 3,012
Depreciation and amortization (Note 5) 4,613 3,231 2,104
Real estate taxes and insurance 2,473 1,448 1,101
Interest expense 860 299 26
---------------------------------------------------------------------------------------
Total expenses 23,230 14,630 8,818
---------------------------------------------------------------------------------------
Income before minority interests 11,563 3,418 2,737
Income applicable to minority interests 2,649 2,279 4,412
---------------------------------------------------------------------------------------
Net income (loss) $ 8,914 $ 1,139 $ (1,675)
=======================================================================================
Allocation of net income (loss) to:
Limited Partners $ 8,568 $ 1,049 $ (839)
General Partner 346 90 (836)
---------------------------------------------------------------------------------------
$ 8,914 $ 1,139 $ (1,675)
=======================================================================================
Basic and diluted net income (loss) per limited and
general partnership unit $ .47 $ .09 $ (.88)
=======================================================================================
See accompanying notes to consolidated financial statements.
F-78
Franklin Street Partners
Limited Partnership and Subsidiaries
Consolidated Statements of Partners Capital
For the years ended December 31, 2000,
1999 and 1998
Total Partners
Limited Partners General Partner Capital
------------------------ ------------------- ------------------------
Units Amount Units Amount Units Amount
==========================================================================================================================
(in thousands, except units)
Balance, December 31, 1997 952,301 $ 8,014 948,499 $ 160 1,900,800 $ 8,174
Net loss -- (839) -- (836) -- (1,675)
Distributions -- (751) -- (749) -- (1,500)
--------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 952,301 6,425 948,499 (1,426) 1,900,800 4,999
Units issued in January 1, 1999 merger
transaction (Note 4) 10,099,107 88,413 -- -- 10,099,107 88,413
Net income -- 1,049 -- 90 -- 1,139
Distributions -- (9,380) -- (1,596) -- (10,976)
--------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 11,051,408 86,507 948,499 (2,932) 11,999,907 83,575
Units issued in January 1, 2000 merger
transaction (Note 4) 4,999,972 45,269 -- -- 4,999,972 45,269
Units issued in October 1, 2000 merger
transaction (Note 4) 7,204,716 77,080 -- -- 7,204,716 77,080
Units issued for compensation (Note 8) 230,000 2,300 -- -- 230,000 2,300
Net income -- 8,568 -- 346 -- 8,914
Distributions -- (15,628) -- (930) -- (16,558)
--------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 23,486,096 204,067 948,499 (3,487) 24,434,595 200,580
==========================================================================================================================
See accompanying notes to consolidated financial statements.
F-79
Franklin Street Partners
Limited Partnership and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended
December 31,
---------------------------------
2000 1999 1998
===========================================================================================
(in thousands)
Cash flows from operating activities:
Net income (loss) $ 8,914 $ 1,139 $ (1,675)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 4,613 3,231 2,104
Partnership units issued for compensation 2,300 -- --
Gain on sale of land (149) -- --
Minority interests 2,649 2,279 4,412
Changes in operating assets and liabilities:
Restricted cash (10) (406) 104
Prepaid expenses and other (364) (566) (590)
Tenant rent receivables (665) (389) (101)
Due from related parties (234) -- --
Deposits and other assets (381) 306 110
Accounts payable and accrued expenses (2,529) 3,635 (401)
Tenant security deposits 10 406 (104)
------------------------------------------------------------------------------------------
Net cash provided by operating activities 14,154 9,635 3,859
------------------------------------------------------------------------------------------
Cash flow from investing activities:
Loan to related party (16,500) -- --
Purchase of property and equipment (9,952) (77,255) (28,980)
Proceeds received on sale of land 1,076 -- --
Change in marketable securities (5,322) -- --
------------------------------------------------------------------------------------------
Net cash used for investing activities (30,698) (77,255) (28,980)
------------------------------------------------------------------------------------------
Cash flows from financing activities:
Cash distributions to partners (16,558) (10,976) (1,500)
Cash distributions to minority interest holders (4,506) (2,375) (5,856)
Borrowings under line of credit 16,500 23,522 --
Repayments of line of credit (23,522) -- --
Capital contributions from minority interest holders 39,829 63,316 34,752
------------------------------------------------------------------------------------------
Net cash provided by financing activities 11,743 73,487 27,396
------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (4,801) 5,867 2,275
Cash and cash equivalents, beginning of period 18,519 12,652 10,377
------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 13,718 $ 18,519 $ 12,652
===========================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 860 $ 299 $ 26
Income taxes $ -- $ -- $ --
Non-cash investing and financing activities:
In connection with the merger transactions described in Note 4, the
Partnership issued limited partnership units in exchange for the limited
partner minority interests in Sponsored Partnerships resulting in a
non-cash fair value step-up in the Partnership's real estate properties
totaling approximately $6,581,000 and $14,390,000 during the years ended
December 31, 2000 and 1999, respectively.
See accompanying notes to consolidated financial statements.
F-80
Franklin Street Partners
Limited Partnership and Subsidiaries
Notes to Consolidated Financial Statements
1. Organization Franklin Street Partners Limited Partnership (the
"Partnership") was formed as a Massachusetts limited
partnership on February 4, 1997. The Partnership owns a
99% interest in FSP Investments LLC ("FSP Investments"),
a 99% interest in FSP Property Management LLC ("FSP
Property Management") and 100% of FSP Holdings LLC ("FSP
Holdings"). The Partnership also has a nominal interest
in five corporations organized to operate as Real Estate
Investment Trusts ("REITs"), which are accounted for on
the equity method (see Notes 2 and 6).
The Partnership operates in two business segments:
rental operations and investment services. FSP
Investments provides real estate investment and
broker/dealer services. FSP Investment's services
include: (i) the organization of REIT entities in 2000
and 2001 (the "Sponsored REITs") and limited
partnerships prior to 2000, (the "Sponsored
Partnerships"), which are syndicated through private
placements; (ii) the acquisition of real estate on
behalf of the sponsored entities; and (iii) the sale of
preferred stock in REITs or limited partnership
interests in the Sponsored Partnerships. FSP Property
Management provides property management services for the
sponsored entities.
During 1999 and 2000, a total of seventeen Sponsored
Partnerships were merged in to the Partnership (see Note
4). Prior to the merger transactions, FSP Holdings owned
a 5% general partner interest in each of the merged
Sponsored Partnerships. Following the consummation of
the merger transactions, the Partnership held 100% of
the partnership interests in each of the seventeen
Sponsored Partnerships.
2. Significant of
Accounting
Policies
Basis of
Presentation The accompanying consolidated financial statements
include the accounts of the Partnership, seventeen
Sponsored Partnerships and majority-owned subsidiaries.
All significant intercompany accounts and transactions
have been eliminated in consolidation.
Restatement As discussed in Note 4, the Partnership has restated its
previously reported consolidated financial statements
for the years ended December 31, 2000, 1999 and 1998 to
reflect certain adjustments related to the Partnership's
change in the accounting treatment for a series of
merger transactions.
Business Segments The Partnership follows Statement of Financial
Accounting Standards ("SFAS") No. 131 "Disclosures about
Segments of an Enterprise and Related Information,"
which established standards for the way that public
business enterprises report information about operating
segments in annual financial statements and requires
that those enterprises report selected information about
operating segments in interim financial reports issued
to shareholders (see Note 3).
Minority Interests Minority interests represents the 95% limited partner
interests in Sponsored Partnerships prior to the date of
merger (see Note 4) and the 1% interest in FSP
Investments and FSP Property Management, which is held
by an officer and member of the general partner of the
Partnership. Minority interests included in the
Partnership's results of operations represents the
minority interest holders' share of the income or loss
of the consolidated entities. The minority interests in
the Partnership's consolidated balance sheets reflects
the original investment made by the minority interest
holders in the consolidated entities along with their
proportional share of the earnings or losses less cash
distributions. Cash distributions paid to minority
interest holders were approximately $4,506,000,
$2,375,000 and $5,856,000 for the years ended December
31, 2000, 1999 and 1998, respectively.
F-81
Franklin Street Partners
Limited Partnership and Subsidiaries
Notes to Consolidated Financial Statements
2. Significant of
Accounting
Policies
(Continued)
Estimates The preparation of financial statements in conformity
and Assumptions with generally accepted accounting principles requires
management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the
date of the financial statements and the reported
amounts of revenues and expenses during the reporting
period. Actual results could differ from those
estimates.
Reclassifications Certain balances in the 1999 and 1998 financial
statements have been reclassified to conform to the 2000
presentation.
Investments in Common stock investments in REITs are accounted for
REITs using the equity method. Under the equity method of
accounting, the Partnership's cost is subsequently
adjusted by their share of the Sponsored REITs'
earnings, after deducting the REITs' preferred stock
dividends paid or accrued. Equity in the losses of
Sponsored REITs' are not recognized to the extent that
the investment balance would become negative. Dividends
are recognized as income after the investment balance is
reduced to zero.
There were no dividends received from the REITs for the
year ended December 31, 2000.
Real Estate Real estate investments are carried at cost, net of and
Investments accumulated depreciation. Betterments, major
Depreciation renovations, and certain costs directly related to the
acquisition and improvement of real estate are
capitalized. Expenditures for maintenance and repairs,
including routine painting and carpeting, are charged to
operations as incurred. Depreciation is computed using
the straight line method over the assets' estimated
useful lives as follows:
Category Years
--------------------------------------------------------
Buildings:
Residential 27
Commercial 39
Building and improvements 15 to 39
Fixtures and equipment 5 to 7
The Partnership evaluates its assets used in operations
by identifying indicators of impairment and by comparing
the sum of the estimated undiscounted future cash flows
for each asset to the asset's carrying value. When
indicators of impairment are present and the sum of the
undiscounted future cash flows are less than the
carrying value of such asset, an impairment loss is
recorded equal to the difference between the assets
current carrying value and its value based on
discounting its estimated future cash flows. At December
31, 2000, 1999 and 1998, no such indicators of
impairment were identified.
Cash and The Partnership considers all highly liquid debt
Cash Equivalents instruments purchased with a maturity of three months or
less to be cash equivalents. Cash and cash equivalents
consists of the following (in thousands):
December 31,
-----------------
2000 1999
==============================================================
Capital reserve funds held in money market
and cash equivalent accounts $ 3,464 $ 8,024
Money market accounts 3,826 --
Operating accounts 6,428 10,495
==============================================================
$13,718 $18,519
==============================================================
Capital reserve funds are internally segregated by the
Partnership and have no external restrictions.
F-82
Franklin Street Partners
Limited Partnership and Subsidiaries
Notes to Consolidated Financial Statements
2. Significant of
Accounting
Policies
(Continued)
Restricted Cash Restricted cash consists of tenant security deposits.
Tenant security deposits are refunded when tenants
vacate provided that the tenant has not damaged the
property.
Marketable The Partnership accounts for investments in debt and
Securities equity securities under the provisions of SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity
Securities". The Partnership classifies its debt and
equity securities as available-for-sale securities.
Investments in marketable securities mature as follows
(in thousands):
After
1 Year
Within Through
December 31, 2000 1 Year 3 Years Total
============================================================
Government-backed debt securities $3,957 $ -- $3,957
Corporate bonds 968 397 1,365
------------------------------------------------------------
$4,925 $397 $5,322
============================================================
The above securities are stated at cost, which
approximates their fair value at December 31, 2000.
Financial The Partnership estimates that the carrying value of
Instruments cash and cash equivalents, restricted cash, marketable
securities, amounts due from related parties and the
bank note payable approximate their fair values based on
their short-term maturity and prevailing interest rates.
Revenue Commercial Properties -- The Partnership has retained
Recognition substantially all of the risks and benefits of ownership
of the Partnership's commercial properties and accounts
for its leases as operating leases. Rental income from
leases, which include scheduled increases in rental
rates during the lease term, is recognized on a
straight-line basis. The Partnership does not have any
percentage rent arrangements with its commercial
property tenants. Reimbursable common area maintenance
charges are included in rental income in the period
earned.
Residential Apartments -- Rental income from tenants of
residential apartment properties is recognized in the
period earned.
Investment Services Income -- The Partnership recognizes
property acquisition and syndication fees in the period
services are rendered, provided that the fee is fixed
and collection is probable. Interim financing fees are
recognized in the period earned. Commission income from
the sale of partnership units in Sponsored Partnerships
or preferred stock in Sponsored REITs is recognized as
earned, which generally occurs upon closing.
Income Taxes No provision has been made for Federal or state income
taxes in the consolidated financial statements of the
Partnership. Partners are required to report on their
individual tax returns their allocable share of income,
gains, losses, deductions and credits of the
Partnership. The Partnership files its tax returns on
the accrual basis.
Net Income (Loss) The Partnership follows SFAS No. 128 "Earnings per
Per Partnership Share", which specifies the computation, presentation
Unit and disclosure requirements for the Partnership's net
income (loss) per partnership unit. Basic net income
(loss) per unit is computed by dividing net income
(loss) by the weighted average number of partnership
units outstanding during period. Diluted net income
(loss) per share reflects the potential dilution that
could occur if securities or other contracts to issue
units were exercised or converted into units. There were
no potential dilutive units outstanding at December 31,
2000, 1999 and 1998.
F-83
Franklin Street Partners
Limited Partnership and Subsidiaries
Notes to Consolidated Financial Statements
2. Significant of
Accounting
Policies
(Continued)
Net Income (Loss) The denominator used for calculating basic and diluted
Per Partnership net income (loss) per unit is as follows:
Unit
(Continued)
Years Ended
December 31,
-----------------------------------
2000 1999 1998
======================================================================
Weighted average number of units
outstanding:
Limited partners 18,025,059 11,051,408 952,301
General partner 948,499 948,499 948,499
----------------------------------------------------------------------
18,973,558 11,999,907 1,900,800
======================================================================
The new partnership units exchanged for the existing
general partner and limited partners interests, in
connection with the January 1, 1999 merger transactions
described in Note 4, are treated as outstanding for the
year ended December 31, 1998.
Recent Accounting In June 1998, the Financial Accounting Standards Board
Standards ("FASB") issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133
requires companies to recognize all derivative contracts
at their fair values, as either assets or liabilities on
the balance sheet. If certain conditions are met, a
derivative may be specifically designated as a hedge,
the objective of which is to match the timing of gain or
loss recognition on the hedging derivative with the
recognition of (1) the changes in the fair value of the
hedged asset or liability that are attributable to the
hedged risk, or (2) the earnings effect of the hedged
forecasted transaction. For a derivative not designated
as a hedging instrument, the gain or loss is recognized
in income in the period of change. SFAS No. 133, as
amended by SFAS No. 137 and 138, is effective for all
fiscal quarters of fiscal years beginning after June 15,
2000. Historically, the Partnership has not entered into
derivative contracts either to hedge existing risks or
for speculative purposes. Accordingly, adoption of the
new standard did not affect the Partnership's financial
statements.
In March 2000, the FASB issued interpretation No. 44
("FIN 44"), "Accounting for Certain Transactions
Involving Stock Compensation, an interpretation of APB
Opinion No. 25." FIN 44 clarifies the application of APB
No. 25 for (a) the definition of an employee for
purposes of applying APB No. 25, (b) the criteria for
determining whether a plan qualifies as a
noncompensatory plan, (c) the accounting consequences of
various modifications to the previously fixed stock
options or awards, and (d) the accounting for an
exchange of stock compensation awards in a business
combination. FIN 44 was effective July 1, 2000 but
certain conclusions covered specific events that
occurred after either December 15, 1998 or January 12,
2000. Adoption of FIN 44 did not have an effect on the
Partnership's financial statements. In December 1999,
the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 which summarizes
certain of the SEC staff's views in applying generally
accepted accounting principles to revenue recognition in
financial statements. The Staff Accounting bulletin
became effective in the fourth quarter of 2000. The
adoption of this guidance did not have an impact on the
Partnership's results of operations or financial
position, however, the guidance may impact the way in
which the Partnership will account for future
transactions.
F-84
Franklin Street Partners
Limited Partnership and Subsidiaries
Notes to Consolidated Financial Statements
3. Business Segments The Partnership operates in two business segments:
rental operations and investment services (including
real estate acquisition, financing and broker/dealer
services). Segment operating results are measured and
assessed based on a performance measure known as Funds
From Operations ("FFO"). FFO is defined as net income
(computed in accordance with generally accepted
accounting principles) plus depreciation and
amortization and other non-cash expenses. FFO is not a
measure of operating results or cash flows from
operating activities as measured by generally accepted
accounting principles, and is not necessarily indicative
of cash available to fund cash needs and should not be
considered an alternative to cash flows as a measure of
liquidity.
FFO by business segment are as follows (in thousands):
Per
Consolidated
Rental Investment Intercompany Statements of
Operations Services Total Eliminations Operations
========================================================================================================
Year ended December 31, 2000:
Total revenues $ 26,817 $ 14,152 $ 40,969 $(6,176) $ 34,793
Total expenses (14,332) (9,854) (24,186) 1,099 (23,087)
Depreciation and amortization 4,694 68 4,762 (149) 4,613
Non-cash expenses -- 2,300 2,300 -- 2,300
--------------------------------------------------------------------------------------------------------
FFO $ 17,179 $ 6,666 $ 23,845 $(5,226) $ 18,619
========================================================================================================
Year ended December 31, 1999:
Total revenues $ 17,204 $ 9,143 $ 26,347 $(8,299) $ 18,048
Total expenses (9,945) (5,315) (15,260) 667 (14,593)
Depreciation and amortization 3,299 41 3,340 (109) 3,231
--------------------------------------------------------------------------------------------------------
FFO $ 10,558 $ 3,869 $ 14,427 $(7,741) $ 6,686
========================================================================================================
Year ended December 31, 1998:
Total revenues $ 11,560 $ 6,208 $ 17,768 $(6,213) $ 11,555
Total expenses (6,979) (2,802) (9,781) 203 (9,578)
Depreciation and amortization 2,136 33 2,169 (65) 2,104
--------------------------------------------------------------------------------------------------------
FFO $ 6,717 $ 3,439 $ 10,156 $(6,075) $ 4,081
========================================================================================================
Non-cash expenses of $2,300,000 for the year ended
December 31, 2000 is comprised of equity-based
compensation charges (see Note 8).
F-85
Franklin Street Partners
Limited Partnership and Subsidiaries
Notes to Consolidated Financial Statements
3. Business Segments
(Continued)
The Partnership's cash distributions from operations for
the year ended December 31, 2000 (excluding $3,953,000
of cash distributions related to the October 1, 2000
Merged Partnerships for the period prior to the date of
merger) are summarized as follows:
Distribution Total
Per Partnership Cash
Quarter paid Unit Distributions
=================================================================
(in thousands)
Second quarter of 2000 $ .24 $ 4,080
Third quarter of 2000 .25 4,308
Fourth quarter of 2000 .26 4,480
First quarter of 2001 .27 6,597
-----------------------------------------------------------------
$19,465
=================================================================
Cash distributions per partnership unit is based on the
total outstanding units at the end of each calendar
quarter. Cash available for distribution, as determined
at the sole discretion of the general partner, is
required to be distributed to unit holders within 90
days following the end of each calendar quarter. The
cash distribution of approximately $6,597,000 for the
fourth quarter of 2000 was declared and paid in 2001.
The cash distribution of approximately $4,200,000 for
the fourth quarter of 1999 was declared and paid in the
first quarter of 2000.
The following table is a summary of other financial
information by business segment (in thousands):
Rental Investment
Operations Services Total
========================================================
December 31, 2000:
Capital expenditures $ 9,825 $ 127 $ 9,952
Identifiable assets $194,328 $25,595 $219,923
December 31, 1999:
Capital expenditures $ 77,060 $ 195 $ 77,255
Identifiable assets $159,324 $31,162 $190,486
December 31, 1998
Capital expenditures $ 28,973 $ 7 $ 28,980
F-86
Franklin Street Partners
Limited Partnership and Subsidiaries
Notes to Consolidated Financial Statements
4. Merger In December 2001, the Partnership restated its
Transactions previously reported consolidated financial statements
for the year ended December 31, 2000, 1999 and 1998 to
reflect certain adjustments related to the Partnerships
accounting treatment for the merger transactions
described below. The merger transactions involved the
exchange of the Partnership's limited partner units for
the minority interest holder limited partnership units
in seventeen Sponsored Partnerships. The merger
transactions were initially recorded at their historic
book values similar to a pooling of interests and
transaction costs were charged to expense in accordance
with the guidance found in Emerging Issues Task Force
("EITF") 87-21 "Change of Accounting Basis in Master
Limited Partnership Transactions." In connection with
the review of the Partnership's public filings by the
Staff of the Securities and Exchange Commission ("SEC")
in December of 2001, the Staff of the SEC and the
Partnership determined that acquisition of minority
interest accounting using the purchase method in
accordance with FASB Technical Bulletin 85-5 "Issues
Relating to Accounting for Business Combinations" was
the preferable treatment. Accordingly, the Partnership
has recorded the minority interest acquisitions based on
the fair value of assets and liabilities acquired.
Additionally, transaction costs incurred in connection
with the 2000 and 1999 mergers totaling approximately
$453,000 and $736,000, respectively have been reflected
as a cost of the minority interest acquisitions. The
fair market value of the merged entities' real estate
was determined based on independent appraisals.
The non-cash adjustments had the impact of decreasing
reported net income for additional depreciation expense
and reallocating net income to minority interest
holders. Additionally, the purchase accounting fair
value adjustments increased real estate assets and
partners' capital. The impact to the Partnership's
consolidated financial statements is summarized in the
table below (in thousands, except per unit amounts):
As Previously
Reported Adjustment Restated
--------------------------------------
Year ended December 31, 2000:
Real estate investments, net $160,631 $ 20,440 $ 181,071
Total partners' capital 180,140 20,440 200,580
Net income 11,706 (2,792) 8,914
Basic and diluted net income per
partnership unit .50 (.10) .40
Year ended December 31, 1999:
Real estate investments, net $155,712 $ 14,056 $ 169,768
Minority interests 52 78,038 78,090
Total partners' capital 147,326 (63,751) 83,575
Net income 3,455 (2,316) 1,139
Basic and diluted net income per
partnership unit .21 (.12) .09
Year ended December 31, 1998:
Net income (loss) $ 1,977 $ (3,652) $ (1,675)
Basic and diluted net income (loss)
per partnership unit .17 (1.05) (.88)
F-87
Franklin Street Partners Limited Partnership and Subsidiaries
Notes to Consolidated Financial Statements
4. Merger Transactions
(Continued)
Effective October 1, 2000, the Partnership and six
Sponsored Partnerships consummated a series of mergers
pursuant to an Agreement and Plan of Merger (the
"October 2000 Merger"). Under the terms of the October
2000 Merger, all limited partnership interests in the
six Sponsored Partnerships outstanding on October 1,
2000 were exchanged for 7,204,716 new limited
partnership units in the Partnership. The operations of
the six merged Sponsored Partnerships consist of six
commercial rental properties (see Note 5).
Effective January 1, 2000, the Partnership and three
Sponsored Partnerships consummated a series of mergers
pursuant to an Agreement and Plan of Merger (the
"January 2000 Merger"). Under the terms of the January
2000 Merger, all limited partnership interests in the
three Sponsored Partnerships outstanding on January 1,
2000 were exchanged for 4,999,972 new limited
partnership units in the Partnership. The operations of
the three merged Sponsored Partnerships consist of a
residential apartment property and two commercial real
estate properties (see Note 5).
Effective January 1, 1999, the Partnership and eight
Sponsored Partnerships consummated a series of mergers
pursuant to an Agreement and Plan of Merger (the "1999
Merger"). Under the terms of the 1999 Merger, all
limited partnership interests in the eight Sponsored
Partnerships outstanding on January 1, 1999 were
exchanged for 10,099,107 new limited partnership units
in the Partnership. Additionally, the partnership
interests held by the Partnership's existing general
partner and limited partners were exchanged for 948,499
new general partnership units and 952,301 new limited
partnership units, respectively. The operations of the
merged Sponsored Partnerships consist of five commercial
rental properties and three residential real estate
properties (see Note 5).
Following the consummation of the mergers described
above, the Partnership owned 100% of the interests in
each merged Sponsored Partnership. The merger
transactions were solely an exchange of partnership
units and no cash was involved. The Partnership's
consolidated financial statements include the full
results of operations of the merged Sponsored
Partnerships from the date of merger.
The following unaudited pro forma consolidated results
of operations are presented as if the merger
transactions had occurred at the beginning of the
periods presented (in thousands, except per unit
amounts):
Years ended December 31, 2000 1999 1998
==================================================================================
(in thousands)
Revenues $34,793 $18,048 $11,555
Net income $10,987 $ 3,121 $ 1,643
Basic and diluted net income per limited and general
partnership unit $ 0.47 $ 0.19 $ 0.14
F-88
Franklin Street Partners
Limited Partnership and Subsidiaries
Notes to Consolidated Financial Statements
5. Real Estate In connection with the various merger transactions
Investments described at Note 4, the Partnership acquired 100%
ownership in seventeen real estate properties during
2000 and 1999. The following is a summary of the more
significant elements of the Partnership's real estate
investments at December 31, 2000 (dollar amounts in
thousands):
Partnership's
Acquisition Cost
-----------------------
Date
Approximate Acquired by Buildings,
Date of Square Date Sponsored Improvements
Description Merger Units Footage Constructed Partnership Land and Fixtures
==============================================================================================================================
Residential Apartments:
Essex House, Houston, TX January 1999 135 118,800 1993 1993 $ 2,920 $ 9,367
Reata, Houston, TX January 1999 159 129,000 1994 1994 3,399 9,657
Weslayan Oaks, Houston, TX January 1999 84 70,500 1995 1997 1,658 3,990
Silverside Plantation, Baton Rouge, LA January 2000 264 223,800 1998 1998 2,136 17,151
Commercial Properties:
North Andover
Office Park, No. Andover, MA January 1999 -- 92,000 1972-1978 1996 1,311 8,136
Park Seneca, Charlotte, NC January 1999 -- 110,600 1969 1997 1,915 7,817
Piedmont Center, Greenville, SC January 1999 -- 143,800 1973 1998 1,449 9,839
4995 P. Henry Drive, Santa Clara, CA January 1999 -- 40,300 1978 1997 3,274 4,130
One Technology Drive, Peabody, MA January 1999 -- 188,000 1982 1995 1,658 10,246
Hillview Center, Milpitas, CA January 2000 -- 36,300 1984 1999 2,203 2,813
Telecom Business Center, San Diego, CA January 2000 -- 101,700 1997 1999 5,035 11,363
Southfield Center, Southfield, MI October 2000 -- 212,500 1977 1999 4,344 11,455
Blue Ravine, Folsom, CA October 2000 -- 47,000 1984 1999 846 5,450
Bollman Place, Savage, MD October 2000 -- 99,000 1984 1999 1,585 4,121
Austin N.W., Austin, TX October 2000 -- 68,600 1998 1999 708 10,494
10 Lyberty Way, Westford, MA October 2000 -- 104,700 1984 2000 1,315 8,862
Gateway Crossing 95, Columbia, MD October 2000 -- 188,800 1988-1994 1999 4,453 15,931
------------------------------------------------------------------------------------------------------------------------------
$40,209 $150,822
=============================================================================================================================
F-89
Franklin Street Partners
Limited Partnership and Subsidiaries
Notes to Consolidated Financial Statements
5. Real Estate
Investments
December 31, 2000
Cost ----------------- Total
Capitalized Accumulated
(Disposals) Buildings, Depreciation at
Subsequent to Improvements December 31,
Description Acquisition Land And Fixtures Total 2000
==================================================================================================================
Residential Apartments:
Essex House, Houston, TX $ 648 $ 2,920 $ 10,015 $ 12,935 $ 2,598
Reata, Houston, TX 567 3,399 10,224 13,623 2,082
Weslayan Oaks, Houston, TX 70 1,658 4,060 5,718 566
Silverside Plantation, Baton Rouge, LA (205) 2,021 17,061 19,082 1,311
Commercial Properties:
North Andover
Office Park, No. Andover, MA 895 1,311 9,031 10,342 1,458
Park Seneca, Charlotte, NC (42) 1,815 7,875 9,690 584
Piedmont Center, Greenville, SC 596 1,449 10,435 11,884 796
4995 P. Henry Drive, Santa Clara, CA 58 3,274 4,188 7,462 294
One Technology Drive, Peabody, MA (450) 1,658 9,796 11,454 1,173
Hillview Center, Milpitas, CA 7 2,203 2,820 5,023 126
Telecom Business Center, San Diego, CA 78 5,035 11,441 16,476 515
Southfield Center, Southfield, MI 138 4,344 11,593 15,937 348
Blue Ravine, Folsom, CA 22 846 5,472 6,318 154
Bollman Place, Savage, MD 45 1,585 4,166 5,751 98
Austin N.W., Austin, TX 161 708 10,655 11,363 264
10 Lyberty Way, Westford, MA 78 1,315 8,940 10,255 135
Gateway Crossing 95, Columbia, MD 291 4,453 16,222 20,675 415
------------------------------------------------------------------------------------------------------------------
$ 2,957 $ 39,994 $153,994 $193,988 $12,917
==================================================================================================================
There were no encumbrances on the above properties.
Depreciation lives at December 31, 2000 are summarized
at Note 2.
The following table summarizes the changes in the
Partnership's real estate investments and accumulated
depreciation (in thousands):
December 31,
--------------------------------
2000 1999 1998
====================================================================
Real estate investments, at cost:
Balance, beginning of period $ 178,294 $ 86,835 $58,080
Acquisitions 15,982 91,271 28,634
Improvements 639 188 121
Dispositions (927) -- --
-------------------------------------------------------------------
Balance, end of period $ 193,988 $178,294 $86,835
====================================================================
Accumulated depreciation:
Balance, beginning of period $ 8,526 $ 5,447 $ 3,617
Depreciation 4,391 3,079 1,830
Dispositions -- -- --
-------------------------------------------------------------------
Balance, end of period $ 12,917 $ 8,526 $ 5,447
====================================================================
F-90
Franklin Street Partners
Limited Partnership and Subsidiaries
Notes to Consolidated Financial Statements
6. Related Party Investment in During 2000, the Partnership acquired 100%
Transactions of the common stock in four Sponsored REITs for nominal
REITs consideration. Additionally, the Sponsored Partnership's
5% general partner interest in one Sponsored Partnership
was exchanged for the common stock in a newly formed
REIT, in connection with this Sponsored Partnership's
reorganization from a limited partnership to a REIT on
January 1, 2001.
The Sponsored REITs were formed as corporations under
the laws of Delaware and operate in a manner intended to
qualify as REITs for Federal income tax purposes. To
qualify as a REIT, each entity must comply with certain
operating activity requirements and must generally
distribute 95% (90% commencing January 1, 2001) of its
taxable income to its shareholders. The REITs have
issued both common stock and preferred stock. The common
stock is owned solely by the Partnership and the
preferred stock is owned by outside individual
investors. Each REIT was organized to acquire a single
real estate property using the proceeds raised through
private offerings of its preferred stock. The REIT's do
not contemplate having any long-term financing. The
preferred shareholders' in each of the REITs are
entitled to 100% of the REITs dividends. As a common
shareholder, the Partnership has no rights to the REIT's
regular cash dividends. However, upon liquidation of the
REITs the Partnership will be entitled to its percentage
interest in any proceeds after the preferred
shareholders have recovered their investment. The
Partnership's percentage interest in each REIT is less
than 1%. The Partnership's cost of its investment in the
REITs approximates its share of the underlying equity in
the net assets of the REITs. The Partnership's share of
the REITs' earnings, after deducting preferred stock
dividends paid or accrued, was not material for the year
ended December 31, 2000.
The affirmative vote of the holders of a majority of the
REIT's preferred stockholders is required for any
actions involving merger, sale of property, amendment to
charter or issuance of additional capital stock. In
addition, all of the REIT's amended their certificates
of incorporation in April 2001 to allow the holders of
more than fifty percent of the outstanding preferred
shares to remove, without cause, and replace one or more
members of the REIT's Board of Directors
Sponsored Entity FSP Investments has provided syndication and real estate
Fees acquisition advisory services for the Sponsored REITs in
2001 and 2000 and Sponsored Partnerships prior to 2000.
Transactions with merged Sponsored Partnerships have
been eliminated in the accompanying consolidated
financial statements. Fees from non-consolidated related
entities for property acquisition services amounted to
approximately $1,581,000 and $346,000 for the years
ended December 31, 2000 and 1999, respectively. Sales
commissions earned for the sale of Sponsored REIT
preferred shares in 2000 and partnership units in one
Sponsored Partnership in 1999 amounted to approximately
$4,036,000 and $443,000 for the years ended December 31,
2000 and 1999, respectively. The Partnership has also
provided interim financing for the purchase of certain
REIT properties prior to completion of the REIT's
private equity offerings. Financing commitment fees
earned by the Partnership from the REITs totaled
approximately $1,957,000 for the year ended December 31,
2000. Interest income charged to the REITs amounted to
approximately $457,000 for the year ended December 31,
2000.
Management Fees Management fees charged to the merged Sponsored
Partnerships have been eliminated in the accompanying
consolidated statements of operations. Total property
management fee income from non-consolidated entities
amounted to approximately $112,000 and $16,000 for the
years ended December 31, 2000 and 1999, respectively.
There were no related entity management fees for the
year ended December 31, 1998. Property management fees
range from 1% to 5% of collected rents.
F-91
Franklin Street Partners
Limited Partnership and Subsidiaries
Notes to Consolidated Financial Statements
6. Related Party
Transactions
(Continued)
Due From Related Amounts due from related parties consist of the
Parties following (in thousands):
December 31, 2000 1999
========================================================
Interim financing note
receivable due from
Sponsored REIT, bearing
interest at the bank's
base rate (9.5% at
December 31, 2000),
collateralized by the
REIT's real estate and the
assignment of its rents;
paid in full upon closing
of REIT's private equity
offering in February 2001 $16,500 $--
Interest receivable from
Sponsored REITs, paid upon
closing of private equity
offering in February
2001 144 --
Non-interest bearing cash advances
due on demand from
Sponsored REITs 90 --
--------------------------------------------------------
$16,734 $--
========================================================
7. Bank Note Payable The Partnership has a revolving line of credit agreement
(the "Loan Agreement") with a bank providing for
borrowings up to $35 million (increased to $53 million
in February 2001). Borrowings under the Loan Agreement
bear interest at either the bank's base rate or a
variable LIBOR rate, as defined. Borrowings outstanding
under the Loan Agreement consist of the following (in
thousands):
December 31, 2000 1999
==========================================================================
Note payable, bearing interest at the bank's base rate
(9.5% at December 31, 2000) $16,500 $ 3,672
Note payable, bearing interest at LIBOR plus 1.25%
per annum (7.75% at December 31, 1999) -- 19,850
--------------------------------------------------------------------------
$16,500 $23,522
==========================================================================
The Loan Agreement includes restrictions on property
liens and requires compliance with various financial
covenants. Financial covenants include the maintenance
of at least $1,500,000 in operating cash accounts, a
minimum tangible net worth of $140,000,000 and
compliance with various debt and operating income
ratios, as defined in the Loan Agreement. The
Partnership was in compliance with the Loan Agreement's
financial covenants as of December 31, 2000. Outstanding
borrowings of $16,500,000 at December 31, 2000 were
repaid in February 2001. The Loan Agreement matures on
February 23, 2003.
The Loan Agreement also provides for personal borrowings
of up to $3,000,000 by the members of the Partnership's
general partner for the purpose of acquiring partnership
units or paying income taxes thereon. Borrowings of
$800,000 were outstanding with members of the general
partner at December 31, 2000, which are guaranteed by
the Partnership.
F-92
Franklin Street Partners
Limited Partnership and Subsidiaries
Notes to Consolidated Financial Statements
(Information for March 31, 2001 and 2000 is unaudited)
8. Partners' Capital
General The Partnership's general partner has the exclusive
right to manage the business of the Partnership and make
certain amendments to the Partnership Agreement, without
the consent or approval of the limited partners. The
Partnership's limited partners do not take part in
management and do not have any voting rights regarding
the Partnership's operations. A majority in interest of
the limited partners, with the consent of the general
partners, may amend the Partnership Agreement, subject
to certain limitations as defined in the Partnership
Agreement. Except as provided for under certain Federal
tax provisions described in the Partnership Agreement,
net income or net losses from operations shall be
allocated to all partners based on their percentage
interest in the Partnership. Net profits or losses
arising from a sale or other disposition of all or any
portion of the Partnership's property or upon
liquidation of the Partnership shall be allocated as
follows:
Net Profit -- The Partnership's net profits are
allocated first to the extent of any partner's negative
capital account balance, and thereafter in proportion
with their percentage interest in the Partnership.
Net Losses -- First to the extent of any partner's
positive capital account balance, and thereafter in
proportion with their percentage interest in the
Partnership.
The Partnership's cash distributions are allocated to
the limited partners and the general partner based on
each partner's percentage interest in the Partnership.
Equity-Based In April 2000 and January 2001, the Partnership issued
Compensation 230,000 and 2,522 partnership units, respectively, with
a fair value of approximately $2,300,000 and $29,000,
respectively, to certain officers and employees of the
Partnership in lieu of cash compensation. These
partnership units were fully vested on the date of
issuance. The equity-based compensation charges of
$2,300,000 and $29,000 are included in selling, general
and administrative expenses in the accompanying
statements of operations for the year ended December 31,
2000 and three months ended March 31, 2001,
respectively. Cash distributions paid to the holders of
the 230,000 units amounted to approximately $117,000 for
the year ended December 31, 2000.
General Partner On December 30, 1999, FSP General Partner LLC (the
"General Partner") was organized solely to hold the
Partnership's general partner units, which were
previously held by eight individuals. The General
Partner's financial activities consist of receiving cash
distributions from the Partnership and paying such
amounts to its members. The members of the General
Partner function as Officers and/or Directors of the
Partnership. The Partnership pays no fees or other
compensation to the General Partner. The General Partner
has no commitment or intent to furnish direct or
indirect financial assistance to the Partnership. Total
cash distributions paid to the General Partner were
approximately $930,000, $1,596,000 and $749,000 for the
years ended December 31, 2000, 1999 and 1998,
respectively.
9. Federal Income The difference between Partners' capital for financial
Tax Reporting reporting purposes and for income tax purposes is
approximately as follows (in thousands):
Partnership capital - financial reporting purposes,
December 31, 2000 $ 200,580
Partnership's cumulative tax
reporting differences,
primarily relating to
non-deductible expenses,
depreciation and other
temporary differences and
the effects of mergers (19,090)
---------------------------------------------------------------
Partners' capital -- income tax purposes,
December 31, 2000 per Form 10 $ 181,490
===============================================================
The merger transactions described in Note 4 were treated
as tax-free reorganizations for income tax reporting
purposes.
F-93
Franklin Street Partners
Limited Partnership and Subsidiaries
Notes to Consolidated Financial Statements
(Information for March 31, 2001 and 2000 is unaudited)
10. Commitments
Rentals Under The Partnership's commercial rental operations include
Operating Leases the leasing of office buildings and industrial
properties subject to leases with terms greater than one
year. The leases thereon expire at various dates through
2012. The following is a schedule of approximate future
minimum rental income on non-cancelable operating leases
as of December 31, 2000 (in thousands):
Year ended December 31,
========================================================
2001 $26,719
2002 14,759
2003 12,179
2004 8,444
2005 3,936
Thereafter 12,358
--------------------------------------------------------
$78,395
========================================================
Office Lease The Partnership leases its corporate office space under
a six year operating lease that commenced in June 1999.
The lease includes a base annual rent and additional
rent for the Partnership's share of taxes and operating
costs.
Future minimum lease payments are approximately as
follows (in thousands):
Year ended December 31,
========================================================
2001 $190
2002 199
2003 203
2004 209
2005 97
--------------------------------------------------------
$898
========================================================
Rent expense was approximately $184,000, $126,000 and
$52,000 for the years ended December 31, 2000, 1999 and
1998, respectively.
Retirement Plan During 1999, the Partnership formed a retirement savings
plan for eligible employees. Under the plan, the
Partnership matches participant contributions up to
$6,000 annually per participant. The Partnership's total
contribution under the plan amounted to approximately
$53,000 and $46,000 for the years ended December 31,
2000 and 1999, respectively.
F-94
FSP Forest Park IV Corp.
Quarterly Report
September 30, 2002
Table of Contents
Page
----
Financial Statements
Balance Sheets as of September 30, 2002 and December 31, 2001 ............ F-96
Statements of Income for the nine months ended
September 30, 2002 and 2001 .............................................. F-97
Statements of Cash Flows for the nine months ended
September 30, 2002 and 2001 .............................................. F-98
Notes to the Financial Statements ........................................ F-99
F-95
FSP Forest Park IV Corp.
Balance Sheets
(unaudited)
September 30, December 31,
(in thousands, except shares and par value amounts) 2002 2001
=====================================================================================================
Assets:
Real estate investments, at cost:
Land $ 1,210 $ 1,210
Buildings and improvements 5,170 5,171
-----------------------------------------------------------------------------------------------------
6,380 6,381
Less accumulated depreciation (387) 310
-----------------------------------------------------------------------------------------------------
Real estate investments, net 5,993 6,071
Cash and cash equivalents 259 199
Cash - funded reserve 656 656
Tenant rent receivables 120 111
Prepaid expenses and other assets, net 47 42
-----------------------------------------------------------------------------------------------------
Total assets $ 7,075 $ 7,079
=====================================================================================================
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and accrued expenses $ 65 $ 178
-----------------------------------------------------------------------------------------------------
Total liabilities 65 178
-----------------------------------------------------------------------------------------------------
Commitments and Contingencies:
Stockholders' Equity:
Preferred Stock, $.01 par value, 78 shares
authorized, issued and outstanding -- --
Common Stock, $.01 par value, 1 share -- --
authorized, issued and outstanding
Additional paid-in capital 7,115 7,115
Retained earnings (deficit) and dividends in excess of earnings (105) (214)
-----------------------------------------------------------------------------------------------------
Total Stockholders' Equity 7,010 6,901
-----------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 7,075 $ 7,079
=====================================================================================================
See accompanying notes to financial statements.
F-96
FSP Forest Park IV Corp.
Statements of Income
(Unaudited)
For the For the
Three Months Nine Months
Ended Ended
September 30, September 30,
--------------------- ---------------------
(in thousands, except shares and per share amounts) 2002 2001 2002 2001
==========================================================================================================
Revenue:
Rental $ 204 $ 202 $ 637 $ 633
Interest and other 4 4 13 26
----------------------------------------------------------------------------------------------------------
Total revenue 208 206 650 659
----------------------------------------------------------------------------------------------------------
Expenses:
Rental operating expenses 40 30 115 134
Depreciation and amortization 10 33 77 121
Real estate taxes and insurance 16 18 48 48
----------------------------------------------------------------------------------------------------------
Total expenses 66 81 240 303
----------------------------------------------------------------------------------------------------------
Net income $ 142 $ 125 $ 410 $ 356
==========================================================================================================
Allocation of net income to:
Preferred shareholders $ 142 $ 125 $ 410 $ 356
Common shareholders -- -- -- --
----------------------------------------------------------------------------------------------------------
$ 142 $ 125 $ 410 $ 356
==========================================================================================================
Weighted average number of shares outstanding,
basic and diluted
Preferred shares 78 78 78 78
Common shares 1 1 1 1
==========================================================================================================
Net income per share, basic and diluted
Preferred shares $1,821 $1,603 $5,256 $4,564
Common shares $ -- $ -- $ -- $ --
==========================================================================================================
See accompanying notes to financial statements.
F-97
FSP Forest Park IV Corp.
Statements of Cash Flows
(Unaudited)
For the
Nine months
Ended
September 30,
--------------------
(in thousands) 2002 2001
========================================================================================
Cash flows from operating activities:
Net income $ 410 $ 356
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 77 121
Changes in operating assets and liabilities:
(Increase) decrease in tenant rent receivables (9) (48)
(Increase) in prepaid expenses and other assets, net (5) 4
Decrease in accounts payable and accrued expenses (113) (88)
----------------------------------------------------------------------------------------
Net cash provided by operating activities 360 345
----------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets 1 (355)
Proceeds from funded reserve -- 214
----------------------------------------------------------------------------------------
Net cash investing activities 1 (141)
----------------------------------------------------------------------------------------
Cash flows from financing activities:
Distributions to stockholders (301) (325)
----------------------------------------------------------------------------------------
Net cash provided by used for financing activities (301) (325)
----------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 60
Cash and cash equivalents, beginning of period 199 111
----------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 259 $ --
========================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ -- $ --
Income taxes -- --
See accompanying notes to financial statements.
F-98
FSP Forest Park IV Corp.
Notes to Financial Statements
(Unaudited)
1. Organization, Basis of presentation, and Recent Accounting Pronouncements
Organization
FSP Forest Park IV Corp. (the "Company") was organized on March 29, 1999 as a
Limited Partnership under the laws of the Commonwealth of Massachusetts to
purchase, own and operate a commercial office building located in Charlotte,
North Carolina (the "Property"). The Property consists of a single-story modern
office building that contains approximately 60,000 square feet of space situated
on approximately 7.52 acres of land. The company acquired the Property on July
8, 1999. The Company subsequently reorganized as a corporation under the laws of
the State of Delaware effective January 1, 2001.
Basis of Presentation
These financial statements should be read in conjunction with the Company's
financial statements and notes thereto contained in the Company's annual
financial statement for its fiscal year ended December 31, 2001.
The accompanying interim financial statements are unaudited; however, the
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information and in conjunction with the rules and regulations of the Securities
and Exchange Commission. Accordingly, they do not include all of the disclosures
required by accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of management, all
adjustments (consisting solely of normal recurring matters) necessary for a fair
presentation of the financial statements for these interim periods have been
included. The results of operations for the interim periods are not necessarily
indicative of the results to be obtained for other interim periods or for the
full fiscal year.
Certain prior-year balances have been reclassified in order to conform to the
current-year presentation.
Recent Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations," which addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This Statement requires that
the fair value of a liability for an asset retirement obligation be recognized
in the period in which it is incurred if a reasonable estimate of the fair value
can be made. The associated asset retirement costs are capitalized as part of
the carrying amount of the long-lived asset. This Statement will be effective at
the beginning of 2003. The Company has reviewed the provisions of SFAS 143 and
believes that the impact of adoption will not be material to its financial
position, results of operations and cash flows.
In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets". This Statement supersedes SFAS No. 121 and
requires that long-lived assets that are to be disposed of by sale be measured
at the lower of book value or fair value less costs to sell. SFAS No. 144
retains the fundamental provisions of SFAS 121 for (a) recognition and
measurement of the impairment of long-lived assets to be held and used, and (b)
measurement of long-lived assets to be disposed of by sale, but broadens the
definition of what constitutes a discontinued operation and how the results of a
discontinued operation are to be measured and presented. This Statement was
effective at the beginning of 2002. With the exception of reclassifying the
operations of certain real estate assets considered "held for sale" (and for
which no significant continuing involvement exists) to "Discontinued operations,
net of tax" in the consolidated statement of income, the impact of adoption is
not expected to have a material impact on the Company's financial position and
cash flows.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FAS Nos. 4, 44, and
64, Amendment of FAS 13, and Technical Corrections". This Statement rescinds
FASB No. 4, "Reporting Gains and Losses from Extinguishment of Debt", and an
amendment of that Statement, FASB No. 64, "Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements". This Statement amends FASB No. 13,
"Accounting for Leases". This Statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings or
describe their applicability under changed conditions. This statement will be
effective for the Company's fiscal year ending December 31, 2003. The Company
has reviewed the provisions of FASB 145 and believes that the impact of adoption
will not be material to its financial position, results of operations and cash
flows.
F-99
FSP Forest Park IV Corp.
Notes to Financial Statements
(Unaudited)
2. Income Taxes
The Company has elected and intends to maintain its election as a REIT under the
Internal Revenue Code of 1986, as amended. As a result, the Company generally
will not be subject to federal taxation to the extent it distributes 90% of its
REIT taxable income to its shareholders and satisfies certain other
requirements. Accordingly, no provision for federal or state income taxes has
been included in the accompanying financial statements.
3. Related Party Transactions
Franklin Street Properties Corp. (FSP), formerly known as Franklin Street
Partners Limited Partnership, is the sole holder of the Company's Common Stock.
FSP has the right, as one class together with the holders of Preferred Stock, to
vote to elect the directors of the Company and to vote on all matters except
those voted by the holders of Shares of Preferred Stock. The Company shall not
declare or pay any cash dividends on shares of Common Stock.
The Company executed a management agreement between the Company and FSP Property
Management LLC, an affiliate of FSP, that provides for a management fee equal to
1% of collected revenues. For the three months ended September 30, 2002 and
2001, respectively, fees earned under the agreement were $2,250 and $1,500. For
the nine months ended September 30, 2002 and 2001 respectively, fees earned
under the agreement were $6,750 and $4,500.
4. Net Income Per Share
The Company follows SFAS No. 128, "Earnings per Share," which specifies the
computation, presentation and disclosure requirements for the Company's net
income per share. Basic net income per share is computed by dividing net income
by the weighted average number of Company shares outstanding during the period.
Diluted net income per share reflects the potential dilution that could occur if
securities or other contracts to issue shares/units were exercised or converted
into shares/units. There were no potential dilutive shares/units outstanding at
September 30, 2002 and 2001.
The denominator used for calculating basic and diluted net income per share is
as follows
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
------------------------------- -------------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
Weighted average number of shares/units
outstanding:
Common shares 1 1 1 1
Preferred shares 78 78 78 78
F-100
FSP FOREST PARK IV CORP.
(A DELAWARE CORPORATION)
FINANCIAL STATEMENTS
DECEMBER 31, 2001
CONTENTS
PAGE
Independent auditors' report F-102
Financial statements:
Balance sheet F-103
Statement of operations F-104
Statement of changes in stockholders' equity F-105
Statement of cash flows F-106
Notes accompanying financial statements F-107
F-101
[LETTERHEAD OF BRAVER & COMPANY, P.C.
CERTIFIED PUBLIC ACCOUNTANTS AND CONSULTANTS]
INDEPENDENT AUDITORS' REPORT
To the Stockholders
FSP Forest Park IV Corp.
(a Delaware Corporation)
We have audited the accompanying balance sheet of FSP Forest Park IV Corp. (a
Delaware Corporation) as of December 31, 2001 and the related statements of
operations, changes in stockholders' equity and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of FSP Forest Park IV Corp. (a
Delaware Corporation) at December 31, 2001, and the results of its operations
and its cash flows for the year ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States of America.
/s/ Braver & Company, P.C.
February 1, 2002
F-102
FSP FOREST PARK IV CORP.
(A DELAWARE CORPORATION)
BALANCE SHEET
DECEMBER 31, 2001
ASSETS
Rental property, at cost:
Land $ 1,210,010
Building 5,171,235
-----------
6,381,245
Less: accumulated depreciation 310,164
-----------
Rental property, net 6,071,081
Cash 199,123
Capital improvement reserves 655,818
Miscellaneous other assets 153,178
-----------
Total assets 7,079,200
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses 34,656
Dividends payable 143,364
-----------
Total liabilities 178,020
-----------
Stockholders' equity
Preferred stock, $.01 par value per share;
authorized 78 shares; issued and outstanding 78 shares 1
Common stock, $.01 par value per share;
authorized one share; issued and outstanding one share
Additional paid-in capital 7,114,811
Retained earnings and dividends in excess of earnings (213,632)
-----------
Total stockholders' equity 6,901,180
-----------
Total liabilities and stockholders' equity $ 7,079,200
===========
See accompanying notes to financial statements
F-103
FSP FOREST PARK IV CORP.
(A DELAWARE CORPORATION)
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2001
REVENUES:
Rental income $851,770
Interest 33,301
--------
Total revenues 885,071
--------
EXPENSES:
Administrative 48,144
Depreciation and amortization 139,343
Management fees 42,384
Operating and maintenance 84,420
Taxes and insurance 62,906
--------
Total expenses 377,197
--------
NET INCOME $507,874
========
See accompanying notes to financial statements
F-104
FSP FOREST PARK IV CORP.
(A DELAWARE CORPORATION)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 2001
Retained Earnings Total
Additional Paid- and Dividends in Stockholders'
Preferred Stock Common Stock in Capital Excess of Earnings Equity
--------------- ------------ ---------- ------------------ ----------
Balance, December 31, 2000 $ -- $ -- $7,114,801 $ (108,816) $7,005,985
Private offering of 78 shares, net 1 -- 10 -- 11
Net income -- -- -- 507,874 507,874
Dividends -- -- -- (612,690) (612,690)
---------- ---------- ---------- ---------- ----------
Balance, December 31, 2001 $ 1 $ -- $7,114,811 $ (213,632) $6,901,180
========== ========== ========== ========== ==========
See accompanying notes to financial statements
F-105
FSP FOREST PARK IV CORP.
(A DELAWARE CORPORATION)
STATEMENT OF CASH FLOW
YEAR ENDED DECEMBER 31, 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 507,874
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 139,343
Changes in operating assets and liabilities:
Decrease in miscellaneous other assets (37,867)
Increase in accounts payable and accrued expenses (50,702)
---------
Net cash provided by operating activities 558,648
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in capital improvement reserves 467,595
Tenant improvements (353,011)
---------
Net cash provided by investing activities 114,584
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of issuance of shares 11
Dividends paid (585,390)
---------
Net cash used in financing activities (585,379)
---------
NET INCREASE IN CASH 87,853
CASH BALANCE, beginning of year 111,270
---------
CASH BALANCE, end of year $ 199,123
=========
See accompanying notes to financial statements
F-106
FSP FOREST PARK IV CORP.
(A DELAWARE CORPORATION)
NOTES ACCOMPANYING FINANCIAL STATEMENT
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION
FSP Forest Park IV was organized on December 26, 2000 as a Corporation
under the laws of the State of Delaware to purchase, own and operate an
office building located in Charlotte, North Carolina (the "Property"). The
Property consists of a single-story modern office building that contains
approximately 60,000 square feet of space situated on 7.52 acres of land.
The Corporation acquired the Property on July 8,1999.
In December 2000, the limited partners of FSP Forest Park IV Limited
Partnership approved the conversion from a partnership into a corporation
and the subsequent election to be taxed as a real estate investment trust
("REIT"). The conversion, which was effective January 1, 2001, was
accomplished by merging FSP Forest Park IV Limited Partnership with and
into FSP Forest Park IV Corp. Under the terms of the Plan of Merger dated
December 7, 2000, each unit of limited partnership interest was exchanged
for one share of preferred stock in the corporation; the 5% general
partnership interest was exchanged for one share of common stock in the
corporation.
METHOD OF ACCOUNTING
The Company maintains its books and records on the accrual method of
accounting in accordance with generally accepted accounting principles.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments with an initial maturity of three months or
less to be cash equivalents.
INCOME TAXES
The Company has elected and intends to maintain its election as a REIT
under the Internal Revenue Code of 1986, as amended. As a result, the
Company generally will not be subject to federal taxation to the extent it
distributes 90% of its REIT taxable income to its shareholders and
satisfies certain other requirements. Accordingly, no provision for
federal or state income taxes has been included in the accompanying
financial statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
SYNDICATION FEES
Syndication fees are selling commissions and other costs associated with
the initial offering of the Company's equity. Such costs, in the amount of
$685,199, have been previously reported as a reduction in the
stockholders' equity.
REVENUE RECOGNITION
Rental income, which includes scheduled increases over the lease term, is
recognized on a straight-line basis. Income recognized on a straight-line
basis differed from income that would have accrued in accordance with the
leases by $42,817 in 2001.
F-107
FSP FOREST PARK IV CORP.
(A DELAWARE CORPORATION)
NOTES ACCOMPANYING FINANCIAL STATEMENT
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
PROPERTY AND DEPRECIATION
Rental property is carried at cost. Depreciation is provided for in
amounts sufficient to relate the cost of depreciable assets to operations
over their estimated service lives of 39 years for real property by use of
the straight-line method for financial reporting. Depreciation was
$129,996 for the year ended December 31, 2001.
DEFERRED LEASING COSTS
The financial statements include intangible assets, representing leasing
commissions, which are amortized over a period of 60 months. Amortization
was $9,347 for the year ended December 31, 2001.
2. CAPITAL STOCK:
PREFERRED STOCK
Each holder of Shares of Preferred Stock is entitled to receive ratably
all dividends, if any, declared by the Board of Directors out of funds
legally available. The right to receive dividends shall be non-cumulative,
and no right to dividends shall accrue by reason of the fact that no
dividend has been declared in any prior year. Each holder of Shares will
be entitled to receive, to the extent that funds are available therefore,
$100,000 per Share, before any payment to the holder of Common Stock, out
of distributions to stockholders upon liquidation, dissolution or the
winding up of the Company; the balance of any such funds available for
distribution will be distributed among the holders of Shares and the
holder of Common Stock, pro rata based on the number of shares held by
each; provided, however, that for these purposes, one share of Common
Stock will be deemed to equal one-tenth of a share of Preferred Stock.
The Company declared a dividend in December 2001 to holders of record on
December 31, 2001. These dividends, in the amount of $143,364, were paid
in 2002 and have been accrued and reflected in Stockholders' Equity.
In addition to certain voting rights provided in the corporate agreements,
the holder of Shares, acting by consent of at least 51%, shall have the
further right to approve or disapprove a proposed sale of the Property,
the merger of the Company with any other entity and amendments to the
corporate charter, and vote on the election and certain changes to the
Board of Directors. A vote of the holders of 66.67% of the Shares is
required for the issue of any additional shares of capital stock. Holders
of Shares have the right, as one class together with the holder of Common
Stock, to vote to elect the directors of the company. Holders of Shares
have no redemption or conversion rights.
COMMON STOCK
Franklin Street Properties Corp. (FSP), formerly Franklin Street Partners
Limited Partnership is the sole holder of the Company's Common Stock. FSP
has the right, as one class together with the holders of Preferred Stock,
to vote to elect the directors of the Company and to vote on all matters
except those voted by the holders of Shares of Preferred Stock. The
Company shall not declare or pay any cash dividends on shares of Common
Stock.
F-108
FSP FOREST PARK IV CORP.
(A DELAWARE CORPORATION)
NOTES ACCOMPANYING FINANCIAL STATEMENT
3. RELATED PARTY TRANSACTIONS:
A management agreement was executed on December 1, 2001 between the
Company and FSP Property Management LLC, an affiliate of the Common
Shareholder. The agreement provides for a total management fee equal to 1%
of collected revenues. The affiliate's portion of the fees earned and paid
was $5,730 for the year ended December 31, 2001.
Franklin Street Partners Limited Partnership operated under the laws of
the Commonwealth of Massachusetts. On January 1, 2002, the limited
partnership merged into Franklin Street Properties Corp (FSP), the Common
Shareholder, and will operate in a manner intended to qualify as a real
estate investment trust ("REIT") for federal income tax purposes.
4. LEASES:
The Company, as lessor, has minimum future rentals due under
noncancellable operating leases as follows:
Year Ended
December 31, Amount
------------ ----------
2002 $ 779,916
2003 796,323
2004 812,936
2005 829,689
2006 678,217
Thereafter 1,512,756
----------
$5,409,837
==========
In addition, the lessees are liable for real estate taxes and operating
expenses as direct expenses to the lessees.
5. CONCENTRATIONS OF RISK:
For the year ended December 31, 2001, 100% of the rental income was
derived from two lessees. As such future rental receipts are dependent
upon the financial strength of the lessee and its ability to perform under
the lease agreement.
The Company maintains their cash accounts at one financial institution.
The balances, at times, may exceed federally insured limits. At December
31, 2001, the Company had cash on deposit exceeding the insured limit by
$750,378.
F-109
FSP FOREST PARK IV LIMITED PARTNERSHIP
(a Massachusetts Limited Partnership)
For the Year Ended December 31, 2000
CONTENTS
--------------------------------------------------------------------------------
Page
Independent Auditors' Report F-111
Financial Statements:
Balance Sheet F-112
Statement of Operations F-113
Statement of Changes in Partners' Equity F-114
Statement of Cash Flows F-115
Notes to Financial Statements F-116
F-110
[LETTERHEAD OF BRAVER & COMPANY, P.C.
CERTIFIED PUBLIC ACCOUNTANTS AND CONSULTANTS]
Independent Auditors' Report
To the Partners
FSP Forest Park IV Limited Partnership
(a Massachusetts Limited Partnership)
Wakefield, Massachusetts
We have audited the accompanying balance sheet of FSP Forest Park IV Limited
Partnership (a Massachusetts Limited Partnership) as of December 31, 2000 and
the related statements of income, changes in partners' equity and cash flows for
the year then ended. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of FSP Forest Park IV Limited
Partnership (a Massachusetts Limited Partnership) at December 31, 2000, and the
results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
/s/ Braver & Company, P.C.
January 31, 2001
F-111
FSP FOREST PARK IV LIMITED PARTNERSHIP
(a Massachusetts Limited Partnership)
Balance Sheet
December 31, 2000
ASSETS
Rental property, at cost:
Land $1,210,010
Building 4,818,224
----------
6,028,234
Less: accumulated depreciation 180,168
----------
Rental property, net 5,848,066
Cash 111,270
Capital improvement reserves 1,123,413
Miscellaneous receivables 76,337
Deferred leasing costs 46,735
Prepaid expenses 1,586
----------
Total assets $7,207,407
----------
LIABILITIES AND PARTNERS' EQUITY
Liabilities:
Advance rents $ 50,691
Accounts payable and accrued expenses 34,666
Accrued partner distributions 116,064
----------
Total liabilities 201,421
----------
Commitments (Notes 2, 3, & 4)
Partners' equity 7,005,986
----------
Total liabilities and partners' equity $7,207,407
==========
See accompanying notes to financial statements
F-112
FSP FOREST PARK IV LIMITED PARTNERSHIP
(a Massachusetts Limited Partnership)
Statement of Operations
For the Year Ended December 31, 2000
REVENUES:
Rental income $660,528
Interest 68,691
--------
Total revenues 729,219
--------
EXPENSES:
Depreciation 123,544
Operating and maintenance 104,256
Taxes and insurance 57,252
Management fees 30,403
Administrative 19,587
--------
Total expenses 335,042
--------
NET INCOME $394,177
========
See accompanying notes to financial statements
F-113
FSP FOREST PARK IV LIMITED PARTNERSHIP
(a Massachusetts Limited Partnership)
Statement of Changes in Partners' Equity
For the Year Ended December 31, 2000
Total
General Limited Partners'
Partner Partners Equity
---------- ---------- ----------
Balance, December 31, 1999 $ -- $7,177,932 $7,177,932
Distributions -- (566,124) (566,124)
Net income -- 394,177 394,177
---------- ---------- ----------
Balance, December 31, 2000 $ -- $7,005,985 $7,005,985
========== ========== ==========
See accompanying notes to financial statements
F-114
FSP FOREST PARK IV LIMITED PARTNERSHIP
(a Massachusetts Limited Partnership)
Statement of Cash Flows
For the Year Ended December 31, 2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 394,177
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 123,544
Changes in operating assets and liabilities:
Increase in accounts receivable (53,382)
Increase in prepaid expenses (514)
Increase in advance rents 919
Increase in accounts payable and accrued expenses 21,639
---------
Net cash provided by operating activities 486,383
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to capital improvement reserves (57,088)
Increase in leasing costs (46,735)
---------
Net cash used in investing activities (103,823)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to partners (450,060)
---------
Net cash used in financing activities (450,060)
---------
NET DECREASE IN CASH (67,500)
CASH BALANCE, beginning of year 178,770
---------
CASH BALANCE, end of year $ 111,270
=========
SUPPLEMENTAL DISCLOSURE OF NON-CASH ITEMS:
As of December 31, 2000, the Partnership accrued partner distributions
totaling $116,064.
See accompanying notes to financial statements
F-115
FSP FOREST PARK IV LIMITED PARTNERSHIP
(a Massachusetts Limited Partnership)
Notes to Financial Statements
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
The Partnership was organized on March 29, 1999 as a Limited Partnership
under the laws of the Commonwealth of Massachusetts to purchase, own and
operate an office building located in Charlotte, North Carolina (the
"Property"). The Property consists of a single-story modem office building
that contains approximately 60,000 square feet of space situated on 7.52
acres of land. The Partnership acquired the Property on July 8, 1999.
In July 1999, the Partnership completed a private offering of 78 Limited
Partner units at $100,000 per unit.
METHOD OF ACCOUNTING
The Partnership maintains its books and records on the accrual method of
accounting in accordance with generally accepted accounting principles.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Partnership considers
all highly liquid debt instruments with an initial maturity of three
months or less to be cash equivalents.
INCOME TAXES
The financial statements do not include a provision for income taxes
because the Partnership does not incur federal or state income taxes.
Instead, its earnings and losses are included in the partners' respective
income tax returns.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
SYNDICATION FEES
Syndication fees are selling commissions and other costs associated with
the offering of partnership units. Such costs have been previously
reported as a reduction in the Limited Partners' Equity.
F-116
FSP FOREST PARK IV LIMITED PARTNERSHIP
(a Massachusetts Limited Partnership)
Notes to Financial Statements
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
REVENUE RECOGNITION
Rental income, which includes scheduled increases over the lease term, is
recognized on a straight-line basis. Income recognized on a straight-line
basis differed from income that would have accrued in accordance with the
leases by $44,904. Rental payments received in advance are deferred until
earned. Two tenants occupied 88% of the Property at December 31, 2000.
PROPERTY AND DEPRECIATION
Rental property is carried at cost. Depreciation is provided for in
amounts sufficient to relate the cost of depreciable assets to operations
over their estimated service lives of 39 years for real property by use of
the straight-line method for financial reporting. Depreciation was
$123,544 for the year ended December 31, 2000.
DEFERRED LEASING COSTS
The financial statements include intangible assets, representing leasing
commissions, which are amortized over a period of 60 months.
NOTE 2 - PARTNERSHIP AGREEMENT
Cash flow from operations, as defined by the Partnership Agreement, is
first used to repay any loans from the General Partner and then 95% to the
Limited Partners and 5% to the General Partner. If in any year the 95%
distribution to the Limited Partners does not provide an 8% return on
their capital contribution, the remaining 5% will be allocated to the
Limited Partners in an amount necessary to provide an 8% annual return. In
the event that 100% of the cash flow in any year does not provide the
Limited Partners with an 8% return, there is no cumulative or make-up
feature. Profits and losses will generally be allocated to partners based
on their respective ownership interests. If cash flow distributions differ
in proportion to respective ownership interests, profits will be allocated
in accordance with the Partnership Agreement.
During the period from January 1, 2000 through December 31, 2000, the
Partnership made the following distributions to the investor limited
partners: $111,072 on February 15, 2000 for the quarter ended December 31,
1999; $102,960 on May 15, 2000 for the quarter ended March 31, 2000;
$114,114 on August 15, 2000 for the quarter ended June 30, 2000; and
$121,914 on November 29, 2000 for the quarter ended September 30, 2000.
Distributions payable of $116,064 for the quarter ended December 31, 2000
were paid on January 30, 2001. Total distributions made to the investor
limited partners were $566,124 and include $455,052 for the twelve months
ended December 31, 2000 and $111,072 related to the fourth quarter of
1999.
F-117
FSP FOREST PARK IV LIMITED PARTNERSHIP
(a Massachusetts Limited Partnership)
Notes to Financial Statements
NOTE 2 - PARTNERSHIP AGREEMENT (Continued)
In addition to the voting rights provided for in the Partnership
Agreement, the Limited Partners, acting by consent of at least 51%, shall
have the further right to approve or disapprove a proposed sale of the
Property and, subject to certain conditions, to amend the Partnership
Agreement, merge or dissolve the Partnership.
The Partnership shall terminate on December 31, 2035, unless earlier by
events described in the Partnership Agreement.
NOTE 3 - RELATED PARTY TRANSACTIONS
A management agreement was executed on July 8, 1999 between the
Partnership and FSP Property Management LLC, an affiliate of the General
Partner. The agreement provides for a total management fee equal to 5% of
collected revenues. The affiliate's portion of the fee earned was $6,073
for the year with $628 owed at December 31, 2000.
The General Partner did not receive equity distributions for the year
ended December 31, 2000.
NOTE 4 - LEASES
The Partnership, as lessor, has minimum future rentals due under
noncancellable operating leases as follows:
Year Ended
December 31, Amount
------------ ----------
2001 $ 764,383
2002 779,916
2003 796,323
2004 812,936
2005 829,689
Thereafter 2,132,200
----------
$6,115,447
==========
In addition, the lessee is liable for real estate taxes and operating
expenses as direct expenses to the lessee.
F-118
FSP FOREST PARK IV LIMITED PARTNERSHIP
(a Massachusetts Limited Partnership)
Notes to Financial Statements
NOTE 5 - CONCENTRATION OF CREDIT RISK
The Partnership maintains their cash accounts at one financial
institution. The balances, at times, may exceed federally insured limits.
At December 31, 2000, the Partnership had cash on deposit exceeding the
insured limit by $1,134,683.
NOTE 6 - SUBSEQUENT EVENTS - MERGER
During 2000, the Partnership voted to merge into FSP Forest Park IV Corp.
(a Delaware Corporation). The merger was effective on January 1, 2001
whereby all Limited Partner units in the Partnership were exchanged for
shares of preferred stock in the Corporation.
The merger will be accounted for as an exchange of securities of companies
under common control in accordance with generally accepted accounting
principles (GAAP). For federal income tax purposes, the merger will be
treated as a "tax free" transaction pursuant to the Internal Revenue Code.
The Corporation plans to make an election to be taxed as a Real Estate
Investment Trust (REIT) under Section 856 of the Internal Revenue Code for
the year 2001. Although the Company believes that it will be organized and
will operate in a manner necessary to satisfy the requirements for
taxation as a REIT under the Code, no assurances can be given that the
Company will be able to so operate for all future periods.
If the Company qualifies as a REIT, it generally will not be subject to
federal corporate income taxes on its net income to the extent that the
income is currently distributed to stockholders. In addition, there are
numerous qualification requirements relative to sources of income, nature
of assets, amount of distributions and the ownership of stock that may
affect the taxable income of the Company.
F-119
FSP FOREST PARK IV LIMITED PARTNERSHIP
(a Massachusetts Limited Partnership)
Financial Statements
For the Period from March 29, 1999
(date of inception) to December 31, 1999
F-120
FSP FOREST PARK IV LIMITED PARTNERSHIP
(a Massachusetts Limited Partnership)
CONTENTS
--------------------------------------------------------------------------------
Page
Independent Auditors Report F-122
Financial Statements:
Balance Sheet F-123
Statement of Operations F-124
Statement of Changes in Partners' Equity F-125
Statement of Cash Flows F-126
Notes to Financial Statements F-127
F-121
[LETTERHEAD OF ROY & STEVENS, P.C. CERTIFIED PUBLIC ACCOUNTANTS]
INDEPENDENT AUDITORS' REPORT
To the Partners
FSP Forest Park IV Limited Partnership
(a Massachusetts Limited Partnership)
Wakefield, Massachusetts
We have audited the accompanying balance sheet of FSP Forest Park IV
Limited Partnership (A Massachusetts Limited Partnership), as of December 31,
1999, and the related statements of operations, changes in partners' equity and
cash flows for the period March 29, 1999 (date of inception) to December 31,
1999. These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of FSP Forest Park IV Limited
Partnership (a Massachusetts Limited Partnership) as of December 31, 1999, and
the results of operations and its cash flows for the period March 29, 1999
(Inception) to December 31, 1999, in conformity with generally accepted
accounting principles.
/s/ Roy & Stevens, P.C.
Boston, Massachusetts
January 27, 2000
F-122
FSP FOREST PARK IV LIMITED PARTNERSHIP
(a Massachusetts Limited Partnership)
Balance Sheet
December 31, 1999
ASSETS
Rental property, at cost:
Land $1,210,010
Building 4,818,224
----------
6,028,234
Less accumulated depreciation 56,624
----------
Rental property, net 5,971,610
Cash 178,770
Capital improvement reserves 1,066,325
Tenant rent receivables 22,955
Prepaid expenses 1,072
----------
Total assets $7,240,732
----------
LIABILITIES AND PARTNERS' EQUITY
Liabilities:
Advance rents $ 49,773
Accounts payable and accrued expenses 13,027
----------
Total liabilities 62,800
----------
Commitments (Notes 2, 3 & 4)
Partners' equity 7,177,932
----------
Total liabilities and partners' equity $7,240,732
==========
See accompanying notes to financial statements.
F-123
FSP FOREST PARK IV LIMITED PARTNERSHIP
(a Massachusetts Limited Partnership)
Statement of Operations
For the Period from March 29, 1999 (date of inception)
to December 31, 1999
REVENUES:
Rental income $308,722
Interest 34,872
--------
Total revenues 343,594
--------
EXPENSES:
Depreciation 56,624
Operating and maintenance 42,761
Administrative 33,715
Taxes and insurance 22,904
Management fees 16,265
Interest 2,192
--------
Total expenses 174,461
--------
NET INCOME $169,133
========
See accompanying notes to financial statements.
F-124
FSP FOREST PARK IV LIMITED PARTNERSHIP
(a Massachusetts Limited Partnership)
Statement of Changes in Partners Equity
For the Period from March 29, 1999 (date of inception)
to December 31, 1999
Total
General Limited Partners'
Partner Partners Equity
---------- ---------- ----------
Contributions $ -- $7,800,000 $7,800,000
Distributions -- (106,002) (106,002)
Syndication fees -- (685,199) (685,199)
Net income -- 169,133 169,133
---------- ---------- ----------
Balance, December 31, 1999 $ -- $7,177,932 $7,177,932
========== ========== ==========
See accompanying notes to financial statements.
F-125
FSP FOREST PARK IV LIMITED PARTNERSHIP
(a Massachusetts Limited Partnership)
Statement of Cash Flows
For the Period from March 29, 1999 (date of inception)
to December 31, 1999
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 169,133
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 56,624
Changes in operating assets and liabilities:
Increase in accounts receivable (22,955)
Increase in prepaid expenses (1,072)
Increase in advance rent 49,773
Increase in accounts payable 3,438
Increase in accrued expenses 9,589
-----------
Net cash provided by operating activities 264,530
-----------
CASH FLOWS FROM INVESTING ACTIVITIES
Deposits to capital improvement reserves (1,066,325)
Purchase of rental property (6,028,234)
-----------
Net cash used by investing activities (7,094,559)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds on loans 100,000
Principal payments on loans (100,000)
Proceeds from limited partner contributions 7,800,000
Syndication fees paid (685,199)
Distributions to partners (106,002)
-----------
Net cash provided by financing activities 7,008,799
-----------
NET INCREASE IN CASH 178,770
CASH BALANCE, beginning of period --
-----------
CASH BALANCE, end of period $ 178,770
===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
Cash paid during the year for interest $ 2,192
===========
See accompanying notes to financial statements.
F-126
FSP FOREST PARK IV LIMITED PARTNERSHIP
(a Massachusetts Limited Partnership)
Notes to Financial Statements
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
The Partnership was organized on March 29, 1999 as a Limited Partnership
under the laws of the Commonwealth of Massachusetts to purchase, own and
operate an office building located in Charlotte, North Carolina (the
"Property"). The Property consists of a single-story modern office
building that contains approximately 61,000 total square feet of space
situated on 7.5 acres of land. The Partnership acquired the Property on
July 8, 1999.
In July 1999, the Partnership completed a private offering of 78 Limited
Partner units at $100,000 per unit.
METHOD OF ACCOUNTING
The Partnership maintains its books and records on the accrual method of
accounting in accordance with generally accepted accounting principles.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Partnership considers
all highly liquid debt instruments with an initial maturity of three
months or less to be cash equivalents.
INCOME TAXES
The financial statements do not include a provision for income taxes
because the Partnership does not incur federal or state income taxes.
Instead, its earnings and losses are included in the partners' respective
income tax returns.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
F-127
FSP FOREST PARK IV LIMITED PARTNERSHIP
(a Massachusetts Limited Partnership)
Notes to Financial Statements
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
SYNDICATION FEES
Syndication fees are selling commissions and other costs associated with
the offering of partnership units. Such costs have been reported as a
reduction in Limited Partner equity.
REVENUE RECOGNITION
Rental income, which includes scheduled increases over the lease term, is
recognized on a straight-line basis. Income recognized on a straight-line
basis differed from income that would have accrued in accordance with the
leases by $22,929 in 1999. Rental payments received in advance are
deferred until earned. One tenant occupied 65.27% of the Property at
December 31, 1999.
PROPERTY AND DEPRECIATION
Rental property is carried at cost. Depreciation is provided for in
amounts sufficient to relate the cost of depreciable assets to operations
over their estimated service lives of 39 years for real property by use of
the straight-line method for financial reporting. Depreciation was $56,624
for the period ended December 31, 1999.
NOTE 2 - PARTNERSHIP AGREEMENT
Cash flow from operations, as defined by the Partnership Agreement, is
first used to repay any loans from the General Partner and then 950/a to
the Limited Partners and 5% to the General Partner. If in any year the 95%
distribution to the Limited Partners does not provide an 8% return on
their capital contribution, the remaining 5% will be allocated to the
Limited Partners in an amount necessary to provide an 8% annual return. In
the event that 100% of the cash flow in any year does not provide the
Limited Partners with an 8% return, there is no cumulative or make-up
feature. Profits and losses will generally be allocated to partners based
on their respective ownership interests. If cash flow distributions differ
in proportion to respective ownership interests, profits will be allocated
in accordance with the Partnership Agreement.
In addition to the voting rights provided for in the Partnership
Agreement, the Limited Partners, acting by consent of at least 51%, shall
have the further right to approve or disapprove a proposed sale of the
Property and, subject to certain conditions, to amend the Partnership
Agreement, merge or dissolve the Partnership.
F-128
FSP FOREST PARK IV LIMITED PARTNERSHIP
(a Massachusetts Limited Partnership)
Notes to Financial Statements
NOTE 2 - PARTNERSHIP AGREEMENT - (Continued)
The Partnership shall terminate on December 31, 2035, unless earlier by
events described in the Partnership Agreement.
NOTE 3 - RELATED PARTY TRANSACTIONS
A management agreement was executed on July 8, 1999 between the
Partnership and FSP Property Management LLC, an affiliate of the General
Partner. The agreement provides for a management fee equal to 5% of
collected revenues. Management fees were $16,265 for the period with
$2,489 owed at December 31, 1999.
An acquisition fee of $312,000 was paid in 1999 to an affiliate of the
General Partner. Such fees paid are included in the cost of the real
estate.
Syndication fees of $624,000 were paid in 1999 to an affiliate of the
General Partner for services related to syndication of the investor
limited partner interest.
During 1999 the Partnership borrowed and repaid in full:
1. Note payable to Franklin Street Partners Limited Partnership, an
affiliate of the General Partner, principal of $100,000 with
interest at 2% over BankBoston base rate (9.75%). Interest for the
period was $1,192.
The General Partner did not receive equity distributions for 1999.
NOTE 4 - LEASES
The Partnership, as lessor, has minimum future rentals due under
noncancellable operating leases as follows:
Year Ended
December 31, Amount
------------ ----------
2000 $ 607,316
2001 618,357
2002 629,399
2003 641,320
2004 653,322
Thereafter 2,797,589
----------
$5,947,303
==========
F-129
FSP FOREST PARK IV LIMITED PARTNERSHIP
(a Massachusetts Limited Partnership)
Notes to Financial Statements
NOTE 4 - LEASES - (Continued)
In addition, the lessee is liable for real estate taxes and operating
expenses as direct expenses to the lessee.
Upon acquiring the commercial rental property in July, 1999, the
Partnership was assigned the lease agreement between the seller of the
Property and the existing tenant. The lease is from February 3, 1999 to
February 28, 2009 with renewal options.
NOTE 5 - ECONOMIC DEPENDENCY
During 1999, all of the rental income was derived from one lessee. As
such, future rental receipts are dependent upon the financial strength of
the lessee and its ability to perform under the lease agreement.
NOTE 6 - CONCENTRATION OF CREDIT RISK
The Partnership maintains their cash accounts at various financial
institutions. The balances, at times, may exceed federally insured limits.
At December 31, 1999, the Partnership had cash on deposit exceeding the
insured limit by $1,185,274.
F-130
FSP Gael Apartments Corp.
Financial Statements
September 30, 2002
Table of Contents
Page
----
Financial Statements
Balance Sheets as of September 30, 2002 and December 31, 2001............. F-132
Statements of Income for the nine months ended September 30, 2002
and 2001................................................................ F-133
Statements of Cash Flows for the nine months ended September 30, 2002
and 2001................................................................ F-134
Notes to the Financial Statements......................................... F-135
F-131
FSP Gael Apartments Corp.
Balance Sheets
(unaudited)
September 30, December 31,
(in thousands, except shares and par value amounts) 2002 2001
===============================================================================
Assets:
Real estate investments, at cost:
Land $ 3,312 $ 3,312
Buildings and improvements 14,789 14,789
-------------------------------------------------------------------------------
18,101 18,101
Less accumulated depreciation 1,166 784
-------------------------------------------------------------------------------
Real estate investments, net 16,935 17,317
Cash and cash equivalents 744 429
Cash - funded reserve 581 581
Cash - restricted 64 66
Prepaid expenses and other assets, net 32 27
-------------------------------------------------------------------------------
Total assets $ 18,356 $ 18,420
===============================================================================
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and accrued expenses 407 457
Tenant security deposits 64 66
-------------------------------------------------------------------------------
Total liabilities 471 523
Commitments and Contingencies:
Stockholders' Equity:
Preferred Stock, $.01 par value per share; 212.5
shares authorized, issued and outstanding -- --
Common Stock, $.01 par value per share, 1 share
authorized, issued and outstanding -- --
Additional paid-in capital 19,435 19,435
Retained earnings (1,550) (1,538)
-------------------------------------------------------------------------------
Total Stockholders' Equity 17,885 17,897
-------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 18,356 $ 18,420
===============================================================================
See accompanying notes to financial statements.
F-132
FSP Gael Apartments Corp.
Statements of Income
(Unaudited)
For the For the
Three Months Nine Months
Ended Ended
September 30, September 30,
---------------- ----------------
(in thousands, except shares and per share amounts) 2002 2001 2002 2001
===================================================================================
Revenue:
Rental $ 655 $ 661 $1,994 $1,894
Interest and other 7 14 19 41
-----------------------------------------------------------------------------------
Total revenue 662 675 2,013 1,935
-----------------------------------------------------------------------------------
Expenses:
Rental operating expenses 158 146 447 434
Depreciation and amortization 127 129 382 387
Real estate taxes and insurance 135 129 399 373
-----------------------------------------------------------------------------------
Total expenses 420 404 1,228 1,194
-----------------------------------------------------------------------------------
Net income $ 242 $ 271 $ 785 $ 741
===================================================================================
Allocation of net income to:
Preferred shareholders $ 242 $ 271 $ 785 $ 741
Common shareholders -- -- -- --
-----------------------------------------------------------------------------------
$ 242 $ 271 $ 785 $ 741
===================================================================================
Weighted average number of shares outstanding,
basic and diluted
Preferred shares 212.50 212.50 212.50 212.50
Common shares 1 1 1 1
===================================================================================
Net income per share, basic and diluted
Preferred shares $1,139 $1,275 $3,694 $3,487
Common shares $ -- $ -- $ -- $ --
===================================================================================
See accompanying notes to financial statements.
F-133
FSP Gael Apartments Corp.
Statements of Cash Flows
(Unaudited)
For the
Nine months
Ended
September 30,
----------------
(in thousands) 2002 2001
======================================================================================
Cash flows from operating activities:
Net income $ 785 $ 741
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 382 387
Changes in operating assets and liabilities:
(Increase) decrease in prepaid expenses and other assets, net (5) 4
(Decrease) in accounts payable and accrued expenses (50) (487)
Restricted cash (2) (18)
(Increase) in Funded Reserve -- (170)
Tenant deposits 2 18
--------------------------------------------------------------------------------------
Net cash provided by operating activities 1,112 475
--------------------------------------------------------------------------------------
Cash flows from financing activities:
Distributions to stockholders/partners (797) (728)
--------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities (797) (728)
--------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 315 (253)
Cash and cash equivalents, beginning of period 429 816
--------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 744 $ 816
======================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ -- $ --
Income taxes -- --
See accompanying notes to financial statements.
F-134
FSP Gael Apartments Corp.
Notes to Financial Statements
(Unaudited)
1. Organization, Basis of presentation, and Recent Accounting Pronouncements
Organization
FSP Gael Apartments Corp. was organized on May 30, 2000 as a Corporation under
the laws of the State of Delaware to purchase, own and operate an existing
luxury apartment complex located in Houston, Texas (the "Property"). The
Property consists of 210 luxury apartments that total 187,368 square feet. The
Company took title to the Property on July 28, 2000 through a newly-formed
limited partnership of which the Company is the sole limited partner, and a
limited liability company wholly-owned by the Company is the sole general
partner. Accordingly, the Company will own, directly or indirectly all of the
beneficial interest in the limited partnership. The company will operate in a
manner intended to qualify as a real estate investment trust ("REIT") for
federal income tax purposes.
In October 2000, the Company completed a private offering of 212.5 shares of
preferred stock at $100,000 per share.
Basis of Presentation
These financial statements should be read in conjunction with the Company's
financial statements and notes thereto contained in the Company's annual
financial statements for its fiscal year ended December 31, 2001.
The accompanying interim financial statements are unaudited; however, the
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information and in conjunction with the rules and regulations of the Securities
and Exchange Commission. Accordingly, they do not include all of the disclosures
required by accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of management, all
adjustments (consisting solely of normal recurring matters) necessary for a fair
presentation of the financial statements for these interim periods have been
included. The results of operations for the interim periods are not necessarily
indicative of the results to be obtained for other interim periods or for the
full fiscal year.
Certain prior-year balances have been reclassified in order to conform to the
current-year presentation.
Recent Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations," which addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This Statement requires that
the fair value of a liability for an asset retirement obligation be recognized
in the period in which it is incurred if a reasonable estimate of the fair value
can be made. The associated asset retirement costs are capitalized as part of
the carrying amount of the long-lived asset. This Statement will be effective at
the beginning of 2003. The Company has reviewed the provisions of SFAS 143 and
believes that the impact of adoption will not be material to its financial
position, results of operations and cash flows.
In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets". This Statement supersedes SFAS No. 121 and
requires that long-lived assets that are to be disposed of by sale be measured
at the lower of book value or fair value less costs to sell. SFAS No. 144
retains the fundamental provisions of SFAS 121 for (a) recognition and
measurement of the impairment of long-lived assets to be held and used, and (b)
measurement of long-lived assets to be disposed of by sale, but broadens the
definition of what constitutes a discontinued operation and how the results of a
discontinued operation are to be measured and presented. This Statement was
effective at the beginning of 2002. With the exception of reclassifying the
operations of certain real estate assets considered "held for sale" (and for
which no significant continuing involvement exists) to "Discontinued operations,
net of tax" in the consolidated statement of income, the impact of adoption is
not expected to have a material impact on the Company's financial position and
cash flows.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FAS Nos. 4, 44, and
64, Amendment of FAS 13, and Technical Corrections". This Statement rescinds
FASB No. 4, "Reporting Gains and Losses from Extinguishment of Debt", and an
amendment of that Statement, FASB No. 64, "Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements". This Statement amends FASB No. 13,
"Accounting for Leases". This Statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings or
describe their applicability under changed conditions. This statement will be
effective for the Company's fiscal year ending December 31, 2003. The Company
has reviewed the provisions of FASB 145 and believes that the impact of adoption
will not be material to its financial position, results of operations and cash
flows.
F-135
FSP Gael Apartments Corp.
Notes to Financial Statements
(Unaudited)
2. Income Taxes
The Company has elected and intends to maintain its election as a REIT under the
Internal Revenue Code of 1986, as amended. As a result, the Company generally
will not be subject to federal taxation to the extent it distributes 90% of its
REIT taxable income to its shareholders and satisfies certain other
requirements. Accordingly, no provision for federal income taxes has been
included in the accompanying financial statements.
For the year ended December 31, 2000, the Company incurred a net operating loss
for income tax purposes of approximately $416,000 that can be carried forward
until it expires in the year 2020.
3. Related Party Transactions
A management agreement was executed on July 28, 2000 between the Company and FSP
Property Management LLC, an affiliate of the Common Shareholder. The agreement
provides for a total management fee equal to 1% of collected revenues. For the
three months ended September 30, 2002 and 2001, respectively, fees earned under
the agreement were $6,343 and $6,377. For the nine months ended September 30,
2002 and 2001 respectively, fees earned under the agreement were $18,848 and
$18,717.
4. Net Income Per Share
The Company follows SFAS No. 128, "Earnings per Share," which specifies the
computation, presentation and disclosure requirements for the Company's net
income per share. Basic net income per share is computed by dividing net income
by the weighted average number of Company shares outstanding during the period.
Diluted net income per share reflects the potential dilution that could occur if
securities or other contracts to issue shares/units were exercised or converted
into shares/units. There were no potential dilutive shares/units outstanding at
September 30, 2002 and 2001.
The denominator used for calculating basic and diluted net income per share is
as follows
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
------------------------- ------------------------
2002 2001 2002 2001
------ ------ ------ ------
Weighted average number of shares/units
outstanding:
Common shares 1 1 1 1
Preferred shares 212.50 212.50 212.50 212.50
------ ------ ------ ------
213.50 213.50 213.50 213.50
====== ====== ====== ======
F-136
FSP GAEL APARTMENTS CORP.
(A DELAWARE CORPORATION)
FINANCIAL STATEMENTS
DECEMBER 31, 2001
CONTENTS
PAGE
Independent auditors' report F-138
Financial statements:
Balance sheet F-139
Statement of operations F-140
Statement of changes in stockholders' equity F-141
Statement of cash flows F-142
Notes accompanying financial statements F-143
F-137
[LETTERHEAD OF BRAVER & COMPANY, P.C.
CERTIFIED PUBLIC ACCOUNTANTS AND CONSULTANTS]
INDEPENDENT AUDITORS' REPORT
To the Stockholders
FSP Gael Apartments Corp.
(a Delaware Corporation)
We have audited the accompanying balance sheet of FSP Gael Apartments Corp. (a
Delaware Corporation) as of December 31. 2001 and the related statements of
operations, changes in stockholders' equity and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of FSP Gael Apartments Corp. (a
Delaware Corporation) at December 31, 2001, and the results of its operations
and its cash flows for the year ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States of America.
/s/ Braver & Company, P.C.
February 1, 2002
F-138
FSP GAEL APARTMENTS CORP.
(A DELAWARE CORPORATION)
BALANCE SHEET
DECEMBER 31, 2001
ASSETS
Rental property, at cost:
Land $ 3,312,002
Building 14,789,041
------------
18,101,043
Less: accumulated depreciation 784,267
------------
Rental property, net 17,316,776
Cash 495,126
Capital improvement reserves 581,571
Miscellaneous other assets 26,881
------------
Total assets 18,420,354
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses 48,915
Deferred rental income 8,678
Dividends payable 399,500
Security deposits 66,125
------------
Total liabilities 523,218
------------
Stockholders' equity:
Preferred stock, $01 par value per share;
authorized 212.5 shares; issued and outstanding 212.5 shares 2
Common stock, $.01 par value per share;
authorized one share; issued and outstanding one share --
Additional paid-in capital 19,434,867
Retained deficit and dividends in excess of earnings (1,537,733)
Total stockholders' equity 17,897,136
------------
Total liabilities and stockholders' equity $ 18,420,354
============
See accompanying notes to financial statements
F-139
FSP GAEL APARTMENTS CORP.
(A DELAWARE CORPORATION)
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2001
REVENUES:
Rental income $2,581,652
Interest 45,838
----------
Total revenues 2,627,490
----------
EXPENSES:
Administrative 174,356
Depreciation 537,783
Management fees 129,630
Operating and maintenance 269,944
Taxes and insurance 510,135
----------
Total expenses 1,621,848
----------
NET INCOME $1,005,642
==========
See accompanying notes to financial statements
F-140
FSP GAEL CORP.
(A DELAWARE CORPORATION)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 2001
Retained Deficit Total
Additional Paid-in and Dividends in Stockholders'
Preferred Stock Common Stock Capital Excess of Earnings Equity
--------------- ------------ ----------- ------------------ -----------
Balance, December 31, 2000 $ 2 $ -- $19,434,867 $ (990,212) $18,444,657
Net income -- -- -- 1,005,642 1,005,642
Dividends -- -- -- (1,553,162) (1,553,162)
----------- ----------- ----------- ----------- -----------
Balance, December 31, 2001 $ 2 $ -- $19,434,867 $(1,537,733) $17,897,136
=========== =========== =========== =========== ===========
See accompanying notes to financial statements
F-141
FSP GAEL APARTMENTS CORP.
(A DELAWARE CORPORATION)
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,005,642
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 537,783
Changes in operating assets and liabilities:
Increase in miscellaneous other assets 1,325
Decrease in deferred rental income (11,880)
Decrease in accounts payable and accrued expenses (427,363)
Decrease in security deposits (19,848)
-----------
Net cash provided by operating activities 1,085,659
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in capital improvement reserves 34,053
-----------
Net cash provided by investing activities 34,053
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (1,526,075)
-----------
Net cash used in financing activities (1,526,075)
-----------
NET DECREASE IN CASH (406,363)
CASH BALANCE, beginning of year 901,489
-----------
CASH BALANCE, end of year $ 495,126
===========
See accompanying notes to financial statements
F-142
FSP GAEL APARTMENTS CORP.
(A CORPORATION)
NOTES ACCOMPANYING FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION
FSP Gael Apartments Corp. was organized on May 30, 2000 as a Corporation
under the laws of the State of Delaware to purchase, own and operate an
existing luxury apartment complex, located in Houston, Texas (the
"Property"). The Company took title to the Property on July 28, 2000
through a newly-formed limited partnership of which the Company is the
sole limited partner, and a limited liability company wholly-owned by the
Company is the sole general partner. Accordingly, the Company will own,
directly or indirectly all of the beneficial interest in the limited
partnership.
The Property consists of 210 luxury apartments that total 187,368 square
feet. The Company will operate in a manner intended to qualify as a real
estate investment trust ("REIT") for federal income tax purposes.
In October 2000, the Company completed a private offering of 212.5 shares
of preferred stock at $100,000 per share.
METHOD OF ACCOUNTING
The Company maintains its books and records on the accrual method of
accounting in accordance with generally accepted accounting principles.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments with an initial maturity of three months or
less to be cash equivalents.
INCOME TAXES
The Company has elected and intends to maintain its election as a REIT
under the Internal Revenue Code of 1986, as amended. As a result, the
Company generally will not be subject to federal taxation to the extent it
distributes 90% of its REIT taxable income to its shareholders' and
satisfies certain other requirements. Accordingly, no provision for
federal income taxes has been included in the accompanying financial
statements.
For the period ended December 31, 2000, the Company incurred a net
operating loss for income tax purposes approximately of $416,000 that can
be carried forward until it expires in the year 2020.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
SYNDICATION FEES
Syndication fees are selling commissions and other costs associated with
the initial offering of the Company's preferred shares. Such costs, in the
amount of $1,815,141 have been reported as a reduction in the
Stockholders' Equity.
F-143
FSP GAEL APARTMENTS CORP.
(A CORPORATION)
NOTES ACCOMPANYING FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
REVENUE RECOGNITION
Rental income is recognized on an accrual basis. Rental payments received
in advance are deferred until earned. All leases between the Company and
the tenants of the Property are short-term operating leases.
PROPERTY AND DEPRECIATION
Rental property is carried at cost. Depreciation is provided for in
amounts sufficient to relate the cost of depreciable assets to operations
over their estimated service lives of 27.5 years for real property by use
of the straight-line method for financial reporting. Depreciation was
$537,783 for the year ended December 31, 2001.
2. CAPITAL STOCK:
PREFERRED STOCK
Each holder of Shares of Preferred Stock is entitled to receive ratably
all dividends, if any, declared by the Board of Directors out of funds
legally available. The right to receive dividends shall be non-cumulative,
and no right to dividends shall accrue by reason of the fact that no
dividend has been declared in any prior year. Each holder of Shares will
be entitled to receive, to the extent that funds are available therefore,
$100,000 per Share, before any payment to the holder of Common Stock, out
of distributions to stockholders upon liquidation, dissolution or the
winding up of the Company; the balance of any such funds available for
distribution will be distributed among the holders of Shares and the
holder of Common Stock, pro rata based on the number of shares held by
each; provided, however, that for these purposes, one share of Common
Stock will be deemed to equal one-tenth of a share of Preferred Stock.
The Company declared a dividend in December 2001 to holders of record on
December 31, 2001. These dividends, in the amount of $399,500, were paid
in 2002 and have been accrued and reflected in Stockholders' Equity.
In addition to certain voting rights provided in the corporate agreements,
the holder of Shares, acting by consent of at least 51%, shall have the
further right to approve or disapprove a proposed sale of the Property,
the merger of the Company with any other entity and amendments to the
corporate charter. A vote of the holders of 66.67% of the Shares is
required for the issue of any additional shares of capital stock. Holders
of Shares have no redemption or conversion rights.
During 2001, a majority interest of Preferred Stockholders voted to amend
the corporate charter whereby allowing the Preferred Stockholders the
right to elect and make certain changes to the Board of Directors.
COMMON STOCK
Franklin Street Properties Corp. (FSP), formerly Franklin Street Partners
Limited Partnership is the sole holder of the Company's Common Stock. FSP
has the right, as one class together with the Holders of Preferred Stock,
to vote to elect the directors of the Company and to vote on all matters
except those voted by the holders of Shares of Preferred Stock. The
Company shall not declare or pay any cash dividends on shares of Common
Stock.
F-144
FSP GAEL APARTMENTS CORP.
(A CORPORATION)
NOTES ACCOMPANYING FINANCIAL STATEMENTS
3. RELATED PARTY TRANSACTIONS:
A management agreement was executed on July 28, 2000 between the Company
and FSP Property Management LLC, an affiliate of the Common Shareholder.
The agreement provides for a total management fee equal to 1% of collected
revenues. The affiliate's portion of the fees earned and paid was $25,926
for the year ended December 31, 2001.
Franklin Street Partners Limited Partnership operated under the laws of
the Commonwealth of Massachusetts. On January 1, 2002, the limited
partnership merged into Franklin Street Properties Corp (FSP), the Common
Shareholder, and will operate in a manner intended to qualify as a real
estate investment trust ("REIT") for federal income tax purposes.
4. CONCENTRATION OF CREDIT RISK:
The Company maintains its cash accounts at two financial institutions. The
balances, at times, may exceed federally insured limits. At December 31,
2001, the Company had cash on deposit exceeding the insured limit of
$1,446,639.
F-145
FSP GAEL APARTMENTS CORPORATION
(a Delaware Corporation)
For the Period from May 30, 2000
(date of inception) to December 31, 2000
CONTENTS
--------------------------------------------------------------------------------
Page
Independent Auditors' Report F-147
Financial Statements:
Balance Sheet F-148
Statement of Operations F-149
Statement of Changes in Stockholders' Equity F-150
Statement of Cash Flows F-151
Notes to Financial Statements F-152
F-146
[LETTERHEAD OF BRAVER AND COMPANY, P.C.]
Independent Auditors' Report
To the Shareholders
FSP Gael Apartments Corp.
(a Delaware Corporation)
Wakefield, Massachusetts
We have audited the accompanying balance sheet of FSP Gael Apartments Corp. (a
Delaware Corporation) as of December 31, 2000 and the related statements of
income, changes in stockholders' equity and cash flows for the period from May
30, 2000 (date of inception) to December 31, 2000. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of FSP Gael Apartments Corp. (a
Delaware Corporation) at December 31, 2000, and the results of its operations
and its cash flows for the period from May 30, 2000 (date of inception) to
December 31, 2000, in conformity with generally accepted accounting principles.
/s/ Braver and Company, P.C.
January 30, 2001
(Except for Note 6, as to which the date is March 23, 2001)
F-147
FSP GAEL APARTMENTS CORPORATION
(a Delaware Corporation)
Balance Sheet
December 31, 2000
ASSETS
Rental property, at cost:
Land $ 3,312,002
Building 14,789,041
------------
18,101,043
Less: accumulated depreciation 246,484
------------
Rental property, net 17,854,559
Cash 901,489
Capital improvement reserves 615,625
Miscellaneous other assets 28,216
------------
Total assets $ 19,399,889
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Advance rents $ 20,558
Accounts payable and accrued expenses 476,288
Security deposits 85,973
Dividends payable 372,413
------------
Total liabilities 955,232
------------
Commitments (Notes 2 & 3)
Stockholders' equity:
Preferred stock, $.01 par value per share;
authorized 212.5 shares; issued and outstanding 212.5 shares 2
Common stock, $.01 par value per share;
authorized one share; issued and outstanding one share --
Additional paid-in capital 19,434,867
Retained deficit and dividends in excess of earnings (990,212)
------------
Total Stockholders' equity 18,444,657
------------
Total liabilities and stockholders' equity $ 19,399,889
============
See accompanying notes to financial statements
F-148
FSP GAEL APARTMENTS CORPORATION
(a Delaware Corporation)
Statement of Operations
For the Period from May 30, 2000
(date of inception) to December 31, 2000
REVENUES:
Rental income $ 1,032,811
Interest 28,300
-----------
Total revenues 1,061,111
-----------
EXPENSES:
Interest 791,754
Depreciation and amortization 246,484
Taxes and insurance 202,208
Administrative 125,486
Operating and maintenance 104,890
Management fees 51,752
-----------
Total expenses 1,522,574
-----------
NET LOSS $ (461,463)
===========
See accompanying notes to financial statements
F-149
FSP GAEL APARTMENTS CORPORATION
(a Delaware Corporation)
Statement of Changes in Stockholders' Equity
For the Period from May 30, 2000
(date of inception) to December 31, 2000
Retained Deficit
and Dividends in Total
Additional Paid Excess of Stockholders'
Preferred Stock Common Stock in Capital Earnings Equity
--------------- ------------ ---------- -------- ------
Private offering of 212.5 shares, net $ 2 $ -- $19,434,867 $ -- $ 19,434,869
Net loss -- -- -- (461,463) (461,463)
Dividends -- -- -- (528,749) (528,749)
-------- --------- ----------- --------- ------------
Balance, December 31, 2000 $ 2 $ -- $19,434,867 $(990,212) $ 18,444,657
======== ========= =========== ========= ============
See accompanying notes to financial statements
F-150
FSP GAEL APARTMENTS CORPORATION
(a Delaware Corporation)
Statement of Cash Flows
For the Period from May 30, 2000
(date of inception) to December 31, 2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (461,463)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 246,484
Changes in operating assets and liabilities:
Increase in miscellaneous other assets (28,216)
Increase in advance rents 20,558
Increase in accounts payable and accrued expenses 476,288
Increase in security deposits 85,973
------------
Net cash provided by operating activities 339,624
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to capital improvement reserves (615,625)
Purchase of rental property (18,101,043)
------------
Net cash used in investing activities (18,716,668)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of issuance of shares, net 19,434,869
Proceeds from long-term debt 17,500,000
Principal payments on long-term debt (17,500,000)
Dividends (156,336)
------------
Net cash provided by financing activities 19,278,533
------------
NET INCREASE IN CASH 901,489
CASH BALANCE, beginning of period --
------------
CASH BALANCE, end of period $ 901,489
============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW:
Cash paid during the period for interest $ 791,754
============
See accompanying notes to financial statements
F-151
FSP GAEL APARTMENTS CORP.
(a Delaware Corporation)
Notes to Financial Statements
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
FSP Gael Apartments Corp. was organized on May 30, 2000 as a Corporation
under the laws of the State of Delaware to purchase, own and operate an
existing luxury apartment complex, located in Houston, Texas (the
"Property"). The Company took title to the Property on July 28, 2000
through a newly-formed limited partnership of which the Company is the
sole limited partner, and a limited liability company wholly-owned by the
Company is the sole general partner. Accordingly, the Company will own,
directly or indirectly all of the beneficial interest in the limited
partnership.
The Property consists of 209 luxury apartments that total 186,713 square
feet. The Company acquired the Property on July 28, 2000 and will operate
in a manner intended to qualify as a real estate investment trust ("REIT")
for federal income tax purposes.
In October 2000, the Company completed a private offering of 212.5 shares
of preferred stock at $100,000 per share.
METHOD OF ACCOUNTING
The Company maintains its books and records on the accrual method of
accounting in accordance with generally accepted accounting principles.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments with an initial maturity of three months or
less to be cash equivalents.
INCOME TAXES
The Company has maintained and intends to maintain its election as a REIT
under the Internal Revenue Code of 1986, as amended. As a result, the
Company generally will not be subject to federal taxation to the extent it
distributes 95% (90% for 2001) of its REIT taxable income to its
shareholders' and satisfies certain other requirements. For the period
ended December 31, 2000, the Company incurred a net operating loss for
income tax purposes of approximately $416,000 that can be carried forward
until it expires in the year 2020. Accordingly, no provision for federal
income taxes has been included in the accompanying financial statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
F-152
FSP GAEL APARTMENTS CORP.
(a Delaware Corporation)
Notes to Financial Statements
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
SYNDICATION FEES
Syndication fees are selling commissions and other costs associated with
the offering of the Company's preferred shares. Such costs, in the amount
of $1,815,141 have been reported as a reduction in the private offering
proceeds on the Statement of Changes in Stockholders' Equity.
REVENUE RECOGNITION
Rental income is recognized on an accrual basis. Rental payments received
in advance are deferred until earned. All leases between the Company and
the tenants of the Property are short-term operating leases. Approximately
95% of the Property was occupied at December 31, 2000.
PROPERTY AND DEPRECIATION
Rental property is carried at cost. Depreciation is provided for in
amounts sufficient to relate the cost of depreciable assets to operations
over their estimated service lives of 27.5 years for real property by use
of the straight-line method for financial reporting. Depreciation was
$246,484 for the period ended December 31, 2000.
NOTE 2 -- CAPITAL STOCK
PREFERRED STOCK
Each holder of Shares of Preferred Stock is entitled to receive ratably
all dividends, if any, declared by the Board of Directors out of funds
legally available. The right to receive dividends shall be non-cumulative,
and no right to dividends shall accrue by reason of the fact that no
dividend has been declared in any prior year. Each holder of Shares will
be entitled to receive, to the extent that funds are available therefore,
$100,000 per Share, before any payment to the holder of Common Stock, out
of distributions to stockholders upon liquidation, dissolution or the
winding up of the Company; the balance of any such funds available for
distribution will be distributed among the holders of Shares and the
holder of Common Stock, pro rata based on the number of shares held by
each; provided, however, that for these purposes, one share of Common
Stock will be deemed to equal one-tenth of a share of Preferred Stock.
The Company paid fourth quarter dividends in the amount of $372,413 during
January 2001. As such, these dividends have been accrued and reflected in
the Statement of Changes in Stockholders' Equity.
F-153
FSP GAEL APARTMENTS CORP.
(a Delaware Corporation)
Notes to Financial Statements
NOTE 2 -- CAPITAL STOCK (Continued)
PREFERRED STOCK (Continued)
In addition to certain voting rights provided in the corporate agreements,
the holder of Shares, acting by consent of at least 51%, shall have the
further right to approve or disapprove a proposed sale of the Property,
the merger of the Company with any other entity and amendments to the
corporate charter. A vote of the holders of 66.67% of the Shares is
required for the issue of any additional shares of capital stock. Holders
of Shares have no redemption or conversion rights.
COMMON STOCK
Franklin Street Partners Limited Partnership (FSP) is the sole holder of
the Company's Common Stock. FSP has the right to elect the directors of
the Company and to vote on all matters except those voted by the holders
of Shares of Preferred Stock. The Company shall not declare or pay any
cash dividends on shares of Common Stock.
NOTE 3 -- RELATED PARTY TRANSACTIONS
A management agreement was executed on July 28, 2000 between the Company
and FSP Property Management LLC, an affiliate of the Common Shareholder.
The agreement provides for a total management fee equal to 5% of collected
revenues. The affiliates portion of the fees earned was $10,350 for the
period with $5,175 owed at December 31, 2000.
An acquisition fee and other costs totaling $566,306 were paid in 2000 to
an affiliate of the Common Shareholder. Such fees were included in the
cost of the real estate.
Syndication fees of $1,700,000 were paid to an affiliate of the Common
Stockholder for services related to syndication of the investor's
preferred stock interest.
During 2000 the Corporation borrowed and repaid in full:
Note payable to Franklin Street Partners Limited Partnership, the Common
Shareholder, principal of $17,500,000 with interest equal to the Citizens
Bank base rate (9.50%). Interest paid to the affiliate was $101,129.
A commitment fee of $690,625 was for obtaining the first mortgage loan.
Such amount is included in interest on the Statement of Operations.
F-154
FSP GAEL APARTMENTS CORP.
(a Delaware Corporation)
Notes to Financial Statements
NOTE 4 -- CONCENTRATION OF CREDIT RISK
The Company maintains its cash accounts at two financial institutions. The
balances, at times, may exceed federally insured limits. At December 31,
2000, the Company had cash on deposit exceeding the insured limit of
$1,298,717.
NOTE 5 -- SUBSEQUENT EVENT
On March 23, 2001, a vote was presented to the preferred shareholders to
amend the corporate charter whereby allowing the preferred shareholders
the sole right to elect the directors of the Company. Such amendment would
be effective on the date consent is received from a majority interest of
preferred shareholders.
F-155
FSP Goldentop Technology Center Corp.
Financial Statement
September 30, 2002
Table of Contents
Financial Statements
Balance Sheets as of September 30, 2002 and December 31, 2001............. F-157
Statement of Income for the nine months ended September 30, 2002
and 2001................................................................ F-158
Statements of Cash Flows for the nine months ended September 30, 2002
and 2001................................................................ F-159
Notes to the Financial Statements......................................... F-160
F-156
FSP Goldentop Technology Center Corp.
Balance Sheets
(unaudited)
September 30, December 31,
(in thousands, except shares and par value amounts) 2002 2001
================================================================================
Assets:
Real estate investments, at cost:
Land $ 4,426 $ 4,467
Buildings and improvements 15,183 15,183
--------------------------------------------------------------------------------
19,609 19,610
Less accumulated depreciation 795 503
--------------------------------------------------------------------------------
Real estate investments, net 18,814 19,107
Cash and cash equivalents 586 534
Cash - funded reserve 867 852
Tenant receivables 278 --
Prepaid expenses and other assets, net 10 208
--------------------------------------------------------------------------------
Total assets $ 20,555 $ 20,701
================================================================================
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and accrued expenses $ 100 $ 45
Dividends payable -- 480
--------------------------------------------------------------------------------
Total liabilities 100 525
Commitments and Contingencies:
Stockholders' Equity:
Preferred Stock, $.01 par value per share; 231.5
shares authorized, issued and outstanding -- --
Common Stock, $.01 par value per share, 1 share
authorized, issued and outstanding -- --
Additional paid-in capital 21,221 21,221
Retained earnings (766) (1,045)
--------------------------------------------------------------------------------
Total Stockholders' Equity 20,455 20,176
--------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 20,555 $ 20,701
================================================================================
See accompanying notes to financial statements.
F-157
FSP Goldentop Technology Center Corp.
Statements of Income
(Unaudited)
For the For the
Three Months Nine Months
Ended Ended
September 30, September 30,
--------------- ---------------
(in thousands, except shares and per share amounts) 2002 2001 2002 2001
====================================================================================
Revenue:
Rental $ 599 $ 598 $1,799 $1,844
Interest and other 10 12 21 44
------------------------------------------------------------------------------------
Total revenue 609 610 1,820 1,88
------------------------------------------------------------------------------------
Expenses:
Rental operating expenses 23 26 67 78
Depreciation and amortization 97 90 292 270
Real estate taxes and insurance 84 81 244 228
------------------------------------------------------------------------------------
Total expenses 204 197 603 576
------------------------------------------------------------------------------------
Net income $ 405 $ 413 $1,217 $1,312
====================================================================================
Allocation of net income to:
Preferred shareholders $ 405 $ 413 $1,217 $1,312
Common shareholders -- -- -- --
------------------------------------------------------------------------------------
$ 405 $ 413 $1,217 $1,312
====================================================================================
Weighted average number of shares outstanding,
basic and diluted
Preferred shares 231.5 231.5 231.5 231.5
Common shares 1 1 1 1
====================================================================================
Net income per share, basic and diluted
Preferred shares $1,749 $1,748 $5,257 $5,667
Common shares $ -- $ -- $ -- $ --
====================================================================================
See accompanying notes to financial statements.
F-158
FSP Goldentop Technology Center Corp..
Statements of Cash Flows
(Unaudited)
For the
Nine months
Ended
September 30,
-------------------
(in thousands) 2002 2001
================================================================================
Cash flows from operating activities:
Net income $ 1,217 $ 1,312
Adjustments to reconcile net income to net cash
provided by operating activities: 292 270
Depreciation and amortization
Changes in operating assets and liabilities:
(Increase) in prepaid expenses and other assets, net 198 66
(Increase) in tenant receivables (278) (142)
(Decrease) in accounts payable and accrued expenses 55 21
(Decrease) in dividends payable (480) (473)
(Increase) in funded reserve (15) (11)
--------------------------------------------------------------------------------
Net cash provided by operating activities 989 1,043
--------------------------------------------------------------------------------
Cash flows from financing activities:
Distributions to stockholders (938) (950)
--------------------------------------------------------------------------------
Net cash used for financing activities (938) (950)
--------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents 51 96
Cash and cash equivalents, beginning of period 535 528
--------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 586 $ 621
================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ -- $ --
Income taxes -- --
See accompanying notes to financial statements.
F-159
FSP Goldentop Technology Center Corp.
Notes to Financial Statements
(Unaudited)
1. Organization, Basis of presentation, and Recent Accounting Pronouncements
Organization
FSP Goldentop Technology Center Corp. was organized on August 16, 2000 as a
Corporation under the laws of the State of Delaware to purchase, own and operate
an existing commercial building located in San Diego, California (the
"Property"). The Property consists of a two-story R&D/Office/Corporate
Headquarters facility containing 141,405 total square feet of space situated on
8 acres of land. The Company acquired the Property on September 22, 2000 and
will operate in a manner intended to qualify as a real estate investment trust
("REIT") for federal income tax purposes.
In November 2000, the Company completed a private offering of 231.5 shares of
preferred stock at $100,000 per share.
Basis of Presentation
These financial statements should be read in conjunction with the Company's
financial statements and notes thereto contained in the Company's annual
financial statements for its fiscal year ended December 31, 2001.
The accompanying interim financial statements are unaudited; however, the
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information and in conjunction with the rules and regulations of the Securities
and Exchange Commission. Accordingly, they do not include all of the disclosures
required by accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of management, all
adjustments (consisting solely of normal recurring matters) necessary for a fair
presentation of the financial statements for these interim periods have been
included. The results of operations for the interim periods are not necessarily
indicative of the results to be obtained for other interim periods or for the
full fiscal year.
Certain prior-year balances have been reclassified in order to conform to the
current-year presentation.
Recent Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations," which addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This Statement requires that
the fair value of a liability for an asset retirement obligation be recognized
in the period in which it is incurred if a reasonable estimate of the fair value
can be made. The associated asset retirement costs are capitalized as part of
the carrying amount of the long-lived asset. This Statement will be effective at
the beginning of 2003. The Company has reviewed the provisions of SFAS 143 and
believes that the impact of adoption will not be material to its financial
position, results of operations and cash flows.
In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets". This Statement supersedes SFAS No. 121 and
requires that long-lived assets that are to be disposed of by sale be measured
at the lower of book value or fair value less costs to sell. SFAS No. 144
retains the fundamental provisions of SFAS 121 for (a) recognition and
measurement of the impairment of long-lived assets to be held and used, and (b)
measurement of long-lived assets to be disposed of by sale, but broadens the
definition of what constitutes a discontinued operation and how the results of a
discontinued operation are to be measured and presented. This Statement was
effective at the beginning of 2002. With the exception of reclassifying the
operations of certain real estate assets considered "held for sale" (and for
which no significant continuing involvement exists) to "Discontinued operations,
net of tax" in the consolidated statement of income, the impact of adoption is
not expected to have a material impact on the Company's financial position and
cash flows.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FAS Nos. 4, 44, and
64, Amendment of FAS 13, and Technical Corrections". This Statement rescinds
FASB No. 4, "Reporting Gains and Losses from Extinguishment of Debt", and an
amendment of that Statement, FASB No. 64, "Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements". This Statement amends FASB No. 13,
"Accounting for Leases". This Statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings or
describe their applicability under changed conditions. This statement will be
effective for the Company's fiscal year ending December 31, 2003. The Company
has reviewed the provisions of FASB 145 and believes that the impact of adoption
will not be material to its financial position, results of operations and cash
flows.
F-160
FSP Goldentop Technology Center Corp.
Notes to Financial Statements
(Unaudited)
2. Income Taxes
The Company has elected and intends to maintain its election as a REIT under the
Internal Revenue Code of 1986, as amended. As a result, the Company generally
will not be subject to federal taxation to the extent it distributes 90% of its
REIT taxable income to its shareholders and satisfies certain other
requirements. Accordingly, no provision for federal income taxes has been
included in the accompanying financial statements.
For the year ended December 31, 2000, the Company incurred a net operating loss
for income tax purposes of approximately $358,000 that can be carried forward
until it expires in the year 2020.
3. Related Party Transactions
A management agreement was executed on September 22, 2000 between the Company
and FSP Property Management LLC, an affiliate of the Common Shareholder. The
agreement provides for a total management fee equal to 3% of collected revenues
For the three months ended September 30, 2002 and 2001, respectively, fees
earned under the agreement were $5,142 and $4,868. For the nine months ended
September 30, 2002 and 2001 respectively, fees earned under the agreement were
$14,880 and $14,603.
4. Net Income Per Share
The Company follows SFAS No. 128, "Earnings per Share," which specifies the
computation, presentation and disclosure requirements for the Company's net
income per share. Basic net income per share is computed by dividing net income
by the weighted average number of Company shares outstanding during the period.
Diluted net income per share reflects the potential dilution that could occur if
securities or other contracts to issue shares/units were exercised or converted
into shares/units. There were no potential dilutive shares/units outstanding at
September 30, 2002 and 2001.
The denominator used for calculating basic and diluted net income per share is
as follows
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
-------------------------- -------------------------
2002 2001 2002 2001
----- ----- ----- -----
Weighted average number of shares/units
outstanding:
Common shares 1 1 1 1
Preferred shares 231.5 231.5 231.5 231.5
----- ----- ----- -----
232.5 232.5 232.5 232.5
===== ===== ===== =====
F-161
FSP GOLDENTOP TECHNOLOGY
CENTER CORP.
(A DELAWARE CORPORATION)
FINANCIAL STATEMENT
DECEMBER 31, 2001
CONTENTS
PAGE
Independent auditors report F-163
Financial statements:
Balance sheet F-164
Statement of operations F-165
Statement of changes in stockholders equity F-166
Statement of cash flows F-167
Notes accompanying financial statements F-168
F-162
[LETTERHEAD OF BRAVER AND COMPANY, P.C.]
INDEPENDENT AUDITORS' REPORT
To the Stockholders
FSP Goldentop Technology Center Corp.
(a Delaware Corporation)
We have audited the accompanying balance sheet of FSP Goldentop Technology
Center Corp. (a Delaware Corporation) as of December 31, 2001 and the related
statements of operations, changes in stockholders' equity and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of FSP Goldentop Technology Center
Corp. (a Delaware Corporation) at December 31, 2001, and the results of its
operations and its cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of America.
/s/ Braver and Company, P.C.
February 1, 2002
F-163
FSP GOLDENTOP TECHNOLOGY CENTER CORP.
(A DELAWARE CORPORATION)
BALANCE SHEET
DECEMBER 31, 2001
ASSETS
Rental property, at cost:
Land $ 4,426,472
Building 15,183,276
------------
19,609,748
Less: accumulated depreciation 502,865
------------
Rental property, net 19,106,883
Cash 534,605
Capital improvement reserves 851,721
Miscellaneous other assets 207,985
------------
Total assets $ 20,701,194
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses 44,731
Dividends payable 480,363
------------
Total liabilities 525,095
------------
Stockholders' equity:
Preferred stock, $.01 par value per share,
authorized 231.5 shares, issued and outstanding
231.5 shares 2
Common stock, $01 par value per share,
authorized one share, issued and outstanding one share --
Additional paid-in capital 21,221,351
Retained deficit and dividends in excess of earnings (1,045,254)
------------
Total stockholders' equity 20,176,099
------------
Total liabilities and stockholders' equity $ 20,701,194
============
See accompanying notes to financial statements
F-164
FSP GOLDENTOP TECHNOLOGY CENTER CORP.
(A DELAWARE CORPORATION)
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2001
REVENUES:
Rental income $2,438,793
Interest 54,135
----------
Total revenues 2,492,928
----------
EXPENSES:
Administrative 32,049
Depreciation 389,315
Management fees 56,379
Operating and maintenance 6,970
Taxes and insurance 297,473
----------
Total expenses 782,186
----------
NET INCOME $1,710,742
==========
See accompanying notes to financial statements
F-165
FSP GOLDENTOP TECHNOLOGY CENTER CORP.
(A DELAWARE CORPORATION)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 2001
Retained Deficit
Additional and Dividends Total
Paid-in in Excess Stockholders'
Preferred Stock Common Stock Capital of Earnings Equity
--------------- ------------ ---------- ----------- ------
Balance, December 31, 2000 $ 2 -- $ 21,221,351 $ (855,464) $ 20,365,889
Net income -- -- -- 1,710,742 1,710,742
Dividends -- -- -- (1,900,532) (1,900,532)
------------ ----------- ------------ ------------ ------------
Balance, December 31, 2001 $ 2 $ -- $ 21,221,351 $ (1,045,254) $ 20,176,099
============ =========== ============ ============ ============
See accompanying notes to financial statements
F-166
FSP GOLDENTOP TECHNOLOGY CENTER CORP.
(A DELAWARE CORPORATION)
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,710,742
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 389,315
Changes in operating assets and liabilities:
Increase in miscellaneous other assets (133,774)
Decrease in accounts payable and accrued expenses (49,119)
-----------
Net cash provided by operating activities 1,917,164
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to capital improvement reserves (16,346)
-----------
Net cash used in investing activities (16,346)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends (1,893,837)
-----------
Net cash used in financing activities (1,893,837)
-----------
NET INCREASE IN CASH 6,981
CASH BALANCE, beginning of year 527,624
-----------
CASH BALANCE, end of year $ 534,605
===========
See accompanying notes to financial statements
F-167
FSP GOLDENTOP TECHNOLOGY CENTER CORP.
(A DELAWARE CORPORATION)
NOTES ACCOMPANYING FINANCIAL STATEMENT
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION
FSP Goldentop Technology Center Corp. was organized on August 16, 2000 as a
Corporation under the laws of the State of Delaware to purchase, own and
operate an existing commercial building located in San Diego, California (the
"Property"). The Property consists of a two-story R&D/Office/Corporate
Headquarters facility containing 141,405 total square feet of space situated
on 8 acres of land. The Company acquired the Property on September 22, 2000
and will operate in a manner intended to qualify as a real estate investment
trust ("REIT") for federal income tax purposes.
In November 2000, the Company completed a private offering of 231.5 shares of
preferred stock at $100,000 per share.
METHOD OF ACCOUNTING
The Company maintains its books and records on the accrual method of
accounting in accordance with generally accepted accounting principles.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments with an initial maturity of three months or
less to be cash equivalents.
INCOME TAXES
The Company has elected and intends to maintain its election as a REIT under
the Internal Revenue Code of 1986, as amended. As a result, the Company
generally will not be subject to federal taxation to the extent it
distributes 90% of its REIT taxable income to its shareholders and satisfies
certain other requirements. Accordingly, no provision for federal or state
income taxes has been included in the accompanying financial statements.
For the period ended December 31, 2000, the Company incurred a net operating
loss for income tax purposes approximately of $358,000 that can be carried
forward until it expires in the year 2020.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
SYNDICATION FEES
Syndication fees are selling commissions and other costs associated with the
initial offering of the Company's preferred shares. Such costs, in the amount
of $1,928,647, have been reported as a reduction in the Stockholders'
Equity.
REVENUE RECOGNITION
Rental income, which includes scheduled increases over the lease term, is
recognized on a straight-line basis. Income recognized on a straight-line
basis differed from income that would have accrued in accordance with the
lease by $150,995 in 2001
F-168
FSP GOLDENTOP TECHNOLOGY CENTER CORP.
(A DELAWARE CORPORATION)
NOTES ACCOMPANYING FINANCIAL STATEMENT
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
PROPERTY AND DEPRECIATION
Rental property is carried at cost. Depreciation is provided for in amounts
sufficient to relate the cost of depreciable assets to operations over their
estimated service lives of 39 years for real property by use of the
straight-line method for financial reporting. Depreciation was $389,315 for
the year ended December 31, 2001.
2. CAPITAL STOCK:
PREFERRED STOCK
Each holder of Shares of Preferred Stock is entitled to receive ratably all
dividends, if any, declared by the Board of Directors out of funds legally
available. The right to receive dividends shall be non-cumulative, and no
right to dividends shall accrue by reason of the fact that no dividend has
been declared in any prior year. Each holder of Shares will be entitled to
receive, to the extent that funds are available therefore, $100,000 per
Share, before any payment to the holder of Common Stock, out of distributions
to stockholders upon liquidation, dissolution or the winding up of the
Company; the balance of any such funds available for distribution will be
distributed among the holders of Shares and the holder of Common Stock, pro
rata based on the number of shares held by each; provided, however, that for
these purposes, one share of Common Stock will be deemed to equal one-tenth
of a share of Preferred Stock.
The Company declared a dividend in December 2001 to holders of record on
December 31, 2001. These dividends, in the amount of $480,363, were paid in
2002 and have been accrued and reflected in Stockholders' Equity.
In addition to certain voting rights provided in the corporate agreements,
the holder of Shares, acting by consent of at least 51%, shall have the
further right to approve or disapprove a proposed sale of the Property, the
merger of the Company with any other entity and amendments to the corporate
charter. A vote of the holders of 66.67% of the Shares is required for the
issue of any additional shares of capital stock. Holders of Shares have no
redemption or conversion rights.
During 2001, a majority interest of Preferred Stockholders voted to amend the
corporate charter whereby allowing the Preferred Stockholders the right to
elect and make certain changes to the Board of Directors.
COMMON STOCK
Franklin Street Properties Corp. (FSP), formerly Franklin Street Partners
Limited Partnership, is the sole holder of the Company's Common Stock. FSP
has the right, as one class together with the Holders of Preferred Stock, to
vote to elect the directors of the Company and to vote on all matters except
those voted by the holders of Shares of Preferred Stock. The Company shall
not declare or pay any cash dividends on shares of Common Stock.
3. RELATED PARTY TRANSACTIONS:
A management agreement was executed on September 22, 2000 between the Company
and FSP Property Management LLC, an affiliate of the Common Shareholder. The
agreement provides for a total management fee equal to 3% of collected
revenues. The affiliate's portion of the fees earned and paid was $19,471 for
the year ended December 31, 2001.
F-169
FSP GOLDENTOP TECHNOLOGY CENTER CORP.
(A DELAWARE CORPORATION)
NOTES ACCOMPANYING FINANCIAL STATEMENT
3. RELATED PARTY TRANSACTIONS: (CONTINUED)
Franklin Street Partners Limited Partnership operated under the laws of the
Commonwealth of Massachusetts. On January 1, 2002, the limited partnership
merged into Franklin Street Properties Corp (FSP), the Common Shareholder,
and will operate in a manner intended to qualify as a real estate investment
trust ("REIT") for federal income tax purposes.
4. LEASES:
The Company, as lessor, has minimum future rentals due under a noncancellable
operating lease as follows:
Year Ended
December 31, Amount
------------ ------
2002 2,002,075
2003 2,057,053
2004 2,115,330
2005 2,173,607
2006 2,235,381
Thereafter 1,148,577
-----------
$11,732,023
===========
In addition, the lessee is liable for real estate taxes and operating
expenses as direct expenses to the lessee.
Upon acquiring the commercial rental property in September 2000, the Company
was assigned the lease agreement between the seller of the Property and the
existing tenant. The lease is from July 1, 2000 to June 30, 2007.
5. CONCENTRATIONS OF RISK:
For the period ended December 31, 2001, all of the rental income was derived
from one lessee. As such, future rental receipts are dependent upon the
financial strength of the lessees and their ability to perform under the
lease agreements.
The Company maintains its cash accounts at two financial institutions. The
balances, at times, may exceed federally insured limits. The Company had cash
on deposit exceeding the insured limit by $1,293,193 in 2001.
F-170
FSP GOLDENTOP TECHNOLOGY CENTER CORP.
(a Delaware Corporation)
For the Period from August 16, 2000
(date of inception) to December 31, 2000
CONTENTS
--------------------------------------------------------------------------------
Page
Independent Auditors' Report F-172
Financial Statements:
Balance Sheet F-173
Statement of Operations F-174
Statement of Changes in Stockholders' Equity F-175
Statement of Cash Flows F-176
Notes to Financial Statements F-177
F-171
[LETTERHEAD OF BRAVER AND COMPANY, P.C.]
Independent Auditors' Report
To the Stockholders
FSP Goldentop Technology Center Corp.
(a Delaware Corporation)
Wakefield, Massachusetts
We have audited the accompanying balance sheet of FSP Goldentop Technology
Center Corp. (a Delaware Corporation) as of December 31, 2000 and the related
statements of income, changes in stockholders' equity and cash flows for the
period from August 16, 2000 (date of inception) to December 31, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of FSP Goldentop Technology Center
Corp. (a Delaware Corporation) at December 31, 2000, and the results of its
operations and its cash flows for the period from August 16, 2000 (date of
inception) to December 31, 2000, in conformity with generally accepted
accounting principles.
/s/ Braver and Company, P.C.
January 30, 2001
(Except for Note 6, as to which the date is March 23, 2001)
F-172
FSP GOLDENTOP TECHNOLOGY CENTER CORP.
(a Delaware Corporation)
Balance Sheet
December 31, 2000
ASSETS
Rental property, at cost:
Land $ 4,426,472
Building 15,183,276
------------
19,609,748
Less: accumulated depreciation 113,550
------------
Rental property, net 19,496,198
Cash 527,624
Capital improvement reserves 835,375
Miscellaneous other assets 74,211
------------
Total assets $ 20,933,408
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accrued expenses $ 93,851
Dividends payable 473,668
------------
Total liabilities 567,519
------------
Commitments (Notes 2, 3, & 4)
Stockholders' equity:
Preferred stock, $.01 par value per share,
authorized 231.5 shares, issued and outstanding 231.5 shares 2
Common stock, $.01 par value per share,
authorized one share, issued and outstanding one share --
Additional paid-in capital 21,221,351
Retained deficit and dividends in excess of earnings (855,464)
------------
Total stockholders' equity 20,365,889
------------
Total liabilities and stockholders' equity $ 20,933,408
============
See accompanying notes to financial statements
F-173
FSP GOLDENTOP TECHNOLOGY CENTER CORP.
(a Delaware Corporation)
Statement of Operations
For the Period from August 16, 2000
(date of inception) to December 31, 2000
REVENUES:
Rental income $ 670,322
Interest 15,035
-----------
Total revenues 685,357
-----------
EXPENSES:
Interest 809,032
Depreciation 113,550
Taxes and insurance 80,643
Administrative 40,523
Management fees 18,098
Operating and maintenance 5,307
-----------
Total expenses 1,067,153
-----------
NET LOSS $ (381,796)
===========
See accompanying notes to financial statements
F-174
FSP GOLDENTOP TECHNOLOGY CENTER CORP.
(a Delaware Corporation)
Statement of Changes in Stockholders' Equity
For the Period from August 16, 2000
(date of inception) to December 31, 2000
Retained Deficit
Additional and Dividends Total
Paid in in Excess Stockholders'
Preferred Stock Common Stock Capital of Earnings Equity
--------------- ------------ ---------- ----------- ------
Private offering of 231.5 shares, net $ 2 $ -- $ 21,221,351 $ -- $ 21,221,353
Net loss -- -- -- (381,796) (381,796)
Dividends -- -- -- (473,668) (473,668)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2000 $ 2 $ -- $ 21,221,351 $ (855,464) $ 20,365,889
============ ============ ============ ============ ============
See accompanying notes to financial statements
F-175
FSP GOLDENTOP TECHNOLOGY CENTER CORP.
(a Delaware Corporation)
Statement of Cash Flows
For the Period from August 16, 2000
(date of inception) to December 31, 2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (381,796)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 113,550
Changes in operating assets and liabilities:
Increase in accounts receivable (61,003)
Increase in miscellaneous other assets 80,643
------------
Net cash used in operating activities (248,606)
------------
CASH FLOWS FROM IN VESTING ACTIVITIES:
Additions to capital improvement reserves (835,375)
Purchase of rental property (19,609,748)
------------
Net cash used in investing activities (20,445,123)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of issuance of shares, net 21,221,353
Proceeds from long-term debt 18,900,000
Principal payments on long-term debt (18,900,000)
------------
Net cash provided by financing activities 21,221,353
------------
NET INCREASE IN CASH 527,624
CASH BALANCE, beginning of period --
------------
CASH BALANCE, end of period $ 527,624
============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW:
Cash paid during the period for interest $ 809,032
============
See accompanying notes to financial statements
F-176
FSP GOLDENTOP TECHNOLOGY CENTER CORP.
(a Delaware Corporation)
Notes to Financial Statements
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
FSP Goldentop Technology Center Corp. was organized on August 16, 2000 as
a Corporation under the laws of the State of Delaware to purchase, own and
operate an existing commercial building located in San Diego, California
(the "Property"). The Property consists of a two-story
R&D/Office/Corporate Headquarters facility containing 141,405 total square
feet of space situated on 8 acres of land. The Company acquired the
Property on September 22, 2000 and will operate in a manner intended to
qualify as a real estate investment trust ("REIT") for federal income tax
purposes.
In November 2000, the Company completed a private offering of 231.5 shares
of preferred stock at $100,000 per share.
METHOD OF ACCOUNTING
The Company maintains its books and records on the accrual method of
accounting in accordance with generally accepted accounting principles.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments with an initial maturity of three months or
less to be cash equivalents.
INCOME TAXES
The Company has maintained and intends to maintain its election as a REIT
under the Internal Revenue Code of 1986, as amended. As a result, the
Company generally will not be subject to federal taxation to the extent it
distributes 95% (90% for 2001) of its REIT taxable income to its
shareholders and satisfies certain other requirements. For the period
ended December 31, 2000, the Company incurred a net operating loss for
income tax purposes of approximately $401,000 that can be carried forward
until it expires in the year 2020. Accordingly, no provision for federal
or state income taxes has been included in the accompanying financial
statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
F-177
FSP GOLDENTOP TECHNOLOGY CENTER CORP.
(a Delaware Corporation)
Notes to Financial Statements
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
SYNDICATION FEES
Syndication fees are selling commissions and other costs associated with
the offering of the Company's preferred shares. Such costs, in the amount
of $1,928,647, have been reported as a reduction of the private offering
proceeds on the Statement of Changes in Stockholders' Equity.
REVENUE RECOGNITION
Rental income, which includes scheduled increases over the lease term, is
recognized on a straight-line basis. Income recognized on a straight-line
basis differed from income that would have accrued in accordance with the
lease by $41,524. One tenant occupied 100% of the Property at December 31,
2000.
PROPERTY AND DEPRECIATION
Rental property is carried at cost. Depreciation is provided for in
amounts sufficient to relate the cost of depreciable assets to operations
over their estimated service lives of 39 years for real property by use of
the straight-line method for financial reporting. Depreciation was
$113,550 for the year ended December 31, 2000.
NOTE 2 -- CAPITAL STOCK
PREFERRED STOCK
Each holder of Shares of Preferred Stock is entitled to receive ratably
all dividends, if any, declared by the Board of Directors out of funds
legally available. The right to receive dividends shall be non-cumulative,
and no right to dividends shall accrue by reason of the fact that no
dividend has been declared in any prior year. Each holder of Shares will
be entitled to receive, to the extent that funds are available therefore,
$100,000 per Share, before any payment to the holder of Common Stock, out
of distributions to stockholders upon liquidation, dissolution or the
winding up of the Company; the balance of any such funds available for
distribution will be distributed among the holders of Shares and the
holder of Common Stock, pro rata based on the number of shares held by
each; provided, however, that for these purposes, one share of Common
Stock will be deemed to equal one-tenth of a share of Preferred Stock.
The Company paid fourth quarter dividends in the amount of $473,668 during
January 2001. As such, these dividends have been accrued and reflected in
the Statement of Changes in Stockholders' Equity.
F-178
FSP GOLDENTOP TECHNOLOGY CENTER CORP.
(a Delaware Corporation)
Notes to Financial Statements
NOTE 2 -- CAPITAL STOCK (Continued)
PREFERRED STOCK -- (Continued)
In addition to certain voting rights provided in the corporate agreements,
the holder of Shares, acting by consent of at least 51%, shall have the
further right to approve or disapprove a proposed sale of the Property,
the merger of the Company with any other entity and amendments to the
corporate charter. A vote of the holders of 66.67% of the Shares is
required for the issue of any additional shares of capital stock. Holders
of Shares have no redemption or conversion rights.
COMMON STOCK
Franklin Street Partners Limited Partnership (FSP) is the sole holder of
the Company's Common Stock. FSP has the right to elect the directors of
the Company and to vote on all matters except those voted by the holders
of Shares of Preferred Stock. The Company shall not declare or pay any
cash dividends on shares of Common Stock.
NOTE 3 -- RELATED PARTY TRANSACTIONS
A management agreement was executed on September 22, 2000 between the
Company and FSP Property Management LLC, an affiliate of the Common
Shareholder. The agreement provides for a total management fee equal to 3%
of collected revenues. The affiliate's portion of the fees earned was
$6,033 for the period with $2,301 owed at December 31, 2000.
An acquisition fee and other costs totaling $661,909 were paid in 2000 to
an affiliate of the Common Shareholder. Such fees were included in the
cost of the real estate.
Syndication fees of $1,852,000 were paid in 2000 to an affiliate of the
Common Shareholder for services related to syndication of the investor's
preferred stock interest.
During 2000, the Company borrowed and repaid in full:
Note payable to Franklin Street Partners Limited Partnership, the Common
Shareholder, principal of $18,900,000 with interest equal to the Citizens
Bank base rate (9.50%). Interest paid to the affiliate was $56,657.
A commitment fee of $752,375 was paid for obtaining the first mortgage
loan. Such amount is included in interest on the Statement of Operations.
F-179
FSP GOLDENTOP TECHNOLOGY CENTER CORP.
(a Delaware Corporation)
Notes to Financial Statements
NOTE 4 -- LEASES
The Company, as lessor, has minimum future rentals due under
noncancellable operating leases as follows:
Year Ended
December 31, Amount
------------ ------
2001 $ 1,947,097
2002 2,002,075
2003 2,057,053
2004 2,115,330
2005 2,173,607
Thereafter 3,383,958
-----------
$13,679,120
===========
In addition, the lessee is liable for real estate taxes and operating
expenses as direct expenses to the lessee.
Upon acquiring the commercial rental property in September 2000, the
Company was assigned the lease agreement between the seller of the
Property and the existing tenant. The lease is from July 1, 2000 to June
30, 2007.
NOTE 5 -- CONCENTRATIONS OF RISK
For the period ended December 31, 2000, all of the rental income was
derived from one lessee. As such, future rental receipts are dependent
upon the financial strength of the lessees and their ability to perform
under the lease agreements.
The Company maintains its cash accounts at two financial institutions. The
balances, at times, may exceed federally insured limits. At December 31,
2000, the Company had cash on deposit exceeding the insured limit by
$1,253,732.
NOTE 6 -- SUBSEQUENT EVENT
On March 23, 2001, a vote was presented to the preferred shareholders to
amend the corporate charter whereby allowing the preferred shareholders
the sole right to elect the directors of the Company. Such amendment would
be effective on the date consent is received from a majority interest of
preferred shareholders.
F-180
FSP Centennial Technology Center Corp.
Financial Statements
September 30, 2002
Table of Contents
Page
----
Financial Statements
Balance Sheets as of September 30, 2002 and December 31, 2001............. F-182
Statements of Income for the three and nine months ended
September 30, 2002 and 2001............................................... F-183
Statements of Cash Flows for the nine months ended
September 30, 2002 and 2001............................................... F-184
Notes to the Financial Statements......................................... F-185
F-181
FSP Centennial Technology Center Corp.
Balance Sheets
(unaudited)
September 30, December 31,
(in thousands, except shares and par value amounts) 2002 2001
================================================================================
Assets:
Real estate investments, at cost:
Land $ 1,305 $ 1,305
Buildings and improvements 12,152 12,152
--------------------------------------------------------------------------------
13,457 13,457
Less accumulated depreciation 636 403
--------------------------------------------------------------------------------
Real estate investments, net 12,821 13,054
Cash and cash equivalents 500 535
Cash - funded reserve 470 470
Cash - restricted 13 13
Prepaid expenses and other assets, net 199 150
--------------------------------------------------------------------------------
Total assets $ 14,003 $ 14,222
================================================================================
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and accrued expenses 116 502
Tenant Security Deposit 13 13
--------------------------------------------------------------------------------
Total liabilities 129 515
--------------------------------------------------------------------------------
Commitments and Contingencies:
Stockholders' Equity:
Preferred Stock, $.01 par value, 158 shares -- --
authorized, issued and outstanding
Common Stock, $.01 par value, 1 share -- --
authorized, issued and outstanding
Additional paid-in capital 14,459 14,459
Retained earnings (585) (752)
--------------------------------------------------------------------------------
Total Stockholders' Equity 13,874 13,707
--------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 14,003 $ 14,222
================================================================================
See accompanying notes to financial statements.
F-182
FSP Centennial Technology Center Corp.
Statements of Income
(Unaudited)
For the For the
Three Months Nine Months
Ended Ended
September 30, September 30,
--------------- ---------------
(in thousands, except shares and per share amounts) 2002 2001 2002 2001
====================================================================================
Revenue:
Rental $ 464 $ 418 $1,367 $1,236
Interest and other 4 9 13 29
------------------------------------------------------------------------------------
Total revenue 468 427 1,380 1,265
------------------------------------------------------------------------------------
Expenses:
Rental operating expenses 71 62 198 181
Depreciation and amortization 78 77 233 231
Real estate taxes and insurance 37 65 110 103
------------------------------------------------------------------------------------
Total expenses 186 204 541 515
------------------------------------------------------------------------------------
Net income $ 282 $ 223 $ 839 $ 750
====================================================================================
Allocation of net income to:
Preferred shareholders $ 282 $ 223 $ 839 $ 750
Common shareholders -- -- -- --
------------------------------------------------------------------------------------
$ 282 $ 223 $ 839 $ 750
====================================================================================
Weighted average number of shares outstanding,
basic and diluted
Preferred shares 158 158 158 158
Common shares 1 1 1 1
====================================================================================
Net income per share, basic and diluted
Preferred shares $1,785 $1,411 $5,310 $4,747
Common shares $ -- $ -- $ -- $ --
====================================================================================
See accompanying notes to financial statements.
F-183
FSP Centennial Technology Center Corp.
Statements of Cash Flows
(Unaudited)
For the
Nine months
Ended
September 30,
--------------
(in thousands) 2002 2001
================================================================================
Cash flows from operating activities:
Net income $ 839 $ 750
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 233 231
Changes in operating assets and liabilities:
Increase in tenant rent receivables (43) (1)
Increase in prepaid expenses and other assets, net (6) --
Decrease in accounts payable and accrued expenses (386) (58)
Increase in funded reserve -- (38)
--------------------------------------------------------------------------------
Net cash provided by operating activities 637 884
--------------------------------------------------------------------------------
Cash flows from financing activities:
Distributions to stockholders (672) (658)
--------------------------------------------------------------------------------
Net cash used for financing activities (672) (658)
--------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (35) 226
Cash and cash equivalents, beginning of period 535 244
--------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 500 470
================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ -- --
Income taxes -- --
See accompanying notes to financial statements.
F-184
FSP Centennial Technology Center Corp.
Notes to Financial Statements
(Unaudited)
1. Organization, Basis of presentation, and Recent Accounting Pronouncements
Organization
FSP Centennial Technology Center Corp. was organized on August 15, 2000 as a
Corporation under the laws of the State of Delaware to purchase, own and operate
commercial buildings located in Colorado Springs, Colorado (the "Property"). The
Property consists of a single story office buildings containing 110,730 total
square feet of space situated on approximately 9 acres of land. The Company
acquired the Property on September 28, 2000 and will operate in a manner
intended to qualify as a real estate investment trust ("REIT") for federal
income tax purposes.
In December 2000, the Company completed a private offering of 158 shares of
preferred stock at $100,000 per share.
Basis of Presentation
These financial statements should be read in conjunction with the Company's
financial statements and notes thereto contained in the Company's annual
financial statement for its fiscal year ended December 31, 2001.
The accompanying interim financial statements are unaudited; however, the
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information and in conjunction with the rules and regulations of the Securities
and Exchange Commission. Accordingly, they do not include all of the disclosures
required by accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of management, all
adjustments (consisting solely of normal recurring matters) necessary for a fair
presentation of the financial statements for these interim periods have been
included. The results of operations for the interim periods are not necessarily
indicative of the results to be obtained for other interim periods or for the
full fiscal year.
Certain prior-year balances have been reclassified in order to conform to the
current-year presentation.
Recent Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations," which addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This Statement requires that
the fair value of a liability for an asset retirement obligation be recognized
in the period in which it is incurred if a reasonable estimate of the fair value
can be made. The associated asset retirement costs are capitalized as part of
the carrying amount of the long-lived asset. This Statement will be effective at
the beginning of 2003. The Company has reviewed the provisions of SFAS 143 and
believes that the impact of adoption will not be material to its financial
position, results of operations and cash flows.
In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets". This Statement supersedes SFAS No. 121 and
requires that long-lived assets that are to be disposed of by sale be measured
at the lower of book value or fair value less costs to sell. SFAS No. 144
retains the fundamental provisions of SFAS 121 for (a) recognition and
measurement of the impairment of long-lived assets to be held and used, and (b)
measurement of long-lived assets to be disposed of by sale, but broadens the
definition of what constitutes a discontinued operation and how the results of a
discontinued operation are to be measured and presented. This Statement was
effective at the beginning of 2002. With the exception of reclassifying the
operations of certain real estate assets considered "held for sale" (and for
which no significant continuing involvement exists) to "Discontinued operations,
net of tax" in the consolidated statement of income, the impact of adoption is
not expected to have a material impact on the Company's financial position and
cash flows.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FAS Nos. 4, 44, and
64, Amendment of FAS 13, and Technical Corrections". This Statement rescinds
FASB No. 4, "Reporting Gains and Losses from Extinguishment of Debt", and an
amendment of that Statement, FASB No. 64, "Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements". This Statement amends FASB No. 13,
"Accounting for Leases". This Statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings or
describe their applicability under changed conditions. This statement will be
effective for the Company's fiscal year ending December 31, 2003. The Company
has reviewed the provisions of FASB 145 and believes that the impact of adoption
will not be material to its financial position, results of operations and cash
flows.
F-185
FSP Centennial Technology Center Corp.
Notes to Financial Statements
(Unaudited)
2. Income Taxes
The Company has elected and intends to maintain its election as a REIT under the
Internal Revenue Code of 1986, as amended. As a result, the Company generally
will not be subject to federal taxation to the extent it distributes 90% of its
REIT taxable income to its shareholders and satisfies certain other
requirements. Accordingly, no provision for federal or state income taxes has
been included in the accompanying financial statements.
For the year ended December 31, 2000, the Company incurred a net operating loss
for income tax purposes of approximately $461,000 that can be carried forward
until it expires in the year 2020.
3. Related Party Transactions
A management agreement was executed on September 28, 2000 between the Company
and FSP Property Management LLC, an affiliate of the Common Shareholder. The
agreement provides for a total management fee equal to 1% of collected revenues.
For the three months ended September 30, 2002 and 2001, respectively, fees
earned under the agreement were $4,248 and $3,900. For the nine months ended
September 30, 2002 and 2001 respectively, fees earned under the agreement were
$12,730 and $11,700.
4. Net Income Per Share
The Company follows SFAS No. 128, "Earnings per Share," which specifies the
computation, presentation and disclosure requirements for the Company's net
income per share. Basic net income per share is computed by dividing net income
by the weighted average number of Company shares outstanding during the period.
Diluted net income per share reflects the potential dilution that could occur if
securities or other contracts to issue shares were exercised or converted into
shares/units. There were no potential dilutive shares outstanding at September
30, 2002 and 2001.
The denominator used for calculating basic and diluted net income per share is
as follows
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
-------------------------- -------------------------
2002 2001 2002 2001
-------- --------- -------- ---------
Weighted average number of shares outstanding:
Common shares 1 1 1 1
Preferred shares 158 158 158 158
F-186
FSP CENTENNIAL TECHNOLOGY
CENTER CORP.
(A DELAWARE CORPORATION)
DECEMBER 31, 2001
CONTENTS
PAGE
Independent auditors' report F-188
Financial statements:
Balance sheet F-189
Statement of operations F-190
Statement of changes in stockholders' equity F-191
Statement of cash flows F-192
Notes accompanying financial statements F-193
F-187
[LETTERHEAD OF BRAVER AND COMPANY, P.C.]
INDEPENDENT AUDITORS' REPORT
To the Stockholders
FSP Centennial Technology Center Corp.
(a Delaware Corporation)
We have audited the accompanying balance sheet of FSP Centennial Technology
Center Corp. (a Delaware Corporation) as of December 31, 2001 and the related
statements of operations, changes in stockholders' equity and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of FSP Centennial Technology
Center Corp. (a Delaware Corporation) at December 31, 2001, and the results of
its operations and its cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
/s/ Braver and Company, P.C.
February 1, 2002
F-188
FSP CENTENNIAL TECHNOLOGY CENTER CORP.
(A DELAWARE CORPORATION)
BALANCE SHEET
DECEMBER 31, 2001
ASSETS
Rental property, at cost:
Land $ 1,305,212
Building 12,151,941
------------
13,457,153
Less: accumulated depreciation 402,469
------------
Rental property, net 13,054,684
Cash 547,460
Capital improvement reserves 469,500
Miscellaneous other assets 150,325
------------
Total assets 14,221,970
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses 152,904
Dividends payable 328,798
Due to affiliate 20,039
Security deposits 13,148
------------
Total liabilities 514,889
------------
Stockholders' equity:
Preferred stock, $.01 par value per share,
authorized 158 shares, issued and outstanding 158 shares 2
Common stock, $.01 par value per share,
authorized one share, issued and outstanding one share --
Additional paid-in capital 14,459,519
Retained deficit and dividends in excess of earnings (752,440)
------------
Total stockholders' equity 13,707,081
------------
Total liabilities and stockholders' equity $ 14,221,970
============
See accompanying notes to financial statements
F-189
FSP CENTENNIAL TECHNOLOGY CENTER CORP.
(A DELAWARE CORPORATION)
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2001
REVENUES:
Rental income $1,816,929
Interest 37,047
----------
Total revenues 1,853,976
----------
EXPENSES:
Administrative 23,580
Depreciation 311,589
Management fees 60,949
Operating and maintenance 152,872
Taxes and insurance 137,150
----------
Total expenses 686,140
----------
NET INCOME $1,167,836
==========
See accompanying notes to financial statements
F-190
FSP CENTENNIAL TECHNOLOGY CENTER CORP.
(A DELAWARE CORPORATION)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 2001
Retained Deficit
Additional and Dividends Total
Paid-in in Excess Stockholders'
Preferred Stock Common Stock Capital of Earnings Equity
--------------- ------------ ---------- ----------- ------
Balance, December 31, 2000 2 -- 14,459,519 (602,398) 13,857,123
Net income -- -- -- 1,167,836 1,167,836
Dividends -- -- -- (1,317,878) (1,317,878)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2001 $ 2 $ -- $ 14,459,519 $ (752,440) $ 13,707,081
============ ============ ============ ============ ============
See accompanying notes to financial statements
F-191
FSP CENTENNIAL TECHNOLOGY CENTER CORP.
(A DELAWARE CORPORATION)
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,167,836
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 311,589
Changes in operating assets and liabilities:
Increase in miscellaneous other assets (147,121)
Increase in accounts a able and accrued expenses 85,004
-----------
Net cash provided by operating activities 1,417,308
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (1,113,601)
-----------
Net cash used in financing activities (1,113,601)
-----------
NET INCREASE IN CASH 303,707
CASH BALANCE, beginning of year 243,753
-----------
CASH BALANCE, end of year $ 547,460
===========
See accompanying notes to financial statements
F-192
FSP CENTENNIAL TECHNOLOGY CENTER CORP.
(A DELAWARE CORPORATION)
NOTES ACCOMPANYING FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION
FSP Centennial Technology Center Corp. was organized on August 15, 2000 as a
Corporation under the laws of the State of Delaware to purchase, own and
operate commercial buildings located in Colorado Springs, Colorado (the
"Property"). The Property consists of two flex office buildings containing
110,730 total square feet of space situated on approximately 9 acres of land.
The Company acquired the Property on September 28, 2000 and will operate in a
manner intended to qualify as a real estate investment trust ("REIT") for
federal income tax purposes.
In December 2000, the Company completed a private offering of 158 shares of
preferred stock at $100,000 per share.
METHOD OF ACCOUNTING
The Company maintains its books and records on the accrual method of
accounting in accordance with generally accepted accounting principles.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments with an initial maturity of three months or
less to be cash equivalents.
INCOME TAXES
The Company has elected and intends to maintain its election as a REIT under
the Internal Revenue Code of 1986, as amended. As a result, the Company
generally will not be subject to federal taxation to the extent it
distributes 90% of its REIT taxable income to its shareholders and satisfies
certain other requirements. Accordingly, no provision for federal or state
income taxes has been included in the accompanying financial statements.
For the year ended December 31, 2000, the Company incurred a net operating
loss for income tax purposes of approximately $461,000 that can be carried
forward until it expires in the year 2020.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
SYNDICATION FEES
Syndication fees are selling commissions and other costs associated with the
initial offering of the Company's preferred shares. Such costs, in the amount
of $1,340,489, have been reported as a reduction in the Stockholders' Equity.
REVENUE RECOGNITION
Rental income, which includes scheduled increases over the lease term, is
recognized on a straight-line basis. Income recognized on a straight-line
basis differed from income that would have accrued in accordance with the
leases by $130,974. Rental payments received in advance are deferred until
earned.
F-193
FSP CENTENNIAL TECHNOLOGY CENTER CORP.
(A DELAWARE CORPORATION)
NOTES ACCOMPANYING FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
PROPERTY AND DEPRECIATION
Rental property is carried at cost. Depreciation is provided for in amounts
sufficient to relate the cost of depreciable assets to operations over their
estimated service lives of 39 years for real property by use of the
straight-line method for financial reporting. Depreciation was $311,589 for
the year ended December 31, 2001.
2. CAPITAL STOCK:
PREFERRED STOCK
Each holder of Shares of Preferred Stock is entitled to receive ratably all
dividends, if any, declared by the Board of Directors out of funds legally
available. The right to receive dividends shall be non-cumulative, and no
right to dividends shall accrue by reason of the fact that no dividend has
been declared in any prior year. Each holder of Shares will be entitled to
receive, to the extent that funds are available therefore, $100,000 per
Share, before any payment to the holder of Common Stock, out of distributions
to stockholders upon liquidation, dissolution or the winding up of the
Company; the balance of any such funds available for distribution will be
distributed among the holders of Shares and the holder of Common Stock, pro
rata based on the number of shares held by each; provided, however, that for
these purposes, one share of Common Stock will be deemed to equal one-tenth
of a share of Preferred Stock.
The Company declared a dividend in December 2001 to holders of record on
December 31, 2001. These dividends, in the amount of $328,798, were paid in
2002 and have been accrued and reflected in Stockholders' Equity.
In addition to certain voting rights provided in the corporate agreements,
the holder of Shares, acting by consent of at least 51%, shall have the
further right to approve or disapprove a proposed sale of the Property, the
merger of the Company with any other entity and amendments to the corporate
charter. A vote of the holders of 66.67% of the Shares is required for the
issue of any additional shares of capital stock. Holders of Shares have no
redemption or conversion rights.
During 2001, a majority interest of Preferred Stockholders voted to amend the
corporate charter whereby allowing the Preferred Stockholders the right to
elect and make certain changes to the Board of Directors.
COMMON STOCK
Franklin Street Properties Corp. (FSP), formerly Franklin Street Partners
Limited Partnership, is the sole holder of the Company's Common Stock. FSP
has the right, as one class together with the holders of Preferred Stock, to
vote to elect the directors of the Company and to vote on all matters except
those voted by the holders of Shares of Preferred Stock. The Company shall
not declare or pay any cash dividends on shares of Common Stock.
3. RELATED PARTY TRANSACTIONS:
A management agreement was executed on September 28, 2000 between the Company
and FSP Property Management LLC, an affiliate of the Common Shareholder. The
agreement provides for a total management fee equal to 1% of collected
revenues. The affiliate's portion of the fees earned and paid was $21,638 for
the year ended at December 31, 2001.
F-194
FSP CENTENNIAL TECHNOLOGY CENTER CORP.
(A DELAWARE CORPORATION)
NOTES ACCOMPANYING FINANCIAL STATEMENTS
3. RELATED PARTY TRANSACTIONS: (CONTINUED)
Franklin Street Partners Limited Partnership operated under the laws of the
Commonwealth of Massachusetts. On January 1, 2002, the limited partnership
merged into Franklin Street Properties Corp (FSP), the Common Shareholder,
and will operate in a manner intended to qualify as a real estate investment
trust ("REIT") for federal income tax purposes.
4. LEASES:
The Company, as lessor, has minimum future rentals due under a noncancellable
operating lease as follows:
Year Ended
December 31, Amount
------------ ------
2002 1,374,415
2003 1,391,207
2004 1,304,652
2005 1,177,155
2006 1,226,393
Thereafter 4,038,384
-----------
$10,512,206
===========
In addition, the lessees are liable for real estate taxes and operating
expenses as direct expenses to the lessees.
Upon acquiring the commercial rental property in September 2000, the Company
was assigned the lease agreements between the seller of the Property and the
existing tenants. The original lease periods range from five to ten years
with renewal options.
5. CONCENTRATIONS OF RISK:
For the period ended December 31, 2001, more than 80% of the rental income
was derived from one lessee. As such, future rental receipts are dependent
upon the financial strength of the lessee and its ability to perform under
the lease agreement.
The Company maintains its cash accounts at one financial institution. The
balances, at times, may exceed federally insured limits. At December 31,
2001, the Company had cash on deposit exceeding the insured limit by
$922,533.
F-195
FSP CENTENNIAL TECHNOLOGY CENTER CORP.
(a Delaware Corporation)
For the Period from August 15, 2000
(date of inception) to December 31, 2000
CONTENTS
--------------------------------------------------------------------------------
Page
Independent Auditors' Report F-197
Financial Statements:
Balance Sheet F-198
Statement of Operations F-199
Statement of Changes in Stockholders' Equity F-200
Statement of Cash Flows F-201
Notes to Financial Statements F-202
F-196
[LETTERHEAD OF BRAVER AND COMPANY, P.C.]
INDEPENDENT AUDITORS' REPORT
To the Stockholders
FSP Centennial Technology Center Corp.
(a Delaware Corporation)
We have audited the accompanying balance sheet of FSP Centennial Technology
Center Corp. (a Delaware Corporation) as of December 31, 2000 and the related
statements of income, changes in stockholders' equity and cash flows for the
period from August 15, 2000 (date of inception) to December 31, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of FSP Centennial Technology
Center Corp. (a Delaware Corporation) at December 31, 2000, and the results of
its operations and its cash flows for the period from August 15, 2000 (date of
inception) to December 31, 2000, in conformity with generally accepted
accounting principles.
/s/ Braver and Company, P.C.
January 30, 2001
(Except for Note 6, as to which the date is March 23, 2001)
F-197
FSP CENTENNIAL TECHNOLOGY CENTER CORP.
(a Delaware Corporation)
Balance Sheet
December 31, 2000
ASSETS
Rental property, at cost:
Land $ 1,305,212
Building 12,151,941
------------
13,457,153
Less: accumulated depreciation 90,880
------------
Rental property, net 13,366,273
Cash 243,753
Capital improvement reserves 469,500
Miscellaneous other assets 3,205
------------
Total assets $ 14,082,731
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accrued expenses $ 67,900
Due to affiliate 20,039
Tenant security deposit 13,148
Dividends payable 124,521
------------
Total liabilities 225,608
------------
Commitments (Notes 2, 3, & 4)
Stockholders' equity:
Preferred stock, $.01 par value per share,
authorized 158 shares, issued and outstanding 158 shares 2
Common stock, $.01 par value per share,
authorized one share, issued and outstanding one share --
Additional paid-in capital 14,459,519
Retained deficit and dividends in excess of earnings (602,398)
------------
Total stockholders' equity 13,857,123
------------
Total liabilities and stockholders' equity $ 14,082,731
============
See accompanying notes to financial statements
F-198
FSP CENTENNIAL TECHNOLOGY CENTER CORP.
(a Delaware Corporation)
Statement of Operations
For the Period from August 15, 2000
(date of inception) to December 31, 2000
REVENUES:
Rental income $ 414,262
Interest 4,500
---------
Total revenues 418,762
---------
EXPENSES:
Interest 698,202
Depreciation 90,880
Administrative 36,061
Operating and maintenance 28,692
Taxes and insurance 26,662
Management fees 16,142
---------
Total expenses 896,639
---------
NET LOSS $(477,877)
=========
See accompanying notes to financial statements
F-199
FSP CENTENNIAL TECHNOLOGY CENTER CORP.
(a Delaware Corporation)
Statement of Changes in Stockholders' Equity
For the Period from August 15, 2000
(date of inception) to December 31, 2000
Retained Deficit
Additional and Dividends Total
Paid in in Excess Stockholders'
Preferred Stock Common Stock Capital of Earnings Equity
--------------- ------------ ---------- ----------- ------
Private offering of 158 shares, net $ 2 $ -- $ 14,459,519 $ -- $ 14,459,521
Net loss -- -- -- (477,877) (477,877)
Dividends -- -- -- (124,521) (124,521)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2000 $ 2 $ -- $ 14,459,519 $ (602,398) $ 13,857,123
============ ============ ============ ============ ============
See accompanying notes to financial statements
F-200
FSP CENTENNIAL TECHNOLOGY CENTER CORP.
(a Delaware Corporation)
Statement of Cash Flows
For the Period from August 15, 2000
(date of inception) to December 31, 2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (477,877)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 90,880
Changes in operating assets and liabilities:
Increase in miscellaneous other assets (3,205)
Increase in accrued expenses 67,900
Increase in due from affiliate 20,039
Increase in tenant security deposits 13,148
------------
Net cash used in operating activities (289,115)
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to capital improvement reserves (469,500)
Purchase of rental property (13,457,153)
------------
Net cash used in investing activities (13,926,653)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of issuance of shares, net 14,459,521
Proceeds from long-term debt 13,000,000
Principal payments on long-term debt (13,000,000)
------------
Net cash provided by financing activities 14,459,521
------------
NET INCREASE IN CASH 243,753
CASH BALANCE, beginning of period --
------------
CASH BALANCE, end of period $ 243,753
============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW:
Cash paid during the period for interest $ 698,202
============
See accompanying notes to financial statements
F-201
FSP CENTENNIAL TECHNOLOGY CENTER CORP.
(a Delaware Corporation)
Notes to Financial Statements
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
FSP Centennial Technology Center Corp. was organized on August 15, 2000 as
a Corporation under the laws of the State of Delaware to purchase, own and
operate commercial buildings located in Colorado Springs, Colorado (the
"Property"). The Property consists of two flex office buildings containing
110,730 total square feet of space situated on approximately 9 acres of
land. The Company acquired the Property on September 28, 2000 and will
operate in a manner intended to qualify as a real estate investment trust
("REIT") for federal income tax purposes. In December 2000, the Company
completed a private offering of 158 shares of preferred stock at $100,000
per share.
METHOD OF ACCOUNTING
The Company maintains its books and records on the accrual method of
accounting in accordance with generally accepted accounting principles.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments with an initial maturity of three months or
less to be cash equivalents.
INCOME TAXES
The Company has maintained and intends to maintain its election as a REIT
under the Internal Revenue Code of 1986, as amended. As a result, the
Company generally will not be subject to federal taxation to the extent it
distributes 95% (90% for 2001) of its REIT taxable income to its
shareholders and satisfies certain other requirements. For the period
ended December 31, 2000, the Company incurred a net operating loss for
income tax purposes of approximately $461,000 that can be carried forward
until it expires in the year 2020. Accordingly, no provision for federal
or state income taxes has been included in the accompanying financial
statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
F-202
FSP CENTENNIAL TECHNOLOGY CENTER CORP.
(a Delaware Corporation)
Notes to Financial Statements
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
SYNDICATION FEES
Syndication fees are selling commissions and other costs associated with
the offering of the Company's preferred shares. Such costs, in the amount
of $1,340,489, have been reported as a reduction of the private offering
proceeds on the Statement of Changes in Stockholders' Equity.
REVENUE RECOGNITION
Rental income, which includes scheduled increases over the lease term, is
recognized on a straight-line basis. Income recognized on a straight-line
basis did not materially differ from income that would have accrued in
accordance with the leases. Three tenants occupied 100% of the Property
with the Company's major tenant leasing over 80% of the space at December
31, 2000.
PROPERTY AND DEPRECIATION
Rental property is carried at cost. Depreciation is provided for in
amounts sufficient to relate the cost of depreciable assets to operations
over their estimated service lives of 39 years for real property by use of
the straight-line method for financial reporting. Depreciation was $90,880
for the period ended December 31, 2000.
NOTE 2 -- CAPITAL STOCK
PREFERRED STOCK
Each holder of Shares of Preferred Stock is entitled to receive ratably
all dividends, if any, declared by the Board of Directors out of funds
legally available. The right to receive dividends shall be non-cumulative,
and no right to dividends shall accrue by reason of the fact that no
dividend has been declared in any prior year. Each holder of Shares will
be entitled to receive, to the extent that funds are available therefore,
$100,000 per Share, before any payment to the holder of Common Stock, out
of distributions to stockholders upon liquidation, dissolution or the
winding up of the Company; the balance of any such funds available for
distribution will be distributed among the holders of Shares and the
holder of Common Stock, pro rata based on the number of shares held by
each; provided, however, that for these purposes, one share of Common
Stock will be deemed to equal one-tenth of a share of Preferred Stock.
The Company paid fourth quarter dividends in the amount of $124,521 during
January 2001. As such, these dividends have been accrued and reflected in
the Statement of Changes in Stockholders' Equity.
F-203
FSP CENTENNIAL TECHNOLOGY CENTER CORP.
(a Delaware Corporation)
Notes to Financial Statements
NOTE 2 -- CAPITAL STOCK (Continued)
PREFERRED STOCK -- (Continued)
In addition to certain voting rights provided in the corporate agreements,
the holder of Shares, acting by consent of at least 51%, shall have the
further right to approve or disapprove a proposed sale of the Property,
the merger of the Company with any other entity and amendments to the
corporate charter. A vote of the holders of 66.67% of the Shares is
required for the issue of any additional shares of capital stock. Holders
of Shares have no redemption or conversion rights.
COMMON STOCK
Franklin Street Partners Limited Partnership (FSP) is the sole holder of
the Company's Common Stock. FSP has the right to elect the directors of
the Company and to vote on all matters except those voted by the holders
of Shares of Preferred Stock. The Company shall not declare or pay any
cash dividends on shares of Common Stock.
NOTE 3 -- RELATED PARTY TRANSACTIONS
A management agreement was executed on September 28, 2000 between the
Company and FSP Property Management LLC, an affiliate of the Common
Shareholder. The agreement provides for a total management fee equal to
3.75% of collected revenues. The affiliate's portion of the fees earned
was $4,304 for the period with $0 owed at December 31, 2000.
An acquisition fee and other costs totaling $367,356 were paid in 2000 to
an affiliate of the Common Shareholder. Such fees were included in the
cost of the real estate.
Syndication fees of $1,264,000 were paid in 2000 to an affiliate of the
Common Shareholder for services related to syndication of the investor's
preferred stock interest.
During 2000, the Company borrowed and repaid in full:
Note payable to Franklin Street Partners Limited Partnership, the Common
Shareholder, principal of $13,000,000 with interest equal to the Citizens
Bank base rate (7.870%). Interest paid to the affiliate was $172,744.
A commitment fee of $513,500 was paid for obtaining the first mortgage
loan. Such amount is included in interest on the Statement of Operations.
F-204
FSP CENTENNIAL TECHNOLOGY CENTER CORP.
(a Delaware Corporation)
Notes to Financial Statements
NOTE 4 -- LEASES
The Company, as lessor, has minimum future rentals due under
noncancellable operating leases as follows:
Year Ended
December 31, Amount
------------ ------
2001 $ 1,322,088
2002 1,374,415
2003 1,391,207
2004 1,304,652
2005 1,177,155
Thereafter 5,264,777
-----------
$11,834,294
===========
In addition, the lessees are liable for real estate taxes and operating
expenses.
Upon acquiring the commercial rental property in September 2000, the
Company was assigned the lease agreements between the seller of the
Property and the existing tenants. The original lease periods range from
five to ten years with renewal options.
NOTE 5 -- CONCENTRATIONS OF RISK
For the period ended December 31, 2000, more than 80% of the rental income
was derived from one lessee. As such, future rental receipts are dependent
upon the financial strength of the lessee and its ability to perform under
the lease agreement.
The Company maintains its cash accounts at one financial institution. The
balances, at times, may exceed federally insured limits. At December 31,
2000, the Company had cash on deposit exceeding the insured limit by
$677,847.
NOTE 6 -- SUBSEQUENT EVENT
On March 23, 2001, a vote was presented to the preferred shareholders to
amend the corporate charter whereby allowing the preferred shareholders
the sole right to elect the directors of the Company. Such amendment would
be effective on the date consent is received from a majority interest of
preferred shareholders.
F-205
FSP Meadow Point Corp.
Financial Statements
September 30, 2002
Table of Contents
Page
----
Financial Statements
Balance Sheets as of September 30, 2002 and December 31, 2001............. F-207
Statements of Operations for the nine months ended September 30, 2002
and 2001................................................................ F-208
Statements of Cash Flows for the nine months ended September 30, 2002
and 2001................................................................ F-209
Notes to the Financial Statements......................................... F-210
F-206
FSP Meadow Point Corp.
Balance Sheets
(unaudited)
September 30, December 31,
(in thousands, except shares and par value amounts) 2002 2001
================================================================================
Assets:
Real estate investments, at cost:
Land $ 2,126 $ 2,126
Buildings and improvements 19,632 19,625
--------------------------------------------------------------------------------
21,758 21,751
Less accumulated depreciation 776 398
--------------------------------------------------------------------------------
Real estate investments, net 20,982 21,353
Cash and cash equivalents 803 607
Cash - funded reserve 896 896
Cash - restricted 271 268
Prepaid expenses and other assets, net 563 293
--------------------------------------------------------------------------------
Total assets $ 23,515 $ 23,417
================================================================================
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and accrued expenses 209 641
Tenant security deposits 271 268
--------------------------------------------------------------------------------
Total liabilities 480 909
--------------------------------------------------------------------------------
Commitments and Contingencies:
Stockholders' Equity:
Preferred Stock, $.01 par value, 257.5 shares
authorized, issued and outstanding -- --
Common Stock, $.01 par value, 1 share
authorized, issued and outstanding -- --
Additional paid-in capital 23,624 23,624
Retained earnings (589) (1,116)
--------------------------------------------------------------------------------
Total Stockholders' Equity 23,035 22,508
--------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 23,515 $ 23,417
================================================================================
See accompanying notes to financial statements.
F-207
FSP Meadow Point Corp.
Statements of Operations
(Unaudited)
For the For the
Three Months Nine Months For the Period
Ended Ended January 4, 2001-
September 30, September 30, September 30,
------------- ------------- -------------
(in thousands, except shares and per share amounts) 2002 2001 2002 2001
==================================================================================================
Revenue:
Rental $ 91 $ 790 $ 2,782 $ 1,724
Interest and other 7 15 23 27
--------------------------------------------------------------------------------------------------
Total revenue 988 805 2,805 1,751
--------------------------------------------------------------------------------------------------
Expenses:
Rental operating expenses 220 213 624 438
Depreciation and amortization 126 126 377 147
Real estate taxes and insurance 81 78 230 246
Interest -- -- -- 1,048
--------------------------------------------------------------------------------------------------
Total expenses 427 417 1,231 1,878
--------------------------------------------------------------------------------------------------
Net income (loss) $ 561 $ 388 $ 1,574 $ (127)
==================================================================================================
Allocation of net income (loss) to:
Preferred shareholders $ 561 $ 388 $ 1,574 $ (127)
Common shareholders -- -- -- --
--------------------------------------------------------------------------------------------------
$ 561 $ 388 $ 1,574 $ (127)
==================================================================================================
Weighted average number of shares outstanding,
basic and diluted
Preferred shares 257.5 257.5 257.5 257.5
Common shares 1 1 1 1
==================================================================================================
Net income (loss) per share, basic and diluted
Preferred shares $2,179 $1,507 $ 6,113 $ (493)
Common shares $ -- $ $ - $
==================================================================================================
See accompanying notes to financial statements.
F-208
FSP Meadow Point Corp.
Statements of Cash Flows
(Unaudited)
For the
Six months
Ended
September 30,
-------------------
(in thousands) 2002 2001
=========================================================================================
Cash flows from operating activities:
Net income (loss) $ 1,574 $ (127)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 377 147
Changes in operating assets and liabilities:
(Increase) Decrease in prepaid expenses and other assets, net (270) 22
(Decrease) Increase in accounts payable and accrued expenses (432) 193
Increase in restricted cash (3) (267)
Increase in tenant deposits 3 267
-----------------------------------------------------------------------------------------
Net cash provided by operating activities 1,249 235
-----------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets (7) (21,751)
Additions to capital improvement reserves -- (1,116)
-----------------------------------------------------------------------------------------
Net cash (used for) provided by investing activities (7) (22,867)
-----------------------------------------------------------------------------------------
Cash flows from financing activities:
Distributions to stockholders/partners (1,046) (519)
Proceeds of issuance of shares -- 23,647
-----------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities (1,046) 23,128
-----------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents 196 496
Cash and cash equivalents, beginning of period 607 --
-----------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 803 $ 496
=========================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ -- $ 1,048
Income taxes -- --
See accompanying notes to financial statements.
F-209
FSP Meadow Point Corp.
Notes to Financial Statements
(Unaudited)
1. Organization, Basis of presentation, and Recent Accounting Pronouncements
Organization
FSP Meadow Point Corp. was organized on January 24, 2001 as a Corporation under
the laws of the State of Delaware to purchase, own and operate a commercial
buildings located in Chantilly, Virginia (the "Property"). The Property consists
of a five-story Class "A" suburban office building containing 134,850 total
square feet located on approximately 6.3 acres of land. The Company acquired the
Property on March 15, 2001 and will operate in a manner intended to qualify as a
real estate investment trust ("REIT") for federal income tax purposes.
In March 2001, the Company completed a private offering of 257.5 shares of
preferred stock at $100,000 per share.
Basis of Presentation
These financial statements should be read in conjunction with the Company's
financial statements and notes thereto contained in the Company's annual
financial statements for its fiscal year ended December 31, 2001.
The accompanying interim financial statements are unaudited; however, the
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information and in conjunction with the rules and regulations of the Securities
and Exchange Commission. Accordingly, they do not include all of the disclosures
required by accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of management, all
adjustments (consisting solely of normal recurring matters) necessary for a fair
presentation of the financial statements for these interim periods have been
included. The results of operations for the interim periods are not necessarily
indicative of the results to be obtained for other interim periods or for the
full fiscal year.
Certain prior-year balances have been reclassified in order to conform to the
current-year presentation.
Recent Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations," which addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This Statement requires that
the fair value of a liability for an asset retirement obligation be recognized
in the period in which it is incurred if a reasonable estimate of the fair value
can be made. The associated asset retirement costs are capitalized as part of
the carrying amount of the long-lived asset. This Statement will be effective at
the beginning of 2003. The Company has reviewed the provisions of SFAS 143 and
believes that the impact of adoption will not be material to its financial
position, results of operations and cash flows.
In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets". This Statement supersedes SFAS No. 121 and
requires that long-lived assets that are to be disposed of by sale be measured
at the lower of book value or fair value less costs to sell. SFAS No. 144
retains the fundamental provisions of SFAS 121 for (a) recognition and
measurement of the impairment of long-lived assets to be held and used, and (b)
measurement of long-lived assets to be disposed of by sale, but broadens the
definition of what constitutes a discontinued operation and how the results of a
discontinued operation are to be measured and presented. This Statement was
effective at the beginning of 2002. With the exception of reclassifying the
operations of certain real estate assets considered "held for sale" (and for
which no significant continuing involvement exists) to "Discontinued operations,
net of tax" in the consolidated statement of income, the impact of adoption is
not expected to have a material impact on the Company's financial position and
cash flows.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FAS Nos. 4, 44, and
64, Amendment of FAS 13, and Technical Corrections". This Statement rescinds
FASB No. 4, "Reporting Gains and Losses from Extinguishment of Debt", and an
amendment of that Statement, FASB No. 64, "Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements". This Statement amends FASB No. 13,
"Accounting for Leases". This Statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings or
describe their applicability under changed conditions. This statement will be
effective for the Company's fiscal year ending December 31, 2003. The Company
has reviewed the provisions of FASB 145 and believes that the impact of adoption
will not be material to its financial position, results of operations and cash
flows.
F-210
FSP Meadow Point Corp.
Notes to Financial Statements
(Unaudited)
2. Income Taxes
The Company has elected and intends to maintain its election as a REIT under the
Internal Revenue Code of 1986, as amended. As a result, the Company generally
will not be subject to federal taxation to the extent it distributes 90% of its
REIT taxable income to its shareholders and satisfies certain other
requirements. Accordingly, no provision for federal or state income taxes has
been included in the accompanying financial statements.
3. Related Party Transactions
Franklin Street Properties Corp. (FSP), formerly known as Franklin Street
Partners Limited Partnership, is the sole holder of the Company's Common Stock.
FSP has the right, as one class together with the holders of Preferred Stock, to
vote to elect the directors of the Company and to vote on all matters except
those voted by the holders of Shares of Preferred Stock. The Company shall not
declare or pay any cash dividends on shares of Common Stock.
A management agreement was executed on March 15, 2001 between the Company and
FSP Property Management LLC, an affiliate of the Common Shareholder. The
agreement provides for a management fee equal to 1% of collected revenues. For
the three months ended September 30, 2002 and 2001, respectively, fees earned
under the agreement were $8,160 and $6,000. For the nine months ended September
30, 2002 and 2001 respectively, fees earned under the agreement were $24,480 and
$10,800.
Acquistion fee and other costs totaling $623,000 were paid in 2001 to an
affiliate of the Common Shareholder. Such fees are included in the cost of the
real estate.
Syndication fees of $2,060,000 were paid in 2001 to an affiliate of the Common
Shareholder for services related to syndication of the investor's preferred
stock interest.
A cash dividend in the amount of $13,000 during 2001 was paid to the Common
Shareholder prior to the completion of the offering of Shares.
A commitment fee of $966,000 was paid to an affiliate of the Common Shareholder
for obtaining the first mortgage loan. Such amount is included in interest
expense on the Statement of Operations.
During 2001, the Company borrowed and repaid in full a note payable to Franklin
Street Partners Limited Partnership, the Common Shareholder, principal of
$21,000,000 with interest equal to the Citizens Bank of Massachusetts base rate.
Interest paid to the affiliate was $82,000.
4. Net Income Per Share
The Company follows SFAS No. 128, "Earnings per Share," which specifies the
computation, presentation and disclosure requirements for the Company's net
income per share. Basic net income per share is computed by dividing net income
by the weighted average number of Company shares outstanding during the period.
Diluted net income per share reflects the potential dilution that could occur if
securities or other contracts to issue shares were exercised or converted into
shares. There were no potential dilutive shares outstanding at September 30,
2002 and 2001.
F-211
FSP Meadow Point Corp.
Notes to Financial Statements
(Unaudited)
The denominator used for calculating basic and diluted net income per share is
as follows:
For the Three Months For the Nine Months
Ended Ended
September 30, September 30,
-------------------- --------------------
2002 2001 2002 2001
-------- ------ --------------------
Weighted average number of
shares/units outstanding:
Common shares 1 1 1 1
Preferred shares 257.5 257.5 257.5 257.5
F-212
FSP MEADOW POINT CORP.
(A DELAWARE CORPORATION)
FINANCIAL STATEMENTS
PERIOD FROM JANUARY 24, 2001
(DATE OF INCEPTION)
TO DECEMBER 31, 2001
CONTENTS
PAGE
Independent auditors' report F-214
Financial statements:
Balance sheet F-215
Statement of operations F-216
Statement of changes in stockholders' equity F-217
Statement of cash flows F-218
Notes accompanying financial statements F-219
F-213
[LETTERHEAD OF BRAVER AND COMPANY, P.C.]
INDEPENDENT AUDITORS' REPORT
To the Stockholders
FSP Meadow Point Corp.
(a Delaware Corporation)
We have audited the accompanying balance sheet of FSP Meadow Point Corp. (a
Delaware Corporation) as of December 31, 2001 and the related statements of
operations, changes in stockholders' equity and cash flows for the period from
January 24, 2001 (date of inception) to December 31, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of FSP Meadow Point Corp. (a
Delaware Corporation) at December 31, 2001, and the results of its operations
and its cash flows for the period from January 24, 2001 (date of inception) to
December 31, 2001, in conformity with accounting principles generally accepted
in the United States of America.
/s/ Braver and Company, P.C.
February 1, 2002
F-214
FSP MEADOW POINT CORP. (A DELAWARE CORPORATION)
BALANCE SHEET
DECEMBER 31, 2001
ASSETS
Rental property, at cost:
Land $ 2,126,482
Building 19,624,795
------------
21,751,277
Less: accumulated depreciation 398,367
------------
Rental property, net 21,352,910
Cash 874,861
Capital improvement reserves 895,875
Miscellaneous other assets 292,962
------------
Total assets 23,416,608
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses 116,406
Dividends payable 511,138
Due to tenants 1,250
Due to affiliate 11,660
Security deposits 268,193
------------
Total liabilities 908,647
------------
Stockholders' equity:
Preferred stock, $.01 par value per share;
authorized 257.5 shares; issued and outstanding 257.5 shares 3
Common stock, $.01 par value per share;
authorized one share; issued and outstanding one share --
Additional paid-in capital 23,624,289
Retained deficit and dividends in excess of earnings (1,116,331)
------------
Total stockholders' equity 22,507,961
------------
Total liabilities and stockholders' equity $ 23,416,608
============
See accompanying notes to financial statements
F-215
FSP MEADOW POINT CORP.
(A DELAWARE CORPORATION)
STATEMENT OF OPERATIONS
PERIOD FROM JANUARY 24, 2001 (DATE OF INCEPTION) TO DECEMBER 31, 2001
REVENUES:
Rental income $2,787,784
Interest 36,947
----------
Total revenues 2,824,731
----------
EXPENSES:
Administrative 194,347
Depreciation 398,367
Interest 1,047,291
Management fees 100,085
Operating and maintenance 411,492
Taxes and insurance 254,712
----------
Total expenses 2,406,294
----------
NET INCOME $ 418,437
==========
See accompanying notes to financial statements
F-216
FSP MEADOW POINT CORP.
(A DELAWARE CORPORATION)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
PERIOD FROM JANUARY 24, 2001 (DATE OF INCEPTION) TO DECEMBER 31, 2001
Retained Deficit
Additional and Dividends Total
Paid-in in Excess Stockholders'
Preferred Stock Common Stock Capital of Earnings Equity
--------------- ------------ ---------- ----------- ------
Private offering of 257.5 shares, net $ 3 $ -- $ 23,624,289 $ -- $ 23,624,292
Net income -- -- -- 418,437 418,437
Dividends -- -- -- (1,534,768) (1,534,768)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2001 $ 3 $ -- $ 23,624,289 $ (1,116,331) $ 22,507,961
============ ============ ============ ============ ============
See accompanying notes to financial statements
F-217
FSP MEADOW POINT CORP.
(A DELAWARE CORPORATION)
STATEMENT OF CASH FLOWS
PERIOD FROM JANUARY 24, 2001 (DATE OF INCEPTION) TO DECEMBER 31, 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 418,437
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 398,367
Changes in operating assets and liabilities:
Increase in miscellaneous other assets (292,962)
Increase in accounts payable and accrued expenses 116,406
Increase in due to tenants 1,250
Increase in due to affiliates 11,660
Increase in security deposits 268,193
------------
Net cash provided by operating activities 921,351
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to capital improvement reserves (895,875)
Purchase of rental property (21,751,277)
------------
Net cash used in investing activities (22,647,152)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of issuance of shares 25,750,003
Syndication costs incurred (2,125,711)
Dividends paid (1,023,630)
Proceeds from promissory note 21,000,000
Repayment of promissory note (21,000,000)
------------
Net cash provided by financing activities 22,600,662
------------
NET INCREASE IN CASH 874,861
CASH BALANCE, beginning of period --
------------
CASH BALANCE, end of period $ 874,861
============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW:
Cash paid during the period for interest $ 1,047,291
============
See accompanying notes to financial statements
F-218
FSP MEADOW POINT CORP.
(A DELAWARE CORPORATION)
NOTES ACCOMPANYING FINANCIAL STATEMENT
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION
FSP Meadow Point Corp. was organized on January 24, 2001 as a Corporation
under the laws of the State of Delaware to purchase, own and operate a
commercial building located in Chantilly, Virginia (the "Property"). The
Property consists of a five-story Class "A" suburban office building
containing 134,850 square feet located on approximately 6.3 acres of land.
The Company acquired the Property on March 15, 2001 and will operate in a
manner intended to qualify as a real estate investment trust ("REIT") for
federal income tax purposes.
In March 2001, the Company completed a private offering of 257.5 shares of
preferred stock at $100,000 per share.
METHOD OF ACCOUNTING
The Company maintains its books and records on the accrual method of
accounting in accordance with generally accepted accounting principles.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments with an initial maturity of three months or
less to be cash equivalents.
INCOME TAXES
The Company has elected and intends to maintain its election as a REIT under
the Internal Revenue Code of 1986, as amended. As a result, the Company
generally will not be subject to federal taxation to the extent it
distributes 90% of its REIT taxable income to its shareholders and satisfies
certain other requirements. Accordingly, no provision for federal or state
income taxes has been included in the accompanying financial statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
SYNDICATION FEES
Syndication fees are selling commissions and other costs associated with the
initial offering of the Company's preferred shares. Such costs, in the
amount of $2,125,708 have been reported as a reduction in the Stockholders'
Equity.
REVENUE RECOGNITION
Rental income, which includes scheduled increases over the lease term, is
recognized on a straight-line basis. Income recognized on a straight-line
basis, differed from income that would have accrued in accordance with the
lease by $267,172 in 2001.
F-219
FSP MEADOW POINT CORP.
(A DELAWARE CORPORATION)
NOTES ACCOMPANYING FINANCIAL STATEMENT
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
PROPERTY AND DEPRECIATION
Rental property is carried at cost. Depreciation is provided for in amounts
sufficient to relate the cost of depreciable assets to operations over their
estimated service lives of 39 years for real property by use of the
straight-line method for financial reporting. Depreciation was $398,367 for
the period ended December 31, 2001.
2. CAPITAL STOCK:
PREFERRED STOCK
Each holder of Shares of Preferred Stock is entitled to receive ratably all
dividends, if any, declared by the Board of Directors out of funds legally
available. The right to receive dividends shall be non-cumulative, and no
right to dividends shall accrue by reason of the fact that no dividend has
been declared in any prior year. Each holder of Shares will be entitled to
receive, to the extent that funds are available therefore, $100,000 per
Share, before any payment to the. holder of Common Stock, out of
distributions to stockholders upon liquidation, dissolution or the winding
up of the Company; the balance of any such funds available for distribution
will be distributed among the holders of Shares and the holder of Common
Stock, pro rata based on the number of shares held by each; provided,
however, that for these purposes, one share of Common Stock will be deemed
to equal one-tenth of a share of Preferred Stock.
The Company declared a dividend in December 2001 to holders on record on
December 31, 2001. These dividends, in the amount of $511,138, were paid in
2002 and have been accrued and reflected in Stockholders' Equity.
In addition to certain voting rights provided in the corporate agreements,
the holder of Shares, acting by consent of at least 51%, shall have the
further right to approve or disapprove a proposed sale of the Property, the
merger of the Company with any other entity and amendments to the corporate
charter, and vote on the election and certain changes to the Board of
Directors. A vote of the holders of 66.67% of the Shares is required for the
issue of any additional shares of capital stock. Holders of Shares have the
right, as one class together with the holder of Common Stock, to vote to
elect the directors of the company. Holders of Shares have no redemption or
conversion rights.
COMMON STOCK
Franklin Street Properties Corp. (FSP), formerly Franklin Street Partners
Limited Partnership, is the sole holder of the Company's Common Stock. FSP
has the right, as one class together with the holders of Preferred Stock, to
vote to elect the directors of the Company and to vote on all matters except
those voted by the holders of Shares of Preferred Stock. After completion of
the offering of Shares, the Company shall not declare or pay any cash
dividends on shares of Common Stock.
3. RELATED PARTY TRANSACTIONS:
A management agreement was executed on March 15, 2001 between the Company
and FSP Property Management LLC, an affiliate of the Common Shareholder. The
agreement provides for a total management fee equal to 1% of collected
revenues. The affiliate's portion of the fees earned and paid was $25,552
for the period ended December 31, 2001.
Acquisition fee and other costs totaling $623,212 were paid in 2001 to an
affiliate of the Common Shareholder. Such fees are included in the cost of
the real estate,
F-220
FSP MEADOW POINT CORP.
(A DELAWARE CORPORATION)
NOTES ACCOMPANYING FINANCIAL STATEMENT
3. RELATED PARTY TRANSACTIONS: (CONTINUED)
Syndication fees of $2,060,000 were paid in 2001 to an affiliate of the
Common Shareholder for services related to syndication of the investor's
preferred stock interest.
A cash dividend in the amount of $13,200 during 2001 was paid to the Common
Shareholder prior to the completion of the offering of Shares.
A commitment fee of $965,625 was paid to an affiliate of the Common
Shareholder for obtaining the first mortgage loan. Such amount is included
in interest on the Statement of Operations.
During 2001, the Company borrowed and repaid in full a note payable to
Franklin Street Partners Limited Partnership, the Common Shareholder,
principal of $21,000,000 with interest equal to the Citizens Bank of
Massachusetts base rate. Interest paid to the affiliate was $81,667.
Franklin Street Partners Limited Partnership operated under the laws of
the Commonwealth of Massachusetts. On January 1, 2002, the limited
partnership merged into Franklin Street Properties Corp (FSP), the Common
Shareholder, and will operate in a manner intended to qualify as a real
estate investment trust ("REIT") for federal income tax purposes.
4. LEASES:
The Company, as lessor, has minimum future rentals due under noncancellable
operating leases as follows:
Year Ended
December 31, Amount
------------ ------
2002 $ 3,213,525
2003 3,294,132
2004 3,376,198
2005 3,460,831
2006 3,546,923
Thereafter 10,866,844
-----------
$27,758,453
===========
In addition, the lessees are liable for real estate taxes and operating
expenses as direct operating expenses to the lessees.
Upon acquiring the commercial rental property in March 2001, the Company was
assigned the lease agreements between the seller of the Property and the
existing tenants. The original lease periods range from five to ten years
with renewal options.
5. CONCENTRATIONS OF RISK:
For the period ended December 31, 2001, 99% of the rental income was derived
from one lessee. As such, future rental receipts are dependent upon the
financial strength of the lessee and its ability to perform under the lease
agreement.
The Company maintains its cash accounts at one financial institution. The
balances, at times, may exceed federally insured limits. At December 31,
2001, the Company had cash on deposit exceeding the insured limit by
$1,688,070.
F-221
FSP Timberlake Corp.
Financial Statements
September 30, 2002
Table of Contents
Financial Statements
Balance Sheets as of September 30, 2002 and December 31, 2001............. F-223
Statements of Operations for the nine months ended September 30, 2002
and 2001................................................................ F-224
Statements of Cash Flows for the nine months ended September 30, 2002
and 2001................................................................ F-225
Notes to the Financial Statements......................................... F-226
F-222
FSP Timberlake Corp.
Balance Sheets
(Unaudited)
September 30, December 31,
(in thousands, except shares and par value amounts) 2002 2001
================================================================================
Assets:
Real estate investments, at cost:
Land $ 2,831 $ 2,831
Buildings and improvements 40,717 40,714
--------------------------------------------------------------------------------
43,548 43,545
Less accumulated depreciation 1,435 652
--------------------------------------------------------------------------------
Real estate investments, net 42,113 42,893
Cash and cash equivalents 1,599 949
Cash - funded reserve 1,759 1,787
Restricted Cash 8 8
Tenant rent receivables 475 344
Prepaid expenses and other assets, net 46 3
--------------------------------------------------------------------------------
Total assets $ 46,000 $ 45,984
================================================================================
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and accrued expenses 619 80
Dividends payable -- 1,022
Security Deposits 8 8
--------------------------------------------------------------------------------
Total liabilities 627 1,110
--------------------------------------------------------------------------------
Commitments and Contingencies:
Stockholders' Equity:
Preferred Stock, $.01 par value per share; 515
shares authorized, issued and outstanding -- --
Common Stock, $.01 par value per share, 1
share authorized, issued and outstanding -- --
Additional paid-in capital 47,253 47,253
Retained earnings (1,880) (2,379)
--------------------------------------------------------------------------------
Total Stockholders' Equity 45,373 44,874
--------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 46,000 $ 45,984
================================================================================
See accompanying notes to financial statements.
F-223
FSP Timberlake Corp.
Statements of Operations
(Unaudited)
For the For the
Three Months Nine Months For the Period
Ended Ended April 17, 2001-
September 30, September 30, September 30,
------------- ------------- -------------
(in thousands, except shares and per share amounts) 2002 2001 2002 2001
==========================================================================================================
Revenue:
Rental $ 1,505 $ 1,391 $ 4,524 $ 1,955
Interest and other 10 18 30 20
----------------------------------------------------------------------------------------------------------
Total revenue 1,515 1,409 4,554 1,975
----------------------------------------------------------------------------------------------------------
Expenses:
Rental operating expenses 236 282 663 361
Depreciation and amortization 262 361 785 434
Real estate taxes and insurance 206 189 608 259
Interest -- -- -- 2,060
----------------------------------------------------------------------------------------------------------
Total expenses 704 832 2,056 3,114
----------------------------------------------------------------------------------------------------------
Net income (loss) $ 811 $ 577 $ 2,498 $ (1,139)
==========================================================================================================
Allocation of net income (loss) to:
Preferred shareholders $ 811 $ 577 $ 2,498 $ (1,139)
Common shareholders -- -- -- --
----------------------------------------------------------------------------------------------------------
$ 811 $ 577 $ 2,498 $ (1,139)
==========================================================================================================
Weighted average number of shares outstanding,
basic and diluted
Preferred shares 515 515 515 515
Common shares 1 1 1 1
==========================================================================================================
Net income (loss) per share, basic and diluted
Preferred shares $ 1,575 $ 1,120 $ 4,850 $ (2,212)
Common shares $ -- $ -- $ -- $ --
==========================================================================================================
See accompanying notes to financial statements.
F-224
FSP Timberlake Corp.
Statements of Cash Flows
(Unaudited)
For the
Nine Months For the Period
Ended April 17, 2001-
September 30, September 30,
------------- -------------
(in thousands) 2002 2001
==========================================================================================
Cash flows from operating activities:
Net income (loss) $ 2,498 $ (1,139)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 785 434
Changes in operating assets and liabilities:
(Increase) in prepaid expenses and other assets, net (36) (78)
Increase in accounts payable and accrued expenses 539 570
Decrease in dividends payable (1,021) --
Increase in tenant receivables (141) (18)
Restricted cash -- (8)
Tenant deposits -- 8
------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,624 (231)
------------------------------------------------------------------------------------------
Cash flows from investing activities:
Establish funded reserves 28 (2,205)
Purchase of rental property (3) (43,539)
------------------------------------------------------------------------------------------
Net cash (used for) provided by investing activities 25 (45,744)
------------------------------------------------------------------------------------------
Cash flows from financing activities:
Distributions to stockholders (1,999) (204)
Proceeds of issuance of shares -- 47,219
------------------------------------------------------------------------------------------
Net cash (used for) provided by financing activities (1,999) 47,015
------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 650 1,040
Cash and cash equivalents, beginning of period 949 --
------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 1,599 $ 1,040
==========================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ -- $ 2,060
Income taxes --
See accompanying notes to financial statements.
F-225
FSP Timberlake Corp.
Notes to Financial Statements
(Unaudited)
1. Organization, Basis of presentation, and Recent Accounting Pronouncements
Organization
FSP Timberlake Corp. was organized on April 17, 2001 as a Corporation under the
laws of the State of Delaware to purchase, own and operate a commercial building
located in Chesterfield, Missouri (the "Property"). The Property consists of two
five-story Class "A" suburban office buildings containing 232,722 square feet
located on 11.5 acres of land. The Company acquired the Property on May 24, 2001
and will operate in a manner intended to qualify as a real estate investment
trust ("REIT") for federal income tax purposes.
In July 2001, the Company completed a private offering of 515 shares of
preferred stock at $100,000 per share.
Basis of Presentation
These financial statements should be read in conjunction with the Company's
financial statements and notes thereto contained in the Company's annual
financial statements for its fiscal year ended December 31, 2001.
The accompanying interim financial statements are unaudited; however, the
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information and in conjunction with the rules and regulations of the Securities
and Exchange Commission. Accordingly, they do not include all of the disclosures
required by accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of management, all
adjustments (consisting solely of normal recurring matters) necessary for a fair
presentation of the financial statements for these interim periods have been
included. The results of operations for the interim periods are not necessarily
indicative of the results to be obtained for other interim periods or for the
full fiscal year.
Certain prior-year balances have been reclassified in order to conform to the
current-year presentation.
Recent Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations," which addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This Statement requires that
the fair value of a liability for an asset retirement obligation be recognized
in the period in which it is incurred if a reasonable estimate of the fair value
can be made. The associated asset retirement costs are capitalized as part of
the carrying amount of the long-lived asset. This Statement will be effective at
the beginning of 2003. The Company has reviewed the provisions of SFAS 143 and
believes that the impact of adoption will not be material to its financial
position, results of operations and cash flows.
In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets". This Statement supersedes SFAS No. 121 and
requires that long-lived assets that are to be disposed of by sale be measured
at the lower of book value or fair value less costs to sell. SFAS No. 144
retains the fundamental provisions of SFAS 121 for (a) recognition and
measurement of the impairment of long-lived assets to be held and used, and (b)
measurement of long-lived assets to be disposed of by sale, but broadens the
definition of what constitutes a discontinued operation and how the results of a
discontinued operation are to be measured and presented. This Statement was
effective at the beginning of 2002. With the exception of reclassifying the
operations of certain real estate assets considered "held for sale" (and for
which no significant continuing involvement exists) to "Discontinued operations,
net of tax" in the consolidated statement of income, the impact of adoption is
not expected to have a material impact on the Company's financial position and
cash flows.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FAS Nos. 4, 44, and
64, Amendment of FAS 13, and Technical Corrections". This Statement rescinds
FASB No. 4, "Reporting Gains and Losses from Extinguishment of Debt", and an
amendment of that Statement, FASB No. 64, "Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements". This Statement amends FASB No. 13,
"Accounting for Leases". This Statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings or
describe their applicability under changed conditions. This statement will be
effective for the Company's fiscal year ending December 31, 2003. The Company
has reviewed the provisions of FASB 145 and believes that the impact of adoption
will not be material to its financial position, results of operations and cash
flows.
F-226
FSP Timberlake Corp.
Notes to Financial Statements
(Unaudited)
2. Income Taxes
The Company has elected and intends to maintain its election as a REIT under the
Internal Revenue Code of 1986, as amended. As a result, the Company generally
will not be subject to federal taxation to the extent it distributes 90% of its
REIT taxable income to its shareholders and satisfies certain other
requirements. Accordingly, no provision for federal income taxes has been
included in the accompanying financial statements.
For the year ended December 31, 2001, the Company incurred a net operating loss
for income tax purposes of approximately $217,000 that can be carried forward
until it expires in the year 2021.
3. Related Party Transactions
A management agreement was executed on September 22, 2000 between the Company
and FSP Property Management LLC, an affiliate of the Common Shareholder. The
agreement provides for a total management fee equal to 3% of collected revenues.
For the three months ended September 30, 2002 and 2001, respectively, fees
earned under the agreement were $15,117 and $3,480. For the nine months ended
September 30, 2002 and 2001 respectively, fees earned under the agreement were
$43,099 and $6,140.
FSP provided syndication and real estate acquisition advisory services for the
Company 2002 and 2001. For the three months ended September 30, 2002 and six
months ended September 30, 2002, respectively, there were no syndication fees
and no transaction fees. For the three months ended September 30, 2001 and six
months ended September 30, 2001, respectively, syndication fees of $4,247,000
have been reported as reduction in stockholders' equity and acquisition fee and
other costs totaling $1,270,000 were paid to an affiliate of the common
shareholder. Such fees were included in the cost of the real estate.
4. Net Income Per Share
The Company follows SFAS No. 128, "Earnings per Share," which specifies the
computation, presentation and disclosure requirements for the Company's net
income per share. Basic net income per share is computed by dividing net income
by the weighted average number of Company shares outstanding during the period.
Diluted net income per share reflects the potential dilution that could occur if
securities or other contracts to issue shares were exercised or converted into
shares. There were no potential dilutive shares outstanding at September 30,
2002 and 2001.
The denominator used for calculating basic and diluted net income per share is
as follows:
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
-------------------------- -------------------------
2002 2001 2002 2001
-------------------------- -------------------------
Weighted average number of shares
Outstanding
Common Shares 1 1 1 1
Preferred Shares 515 515 515 515
F-227
FSP TIMBERLAKE CORP.
(A DELAWARE CORPORATION)
FINANCIAL STATEMENTS
PERIOD FROM APRIL 16, 2001
(DATE OF INCEPTION)
TO DECEMBER 31, 2001
CONTENTS
PAGE
Independent auditors' report F-229
Financial statements:
Balance sheet F-230
Statement of operations F-231
Statement of changes in stockholders' equity F-232
Statement of cash flows F-233
Notes accompanying financial statements F-234
F-228
[LETTERHEAD OF BRAVER AND COMPANY, P.C.]
INDEPENDENT AUDITORS' REPORT
To the Stockholders
FSP Timberlake Corp.
(a Delaware Corporation)
We have audited the accompanying balance sheet of FSP Timberlake Corp. (a
Delaware Corporation) as of December 31, 2001 and the related statements of
operations, changes in stockholders' equity and cash flows for the period from
April 16, 2001 (date of inception) to December 31, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of FSP Timberlake Corp. (a
Delaware Corporation) at December 31, 2001, and the results of its operations
and its cash flows for the period from April 16, 2001 (date of inception) to
December 31, 2001, in conformity with accounting principles generally accepted
in the United States of America.
/s/ Braver and Company, P.C.
February 1, 2002
F-229
FSP TIMBERLAKE CORP.
(A DELAWARE CORPORATION)
BALANCE SHEET
DECEMBER 31, 2001
ASSETS
Rental property, at cost:
Land $ 2,830,955
Building 40,714,281
------------
43,545,236
Less: accumulated depreciation 652,472
------------
Rental property, net 42,892,764
Cash 956,682
Capital improvement reserves 1,786,750
Miscellaneous other assets 347,030
------------
Total assets $ 45,983,226
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses $ 79,510
Dividends payable 1,021,245
Security deposits 8,460
------------
Total liabilities 1,109,215
------------
Stockholders' equity:
Preferred stock, $.01 par value per share,
authorized 515 shares, issued and outstanding 515 shares 5
Common stock, $.01 par value per share,
authorized one share, issued and outstanding one share --
Additional paid-in capital 47,253,001
Retained deficit and dividends in excess of earnings (2,378,995)
------------
Total stockholders' equity 44,874,011
------------
Total liabilities and stockholders' equity $ 45,983,226
============
See accompanying notes to financial statements
F-230
FSP TIMBERLAKE CORP.
(A DELAWARE CORPORATION)
STATEMENT OF OPERATIONS
PERIOD FROM APRIL 16, 2001 (DATE OF INCEPTION) TO DECEMBER 31, 2001
REVENUES:
Rental income $ 3,641,086
Interest 44,887
-----------
Total revenues 3,685,973
-----------
EXPENSES:
Administrative 57,515
Depreciation 652,472
Interest 2,059,612
Management fees 77,502
Operating and maintenance 410,426
Taxes and insurance 479,375
-----------
Total expenses 3,736,902
-----------
NET LOSS $ (50,929)
===========
See accompanying notes to financial statements
F-231
FSP TIMBERLAKE CORP.
(A DELAWARE CORPORATION)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
PERIOD FROM APRIL 16, 2001 (DATE OF INCEPTION) TO DECEMBER 31, 2001
Retained Deficit
Additional and Dividends Total
Paid-in in Excess Stockholders'
Preferred Stock Common Stock Capital of Earnings Equity
--------------- ------------ ---------- ----------- ------
Private offering of 515 shares, net $ 5 $ -- $ 47,253,001 $ -- $ 47,253,006
Net loss -- -- -- (50,929) (50,929)
Dividends -- -- -- (2,328,066) (2,328,066)
------------ ------------- ------------ ------------ ------------
Balance, December 31, 2001 $ 5 $ -- $ 47,253,001 $ (2,378,995) $ 44,874,011
============ ============= ============ ============ ============
See accompanying notes to financial statements
F-232
FSP TIMBERLAKE CORP.
(A DELAWARE CORPORATION)
STATEMENT OF CASH FLOWS
PERIOD APRIL 16, 2001 (DATE OF INCEPTION) TO DECEMBER 31, 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (50,929)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 652,472
Changes in operating assets and liabilities:
Increase in miscellaneous other assets (347,030)
Increase in accounts payable and accrued expenses 79,510
Increase in security deposits 8,460
------------
Net cash provided by operating activities 342,483
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to capital improvement reserves (1,786,750)
Purchase of rental property (43,545,236)
------------
Net cash used in investing activities (45,331,986)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of issuance of shares 47,253,006
Dividends paid (1,306,821)
Proceeds from promissory note 42,150,000
Principal payments on promissory note (42,150,000)
------------
Net cash provided by financing activities 45,946,185
------------
NET INCREASE IN CASH 956,682
CASH BALANCE, beginning of period --
------------
CASH BALANCE, end of period $ 956,682
============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW:
Cash paid during the period for interest $ 2,059,612
============
See accompanying notes to financial statements
F-233
FSP TIMBERLAKE CORP.
(A DELAWARE CORPORATION)
NOTES ACCOMPANYING FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION
FSP Timberlake Corp. was organized on April 16, 2001 as a Corporation under
the laws of the State of Delaware to purchase, own and operate a commercial
building located in Chesterfield, Missouri (the "Property"). The Property
consists of two five-story Class "A" suburban office buildings containing
232,722 square feet located on 11.5 acres of land. The Company acquired the
Property on May 24, 2001 and will operate in a manner intended to qualify as
a real estate investment trust ("REIT") for federal income tax purposes.
In July 2001, the Company completed a private offering of 515 shares of
preferred stock at $100,000 per share.
METHOD OF ACCOUNTING
The Company maintains its books and records on the accrual method of
accounting in accordance with generally accepted accounting principles.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments with an initial maturity of three months or
less to be cash equivalents.
INCOME TAXES
The Company has elected and intends to maintain its election as a REIT under
the Internal Revenue Code of 1986, as amended. As a result, the Company
generally will not be subject to federal taxation to the extent it
distributes 90% of its REIT taxable income to its shareholders' and satisfies
certain other requirements. Accordingly, no provision for federal income
taxes has been included in the accompanying financial statements.
For the period ended December 31, 2001, the Company incurred a net operating
loss for income tax purposes approximately of $217,000 that can be carried
forward until it expires in the year 2021. The primary difference between the
financial and taxable net loss is due to timing difference in the recognition
of rental revenues. Approximately $185,000 of such revenue is recognized for
financial reporting purposes but deferred for tax purposes.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
SYNDICATION FEES
Syndication fees are selling commissions and other costs associated with the
initial offering of the Company's preferred shares. Such costs, in the amount
of $4,247,004 have been reported as a reduction in Stockholders' Equity.
REVENUE RECOGNITION
Rental income, which includes scheduled increases over the lease term, is
recognized on a straight-line basis. Income recognized on a straight-line
basis differed from income that would have accrued in accordance with the
lease by $185,318 in 2001.
F-234
FSP TIMBERLAKE CORP.
(A DELAWARE CORPORATION)
NOTES ACCOMPANYING FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIF1CANT ACCOUNTiNG POLICIES: (CONTINUED)
PROPERTY AND DEPRECIATION
Rental property is carried at cost. Depreciation is provided for in amounts
sufficient to relate the cost of depreciable assets to operations over their
estimated service lives of 39 years for real property by use of the
straight-line method for financial reporting. Depreciation was $652,472 for
the period ended December 31, 2001.
2. CAPITAL STOCK:
PREFERRED STOCK
Each holder of Shares of Preferred Stock is entitled to receive ratably all
dividends, if any, declared by the Board of Directors out of funds legally
available. The right to receive dividends shall be non-cumulative, and no
right to dividends shall accrue by reason of the fact that no dividend has
been declared in any prior year. Each holder of Shares will be entitled to
receive, to the extent that funds are available therefore, $100,000 per
Share, before any payment to the holder of Common Stock, out of distributions
to stockholders upon liquidation, dissolution or the winding up of the
Company; the balance of any such funds available for distribution will be
distributed among the holders of Shares and the holder of Common Stock, pro
rata based on the number of shares held by each; provided, however, that for
these purposes, one share of Common Stock will be deemed to equal one-tenth
of a share of Preferred Stock.
The Company declared a dividend in December 2001 to holders on record on
December 31, 2001. These dividends, in the amount of $1,021,245, were paid in
2002 and have been reflected in Stockholders' Equity.
In addition to certain voting rights provided in the corporate agreements,
the holder of Shares, acting by consent of at least 51%, shall have the
further right to approve or disapprove a proposed sale of the Property, the
merger of the Company with any other entity and amendments to the corporate
charter, and vote on the election and certain changes to the Board of
Directors. A vote of the holders of 66.67% of the Shares is required for the
issue of any additional shares of capital stock. Holders of Shares have the
right, as one class together with the holder of Common Stock, to vote to
elect the directors of the company. Holders of Shares have no redemption or
conversion rights.
COMMON STOCK
Franklin Street Properties Corp. (FSP), formerly Franklin Street Partners
Limited Partnership, is the sole holder of the Company's Common Stock. FSP
has the right, as one class together with the holders of Preferred Stock, to
vote to elect the directors of the Company and to vote on all matters except
those voted by the holders of Shares of Preferred Stock. After completion of
the offering of Shares, the Company shall not declare or pay any cash
dividends on shares of Common Stock.
3. RELATED PARTY TRANSACTIONS:
A management agreement was executed on May 24, 2001 between the Company and
FSP Property Management LLC, an affiliate of the Common Shareholder. The
agreement provides for a total management fee equal to 1% of collected
revenues. The affiliates portion of the fees earned and paid was $33,076 for
the period ended December 31, 2001.
Acquisition fee and other costs totaling $1,269,879 were paid in 2001 to an
affiliate of the Common Shareholder. Such fees were included in the cost of
the real estate.
F-235
FSP TIMBERLAKE CORP.
(A DELAWARE CORPORATION)
NOTES ACCOMPANYING FINANCIAL STATEMENTS
3. RELATED PARTY TRANSACTIONS: (CONTINUED)
Syndication fees of $4,120,000 were paid to an affiliate of the Common
Stockholder for services related to syndication of the investor's preferred
stock interest.
A cash dividend in the amount of $89,800 during 2001 was paid to the Common
Shareholder prior to the completion of the offering of Shares.
A commitment fee of $1,931,250 was paid to an affiliate of the Common
Shareholder for obtaining the first mortgage loan. Such amount is included in
interest on the Statement of Operations.
During 2001, the Corporation borrowed and repaid in full a note payable to
Franklin Street Partners Limited Partnership, the Common Shareholder,
principal of $42,150,000 with interest equal to the Citizens Bank of
Massachusetts base rate. Interest paid to the affiliate was $128,362.
Franklin Street Partners Limited Partnership operated under the laws of the
Commonwealth of Massachusetts. On January 1, 2002, the limited partnership
merged into Franklin Street Properties Corp (FSP), the Common Shareholder,
and will operate in a manner intended to qualify as a real estate investment
trust ("REIT") for federal income tax purposes.
4. LEASES:
The Company, as lessor, has minimum future rentals due under noncancellable
operating leases as follows:
Year Ended
December 31, Amount
----------- ------
2002 $ 5,040,097
2003 5,260,308
2004 5,256,786
2005 5,310,694
2006 3,484,812
Thereafter 6,253,241
-----------
$30,605,938
===========
In addition, the lessees are liable for real estate taxes and operating
expenses as direct expenses to the lessees.
Upon acquiring the commercial rental property in May 2001, the Company was
assigned the lease agreements between the seller of the Property and the
existing tenants. The original lease periods expire from five to ten years
with renewal options.
5. CONCENTRATIONS OF RISK:
For the period ended December 31, 2001, 93% of the rental income was from two
lessees. As such, future receipts are dependent upon the financial strength
of the lessees and their ability to perform under the lease agreements.
The Company maintains its cash accounts at two financial institutions. The
balances, at times, may exceed federally insured limits. At December 31,
2001, the Company had cash on deposit exceeding the insured limit of
$2,746,261.
F-236
FSP Federal Way Corp.
Financial Statements
September 30, 2002
Table of Contents
Page
----
Financial Statements
Balance Sheets as of September 30, 2002 and December 31, 2001 ............ F-238
Statements of Operation for the three and nine months ended
September 30, 2002 and 2001 .............................................. F-239
Statements of Cash Flows for the nine months ended
September 30, 2002 and 2001 .............................................. F-240
Notes to the Financial Statements ........................................ F-241
F-237
FSP Federal Way Corp.
Balance Sheets
(unaudited)
September 30, December 31,
(in thousands, except shares and par value amounts) 2002 2001
============================================================================================
Assets:
Real estate investments, at cost:
Land $ 2,509 $ 2,509
Buildings and improvements 13,602 13,602
--------------------------------------------------------------------------------------------
16,111 16,111
Less accumulated depreciation 363 102
--------------------------------------------------------------------------------------------
Real estate investments, net 15,748 16,009
Cash and cash equivalents 404 560
Cash - funded reserve 1,038 1,038
Tenant rent receivable 68 26
Prepaid expenses and other assets, net 5 1
--------------------------------------------------------------------------------------------
Total assets $ 17,263 $ 17,634
============================================================================================
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and accrued expenses $ 17 $ 578
--------------------------------------------------------------------------------------------
Total liabilities 17 578
--------------------------------------------------------------------------------------------
Commitments and Contingencies:
Stockholders' Equity:
Preferred Stock, $.01 par value, 200 shares
authorized, issued and outstanding
Common Stock, $.01 par value, 1 share
authorized, issued and outstanding 18,329 18,329
Additional paid-in capital
Retained deficit and dividends in excess of earnings (1,083) (1,273)
--------------------------------------------------------------------------------------------
Total Stockholders' Equity 17,246 17,056
--------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 17,246 $ 17,634
============================================================================================
See accompanying notes to financial statements.
F-238
FSP Federal Way Corp.
Statements of Operations
(Unaudited)
For the For the
Three Months Nine Months For the Period
Ended Ended July 25, 2001-
September 30, September 30, September 30,
------------- ------------- --------------
(in thousands, except shares and per share amounts) 2002 2001 2002 2001
========================================================================================================================
Revenue:
Rental $ 427 $ 77 $ 1,277 $ 77
Interest and other 7 2 19 2
------------------------------------------------------------------------------------------------------------------------
Total revenue 434 79 1,296 79
------------------------------------------------------------------------------------------------------------------------
Expenses:
General and administrative 10 4 30 4
Depreciation and amortization 88 15 262 15
Real estate taxes and insurance 2 -- 6 --
Interest -- 1,166 -- 1,166
------------------------------------------------------------------------------------------------------------------------
Total expenses 100 1,185 298 1,185
------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 334 $(1,106) $ 998 $(1,106)
========================================================================================================================
Allocation of net income (loss) to:
Preferred shareholders $ 334 $(1,106) $ 998 $(1,106)
Common shareholders -- -- -- --
------------------------------------------------------------------------------------------------------------------------
$ 334 $(1,106) $ 998 $(1,106)
========================================================================================================================
Weighted average number of shares outstanding,
basic and diluted
Preferred shares 200 200 200 200
Common shares 1 1 1 1
========================================================================================================================
Net income per share, basic and diluted
Preferred shares $ 1,670 $(5,530) $ 4,990 $(5,530)
Common shares $ -- $ -- $ -- $ --
========================================================================================================================
See accompanying notes to financial statements.
F-239
FSP Federal Way Corp.
Statements of Cash Flows
(Unaudited)
For the
Nine Months For the Period
Ended July 25, 2001-
September 30, September 30,
(in thousands) 2002 2001
================================================================================================
Cash flows from operating activities:
Net income (loss) $ 998 $ (1,106)
Adjustments to reconcile net income to net cash
Provided by operating activities:
Depreciation and amortization 262 15
Changes in operating assets and liabilities:
(Increase) in tenant receivables (42) --
(Increase) in prepaid expenses and other assets, net (4) 2
(Decrease) in accounts payable and accrued expenses (561) 19
(Increase) in funds reserve -- (1,050)
------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 653 (2,120)
------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate -- (16,064)
------------------------------------------------------------------------------------------------
Net cash used for investing activities -- (16,064)
------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Distributions to stockholders (808) --
Proceeds of issuance of shares -- 19,870
Syndication costs incurred -- (1,608)
------------------------------------------------------------------------------------------------
Net cash (used for) provided by financing activities (808) 18,262
------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents (156) 78
Cash and cash equivalents, beginning of period 560 --
------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 406 $ 78
================================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ -- $ 1,166
Income taxes -- --
See accompanying notes to financial statements.
F-240
FSP Federal Way Corp.
Notes to Financial Statements
(Unaudited)
1. Organization, Basis of presentation, and Recent Accounting Pronouncements
Organization
FSP Federal Way Corp. (the "Company") was organized on July 25, 2001 as a
Corporation under the laws of the State of Delaware to purchase, own and operate
a commercial office building located in Federal Way, Washington (the
"Property"). The Property consists of two Class "A" suburban office buildings
containing 117,227 square feet of space. The company acquired the Property on
September 14, 2001 and will operate in a manner intended to qualify as a real
estate investment trust ("REIT") for federal income tax purposes.
Basis of Presentation
These financial statements should be read in conjunction with the Company's
financial statements and notes thereto contained in the Company's annual
financial statement for its fiscal year ended December 31, 2001.
The accompanying interim financial statements are unaudited; however, the
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information and in conjunction with the rules and regulations of the Securities
and Exchange Commission. Accordingly, they do not include all of the disclosures
required by accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of management, all
adjustments (consisting solely of normal recurring matters) necessary for a fair
presentation of the financial statements for these interim periods have been
included. The results of operations for the interim periods are not necessarily
indicative of the results to be obtained for other interim periods or for the
full fiscal year.
Certain prior-year balances have been reclassified in order to conform to the
current-year presentation.
Recent Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations," which addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This Statement requires that
the fair value of a liability for an asset retirement obligation be recognized
in the period in which it is incurred if a reasonable estimate of the fair value
can be made. The associated asset retirement costs are capitalized as part of
the carrying amount of the long-lived asset. This Statement will be effective at
the beginning of 2003. The Company has reviewed the provisions of SFAS 143 and
believes that the impact of adoption will not be material to its financial
position, results of operations and cash flows.
In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets". This Statement supersedes SFAS No. 121 and
requires that long-lived assets that are to be disposed of by sale be measured
at the lower of book value or fair value less costs to sell. SFAS No. 144
retains the fundamental provisions of SFAS 121 for (a) recognition and
measurement of the impairment of long-lived assets to be held and used, and (b)
measurement of long-lived assets to be disposed of by sale, but broadens the
definition of what constitutes a discontinued operation and how the results of a
discontinued operation are to be measured and presented. This Statement was
effective at the beginning of 2002. With the exception of reclassifying the
operations of certain real estate assets considered "held for sale" (and for
which no significant continuing involvement exists) to "Discontinued operations,
net of tax" in the consolidated statement of income, the impact of adoption is
not expected to have a material impact on the Company's financial position and
cash flows.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FAS Nos. 4, 44, and
64, Amendment of FAS 13, and Technical Corrections". This Statement rescinds
FASB No. 4, "Reporting Gains and Losses from Extinguishment of Debt", and an
amendment of that Statement, FASB No. 64, "Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements". This Statement amends FASB No. 13,
"Accounting for Leases". This Statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings or
describe their applicability under changed conditions. This statement will be
effective for the Company's fiscal year ending December 31, 2003. The Company
has reviewed the provisions of FASB 145 and believes that the impact of adoption
will not be material to its financial position, results of operations and cash
flows.
F-241
FSP Federal Way Corp.
Notes to Financial Statements
(Unaudited)
2. Income Taxes
The Company has elected and intends to maintain its election as a REIT under the
Internal Revenue Code of 1986, as amended. As a result, the Company generally
will not be subject to federal taxation to the extent it distributes 90% of its
REIT taxable income to its shareholders and satisfies certain other
requirements. Accordingly, no provision for federal or state income taxes has
been included in the accompanying financial statements.
For the year ended December 31, 2001, the Company incurred a net operating loss
for income tax purposes of approximately $662,000 that can be carried forward
until it expires in the year 2021. The primary difference between the financial
and taxable net loss is due to timing difference in the recognition of rental
revenue. Approximately $137,000 of such is deferred for financial reporting
purposes but included in taxable income.
3. Related Party Transactions
Franklin Street Properties Corp. (FSP), formerly known as Franklin Street
Partners Limited Partnership, is the sole holder of the Company's Common Stock.
FSP has the right, as one class together with the holders of Preferred Stock, to
vote to elect the directors of the Company and to vote on all matters except
those voted by the holders of Shares of Preferred Stock. The Company shall not
declare or pay any cash dividends on shares of Common Stock.
The Company executed a management agreement between the Company and FSP Property
Management LLC, an affiliate of FSP, that provides for a management fee equal to
1% of collected revenues. For the three months ended September 30, 2002 fees
earned under the agreement were $4,123. For the nine months ended September 30,
2002 fees earned under the agreement were $12,331.
4. Net Income Per Share
The Company follows SFAS No. 128, "Earnings per Share," which specifies the
computation, presentation and disclosure requirements for the Company's net
income per share. Basic net income per share is computed by dividing net income
by the weighted average number of Company shares outstanding during the period.
Diluted net income per share reflects the potential dilution that could occur if
securities or other contracts to issue shares/units were exercised or converted
into shares/units. There were no potential dilutive shares/units outstanding at
September 30, 2002 and 2001.
The denominator used for calculating basic and diluted net income per share is
as follows
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
2002 2002
------------- -------------
Weighted average number of shares/units
outstanding:
Common shares 1 1
Preferred shares 200 200
F-242
FSP FEDERAL WAY CORP.
(A DELAWARE CORPORATION)
FINANCIAL STATEMENTS
PERIOD FROM JULY 26, 2001
(DATE OF INCEPTION)
DECEMBER 31, 2001
CONTENTS
PAGE
Independent auditors' report F-244
Financial statements:
Balance sheet F-245
Statement of operations F-246
Statement of changes in stockholders' equity F-247
Statement of cash flows F-248
Notes accompanying financial statements F-249
F-243
[LETTERHEAD OF BRAVER AND COMPANY, P.C.]
INDEPENDENT AUDITORS' REPORT
To the Stockholders
FSP Federal Way Corp.
(a Delaware Corporation)
We have audited the accompanying balance sheet of FSP Federal Way Corp. (a
Delaware Corporation) as of December 31, 2001 and the related statements of
operations, changes in stockholders' equity and cash flows for the period from
July 26, 2001 (date of inception) to December 31, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of FSP Federal Way Corp. (a
Delaware Corporation) at December 31, 2001, and the results of its operations
and its cash flows for the period from July 26, 2001 (date of inception) to
December 31, 2001 in conformity with accounting principles generally accepted in
the United States of America.
/s/ Braver and Company, P.C.
February 1, 2002
F-244
FSP FEDERAL WAY CORP.
(A DELAWARE CORPORATION)
BALANCE SHEET
DECEMBER 31, 2001
ASSETS
Rental property, at cost:
Land $ 2,509,000
Building 13,602,379
------------
16,111,379
Less: accumulated depreciation 101,727
------------
Rental property, net 16,009,652
Cash 559,913
Capital improvement reserves 1,038,149
Miscellaneous other assets 26,403
------------
Total assets 17,634,117
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses 35,759
Dividends payable 405,000
Deferred rental income 136,765
------------
Total liabilities 577,524
------------
Stockholders' equity:
Preferred stock, $.01 par value per share;
authorized 200 shares; issued and outstanding 200 shares 2
Common stock, $.01 par value per share;
authorized one share; issued and outstanding one share --
Additional paid-in capital 18,329,119
Retained deficit and dividends in excess of earnings (1,272,528)
------------
Total Stockholders' equity 17,056,593
------------
Total liabilities and stockholders' equity $ 17,634,117
============
See accompanying notes to financial statements
F-245
FSP FEDERAL WAY CORP.
(A DELAWARE CORPORATION)
STATEMENT OF OPERATION
PERIOD FROM JULY 26, 2001 (DATE OF INCEPTION) TO DECEMBER 31, 2001
REVENUES:
Rental income $ 512,812
Interest 8,467
-----------
Total revenues 521,279
-----------
EXPENSES:
Administrative 20,611
Depreciation 101,727
Interest 1,165,675
Management fees 4,878
Operating and maintenance 17,733
Taxes and insurance 1,282
-----------
Total expenses 1,311,906
-----------
NET LOSS $ (790,627)
===========
See accompanying notes to financial statements
F-246
FSP FEDERAL WAY CORP.
(A DELAWARE CORPORATION)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
PERIOD FROM JULY 26, 2001 (DATE OF INCEPTION) TO DECEMBER 31, 2001
Retained Deficit
Additional and Dividends Total
Paid-in in Excess Stockholders'
Preferred Stock Common Stock Capital of Earnings Equity
--------------- ------------ ---------- ----------- ------
Private offering of 200 shares, net $ 2 $ -- $ 18,329,119 $ -- $ 18,329,121
Net loss -- -- -- (790,627) (790,627)
Dividends -- -- -- (481,901) (481,901)
------------ ------------- ------------ ------------ ------------
Balance, December 31, 2001 $ 2 $ -- $ 18,329,119 $ (1,272,528) $ 17,056,593
============ ============= ============ ============ ============
See accompanying notes to financial statements
F-247
FSP FEDERAL WAY CORP.
(A DELAWARE CORPORATION)
STATEMENT OF CASH FLOWS
PERIOD FROM JULY 26, 2001 (DATE OF INCEPTION) TO DECEMBER 31, 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (790,627)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 101,727
Changes in operating assets and liabilities:
Increase in miscellaneous other assets (26,403)
Increase in accounts payable and accrued expenses 35,759
Increase in deferred rental income 136,765
------------
Net cash used in operating activities (542,779)
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to capital improvement reserves (1,038,149)
Purchase of rental property (16,111,379)
------------
Net cash used in investing activities (17,149,528)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of issuance of shares 20,000,010
Syndication costs incurred (1,670,889)
Dividends paid (76,901)
Proceeds from promissory note 16,000,000
Repayment of promissory note (16,000,000)
------------
Net cash provided by financing activities 18,252,220
------------
NET INCREASE IN CASH 559,913
CASH BALANCE, beginning of period --
------------
CASH BALANCE, end of period $ 559,913
============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW:
Cash paid during the period for interest $ 1,150,000
============
See accompanying notes to financial statements
F-248
FSP FEDERAL WAY CORP.
(A DELAWARE CORPORATION)
NOTES ACCOMPANYING FINANCIAL STATEMENT
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION
FSP Federal Way Corp. was organized on July 26, 2001, as a Corporation under
the laws of the State of Delaware to purchase, own and operate a commercial
building located in Federal Way, Washington (the "Property"). The Property
consists of two multi-story Class "A" suburban office buildings containing
117,227 square feet. The Company acquired the Property on September 14, 2001
and will operate in a manner intended to qualify as a real estate investment
trust ("REIT") for federal income tax purposes.
In October 2001, the Company completed a private offering of 200 shares of
preferred stock at $100,000 per share.
METHOD OF ACCOUNTING
The Company maintains its books and records on the accrual method of
accounting in accordance with generally accepted accounting principles.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments with an initial maturity of three months or
less to be cash equivalents.
INCOME TAXES
The Company has elected and intends to maintain its election as a REIT under
the Internal Revenue Code of 1986, as amended. As a result, the Company
generally will not be subject to federal taxation to the extent it
distributes 90% of its REIT taxable income to its shareholders and satisfies
certain other requirements. Accordingly, no provision for federal or state
income taxes has been included in the accompanying financial statements.
For the period ended December 31, 2001, the Company incurred a net operating
loss for income tax purposes of approximately $662,000 that can be carried
forward until it expires in the year 2021. The primary difference between the
financial and taxable net loss is due to timing difference in the recognition
of rental revenue. Approximately $137,000 of such revenue is deferred for
financial reporting purposes but included in taxable income.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
SYNDICATION FEES
Syndication fees are selling commissions and other costs associated with the
initial offering of the Company's preferred shares. Such costs, in the amount
of $1,670,889 have been reported as a reduction in the Stockholders' Equity.
REVENUE RECOGNITION
Rental income, which includes scheduled increases over the lease term, is
recognized on a straight-line basis. Income recognized on a straight-line
basis, differed from income that would have accrued in accordance with the
lease by $25,017 in 2001.
F-249
FSP FEDERAL WAY CORP.
(A DELAWARE CORPORATION)
NOTES ACCOMPANYING FINANCIAL STATEMENT
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
PROPERTY AND DEPRECIATION
Rental property is carried at cost. Depreciation is provided for in amounts
sufficient to relate the cost of depreciable assets to operations over their
estimated service lives of 39 years for real property by use of the
straight-line method for financial reporting. Depreciation was $101,727 for
the period ended December 31, 2001.
2. CAPITAL STOCK:
PREFERRED STOCK
Each holder of Shares of Preferred Stock is entitled to receive ratably all
dividends, if any, declared by the Board of Directors out of funds legally
available. The right to receive dividends shall be non-cumulative, and no
right to dividends shall accrue by reason of the fact that no dividend has
been declared in any prior year. Each holder of Shares will be entitled to
receive, to the extent that funds are available therefore, $100,000 per
Share, before any payment to the holder of Common Stock, out of distributions
to stockholders upon liquidation, dissolution or the winding up of the
Company; the balance of any such funds available for distribution will be
distributed among the holders of Shares and the holder of Common Stock, pro
rata based on the number of shares held by each; provided, however, that for
these purposes, one share of Common Stock will be deemed to equal one-tenth
of a share of Preferred Stock.
The Company declared a dividend in December 2001 to holders on record on
December 31, 2001. These dividends, in the amount of $405,000, were paid in
2002 and have been accrued and reflected in Stockholders' Equity.
In addition to certain voting rights provided in the corporate agreements,
the holder of Shares, acting by consent of at least 51%, shall have the
further right to approve or disapprove a proposed sale of the Property, the
merger of the Company with any other entity and amendments to the corporate
charter, and vote on the election and certain changes to the Board of
Directors. A vote of the holders of 66.67% of the Shares is required for the
issue of any additional shares of capital stock. Holders of Shares have the
right, as one class together with the holder of Common Stock, to vote to
elect the directors of the company. Holders of Shares have no redemption or
conversion rights.
COMMON STOCK
Franklin Street Properties Corp. (FSP), formally Franklin Street Partners
Limited Partnership, is the sole holder of the Company's Common Stock. FSP
has the right, as one class together with the holders of Preferred Stock, to
vote to elect the directors of the Company and to vote on all matters except
those voted by the holders of Shares of Preferred Stock. After completion of
the offering of Shares, the Company shall not declare or pay any cash
dividends on shares of Common Stock.
3. RELATED PARTY TRANSACTIONS:
A management agreement was executed on September 14, 2001 between the Company
and FSP Property Management LLC, an affiliate of the Common Shareholder. The
agreement provides for a total management fee equal to 1% of collected
revenues. The affiliate's portion of the fees earned and paid was $4,878 for
the period ended December 31, 2001.
Other acquisition costs totaling $50,400 were paid to an affiliate of the
Common Shareholder.
F-250
FSP FEDERAL WAY CORP.
(A DELAWARE CORPORATION)
NOTES ACCOMPANYING FINANCIAL STATEMENT
3. RELATED PARTY TRANSACTIONS: (CONTINUED)
Syndication fees of $1,600,000 were paid in 2001 to an affiliate of the
Common Shareholder for services related to syndication of the investor's
preferred stock interest.
A cash dividend in the amount of $15,359 during 2001 was paid to the Common
Shareholder.
A commitment fee of $1,150,000 was paid to an affiliate of the Common
Shareholder for obtaining the first mortgage loan. Such amount is included in
interest on the Statement of Operations.
During 2001, the Company borrowed and repaid a note payable to Franklin
Street Partners Limited Partnership, the Common Shareholder, principal of
$16,000,000 with interest equal to the Citizens Bank of Massachusetts base
rate. Interest paid to the affiliate was $15,675 in 2001.
Franklin Street Partners Limited Partnership operated under the laws of the
Commonwealth of Massachusetts. On January 1, 2002, the limited partnership
merged into Franklin Street Properties Corp (FSP), the Common Shareholder,
and will operate in a manner intended to qualify as a real estate investment
trust ("REIT") for federal income tax purposes.
4. LEASES:
The Company, as lessor, has minimum future rentals due under noncancellable
an operating lease as follows:
Year Ended
December 31, Amount
------------ ------
2002 $ 1,653,373
2003 1,694,751
2004 1,737,301
2005 1,780,675
2006 1,272,836
Thereafter --
-----------
$ 8,138,936
===========
In addition, the lessees are liable for real estate taxes and operating
expenses as direct operating expenses to the lessee.
Upon acquiring the commercial rental property in September 2001, the Company
was assigned the lease agreement between the seller of the Property and the
existing tenants. The original lease period is five years with renewal
options.
5. CONCENTRATIONS OF RISK:
For the period ended December 31, 2001, 100% of the rental income was derived
from one lessee. As such, future rental receipts are dependent upon the
financial strength of the lessee and their ability to perform under the lease
agreement.
The Company maintains its cash accounts at one financial institution. The
balances, at times, may exceed federally insured limits. At December 31,
2001, the Company had cash on deposit exceeding the insured limit by
$1,598,062.
F-251
FSP Fair Lakes Corp.
Financial Statement
September 30, 2002
Table of Contents
Page
----
Financial Statements
Balance Sheets as of September 30, 2002 and December 31, 2001 ............ F-253
Statement of Income for the three and nine months ended
September 30, 2002 and 2001 .............................................. F-254
Statement of Cash Flows for the nine months ended
September 30, 2002 and 2001 .............................................. F-255
Notes to the Financial Statements ........................................ F-256
F-252
FSP Fair Lakes Corp.
Balance Sheets
(unaudited)
September 30, December 31,
(in thousands, except shares and par value amounts) 2002 2001
======================================================================================
Assets:
Real estate investments, at cost:
Land $ 4,183 $ 4,183
Buildings and improvements 35,277 35,277
--------------------------------------------------------------------------------------
39,460 39,460
Less accumulated depreciation 942 264
--------------------------------------------------------------------------------------
Real estate investments, net 38,518 39,196
Cash and cash equivalents 1,328 1,050
Cash - funded reserve 1,801 1,801
Tenant rent receivables 605 160
Prepaid expenses and other assets, net 24 6
--------------------------------------------------------------------------------------
Total assets $ 42,276 $ 42,213
======================================================================================
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and accrued expenses $ 352 $ 1,209
--------------------------------------------------------------------------------------
Total liabilities 352 1,209
--------------------------------------------------------------------------------------
Commitments and Contingencies:
Stockholders' Equity:
Preferred Stock, $.01 par value, 480 shares -- --
authorized, issued and outstanding -- --
Common Stock, $.01 par value, 1 share -- --
authorized, issued and outstanding -- --
Additional paid-in capital 44,045 44,045
Retained deficit and dividends in excess of earnings (2,121) (3,041)
--------------------------------------------------------------------------------------
Total Stockholders' Equity 41,924 41,004
--------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 42,276 $ 42,213
======================================================================================
See accompanying notes to financial statements.
F-253
FSP Fair Lakes Corp.
Statements of Income
(Unaudited)
For the For the Period For the For the Period
Three months July 24, 2001 Nine months July 24, 2001
ended date of inception to ended date of inception to
September 30, 2002 September 30, 2001 September 30, 2002 September 30, 2002
------------------ ------------------ ------------------ ------------------
(in thousands, except shares and
per share amounts)
================================================================================================================================
Revenue:
Rental $1,741 $ 254 $4,906 $254
Interest and other 12 1 36 1
--------------------------------------------------------------------------------------------------------------------------------
Total revenue 1,753 255 4,942 255
--------------------------------------------------------------------------------------------------------------------------------
Expenses:
Rental operating expenses 440 50 1,117 50
Depreciation and amortization 226 -- 678 --
Real estate taxes and insurance 108 -- 355 --
Interest -- -- 13 --
--------------------------------------------------------------------------------------------------------------------------------
Total expenses 774 50 2,163 50
--------------------------------------------------------------------------------------------------------------------------------
Net income (Loss) $ 979 $ 205 $2,779 $205
================================================================================================================================
Allocation of net income to:
Preferred shareholders $ 979 $ 205 $2,779 $205
Common shareholders -- -- -- --
--------------------------------------------------------------------------------------------------------------------------------
$ 979 $ 205 2,779 $205
================================================================================================================================
Weighted average number of shares
outstanding, basic and diluted
Preferred shares 480 480 480 480
Common shares 1 1 1 1
================================================================================================================================
Net income per share, basic and diluted
Preferred shares $2,040 $ 427 $5,790 $427
Common shares $ -- $ -- $ -- $ --
================================================================================================================================
Note: The Company purchased the land and building on September 17, 2001.
See accompanying notes to financial statements
F-254
FSP Fair Lakes Corp.
Statements of Cash Flows
(Unaudited)
For the For the Period
Nine Months July 24, 2001
Ended date of inception to
September 30, September 30,
(in thousands) 2002 2001
=====================================================================================================
Cash flows from operating activities:
Net income $ 2,779 $ 298
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 678 --
Changes in operating assets and liabilities:
(Increase) in tenant rent receivables (352) (13)
(Increase) in prepaid expenses and other assets, net (18) (10)
(Decrease) in accounts payable and accrued expenses (857) 2,064
-----------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,230 2,339
-----------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets -- (39,104)
-----------------------------------------------------------------------------------------------------
Net cash used by investing activities -- (39,104)
-----------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from note payable -- 39,000
Distributions to stockholders (1,952) --
-----------------------------------------------------------------------------------------------------
Net cash used for financing activities (1,952) 39,000
-----------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 278 2,235
Cash and cash equivalents, beginning of period 1,050 --
-----------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 1,328 2,235
=====================================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 13 $ --
Income taxes $ -- $ --
See accompanying notes to financial statements.
F-255
FSP Fair Lakes Corp.
Notes to Financial Statements
(Unaudited)
1. Organization, Basis of presentation, and Recent Accounting Pronouncements
Organization
Fair Lakes Corp. (the "Company") was organized on July 24, 2001 as a Corporation
under the laws of the State of Delaware to purchase, own and operate a
commercial office building located in Fairfax, Virginia (the "Property"). The
Property consists of a six-story Class "A" suburban office building that
contains approximately 211,000 square feet of space situated on approximately
5.8 acres of land. The company acquired the Property on September 17, 2001.
Basis of Presentation
These financial statements should be read in conjunction with the Company's
financial statements and notes thereto contained in the Company's annual
financial statement for its fiscal year ended December 31, 2001.
The accompanying interim financial statements are unaudited; however, the
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information and in conjunction with the rules and regulations of the Securities
and Exchange Commission. Accordingly, they do not include all of the disclosures
required by accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of management, all
adjustments (consisting solely of normal recurring matters) necessary for a fair
presentation of the financial statements for these interim periods have been
included. The results of operations for the interim periods are not necessarily
indicative of the results to be obtained for other interim periods or for the
full fiscal year.
Certain prior-year balances have been reclassified in order to conform to the
current-year presentation.
Recent Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations," which addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This Statement requires that
the fair value of a liability for an asset retirement obligation be recognized
in the period in which it is incurred if a reasonable estimate of the fair value
can be made. The associated asset retirement costs are capitalized as part of
the carrying amount of the long-lived asset. This Statement will be effective at
the beginning of 2003. The Company has reviewed the provisions of SFAS 143 and
believes that the impact of adoption will not be material to its financial
position, results of operations and cash flows.
In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets". This Statement supersedes SFAS No. 121 and
requires that long-lived assets that are to be disposed of by sale be measured
at the lower of book value or fair value less costs to sell. SFAS No. 144
retains the fundamental provisions of SFAS 121 for (a) recognition and
measurement of the impairment of long-lived assets to be held and used, and (b)
measurement of long-lived assets to be disposed of by sale, but broadens the
definition of what constitutes a discontinued operation and how the results of a
discontinued operation are to be measured and presented. This Statement was
effective at the beginning of 2002. With the exception of reclassifying the
operations of certain real estate assets considered "held for sale" (and for
which no significant continuing involvement exists) to "Discontinued operations,
net of tax" in the consolidated statement of income, the impact of adoption is
not expected to have a material impact on the Company's financial position and
cash flows.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FAS Nos. 4, 44, and
64, Amendment of FAS 13, and Technical Corrections". This Statement rescinds
FASB No. 4, "Reporting Gains and Losses from Extinguishment of Debt", and an
amendment of that Statement, FASB No. 64, "Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements". This Statement amends FASB No. 13,
"Accounting for Leases". This Statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings or
describe their applicability under changed conditions. This statement will be
effective for the Company's fiscal year ending December 31, 2003. The Company
has reviewed the provisions of FASB 145 and believes that the impact of adoption
will not be material to its financial position, results of operations and cash
flows.
F-256
FSP Fair Lakes Corp.
Notes to Financial Statements
(Unaudited)
2. Income Taxes
The Company has elected and intends to maintain its election as a REIT under the
Internal Revenue Code of 1986, as amended. As a result, the Company generally
will not be subject to federal taxation to the extent it distributes 90% of its
REIT taxable income to its shareholders and satisfies certain other
requirements. Accordingly, no provision for federal or state income taxes has
been included in the accompanying financial statements. For the period ending
December 31, 2001 the Company incurred a tax loss of approximately $2,173,000
that can be carried forward until 2021.
3. Related Party Transactions
Franklin Street Properties Corp. (FSP), formerly known as Franklin Street
Partners Limited Partnership, is the sole holder of the Company's Common Stock.
FSP has the right, as one class together with the holders of Preferred Stock, to
vote to elect the directors of the Company and to vote on all matters except
those voted by the holders of Shares of Preferred Stock. The Company shall not
declare or pay any cash dividends on shares of Common Stock.
The Company executed a management agreement between the Company and FSP Property
Management LLC, an affiliate of FSP, that provides for a management fee equal to
1% of collected revenues. For the three months ended September 30, 2002 and
2001, respectively, fees earned under the agreement were $15,000 and $2,413. For
the nine months ended September 30, 2002 and 2001 respectively, fees earned
under the agreement were $44,730 and $2,413.
4. Net Income Per Share
The Company follows SFAS No. 128, "Earnings per Share," which specifies the
computation, presentation and disclosure requirements for the Company's net
income per share. Basic net income per share is computed by dividing net income
by the weighted average number of Company shares outstanding during the period.
Diluted net income per share reflects the potential dilution that could occur if
securities or other contracts to issue shares/units were exercised or converted
into shares/units. There were no potential dilutive shares/units outstanding at
September 30, 2002 and 2001.
The denominator used for calculating basic and diluted net income per share is
as follows
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
------------- -------------
2002 2002
------------- -------------
Weighted average number of shares/units
outstanding:
Common shares 1 1
Preferred shares 480 480
F-257
FSP FAIR LAKES CORP.
(A DELAWARE CORPORATION)
FINANCIAL STATEMENTS
PERIOD FROM JULY 24, 2001
(DATE OF INCEPTION)
TO DECEMBER 31, 2001
CONTENTS
PAGE
Independent auditors' report F-259
Financial statements:
Balance sheet F-260
Statement of operations F-261
Statement of changes in stockholders' equity F-262
Statement of cash flows F-263
Notes accompanying financial statements F-264
F-258
[LETTERHEAD OF BRAVER AND COMPANY, P.C.]
INDEPENDENT AUDITORS' REPORT
To the Stockholders
FSP Fair Lakes Corp.
(a Delaware Corporation)
We have audited the accompanying balance sheet of FSP Fair Lakes Corp. (a
Delaware Corporation) as of December 31, 2001 and the related statements of
operations, changes in stockholders' equity and cash flows for the period from
July 24, 2001 (date of inception) to December 31, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of FSP Fair Lakes Corp. (a
Delaware Corporation) at December 31, 2001, and the results of its operations
and its cash flows for the period from July 24, 2001 (date of inception) to
December 31, 2001, in conformity with accounting principles generally accepted
in the United States of America.
/s/ Braver and Company, P.C.
February 1, 2002
F-259
FSP FAIR LAKES CORP.
(A DELAWARE CORPORATION)
BALANCE SHEET
DECEMBER 31, 2001
ASSETS
Rental property, at cost:
Land $ 4,183,196
Building 35,276,656
------------
39,459,852
Less: accumulated depreciation 263,821
------------
Rental property, net 39,196,031
Cash 1,049,719
Capital improvement reserves 1,801,043
Miscellaneous other assets 259,095
------------
Total assets $ 42,305,888
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accrued payable and accrued expenses $ 285,006
Dividends payable 923,680
------------
Total liabilities 1,208,686
------------
Stockholders' equity:
Preferred stock, $01 par value per share,
authorized 480 shares, issued and outstanding 480 shares 5
Common stock, $.01 par value per share,
authorized one share, issued and outstanding one share --
Additional paid-in capital 44,045,431
Retained deficit and dividends in excess of earnings (2,948,234)
------------
Total stockholders' equity 41,097,202
------------
Total liabilities and stockholders' equity $ 42,305,888
============
See accompanying notes to financial statements
F-260
FSP FAIR LAKES CORP.
(A DELAWARE CORPORATION)
STATEMENT OF OPERATIONS
PERIOD FROM JULY 24, 2001 (DATE OF INCEPTION) TO DECEMBER 31, 2001
REVENUES:
Rental income $ 1,830,804
Interest 13,636
-----------
Total revenues 1,844,440
-----------
EXPENSES:
Administrative 120,797
Depreciation 263,821
Interest 2,940,668
Management fees 57,270
Operating and maintenance 315,454
Taxes and insurance 147,984
-----------
Total expenses 3,845,994
-----------
NET LOSS $(2,001,554)
===========
See accompanying notes to financial statements
F-261
FSP FAIR LAKES CORP.
(A DELAWARE CORPORATION)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
PERIOD FROM JULY 24, 2001 (DATE OF INCEPTION) TO DECEMBER 31, 2001
Retained Deficit
Additional and Dividends Total
Paid-in in Excess Stockholders'
Preferred Stock Common Stock Capital of Earnings Equity
--------------- ------------ ---------- ----------- ------
Private offering of 480 shares, net $ 5 $ -- $ 44,045,431 $ -- $ 44,045,436
Net loss -- -- -- (2,001,554) (2,001,554)
Dividends -- -- -- (946,680) (946,680)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2001 $ 5 $ -- $ 44,045,431 $ (2,948,234) $ 41,097,202
------------ ------------ ------------ ------------ ------------
See accompanying notes to financial statements
F-262
FSP FAIR LAKES CORP. (A DELAWARE CORPORATION)
STATEMENT OF CASH FLOWS
PERIOD FROM JULY 24, 2001 (DATE OF INCEPTION) TO DECEMBER 31, 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,001,554)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 263,821
Changes in operating assets and liabilities:
Increase in miscellaneous other assets (259,095)
Increase in accounts payable and accrued expenses 285,006
------------
Net cash used in operating activities (1,711,822)
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to capital improvement reserves (1,801,043)
Purchase of rental property (39,459,852)
------------
Net cash used in investing activities (41,260,895)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of issuance of shares 48,000,010
Syndication costs incurred (3,954,574)
Dividends paid (23,000)
Proceeds from promissory note 39,000,000
Principal payments on promissory note (39,000,000)
------------
Net cash provided by financing activities 44,022,436
------------
NET INCREASE IN CASH 1,049,719
CASH BALANCE, beginning of period --
------------
CASH BALANCE, end of period $ 1,049,719
============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW:
Cash paid during the period for interest $ 2,940,668
============
See accompanying notes to financial statements
F-263
FSP FAIR LAKES CORP.
(A DELAWARE CORPORATION)
NOTES ACCOMPANYING FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION
FSP Fair Lakes Corp. was organized on July 24, 2001 as a Corporation under
the laws of the State of Delaware to purchase, own and operate a commercial
building located in Fairfax, Virginia (the "Property"). The Property consists
of a six-story Class "A" suburban office building containing 210,993 square
feet located on approximately 5.8 acres of land. The Company acquired the
Property on September 17, 2001 and will operate in a manner intended to
qualify as a real estate investment trust ("REIT") for federal income tax
purposes.
In November 2001, the Company completed a private offering of 480 shares of
preferred stock at $100,000 per share.
METHOD OF ACCOUNTING
The Company maintains its books and records on the accrual method of
accounting in accordance with generally accepted accounting principles.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments with an initial maturity of three months or
less to be cash equivalents.
INCOME TAXES
The Company has elected and intends to maintain its election as a REIT under
the Internal Revenue Code of 1986, as amended. As a result, the Company
generally will not be subject to federal taxation to the extent it
distributes 90% of its REIT taxable income to its shareholders and satisfies
certain other requirements. Accordingly, no provision for federal or state
income taxes has been included in the accompanying financial statements.
For the period ended December 31, 2001, the Company incurred a net operating
loss for income tax purposes approximately of $2,137,000 that can be carried
forward until it expires in the year 2021. The primary difference between the
financial and taxable net loss is due to timing differences in the
recognition of rental revenue. Approximately $154,000 of such revenue is
recognized for financial reporting purposes but deferred for tax purposes.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
SYNDICATION FEES
Syndication fees are selling commissions and other costs associated with the
initial offering of the Company's preferred shares. Such costs, in the amount
of $3,954,574 have been reported as a reduction in the Stockholders' Equity.
REVENUE RECOGNITION
Rental income, which includes scheduled increases over the lease term, is
recognized on a straight-line basis. Income recognized on a straight-line
basis did materially differ from income that would have accrued in accordance
with the leases.
F-264
FSP FAIR LAKES CORP.
(A DELAWARE CORPORATION)
NOTES ACCOMPANYING FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
PROPERTY AND DEPRECIATION
Rental property is carried at cost. Depreciation is provided for in amounts
sufficient to relate the cost of depreciable assets to operations over their
estimated service lives of 39 years for real property by use of the
straight-line method for financial reporting. Depreciation was $263,821 for
the period ended December 31, 2001.
2. CAPITAL STOCK:
PREFERRED STOCK
Each holder of Shares of Preferred Stock is entitled to receive ratably all
dividends, if any, declared by the Board of Directors out of funds legally
available. The right to receive dividends shall be non-cumulative, and no
right to dividends shall accrue by reason of the fact that no dividend has
been declared in any prior year. Each holder of Shares will be entitled to
receive, to the extent that funds are available therefore, $100,000 per
Share, before any payment to the holder of Common Stock, out of distributions
to stockholders upon liquidation, dissolution or the winding up of the
Company; the balance of any such funds available for distribution will be
distributed among the holders of Shares and the holder of Common Stock, pro
rata based on the number of shares held by each; provided, however, that for
these purposes, one share of Common Stock will be deemed to equal one-tenth
of a share of Preferred Stock.
The Company declared a dividend in 2001 to holders on record on December 31,
2001. These dividends, in the amount of $835,503, were paid in 2002 and have
been accrued and reflected in Stockholders' Equity.
In addition to certain voting rights provided in the corporate agreements,
the holder of Shares, acting by consent of at least 51%, shall have the
further right to approve or disapprove a proposed sale of the Property, the
merger of the Company with any other entity and amendments to the corporate
charter, and vote on the election and certain changes to the Board of
Directors. A vote of the holders of 66.67% of the Shares is required for the
issue of any additional shares of capital stock. Holders of Shares have the
right, as one class together with the holder of Common Stock, to vote to
elect the directors of the company. Holders of Shares have no redemption or
conversion rights.
COMMON STOCK
Franklin Street Properties Corp. (FSP), formerly Franklin Street Partners
Limited Partnership, is the sole holder of the Company's Common Stock. FSP
has the right, as one class together with the holders of Preferred Stock, to
vote to elect the directors of the Company and to vote on all matters except
those voted by the holders of Shares of Preferred Stock. After completion of
the offering of Shares, the Company shall not declare or pay any cash
dividends on shares of Common Stock.
The Company paid dividends of $111,177 of which $88,177 was accrued at
December 31, 2001 and paid February 2002.
3. RELATED PARTY TRANSACTIONS:
A management agreement was executed on December 4, 2001 between the Company
and FSP Property Management LLC, an affiliate of the Common Shareholder. The
agreement provides for a total management fee equal to 1% of collected
revenues. The affiliate's portion of the fees earned and paid was $16,508 for
the period ended December 31, 2001.
An acquisition fee and other costs totaling $280,341 were paid in 2001 to an
affiliate of the Common Shareholder. Such fees were included in the cost of
the real estate.
F-265
FSP FAIR LAKES CORP.
(A DELAWARE CORPORATION)
NOTES ACCOMPANYING FINANCIAL STATEMENTS
3. RELATED PARTY TRANSACTIONS: (CONTINUED)
Syndication fees of $3,840,000 were paid in 2001 to an affiliate of the
Common Shareholder for services related to syndication of the investor's
preferred stock interest.
A commitment fee of $2,760,000 was paid to an affiliate of the Common
Shareholder for obtaining the first mortgage loan. Such amount is included in
interest on the Statement of Operations.
During 2001, the Company borrowed and repaid in full a note payable to
Franklin Street Partners Limited Partnership, the Common Shareholder,
principal of $39,000,000 with interest equal to the Citizens Bank of
Massachusetts base rate. Interest paid to the affiliate was $180,668.
Franklin Street Partners Limited Partnership operated under the laws of the
Commonwealth of Massachusetts. On January 1, 2002, the limited partnership
merged into Franklin Street Properties Corp (FSP), the Common Shareholder,
and will operate in a manner intended to qualify as a real estate investment
trust ("REIT") for federal income tax purposes.
4. LEASES:
The Company, as lessor, has minimum future rentals due under a noncancellable
operating lease as follows:
Year Ended
December 31, Amount
------------ ------
2002 $ 3,876,732
2003 4,087,345
2004 4,189,541
2005 4,294,279
2006 4,401,637
Thereafter 13,876,229
-----------
$34,725,763
===========
In addition, the lessee is liable for real estate taxes and operating
expenses as direct expenses to the lessee.
Upon acquiring the commercial rental property in September 2001, the Company
was assigned the lease agreements between the seller of the Property and the
existing tenants. The original lease expires December 31, 2009 with two
five-year options to renew.
5. CONCENTRATIONS OF RISK:
For the period ended December 31, 2001, 100% of the rental income was derived
from one lessee. As such, future rental receipts are dependent upon the
financial strength of the lessee and its ability to perform under the lease
agreement.
The Company maintains its cash accounts at one financial institution. The
balances, at times, may exceed federally insured limits. At December 31, 200
1,the Company had cash on deposit exceeding the insured limit by $649,753.
F-266
FSP Northwest Point
Financial Statements
September 30, 2002
Table of Contents
Page
----
Financial Statements
Balance Sheets as of September 30, 2002 and December 31, 2001............. F-268
Statements of Income for the six months ended September 30, 2002.......... F-269
Statements of Cash Flows for the six months ended September 30, 2002...... F-270
Notes to the Financial Statements......................................... F-271
F-267
FSP Northwest Point
Balance Sheets
(unaudited)
September 30, December 31,
(in thousands, except shares and par value amounts) 2002 2001
================================================================================
Assets:
Real estate investments, at cost:
Land $ 3,242 $ 3,242
Buildings and improvements 27,955 27,955
--------------------------------------------------------------------------------
31,197 31,197
Less accumulated depreciation 556 30
--------------------------------------------------------------------------------
Real estate investments, net 30,641 31,167
Cash and cash equivalents 1,968 657
Cash - funded reserve 1,498 1,498
Tenant rent receivables 259 --
Prepaid expenses and other assets, net 31 36
--------------------------------------------------------------------------------
Total assets $ 34,397 $ 33,358
================================================================================
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and accrued expenses $ 1,777 $ 1,312
--------------------------------------------------------------------------------
Total liabilities 1,777 1,312
--------------------------------------------------------------------------------
Commitments and Contingencies:
Stockholders' Equity:
Preferred Stock, $.01 par value, 372.5 shares
authorized, issued and outstanding
Common Stock, $.01 par value, 1 share
authorized, issued and outstanding
Additional paid-in capital 34,186 34,186
Retained deficit and dividends in excess of earnings (1,566) (2,140)
--------------------------------------------------------------------------------
Total Stockholders' Equity 32,620 32,046
--------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 34,397 $ 33,358
================================================================================
See accompanying notes to financial statements.
F-268
FSP Northwest Point
Statements of Income
(Unaudited)
For the For the
Three Months Nine Months
Ended Ended
September 30, September 30,
------------- -------------
(in thousands, except shares and per share amounts) 2002 2002
===================================================================================
Revenue:
Rental $ 1,299 $ 4,054
Interest and other 13 29
-----------------------------------------------------------------------------------
Total revenue 1,312 4,083
-----------------------------------------------------------------------------------
Expenses:
Rental operating expenses 143 484
Depreciation and amortization 176 526
Real estate taxes and insurance 341 1,015
-----------------------------------------------------------------------------------
Total expenses 660 2,025
Net income $ 652 $ 2,058
===================================================================================
Allocation of net income to:
Preferred shareholders $ 652 $ 2,058
Common shareholders -- --
===================================================================================
Weighted average number of shares outstanding,
basic and diluted
Preferred shares 372.5 372.5
Common shares 1 1
===================================================================================
Net income per share, basic and diluted
Preferred shares $ 1,750 $ 5,525
Common shares -- --
===================================================================================
Note: The Company purchased the land and building on December 5, 2001. There is
no comparative information for the corresponding periods in the prior year.
See accompanying notes to financial statements.
F-269
FSP Northwest Point
Statements of Cash Flows
(Unaudited)
For the
Nine months
Ended
September 30,
-------------
(in thousands) 2002
================================================================================
Cash flows from operating activities:
Net income $ 2,058
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 526
Changes in operating assets and liabilities:
Decrease in prepaid expenses and other assets, net 6
Increase in tenants accounts receivable (259)
Increase in accounts payable and accrued expenses 464
Net cash provided by operating activities 2,795
--------------------------------------------------------------------------------
Net cash (used for) provided by investing activities --
--------------------------------------------------------------------------------
Cash flows from financing activities:
Distributions to stockholders (1,484)
--------------------------------------------------------------------------------
Net cash used for financing activities
--------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents 1,311
Cash and cash equivalents, beginning of period 657
--------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 1,968
================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ --
Income taxes $ --
See accompanying notes to financial statements.
F-270
FSP Northwest Point Corp.
Notes to Financial Statements
(Unaudited)
1. Organization, Basis of presentation, and Recent Accounting Pronouncements
Organization
FSP Northwest Point Corp. (the "Company") was organized on October 17, 2001 as a
Corporation under the laws of the State of Delaware to purchase, own and operate
a commercial office building located in Elk Grove Village Illinois (the
"Property"). The Property consists of a six-story Class "A" suburban office
building that contains approximately 176,848 rentable square feet of space
situated within the campus-like setting of the Park at Northwest Point, a 125
acre planned business park. The company acquired the Property on December 5,
2001 and will operate in a manner intended to qualify as a real estate
investment trust ("REIT") for federal tax purposes.
Basis of Presentation
These financial statements should be read in conjunction with the Company's
financial statements and notes thereto contained in the Company's annual
financial statements for its fiscal year ended December 31, 2001.
The accompanying interim financial statements are unaudited; however, the
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information and in conjunction with the rules and regulations of the Securities
and Exchange Commission. Accordingly, they do not include all of the disclosures
required by accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of management, all
adjustments (consisting solely of normal recurring matters) necessary for a fair
presentation of the financial statements for these interim periods have been
included. The results of operations for the interim periods are not necessarily
indicative of the results to be obtained for other interim periods or for the
full fiscal year.
Certain prior-year balances have been reclassified in order to conform to the
current-year presentation.
Recent Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations," which addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This Statement requires that
the fair value of a liability for an asset retirement obligation be recognized
in the period in which it is incurred if a reasonable estimate of the fair value
can be made. The associated asset retirement costs are capitalized as part of
the carrying amount of the long-lived asset. This Statement will be effective at
the beginning of 2003. The Company has reviewed the provisions of SFAS 143 and
believes that the impact of adoption will not be material to its financial
position, results of operations and cash flows.
In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets". This Statement supersedes SFAS No. 121 and
requires that long-lived assets that are to be disposed of by sale be measured
at the lower of book value or fair value less costs to sell. SFAS No. 144
retains the fundamental provisions of SFAS 121 for (a) recognition and
measurement of the impairment of long-lived assets to be held and used, and (b)
measurement of long-lived assets to be disposed of by sale, but broadens the
definition of what constitutes a discontinued operation and how the results of a
discontinued operation are to be measured and presented. This Statement was
effective at the beginning of 2002. With the exception of reclassifying the
operations of certain real estate assets considered "held for sale" (and for
which no significant continuing involvement exists) to "Discontinued operations,
net of tax" in the consolidated statement of income, the impact of adoption is
not expected to have a material impact on the Company's financial position and
cash flows.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FAS Nos. 4, 44, and
64, Amendment of FAS 13, and Technical Corrections". This Statement rescinds
FASB No. 4, "Reporting Gains and Losses from Extinguishment of Debt", and an
amendment of that Statement, FASB No. 64, "Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements". This Statement amends FASB No. 13,
"Accounting for Leases". This Statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings or
describe their applicability under changed conditions. This statement will be
effective for the Company's fiscal year ending December 31, 2003. The Company
has reviewed the provisions of FASB 145 and believes that the impact of adoption
will not be material to its financial position, results of operations and cash
flows.
F-271
FSP Northwest Point Corp.
Notes to Financial Statements
(Unaudited)
2. Income Taxes
The Company has elected and intends to maintain its election as a REIT under the
Internal Revenue Code of 1986, as amended. As a result, the Company generally
will not be subject to federal taxation to the extent it distributes 90% of its
REIT taxable income to its shareholders and satisfies certain other
requirements. Accordingly, no provision for federal or state income taxes has
been included in the accompanying financial statements.
3. Related Party Transactions
Franklin Street Properties Corp. (FSP), formerly known as Franklin Street
Partners Limited Partnership, is the sole holder of the Company's Common Stock.
FSP has the right, as one class together with the holders of Preferred Stock, to
vote to elect the directors of the Company and to vote on all matters except
those voted by the holders of Shares of Preferred Stock. The Company shall not
declare or pay any cash dividends on shares of Common Stock.
The Company executed a management agreement between the Company and FSP Property
Management LLC, an affiliate of FSP, that provides for a management fee equal to
1% of collected revenues. For the three months ended September 30, 2002 fees
earned under the agreement were $14,250. For the nine months ended September 30,
2002 fees earned under the agreement were $42,255.
4. Net Income Per Share
The Company follows SFAS No. 128, "Earnings per Share," which specifies the
computation, presentation and disclosure requirements for the Company's net
income per share. Basic net income per share is computed by dividing net income
by the weighted average number of Company shares outstanding during the period.
Diluted net income per share reflects the potential dilution that could occur if
securities or other contracts to issue shares/units were exercised or converted
into shares/units. There were no potential dilutive shares/units outstanding at
September 30, 2002.
The denominator used for calculating basic and diluted net income per share is
as follows
For the Three For the Six
Months Ended Months Ended
September 30, September 30,
------------- -------------
2002 2002
------------- -------------
Weighted average number of shares/units
outstanding:
Common shares 1 1
Preferred shares 372.5 372.5
F-272
FSP NORTHWEST POINT CORP.
(A DELAWARE CORPORATION)
FINANCIAL STATEMENTS
PERIOD FROM OCTOBER 17, 2001
(DATE OF INCEPTION)
TO DECEMBER 31, 2001
CONTENTS
PAGE
Independent auditors' report F-274
Financial statements:
Balance sheet F-275
Statement of operations F-276
Statement of changes in stockholders' equity F-277
Statement of cash flows F-278
Notes accompanying financial statements F-279
F-273
[LETTERHEAD OF BRAVER AND COMPANY, P.C.]
INDEPENDENT AUDITORS' REPORT
To the Stockholders
FSP Northwest Point Corp.
(a Delaware Corporation)
We have audited the accompanying balance sheet of FSP Northwest Point Corp. (a
Delaware Corporation) as of December 31, 2001 and the related statements of
operations, changes in stockholders' equity and cash flows for the period from
October 17, 2001 (date of inception) to December 31, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of FSP Northwest Point Corp. (a
Delaware Corporation) at December 31, 2001, and the results of its operations
and its cash flows for the period from October 17, 2001 (date of inception) to
December 31, 2001, in conformity with accounting principles generally accepted
in the United States of America.
/s/ Braver and Company, P.C.
February 1, 2002
F-274
FSP NORTHWEST POINT CORP.
(A DELAWARE CORPORATION)
BALANCE SHEET
DECEMBER 31, 2001
ASSETS
Rental property, at cost:
Land $ 3,242,038
Building 27,954,935
------------
31,196,973
Less: accumulated depreciation 29,866
------------
Rental property, net 31,167,107
Cash 657,014
Capital improvement reserves 1,497,584
Due from affiliates 35,959
Miscellaneous other assets 1,088
------------
Total assets 33,358,752
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses 790,020
Deferred rental income 390,293
Dividends payable 132,201
------------
Total liabilities 1,312,514
------------
Stockholders' equity:
Preferred stock, $01 par value per share;
authorized 372.5 shares; issued and outstanding 372.5 shares 4
Common stock, $.01 par value per share;
authorized one share; issued and outstanding one share --
Additional paid-in capital 34,186,363
Retained deficit and dividends in excess of earnings (2,140,129)
------------
Total Stockholders' equity 32,046,238
------------
Total liabilities and stockholders' equity $ 33,358,752
============
See accompanying notes to financial statements
F-275
FSP NORTHWEST POINT CORP.
(A DELAWARE CORPORATION)
STATEMENT OF OPERATIONS
PERIOD FROM OCTOBER 17, 2001 (DATE OF INCEPTION) TO DECEMBER 31, 2001
REVENUES:
Rental income $ 351,315
Interest 6,284
-----------
Total revenues 357,599
-----------
EXPENSES:
Administrative 53,145
Depreciation and amortization 29,866
Interest 2,186,681
Management fees 6,799
Operating and maintenance 29,474
Taxes and insurance 59,563
-----------
Total expenses 2,365,527
-----------
NET LOSS $(2,007,928)
===========
See accompanying notes to financial statements
F-276
FSP NORTHWEST POINT CORP.
(A DELAWARE CORPORATION)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
PERIOD FROM OCTOBER 17, 2001 (DATE OF INCEPTION) TO DECEMBER 31, 2001
Retained Deficit
Additional and Dividends Total
Paid-in in Excess Stockholders'
Preferred Stock Common Stock Capital of Earnings Equity
--------------- ------------ ---------- ----------- ------
Private offering of 372.5 shares, net $ 4 $ -- $ 34,186,363 $ -- $ 34,186,367
Net loss -- -- -- (2,007,928) (2,007,928)
Dividends -- -- -- (132,201) (132,201)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2001 $ 4 $ -- $ 34,186,363 $ (2,140,129) $ 32,046,238
============ ============ ============ ============ ============
See accompanying notes to financial statements
F-277
FSP NORTHWEST POINT CORP.
(A DELAWARE CORPORATION)
STATEMENT OF CASH FLOWS
PERIOD FROM OCTOBER 17,2001 (DATE OF INCEPTION) TO DECEMBER 31, 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,007,928)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 29,866
Changes in operating assets and liabilities:
Increase in due from affiliates (35,959)
Increase in miscellaneous other assets (1,088)
Increase in accounts payable and accrued expenses 790,020
Increase in deferred rental income 390,293
------------
Net cash used in operating activities (834,796)
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to capital improvement reserves (1,497,584)
Purchase of rental property (31,196,973)
------------
Net cash used in investing activities (32,694,557)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of issuance of shares 37,250,010
Syndication costs incurred (3,063,643)
Proceeds from promissory note 30,150,000
Principal payments on promissory note (30,150,000)
------------
Net cash provided by financing activities 34,186,367
------------
NET INCREASE IN CASH 657,014
CASH BALANCE, beginning of period --
------------
CASH BALANCE, end of period $ 657,014
============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW:
Cash paid during the period for interest $ 2,141,875
============
See accompanying notes to financial statements
F-278
FSP NORTHWEST POINT CORP.
(A DELAWARE CORPORATION))
NOTES ACCOMPANYING FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION
FSP Northwest Point Corp. was organized on October 17, 2001 as a Corporation
under the laws of the State of Delaware to purchase, own and operate a
commercial building located in Elk Grove Village, Illinois (the "Property").
The Property consists of a six-story Class "A" suburban office building
containing 176,848 rentable square feet of space positioned within the
campus-like setting of the Park at Northwest Point, a 125-acre planned
business park located in metropolitan Chicago's desirable northwest suburb of
Elk Grove Village. The Company acquired the Property on December 5, 2001 and
will operate in a manner intended to qualify as a real estate investment
trust ("REIT") for federal income tax purposes.
In December 2001, the Company completed a private offering of 372.5 shares of
preferred stock at $100,000 per share.
METHOD OF ACCOUNTING
The Company maintains its books and records on the accrual method of
accounting in accordance with generally accepted accounting principles.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments with an initial maturity of three months or
less to be cash equivalents.
INCOME TAXES
The Company has elected and intends to maintain its election as a REIT under
the Internal Revenue Code of 1986, as amended. As a result, the Company
generally will not be subject to federal taxation to the extent it
distributes 90% of its REIT taxable income to its shareholders and satisfies
certain other requirements. Accordingly, no provision for federal or state
income taxes has been included in the accompanying financial statements.
For the period ended December 31, 2001, the Company incurred a net operating
loss for income tax purposes of approximately $1,593,000 that can be carried
forward until it expires in the year 2021. The primary difference between the
financial and taxable net loss is due to timing difference in the recognition
of rental revenues. Approximately $309,000 of such revenue is deferred for
financial reporting purposes but included in taxable income.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
SYNDICATION FEES
Syndication fees are selling commissions and other costs associated with the
initial offering of the Company's preferred shares. Such costs, in the amount
of $3,063,644, have been reported as a reduction in the Stockholders' Equity.
F-279
FSP NORTHWEST POINT CORP.
(A DELAWARE CORPORATION))
NOTES ACCOMPANYING FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
REVENUE RECOGNITION
Rental income, which includes scheduled increases over the lease term, is
recognized on a straight-line basis. Income recognized on a straight-line
basis did not materially differ from income that would have accrued in
accordance with the leases.
PROPERTY AND DEPRECIATION
Rental property is carried at cost. Depreciation is provided for in amounts
sufficient to relate the cost of depreciable assets to operations over their
estimated service lives of 39 years for real property by use of the
straight-line method for financial reporting. Depreciation was $29,866 for
the period ended December 31, 2001.
2. CAPITAL STOCK:
PREFERRED STOCK
Each holder of Shares of Preferred Stock is entitled to receive ratably all
dividends, if any, declared by the Board of Directors out of funds legally
available. The right to receive dividends shall be non-cumulative, and no
right to dividends shall accrue by reason of the fact that no dividend has
been declared in any prior year. Each holder of Shares will be entitled to
receive, to the extent that funds are available therefore, $100,000 per
Share, before any payment to the holder of Common Stock, out of distributions
to stockholders upon liquidation, dissolution or the winding up of the
Company; the balance of any such funds available for distribution will be
distributed among the holders of Shares and the holder of Common Stock, pro
rata based on the number of shares held by each; provided, however, that for
these purposes, one share of Common Stock will be deemed to equal one-tenth
of a share of Preferred Stock.
The Company declared a dividend in December 2001 to holders on record on
December 31, 2001. These dividends, in the amount of $132,201, were paid in
2002 and have been accrued and reflected in Stockholders' Equity.
In addition to certain voting rights provided in the corporate agreements,
the holder of Shares, acting by consent of at least 51%, shall have the
further right to approve or disapprove a proposed sale of the Property, the
merger of the Company with any other entity and amendments to the corporate
charter, and vote on the election and certain changes to the Board of
Directors. A vote of the holders of 66.67% of the Shares is required for the
issue of any additional shares of capital stock. Holders of Shares have no
redemption or conversion rights.
COMMON STOCK
Franklin Street Properties Corp. (FSP), formerly Franklin Street Partners
Limited Partnership, is the sole holder of the Company's Common Stock. FSP
has the right, as one class together with the holders of Preferred Stock, to
vote to elect the directors of the Company and to vote on all matters except
those voted by the holders of Shares of Preferred Stock. After the completion
of the offering of Shares, the Company shall not declare or pay any cash
dividends on shares of Common Stock.
F-280
FSP NORTHWEST POINT CORP.
(A DELAWARE CORPORATION))
NOTES ACCOMPANYING FINANCIAL STATEMENTS
3. RELATED PARTY TRANSACTIONS:
A management agreement was executed on December 5, 2001 between the Company
and FSP Property Management LLC, an affiliate of the Common Shareholder. The
agreement provides for a total management fee equal to 1% of gross revenue.
The affiliate's portion of the fees earned was $3,400 for 2001, with $3,400
owed at December 31, 2001.
An acquisition fee and other costs totaling $186,250 were paid in 2001 to an
affiliate of the Common Shareholder. Such fees were included in the cost of
the real estate.
Syndication fees of $2,980,000 were paid in 2001 to an affiliate of the
Common Shareholder for services related to syndication of the investor's
preferred stock interest.
A commitment fee of $2,141,875 was paid to an affiliate of the Common
Shareholder for obtaining the first mortgage loan. Such amount is included in
interest on the Statement of Operations.
During 2001, the Company borrowed and repaid in full a note payable to
Franklin Street Partners Limited Partnership, the Common Shareholder,
principal of $30,150,000 with interest equal to the Citizens Bank of
Massachusetts base rate. Interest owed at December 31, 2001 to the affiliate
was $44,806.
Franklin Street Partners Limited Partnership operated under the laws of the
Commonwealth of Massachusetts. On January 1, 2002, the limited partnership
merged into Franklin Street Properties Corp (FSP), the Common Shareholder,
and will operate in a manner intended to qualify as a real estate investment
trust ("REIT") for federal income tax purposes.
4. LEASES:
The Company, as lessor, has minimum future rentals due under a noncancellable
operating lease as follows:
Year Ended
December 31, Amount
------------ ------
2002 $ 2,687,206
2003 2,767,819
2004 2,851,232
2005 2,936,709
2006 3,024,985
Thereafter 10,537,193
-----------
$24,805,144
===========
In addition, the lessee is liable for real estate taxes and operating
expenses as direct expenses to the lessee.
Upon acquiring the commercial rental property in December 2001, the Company
was assigned the lease agreement between the seller of the Property and the
existing tenant. The original lease period is ten years with renewal options.
F-281
FSP NORTHWEST POINT CORP.
(A DELAWARE CORPORATION))
NOTES ACCOMPANYING FINANCIAL STATEMENTS
5. CONCENTRATIONS OF RISK:
For the period ended December 31, 2001,100% of the rental income was derived
from one lessee. As such, future rental receipts are dependent upon the
financial strength of the lessee and its ability to perform under the lease
agreement.
The Company maintains its cash accounts at two financial institutions. The
balances, at times, may exceed federally insured limits. At December 31,
2001, the Company had cash on deposit exceeding the insured limit by
$2,066,188.
6. ACCRUED EXPENSES:
In conjunction with the purchase of the real estate, the Company assumed
$692,219 of real estate taxes to be paid during 2002. This amount has been
included in the cost of the property with the related obligation included in
accrued expenses.
F-282
FSP Timberlake East Corp.
Financial Statements
September 30, 2002
Table of Contents
Page
----
Financial Statements
Balance Sheet as of September 30, 2002.................................... F-284
Statements of Operations for the nine months ended September 30, 2002..... F-285
Statements of Changes in Stockholders Equity for the period ended
September 30, 2002...................................................... F-286
Statements of Cash Flow for the period ended September 30, 2002........... F-287
Notes to the Financial Statements......................................... F-288
F-283
FSP Timberlake East Corp.
Balance Sheet
(unaudited)
September 30,
(in thousands, except shares and par value amounts) 2002
================================================================================
Assets:
Real estate investments, at cost:
Land $ 3,018
Buildings and improvements 17,707
--------------------------------------------------------------------------------
Less accumulated depreciation 245
--------------------------------------------------------------------------------
Real estate investments, net
Cash and cash equivalents 1,154
Cash - funded reserve 778
Restricted Cash 17
Tenant rent receivables 13
Prepaid expenses and other assets, net 50
--------------------------------------------------------------------------------
Total assets $ 22,492
================================================================================
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and accrued expenses $ 664
Tenant security deposits 17
--------------------------------------------------------------------------------
Total liabilities 681
--------------------------------------------------------------------------------
Commitments and Contingencies:
Stockholders' Equity:
Preferred Stock, $.01 par value, 250 shares
authorized, issued and outstanding
Common Stock, $.01 par value, 1 share
authorized, issued and outstanding
Additional paid-in capital 22,951
Deficit and distribution in excess of earnings (1,140)
--------------------------------------------------------------------------------
Total Stockholders' Equity 21,811
--------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 22,492
================================================================================
See accompanying notes to financial statements.
F-284
FSP Timberlake East Corp.
Statements of Operations
(Unaudited)
For the For the
For the Period For the Period Three months Nine months
Jan 1, 2002- March 4, 2002 ended ended
March 3, 2002 September 30, 2002 September 30, 2002 September 30, 2002
------------- ------------------ ------------------ ------------------
(predecessor) (Timberlake East) (Timberlake East) (Combined)
(in thousands, except shares and
per share amounts)
=========================================================================================================================
Revenue:
Rental $ 468 $ 1,711 $ 1,078 $ 2,179
Interest and other 2 30 19 32
-------------------------------------------------------------------------------------------------------------------------
Total revenue 470 1,741 1,097 2,211
-------------------------------------------------------------------------------------------------------------------------
Expenses:
Rental operating expenses 118 353 175 471
Depreciation and amortization 65 245 27 310
Real estate taxes and insurance 60 196 16 256
Interest 93 1,438 (10) 1,531
-------------------------------------------------------------------------------------------------------------------------
Total expenses 336 2,232 228 2,568
-------------------------------------------------------------------------------------------------------------------------
Net income (Loss) $ 134 $ (507) $ 869 $ (357)
=========================================================================================================================
Allocation of net income to:
Predecessor $ 134 $ -- $ -- $ 134
Preferred shareholders -- (491) 869 (507)
Common shareholders -- 16 -- 16
-------------------------------------------------------------------------------------------------------------------------
$ 134 $ (491) 869 $ (357)
=========================================================================================================================
Weighted average number of shares outstanding,
basic and diluted
Preferred shares N/C 250 N/C N/C
Common shares N/C 1 N/C N/C
=========================================================================================================================
Net income per share, basic and diluted
Preferred shares $ N/C $(1,964) $ N/C $ N/C
Common shares $ N/C $ -- $ N/C $ N/C
=========================================================================================================================
N/C - not computable
Note: The Company purchased the land and building on March 4, 2002. There is no
comparative information for the corresponding periods in the prior year.
See accompanying notes to financial statements.
F-285
FSP Timberlake East Corp.
Statement of Changes in Stockholders' Equity
For the Period January 10, 2002
(date of inception) to September 30, 2002
(In thousands, except shares) Retained Deficit
and Dividends in Total
Preferred Common Additional Paid Excess of Stockholders
Stock Stock in Capital Earnings Equity
--------- --------- --------- --------- ---------
Private offering of 250 share, net $ -- $ -- $ 22,950 $ -- $ 22,950
Net Loss -- -- -- (491) (491)
Dividends -- -- -- (648) (648)
--------- --------- --------- --------- ---------
Balance, September 30, 2002 $ -- $ -- $ 22,950 $ (1,139) $ 21,811
========= ========= ========= ========= =========
See accompanying notes to financial statements
F-286
FSP Timberlake East Corp.
Statements of Cash Flows
For the Period from January 10, 2002
(Date of inception) to September 30, 2002
(in thousands)
================================================================================
Cash flows from operating activities:
Net Loss $ (491)
Adjustments to reconcile net income (Loss) to net cash
provided by operating activities:
Depreciation and amortization 245
Changes in operating assets and liabilities:
Increase in tenant rent receivables (13)
Increase in prepaid expenses and other assets, net (50)
Increase in accounts payable and accrued expenses 682
--------------------------------------------------------------------------------
Net cash provided by operating activities 373
--------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets (24,764)
Establish funded reserve (778)
--------------------------------------------------------------------------------
Net cash used for investing activities (25,542)
--------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of company stock 22,950
Distributions to stockholders/partners (648)
--------------------------------------------------------------------------------
Net cash provided by used for financing activities 22,302
--------------------------------------------------------------------------------
Net increase in cash and cash equivalents 1,171
Cash and cash equivalents, beginning of period --
--------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 1,171
================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 1,438
Income taxes --
See accompanying notes to financial statements.
F-287
FSP Timberlake East Corp.
Notes to Financial Statements
(Unaudited)
1. Organization, Basis of presentation, and Recent Accounting Pronouncements
Organization
FSP Timberlake East Corp. (the "Company") was organized on January 10, 2002 as a
Corporation under the laws of the State of Delaware to purchase, own and operate
a commercial office building located in Chesterfield, MO (the "Property"). The
Property consists of a five-story Class "A" suburban office building that
contains approximately 116,361 square feet of space situated on approximately
8.6 acres of land. The Company acquired the Property on March 4, 2002.
2. Summary of Significant Accounting Policies
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments with an initial maturity of three months or
less to be cash equivalents.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
SYNDICATION FEES
Syndication fees are selling commissions and other costs associated with
the initial offering of the Company's preferred shares. Such costs, in the
amount of $2,050,000 have been reported as a reduction in the
Stockholders' Equity.
REVENUE RECOGNITION
Rental income, which includes scheduled increases over the lease term, is
recognized on a straight-line basis. Income recognized on a straight-line
basis differed from income that would have accrued in accordance with the
leases by $70,000. Rental payments received in advance are deferred until
earned.
PROPERTY AND DEPRECIATION
Real estate assets are stated at the lower of cost or fair value, as
appropriate, less accumulated depreciation.
Costs related to property acquisition and improvements are capitalized.
Typical capital items include new roofs, site improvements, various
exterior building improvements and major interior renovations. Funding for
capital improvements typically is provided by cash set aside at the time
the property was purchased.
Routine replacements and ordinary maintenance and repairs that do not
extend the life of the asset are expensed as incurred. Typical expense
items include interior painting, landscaping and minor carpet
replacements. Funding for repairs and maintenance items typically is
provided by cash flows from operating activities.
Depreciation is computed using the straight line method over the assets'
estimated useful lives as follows:
Category Years
-------- -----
Building - Commercial 39
Building Improvements 39
Furniture and equipment 5-7
F-288
FSP Timberlake East Corp.
Notes to Financial Statements
(Unaudited)
2. Summary of Significant Accounting Policies (continued)
RESTRICTED CASH
Restricted cash consists of tenant security deposits. Tenant security
deposits are refunded when tenants vacate provided that the tenant has not
damaged the property.
CONCENTRATION OF CREDIT RISK
Cash, cash equivalents and short-term investments are financial
instruments that potentially subject the Company to a concentration of
credit risk. The Company maintains its cash balances and short term
investments principally in one bank which the Company believes to be
creditworthy. The Company periodically assesses the financial condition of
the bank and believes that the risk of loss is minimal. Cash balances held
with various financial institutions frequently exceed the insurance limit
of $100,000 provided by the Federal Deposit Insurance Corporation.
3. Basis of Presentation
The accompanying interim financial statements are unaudited; however, the
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America and in conjunction with the
rules and regulations of the Securities and Exchange Commission. In the opinion
of management, all adjustments necessary for a fair presentation of the
financial statements for these interim periods have been included. The results
of operations for the interim periods, or from inception to date, are not
necessarily indicative of the results to be obtained for other interim periods
or for the full fiscal year.
The statement of operations includes the results of operations of the
predecessor company for the period from January 1, 2002 through the date of
purchase of the property. The Company has not presented a balance sheet for any
period prior to September 30, 2002, or cash flows and changes in stockholders
equity for the periods January 1, 2002 to March 4, 2002 as the information
necessary to prepare these statements was not available from the previous owner
(Predecessor) of the Property.
4. Recent Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations," which addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This Statement requires that
the fair value of a liability for an asset retirement obligation be recognized
in the period in which it is incurred if a reasonable estimate of the fair value
can be made. The associated asset retirement costs are capitalized as part of
the carrying amount of the long-lived asset. This Statement will be effective at
the beginning of 2003. The Company has reviewed the provisions of SFAS 143 and
believes that the impact of adoption will not be material to its financial
position, results of operations and cash flows.
In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets". This Statement supersedes SFAS No. 121 and
requires that long-lived assets that are to be disposed of by sale be measured
at the lower of book value or fair value less costs to sell. SFAS No. 144
retains the fundamental provisions of SFAS 121 for (a) recognition and
measurement of the impairment of long-lived assets to be held and used, and (b)
measurement of long-lived assets to be disposed of by sale, but broadens the
definition of what constitutes a discontinued operation and how the results of a
discontinued operation are to be measured and presented. This Statement was
effective at the beginning of 2002. With the exception of reclassifying the
operations of certain real estate assets considered "held for sale" (and for
which no significant continuing involvement exists) to "Discontinued operations,
net of tax" in the consolidated statement of income, the impact of adoption is
not expected to have a material impact on the Company's financial position and
cash flows.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FAS Nos. 4, 44, and
64, Amendment of FAS 13, and Technical Corrections". This Statement rescinds
FASB No. 4, "Reporting Gains and Losses from Extinguishment of Debt", and an
amendment of that Statement, FASB No. 64, "Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements". This Statement amends FASB No. 13,
"Accounting for Leases". This Statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings or
describe their applicability under changed conditions. This statement will be
effective for the Company's fiscal year ending December 31, 2003. The Company
has reviewed the provisions of FASB 145 and believes that the impact of adoption
will not be material to its financial position, results of operations and cash
flows.
F-289
FSP Timberlake East Corp.
Notes to Financial Statements
(Unaudited)
5. Leases
The Company, as lessor, has minimum future rentals due under a
non-cancelable operating lease as follows:
Year Ended
December 31, Amount
------------ ------------
2002 2,131,000
2003 2,694,000
2004 2,779,000
2005 2,424,000
2006 1,500,000
Thereafter 2,503,000
------------
$ 14,031,000
============
In addition, the lessees are liable for real estate taxes and operating
expenses as direct expenses to the lessees.
Upon acquiring the commercial rental property in March, 2002, the Company
was assigned the lease agreements between the seller of the Property and
the existing tenants. The original lease periods range from four to eleven
years with renewal options.
6. Income Taxes
The Company has elected and intends to maintain its election as a REIT under the
Internal Revenue Code of 1986, as amended. As a result, the Company generally
will not be subject to federal taxation to the extent it distributes 90% of its
REIT taxable income to its shareholders and satisfies certain other
requirements. Accordingly, no provision for federal or state income taxes has
been included in the accompanying financial statements.
7. Related Party Transactions
The Company executed a management agreement between the Company and FSP Property
Management LLC, an affiliate of FSP, that provides for a management fee equal to
1% of collected revenues. For the three months ended September 30, 2002, fees
earned under the agreement were $13,800 for the six months ended September 30,
2002, fees earned under the agreement were $30,900.
An acquisition fee and other costs totaling $250,000 were paid in 2002 to an
affiliate of the Common Shareholder. Such fees were included in the cost of the
real estate.
Syndication fees of $2,050,000 were paid in 2002 to an affiliate of the Common
Shareholder for services related to syndication of the investor's preferred
stock interest.
During 2002, the Company borrowed and repaid in full:
Note payable to FSP, principal of $20,360,000 with interest equal to the
Citizens Bank base rate (4.75%). Interest paid to the affiliate was $10,000.
A commitment fee of $1,438,000 was paid for obtaining the first mortgage loan.
Such amount is included in interest expenses on the Statement of Operations.
F-290
FSP Timberlake East Corp.
Notes to Financial Statements
(Unaudited)
8. Capital Stock
PREFERRED STOCK
Each holder of Shares of Preferred Stock is entitled to receive ratably all
dividends, if any, declared by the Board of Directors out of funds legally
available. The right to receive dividends shall be non-cumulative, and no right
to dividends shall accrue by reason of the fact that no dividend has been
declared in any prior year. Each holder of Shares will be entitled to receive,
to the extent that funds are available therefore, $100,000 per Share, before any
payment to the holder of Common Stock, out of distributions to stockholders upon
liquidation, dissolution or the winding up of the Company; the balance of any
such funds available for distribution will be distributed among the holders of
Shares and the holder of Common Stock, pro rata based on the number of shares
held by each; provided, however, that for these purposes, one share of Common
Stock will be deemed to equal one-tenth of a share of Preferred Stock.
In addition to certain voting rights provided in the corporate agreements, the
holder of Shares, acting by consent of at least 51%, shall have the further
right to approve or disapprove a proposed sale of the Property, the merger of
the Company with any other entity and amendments to the corporate charter. A
vote of the holders of 66.67% of the Shares is required for the issue of any
additional shares of capital stock. Holders of Shares have no redemption or
conversion rights.
COMMON STOCK
Franklin Street Properties Corp. (FSP), is the sole holder of the Company's
Common Stock. FSP has the right, as one class together with the holders of
Preferred Stock, to vote to elect the directors of the Company and to vote on
all matters except those voted by the holders of Shares of Preferred Stock. The
Company shall not declare or pay any cash dividends on shares of Common Stock
subsequent to the completion of the offering of preferred shares.
9. Net Income (Loss) Per Share
The Company follows SFAS No. 128, "Earnings per Share," which specifies the
computation, presentation and disclosure requirements for the Company's net
income per share. Basic net income per share is computed by dividing net income
by the weighted average number of Company shares outstanding during the period.
Diluted net income per share reflects the potential dilution that could occur if
securities or other contracts to issue shares/units were exercised or converted
into shares/units. There were no potential dilutive shares/units outstanding at
September 30, 2002.
The denominator used for calculating basic and diluted net income per share is
as follows
For the period For the period
Ended September 30, Ended September 30,
2002 2002
------------------- -------------------
Weighted average number of
shares/units outstanding:
Common shares 1 1
Preferred shares 250 250
F-291
FSP Merrywood Apartments Corp.
Financial Statements
September 30, 2002
Table of Contents
Page
----
Financial Statements
Balance Sheets as of September 30, 2002 .................................. F-293
Statements of Operations for the nine months ended September 30, 2002 .... F-294
Statements of Changes in Stockholders Equity as of September 30, 2002 .... F-295
Statements of Cash Flows for the nine months ended September 30, 2002 .... F-296
Notes to the Financial Statements......................................... F-297
F-292
FSP Merrywood Apartments Corp.
Balance Sheet
(unaudited)
September 30,
(in thousands, except shares and par value amounts) 2002
================================================================================
Assets:
Real estate investments, at cost:
Land $ 2,317
Buildings and improvements 14,867
--------------------------------------------------------------------------------
Less accumulated depreciation 187
--------------------------------------------------------------------------------
Real estate investments, net 16,997
Cash and cash equivalents 834
Cash - funded reserve 500
Restricted cash 14
Tenant rent receivables, net 3
Prepaid expenses and other assets, net --
--------------------------------------------------------------------------------
Total assets $ 18,348
================================================================================
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and accrued expenses $ 377
Tenant security deposits 79
--------------------------------------------------------------------------------
Total liabilities 456
--------------------------------------------------------------------------------
Commitments and Contingencies:
Stockholders' Equity:
Preferred Stock, $.01 par value, 206 shares
authorized, issued and outstanding
Common Stock, $.01 par value, 1 share
authorized, issued and outstanding
Additional paid-in capital 18,892
Retained deficit and distributions in excess of earnings (1,000)
--------------------------------------------------------------------------------
Total Stockholders' Equity 17,892
--------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 18,348
================================================================================
See accompanying notes to financial statements.
F-293
FSP Merrywood Apartments Corp.
Statements of Operations
(Unaudited)
For the For the
For the Period For the Period Three months Nine months
Jan 1, 2002- April 24, 2002 ended ended
April 23, 2002 September 30, 2002 September 30, 2002 September 30, 2002
-------------- ------------------ ------------------ ------------------
(predecessor) (Merrywood) (Merrywood) (Combined)
(in thousands, except shares and
per share amounts)
======================================================================================================================
Revenue:
Rental $ 833 $ 1,169 $ 682 $ 2,002
Interest and other 3 7 6 10
----------------------------------------------------------------------------------------------------------------------
Total revenue 836 1,176 688 2,012
----------------------------------------------------------------------------------------------------------------------
Expenses:
Rental operating expenses 219 296 164 515
Depreciation and amortization 180 187 136 367
Real estate taxes and insurance 180 226 97 406
Interest -- 1,204 -- 1,204
----------------------------------------------------------------------------------------------------------------------
Total expenses 579 1,913 397 2,492
----------------------------------------------------------------------------------------------------------------------
Net income (Loss) $ 257 $ (737) $ 291 $ (480)
======================================================================================================================
Allocation of net income to:
Predecessor $ 257 $ -- $ -- $ 257
Preferred shareholders -- (763) 265 (763)
Common shareholders -- 26 26 26
----------------------------------------------------------------------------------------------------------------------
$ 257 $ (737) $ 291 $ (480)
======================================================================================================================
Weighted average number of shares outstanding,
basic and diluted
Preferred shares N/C 206 N/C N/C
Common shares N/C 1 N/C N/C
======================================================================================================================
Net income per share, basic and diluted
Preferred shares $ N/C $ (4,063) $ N/C $ N/C
Common shares $ N/C $ 26,000 $ N/C $ N/C
======================================================================================================================
N/C - not computable
Note: The Company purchased the land and building on April 24, 2002. There is no
comparative information for the corresponding periods in the prior year.
See accompanying notes to financial statements.
F-294
FSP Merrywood Apartments Corp.
Statement of Changes in Stockholders' Equity
For the Period from March 1, 2002
(date of inception) to September 30, 2002
(in thousands, except shares)
Retained Deficit
and Dividends in Total
Preferred Common Additional Excess of Stockholders
Stock Stock Paid in Capital Earnings Equity
--------- ------ ----------- ----------- ---------
Private offering of 206 shares $ -- $ -- $ 18,892 $ -- $ 18,892
Net loss -- -- -- (736) (736)
Dividends -- -- -- (264) (264)
--------- ------ ----------- ----------- ---------
Balance, September 30, 2002 $ $ $ $ (1,000) $ 17,892
========= ====== =========== =========== =========
See accompanying notes to financial statements.
F-295
FSP Merrywood Apartments Corp.
Statements of Cash Flows
For the Period March 1, 2002
(Date of inception)
to September 30, 2002
(Unaudited)
(in thousands)
================================================================================
Cash flows from operating activities:
Net loss $ (737)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 187
Changes in operating assets and liabilities:
Increase in restricted cash (14)
Increase in tenant rent receivables (3)
Increase in prepaid expenses and other assets, net --
Increase in accounts payable and accrued expenses 377
Increase in tenant security deposits 79
--------------------------------------------------------------------------------
Net cash used for operating activities (111)
--------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets, office computers and furniture (17,184)
Establish funded reserve (500)
--------------------------------------------------------------------------------
Net cash used for investing activities (17,684)
--------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of company stock, net of offering costs 18,892
Distributions to stockholders (263)
Proceeds from note payable 17,000
Repayment of note payable (17,000)
--------------------------------------------------------------------------------
Net cash provided by financing activities 18,629
--------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents 834
Cash and cash equivalents, beginning of period --
--------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 834
================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 1,204
Income taxes --
See accompanying notes to financial statements.
F-296
FSP Merrywood Apartments Corp.
Notes to Financial Statements
(Unaudited)
1. Organization, Basis of presentation, and Recent Accounting Pronouncements
Organization
FSP Merrywood Apartments Corp. ("Merrywood" or the "Company") was organized on
March 1, 2002 as a Corporation under the laws of the State of Delaware to
purchase, own and operate a newly constructed 228 unit luxury apartment complex
in Katy, TX (the "Property"). The Property consists of thirteen two story
apartment buildings situated on approximately 14.4 acres of land. The Company
acquired the Property on March 24, 2002.
2. Summary of Significant Accounting Policies
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments with an initial maturity of three months or
less to be cash equivalents.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
SYNDICATION FEES
Syndication fees are selling commissions and other costs associated with
the initial offering of the Company's preferred shares. Such costs, in the
amount of $1,545,000 have been reported as a reduction in the
Stockholders' Equity.
REVENUE RECOGNITION
Rental income is recognized on an accrual basis. Rental payments received
in advance are deferred until earned. All leases between the Company and
its tenants of the property are short-term operating leases.
PROPERTY AND DEPRECIATION
Real estate assets are stated at the lower of cost or fair value, as
appropriate, less accumulated depreciation.
Costs related to property acquisition and improvements are capitalized.
Typical capital items include new roofs, site improvements, various
exterior building improvements and major interior renovations. Funding for
capital improvements typically is provided by cash set aside at the time
the property was purchased.
Routine replacements and ordinary maintenance and repairs that do not
extend the life of the asset are expensed as incurred. Typical expense
items include interior painting, landscaping, minor carpet replacements
and residential appliances. Funding for repairs and maintenance items
typically is provided by cash flows from operating activities.
Depreciation is computed using the straight line method over the assets'
estimated useful lives as follows:
Category Years
-------- -----
Building - Residential 27.5
Building Improvements 15-27.5
Furniture and equipment 5-7
RESTRICTED CASH
Restricted cash consists of tenant security deposits. Tenant security
deposits are refunded when tenants vacate provided that the tenant has not
damaged the property.
F-297
FSP Merrywood Apartments Corp.
Notes to Financial Statements
(Unaudited)
2. Summary of Significant Accounting Policies (continued)
CONCENTRATION OF CREDIT RISK
Cash, cash equivalents and short-term investments are financial
instruments that potentially subject the Company to a concentration of
credit risk. The Company maintains its cash balances and short term
investments principally in one bank which the Company believes to be
creditworthy. The Company periodically assesses the financial condition of
the bank and believes that the risk of loss is minimal. Cash balances held
with various financial institutions frequently exceed the insurance limit
of $100,000 provided by the Federal Deposit Insurance Corporation.
3. Basis of Presentation
The accompanying interim financial statements are unaudited; however, the
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America and in conjunction with the
rules and regulations of the Securities and Exchange Commission. In the opinion
of management, all adjustments necessary for a fair presentation of the
financial statements for these interim periods have been included. The results
of operations for the interim periods, or from inception to date, are not
necessarily indicative of the results to be obtained for other interim periods
or for the full fiscal year.
The statement of operations includes the results of operations of the
predecessor company for the period from January 1, 2002 through the date of
purchase of the property. The Company has not presented a balance sheet for any
period prior to September 30, 2002, or cash flows and changes in stockholders
equity for the periods January 1, 2002 to April 24, 2002 as the information
necessary to prepare these statements was not available from the previous owner
(Predecessor) of the Property.
4. Recent Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations," which addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This Statement requires that
the fair value of a liability for an asset retirement obligation be recognized
in the period in which it is incurred if a reasonable estimate of the fair value
can be made. The associated asset retirement costs are capitalized as part of
the carrying amount of the long-lived asset. This Statement will be effective at
the beginning of 2003. The Company has reviewed the provisions of SFAS 143 and
believes that the impact of adoption will not be material to its financial
position, results of operations and cash flows.
In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets". This Statement supersedes SFAS No. 121 and
requires that long-lived assets that are to be disposed of by sale be measured
at the lower of book value or fair value less costs to sell. SFAS No. 144
retains the fundamental provisions of SFAS 121 for (a) recognition and
measurement of the impairment of long-lived assets to be held and used, and (b)
measurement of long-lived assets to be disposed of by sale, but broadens the
definition of what constitutes a discontinued operation and how the results of a
discontinued operation are to be measured and presented. This Statement was
effective at the beginning of 2002. With the exception of reclassifying the
operations of certain real estate assets considered "held for sale" (and for
which no significant continuing involvement exists) to "Discontinued operations,
net of tax" in the consolidated statement of income, the impact of adoption is
not expected to have a material impact on the Company's financial position and
cash flows.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FAS Nos. 4, 44, and
64, Amendment of FAS 13, and Technical Corrections". This Statement rescinds
FASB No. 4, "Reporting Gains and Losses from Extinguishment of Debt", and an
amendment of that Statement, FASB No. 64, "Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements". This Statement amends FASB No. 13,
"Accounting for Leases". This Statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings or
describe their applicability under changed conditions. This statement will be
effective for the Company's fiscal year ending December 31, 2003. The Company
has
F-298
FSP Merrywood Apartments Corp.
Notes to Financial Statements
(Unaudited)
reviewed the provisions of FASB 145 and believes that the impact of adoption
will not be material to its financial position, results of operations and cash
flows.
5. Income Taxes
The Company has elected and intends to maintain its election as a REIT under the
Internal Revenue Code of 1986, as amended. As a result, the Company generally
will not be subject to federal taxation to the extent it distributes 90% of its
REIT taxable income to its shareholders and satisfies certain other
requirements. Accordingly, no provision for federal or state income taxes has
been included in the accompanying financial statements.
6. Related Party Transactions
The Company executed a management agreement between the Company and FSP Property
Management LLC, an affiliate of the Common Shareholder ("FSP"), that provides
for a management fee equal to 1% of collected revenues. For the three and nine
months ended September 30, 2002, fees earned under the agreement were $7,000 and
$16,500 respectively.
An acquisition fee and other costs totaling $425,000 were paid in 2002 to an
affiliate of the Common Shareholder. Such fees were included in the cost of the
real estate.
Syndication fees of $1,709,000 were paid in 2002 to an affiliate of the Common
Shareholder for services related to syndication of the investor's preferred
stock interest.
During 2002, the Company borrowed and repaid in full a mortgage note, secured by
the Property, payable to FSP, a principal of $17,000,000 with interest equal to
the Citizens Bank base rate (4.75%). Interest paid to FSP was $18,000.
A commitment fee of $1,185,000 was paid to FSP for obtaining the first mortgage
loan. Such amount is included in interest on the Statement of Operations as the
outstanding principal has been paid and no further borrowings are available
under the loan agreement.
7. Capital Stock
PREFERRED STOCK
Each holder of Shares of Preferred Stock is entitled to receive ratably all
dividends, if any, declared by the Board of Directors out of funds legally
available. The right to receive dividends shall be non-cumulative, and no right
to dividends shall accrue by reason of the fact that no dividend has been
declared in any prior year. Each holder of Shares will be entitled to receive,
to the extent that funds are available therefore, $100,000 per Share, before any
payment to the holder of Common Stock, out of distributions to stockholders upon
liquidation, dissolution or the winding up of the Company; the balance of any
such funds available for distribution will be distributed among the holders of
Shares and the holder of Common Stock, pro rata based on the number of shares
held by each; provided, however, that for these purposes, one share of Common
Stock will be deemed to equal one-tenth of a share of Preferred Stock.
In addition to certain voting rights provided in the corporate agreements, the
holder of Shares, acting by consent of at least 51%, shall have the further
right to approve or disapprove a proposed sale of the Property, the merger of
the Company with any other entity and amendments to the corporate charter. A
vote of the holders of 66.67% of the Shares is required for the issue of any
additional shares of capital stock. Holders of Shares have no redemption or
conversion rights.
COMMON STOCK
The Company has issued one share of common stock, of which Franklin Street
Properties Corp. (FSP) owns 99% and George Carter, the President of FSP owns the
other 1%. The Common Shareholder has the right, as one class together with the
holders of Preferred Stock, to vote to elect the directors of the Company and to
vote on all matters except those voted by the holders of Shares of Preferred
Stock. The Company shall not declare or pay any cash dividends on shares of
Common Stock subsequent to the completion of the offering of preferred shares.
F-299
FSP Merrywood Apartments Corp.
Notes to Financial Statements
(Unaudited)
8. Net Income Per Share
The Company follows SFAS No. 128, "Earnings per Share," which specifies the
computation, presentation and disclosure requirements for the Company's net
income per share. Basic net income per share is computed by dividing net income
by the weighted average number of Company shares outstanding during the period.
Diluted net income per share reflects the potential dilution that could occur if
securities or other contracts to issue shares/units were exercised or converted
into shares/units. There were no potential dilutive shares/units outstanding at
September 30, 2002.
The denominator used for calculating basic and diluted net income per share is
as follows
For the period beginning March 1, 2002
(date of inception)
and ending September 30, 2002
-----------------------------
Weighted average number of shares/units outstanding:
Common shares 1
Preferred shares 206
F-300
FSP Plaza Ridge Corp.
Quarterly Report
September 30, 2002
Table of Contents
Page
----
Financial Statements
Balance Sheet as of September 30, 2002.................................... F-302
Statement of Operations for the nine months ended September 30, 2002...... F-303
Statement of Stockholders' Equity for the period ended September 30, 2002. F-304
Statement of Cash Flow for the period ended September 30, 2002............ F-305
Notes to the Financial Statements......................................... F-306
F-301
FSP Plaza Ridge Corp.
Balance Sheet
(Unaudited)
September 30,
(in thousands, except shares and par value amounts) 2002
================================================================================
Assets:
Real estate investments, at cost:
Land $ 4,039
Buildings and improvements 28,477
--------------------------------------------------------------------------------
32,516
Less accumulated depreciation 262
--------------------------------------------------------------------------------
Real estate investments, net 32,254
Cash and cash equivalents 1,622
Cash - funded reserve 1,729
Tenant rent receivables 197
--------------------------------------------------------------------------------
Total assets $ 35,802
================================================================================
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and accrued expenses $ 502
Deferred Rental Income 232
--------------------------------------------------------------------------------
Total liabilities 734
--------------------------------------------------------------------------------
Commitments and Contingencies:
Stockholders' Equity:
Preferred Stock, $.01 par value, 400 shares
Authorized, issued and outstanding
Common Stock, $.01 par value, 1 share
Authorized, issued and outstanding
Additional paid-in capital 36,756
Deficit and distribution in excess of earnings (1,688)
--------------------------------------------------------------------------------
Total Stockholders' Equity $ 35,068
--------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 35,802
================================================================================
See accompanying notes to financial statements.
F-302
FSP Plaza Ridge Corp.
Statements of Operations
(Unaudited)
For the For the
For the Period For the Period Three months Nine months
Jan 1, 2002- May 24, 2002 ended ended
May 23, 2002 September 30, 2002 September 30, 2002 September 30, 2002
------------ ------------------ ------------------ ------------------
(predecessor) (Plaza Ridge) (Plaza Ridge) (Combined)
(in thousands, except shares and
per share amounts)
======================================================================================================================
Revenue:
Rental $ 958 $ 1,797 $ 1,288 $ 2,755
Interest and other 6 13 12 19
----------------------------------------------------------------------------------------------------------------------
Total revenue 964 1,810 1,300 2,774
----------------------------------------------------------------------------------------------------------------------
Expenses:
Rental operating expenses 390 327 244 717
Depreciation and amortization 304 262 505 566
Real estate taxes and insurance 107 100 78 207
Interest -- 2,597 -- 2,597
----------------------------------------------------------------------------------------------------------------------
Total expenses 801 2,231 827 4,087
----------------------------------------------------------------------------------------------------------------------
Net income (Loss) $ 163 $(1,476) $ 473 $(1,313)
======================================================================================================================
Allocation of net income to:
Predecessor $ 163 $ -- $ -- $ 163
Preferred shareholders -- (1,576) 373 (1,576)
Common shareholders -- 100 100 100
----------------------------------------------------------------------------------------------------------------------
$ 163 $(1,476) $ 473 $(1,313)
======================================================================================================================
Weighted average number of shares outstanding,
basic and diluted
Preferred shares N/C 400 N/C N/C
Common shares N/C 1 N/C N/C
======================================================================================================================
Net income per share, basic and diluted
Preferred shares $ N/C $(3,940) $ N/C $ N/C
Common shares $ N/C $ -- $ N/C $ N/C
======================================================================================================================
N/C - not computable
Note: The Company purchased the land and building on May 23, 2002. There is no
comparative information for the corresponding period in the prior year.
See accompanying notes to financial statements
F-303
FSP Plaza Ridge Corp.
Statement of Changes in Stockholders' Equity
For the Period February 28, 2002
(date of inception) to September 30, 2002
(in thousands, except shares)
Retained Deficit
and Dividends in Total
Preferred Common Additional Paid Excess of Stockholders
Stock Stock in Capital Earnings Equity
--------- --------- --------- --------- ---------
Private offering of 400 share, net $ -- $ -- $ 36,756 $ -- $ 36,756
Net Loss -- -- -- (1,476) (1,476)
Dividends -- -- -- (212) (212)
--------- --------- --------- --------- ---------
Balance, September 30, 2002 $ -- $ -- $ 36,756 $ (1,688) $ 35,068
========= ========= ========= ========= =========
See accompanying notes to financial statements
F-304
FSP Plaza Ridge Corp.
Statements of Cash Flows
For the Period February 28, 2002
(Date of inception) to September 30, 2002
(in thousands)
================================================================================
Cash flows from operating activities:
Net Loss $ (1,476)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 262
Changes in operating assets and liabilities:
Increase in tenant rent receivables (197)
Increase in accounts payable and accrued expenses 502
Increase in Deferred rental income 232
--------------------------------------------------------------------------------
Net cash used by operating activities (677)
--------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets (32,516)
Establish funded reserve (1,729)
--------------------------------------------------------------------------------
Net cash used for investing activities (34,245)
--------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of company stock 36,756
Distribution to stockholder (212)
Proceeds from loan 32,250
Repayment of loan (32,250)
--------------------------------------------------------------------------------
Net cash provided by (used for) financing activities 36,544
--------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents 1,622
Cash and cash equivalents, beginning of period --
--------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 1,622
================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 2,597
Income taxes --
See accompanying notes to financial statements.
F-305
FSP Plaza Ridge Corp.
Notes to Financial Statements
(Unaudited)
1. Organization
FSP Plaza Ridge Corp. ("Plaza Ridge" or the "Company") was organized on February
28, 2002 as a Corporation under the laws of the State of Delaware to purchase,
own and operate a commercial office building located in Herndon, VA (the
"Property"). The Property consists of a six-story Class "A" suburban office
building that contains approximately 158,016 square feet of space situated on
approximately 5.3 acres of land. The company acquired the Property on May 23,
2002.
2. Summary of Significant Accounting Policies
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments with an initial maturity of three months or
less to be cash equivalents.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
SYNDICATION FEES
Syndication fees are selling commissions and other costs associated with
the initial offering of the Company's preferred shares. Such costs, in the
amount of $3,254,000 have been reported as a reduction in the
Stockholders' Equity.
REVENUE RECOGNITION
Rental income, which includes scheduled increases over the lease term, is
recognized on a straight-line basis. Income recognized on a straight-line
basis differed from income that would have accrued in accordance with the
leases by $188,400. Rental payments received in advance are deferred until
earned.
PROPERTY AND DEPRECIATION
Real estate assets are stated at the lower of cost or fair value, as
appropriate, less accumulated depreciation.
Costs related to property acquisition and improvements are capitalized.
Typical capital items include new roofs, site improvements, various
exterior building improvements and major interior renovations. Funding for
capital improvements typically is provided by cash set aside at the time
the property was purchased.
Routine replacements and ordinary maintenance and repairs that do not
extend the life of the asset are expensed as incurred. Typical expense
items include interior painting, landscaping, minor carpet replacements
and residential appliances. Funding for repairs and maintenance items
typically is provided by cash flows from operating activities.
Depreciation is computed using the straight-line method over the assets'
estimated useful lives as follows:
Category Years
-------- -----
Building - Commercial 39
Building Improvements 15-39
Furniture and equipment 5-7
F-306
FSP Plaza Ridge Corp.
Notes to Financial Statements
(Unaudited)
2. Summary of Significant Accounting Policies (continued)
CONCENTRATION OF CREDIT RISK
Cash, cash equivalents and short-term investments are financial
instruments that potentially subject the Company to a concentration of
credit risk. The Company maintains its cash balances and short-term
investments principally in one bank, which the Company believes to be
creditworthy. The Company periodically assesses the financial condition of
the bank and believes that the risk of loss is minimal. Cash balances held
with various financial institutions frequently exceed the insurance limit
of $100,000 provided by the Federal Deposit Insurance Corporation.
3. Basis of Presentation
The accompanying interim financial statements are unaudited; however, the
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America and in conjunction with the
rules and regulations of the Securities and Exchange Commission. In the opinion
of management, all adjustments necessary for a fair presentation of the
financial statements for these interim periods have been included. The results
of operations for the interim periods, or from inception to date, are not
necessarily indicative of the results to be obtained for other interim periods
or for the full fiscal year.
The Company has not presented financial information for any period prior to May
23, 2002 as the information necessary to prepare these statements was not
available from the previous owner ("Predecessor") of the Property.
4. Recent Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations," which addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This Statement requires that
the fair value of a liability for an asset retirement obligation be recognized
in the period in which it is incurred if a reasonable estimate of the fair value
can be made. The associated asset retirement costs are capitalized as part of
the carrying amount of the long-lived asset. This Statement will be effective at
the beginning of 2003. The Company has reviewed the provisions of SFAS 143 and
believes that the impact of adoption will not be material to its financial
position, results of operations and cash flows.
In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets". This Statement supersedes SFAS No. 121 and
requires that long-lived assets that are to be disposed of by sale be measured
at the lower of book value or fair value less costs to sell. SFAS No. 144
retains the fundamental provisions of SFAS 121 for (a) recognition and
measurement of the impairment of long-lived assets to be held and used, and (b)
measurement of long-lived assets to be disposed of by sale, but broadens the
definition of what constitutes a discontinued operation and how the results of a
discontinued operation are to be measured and presented. This Statement was
effective at the beginning of 2002. With the exception of reclassifying the
operations of certain real estate assets considered "held for sale" (and for
which no significant continuing involvement exists) to "Discontinued operations,
net of tax" in the consolidated statement of income, the impact of adoption is
not expected to have a material impact on the Company's financial position and
cash flows.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FAS Nos. 4, 44, and
64, Amendment of FAS 13, and Technical Corrections". This Statement rescinds
FASB No. 4, "Reporting Gains and Losses from Extinguishments of Debt", and an
amendment of that Statement, FASB No. 64, "Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements". This Statement amends FASB No. 13,
"Accounting for Leases". This Statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings or
describe their applicability under changed conditions. This statement will be
effective for the Company's fiscal year ending December 31, 2003. The Company
has reviewed the provisions of FASB 145 and believes that the impact of adoption
will not be material to its financial position, results of operations and cash
flows.
F-307
FSP Plaza Ridge Corp.
Notes to Financial Statements
(Unaudited)
5. Capital Stock
PREFERRED STOCK
Each holder of Shares of Preferred Stock is entitled to receive ratably all
dividends, if any, declared by the Board of Directors out of funds legally
available. The right to receive dividends shall be non-cumulative, and no right
to dividends shall accrue by reason of the fact that no dividend has been
declared in any prior year. Each holder of Shares will be entitled to receive,
to the extent that funds are available therefore, $100,000 per Share, before any
payment to the holder of Common Stock, out of distributions to stockholders upon
liquidation, dissolution or the winding up of the Company; the balance of any
such funds available for distribution will be distributed among the holders of
Shares and the holder of Common Stock, pro rata based on the number of shares
held by each; provided, however, that for these purposes, one share of Common
Stock will be deemed to equal one-tenth of a share of Preferred Stock.
In addition to certain voting rights provided in the corporate agreements, the
holder of Shares, acting by consent of at least 51%, shall have the further
right to approve or disapprove a proposed sale of the Property, the merger of
the Company with any other entity and amendments to the corporate charter. A
vote of the holders of 66.67% of the Shares is required for the issue of any
additional shares of capital stock. Holders of Shares have no redemption or
conversion rights.
COMMON STOCK
The Company has issued one share of common stock, of which Franklin Street
Properties Corp. (FSP) owns 99% and George Carter, the President of FSP owns the
other 1%. The Common Shareholder has the right, as one class together with the
holders of Preferred Stock, to vote to elect the directors of the Company and to
vote on all matters except those voted by the holders of Shares of Preferred
Stock. The Company shall not declare or pay any cash dividends on shares of
Common Stock subsequent to the completion of the offering of preferred shares.
6. Leases
The Company, as lessor, has minimum future rentals due under a
non-cancelable operating lease as follows:
Year Ended
December 31, Amount
------------ ------------
2002 2,342,000
2003 4,762,000
2004 5,093,000
2005 4,932,000
2006 5,228,000
Thereafter 23,893,000
------------
$ 46,250,000
============
In addition, the lessees are liable for real estate taxes and operating
expenses as direct expenses to the lessees.
Upon acquiring the commercial rental property in May 2002, the Company was
assigned the lease agreements between the seller of the Property and the
existing tenants. The original lease periods range from four to eleven
years with renewal options.
7. Income Taxes
The Company has elected and intends to maintain its election as a REIT under the
Internal Revenue Code of 1986, as amended. As a result, the Company generally
will not be subject to federal taxation to the extent it distributes 90% of its
REIT taxable income to its shareholders and satisfies certain other
requirements. Accordingly, no provision for federal or state income taxes has
been included in the accompanying financial statements.
F-308
FSP Plaza Ridge Corp.
Notes to Financial Statements
(Unaudited)
8. Related Party Transactions
The Company executed a management agreement between the Company and FSP Property
Management LLC, an affiliate of FSP, that provides for a management fee equal to
1% of collected revenues. For the three and nine months ended September 30,
2002, fees earned under the agreement were $10,164.
An acquisition fee and other costs totaling $400,000 were paid in 2002 to an
affiliate of the Common Shareholder. Such fees were included in the cost of the
real estate.
Syndication fees of $3,254,000 were paid in 2002 to an affiliate of the Common
Shareholder for services related to syndication of the investor's preferred
stock interest.
During 2002, the Company borrowed and repaid in full:
Note payable to FSP, principal of $32,250,000 with interest equal to the
Citizens Bank base rate (4.75%). Interest paid to the affiliate was $51,000.
A commitment fee of $2,300,000 was paid for obtaining the first mortgage loan.
Such amount is included in interest on the Statement of Operations.
9. Net Income Per Share
The Company follows SFAS No. 128, "Earnings per Share," which specifies the
computation, presentation and disclosure requirements for the Company's net
income per share. Basic net income per share is computed by dividing net income
by the weighted average number of Company shares outstanding during the period.
Diluted net income per share reflects the potential dilution that could occur if
securities or other contracts to issue shares/units were exercised or converted
into shares/units. There were no potential dilutive shares/units outstanding at
September 30, 2002.
The denominator used for calculating basic and diluted net income per share is
as follows:
For the Three Months For the Nine Months
Ended September 30 Ended September 30
-------------------- -------------------
2002 2002
-------------------- -------------------
Weighted average number of shares/units outstanding:
Common shares 1 1
Preferred shares 400 400
F-309
FSP Park Ten Corp.
Financial Statements
September 30, 2002
Table of Contents
Page
----
Financial Statements
Balance Sheet as of September 30, 2002.................................... F-311
Statement of Operations for the nine months ended September 30, 2002...... F-312
Statement of Stockholders' Equity for the period ended September 30, 2002. F-313
Statement of Cash Flow for the period ended September 30, 2002............ F-314
Notes to the Financial Statements......................................... F-315
F-310
FSP Park Ten Corp.
Balance Sheet
(unaudited)
September 30,
(in thousands, except shares and par value amounts) 2002
================================================================================
Assets:
Real estate investments, at cost:
Land $ 1,359
Buildings and improvements 21,038
--------------------------------------------------------------------------------
22,397
Less accumulated depreciation 156
--------------------------------------------------------------------------------
Real estate investments, net 22,241
Cash and cash equivalents 948
Cash - funded reserves 1,061
Cash - restricted 53
Tenant rent receivables 15
Prepaid expenses and other assets, net 1
--------------------------------------------------------------------------------
Total assets $ 24,319
================================================================================
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and accrued expenses $ 367
Tenant security deposits 53
--------------------------------------------------------------------------------
Total liabilities 420
--------------------------------------------------------------------------------
Commitments and Contingencies:
Stockholders' Equity:
Preferred Stock, $.01 par value, 275 shares
authorized, none issued and outstanding
Common Stock, $.01 par value, 1 share
authorized, issued and outstanding
Additional paid-in capital 25,189
Deficit and distribution in excess of earnings (1,290)
--------------------------------------------------------------------------------
Total Stockholders' Equity 23,899
--------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 24,319
================================================================================
See accompanying notes to financial statements.
F-311
FSP Park Ten Corp.
Statements of Operations
(Unaudited)
For the For the
For the Period For the Period Three months Nine months
Jan 1, 2002- June 28, 2002 ended ended
June 27, 2002 September 30, 2002 September 30, 2002 September 30, 2002
------------- ------------------ ------------------ ------------------
(predecessor) (Park Ten) (Park Ten) (Combined)
(in thousands, except shares and
per share amounts)
=========================================================================================================================
Revenue:
Rental $ 1,791 $ 936 $ 896 $ 2,727
Interest and other -- 5 5 5
-------------------------------------------------------------------------------------------------------------------------
Total revenue 1,791 941 901 2,732
-------------------------------------------------------------------------------------------------------------------------
Expenses:
Rental operating expenses 368 158 150 526
Depreciation and amortization 269 156 156 425
Real estate taxes and insurance 240 120 115 360
Interest -- 1,797 1,787 1,797
-------------------------------------------------------------------------------------------------------------------------
Total expenses 877 2,231 2,208 3,108
-------------------------------------------------------------------------------------------------------------------------
Net income (Loss) $ 914 $(1,290) $(1,307) $ (376)
=========================================================================================================================
Allocation of net income to:
Predecessor $ 914 $ -- $ -- $ --
Preferred shareholders -- (1,290) (1,307) (376)
Common shareholders -- 31 31 31
-------------------------------------------------------------------------------------------------------------------------
$ 914 $(1,259) $(1,276) $ 345
=========================================================================================================================
Weighted average number of shares outstanding,
basic and diluted
Preferred shares N/C 275 N/C N/C
Common shares N/C 1 N/C N/C
=========================================================================================================================
Net income per share, basic and diluted
Preferred shares $ N/C $(4,691) $ N/C $ N/C
Common shares $ N/C $ -- $ N/C $ N/C
=========================================================================================================================
N/C - not computable
Note: The Company purchased the land and building on June 27, 2002. There is no
comparative information for the prior year.
See accompanying notes to financial statements.
F-312
FSP Park Ten Corp.
Statement of Changes in Stockholders' Equity
For the Period from May 13, 2002
(date of inception) to September 30, 2002
(in thousands, except shares)
Total
Preferred Common Additional Paid Retained Stockholders
Stock Stock in Capital Earnings Equity
------------ ------------ ------------ ------------ ------------
Private offering of 275 share, net $ -- $ -- $ 25,189 $ -- $ 25,189
Net Loss -- -- -- (1,290) (1,290)
------------ ------------ ------------ ------------ ------------
Balance, September 30, 2002 $ -- $ -- $ 25,189 $ (1,290) $ 23,899
============ ============ ============ ============ ============
See accompanying notes to financial statements
F-313
FSP Park Ten Corp.
Statements of Cash Flows
For the Period May 13, 2002
(Date of inception) to September 30, 2002
(in thousands)
================================================================================
Cash flows from operating activities:
Net Loss $ (1,290)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 156
Changes in operating assets and liabilities:
Increase in restricted cash (53)
Increase in tenant rent receivables (15)
Increase in prepaid expenses and other assets, net (1)
Increase in accounts payable and accrued expenses 367
Increase in tenant security deposits 53
--------------------------------------------------------------------------------
Net cash used for operating activities (783)
--------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets (22,397)
Establish funded reserves (1,061)
--------------------------------------------------------------------------------
Net cash used for investing activities (23,458)
--------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of company stock 25,189
--------------------------------------------------------------------------------
Net cash provided by financing activities 25,189
--------------------------------------------------------------------------------
Net increase in cash and cash equivalents 948
Cash and cash equivalents, beginning of period --
--------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 948
================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 1,797
Income taxes
See accompanying notes to financial statements.
F-314
FSP Park Ten Corp.
Notes to Financial Statements
(Unaudited)
1. Organization
FSP Park Ten Corp. ("Park Ten" or the "Company") was organized on May 13, 2002
as a Corporation under the laws of the State of Delaware to purchase, own and
operate a commercial office building located in Houston, TX (the "Property").
The Property consists of a six-story Class "A" suburban office building that
contains approximately 155,715 square feet of space situated on approximately
6.325 acres of land. The company acquired the Property on June 27, 2002.
2. Summary of Significant Accounting Policies
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments with an initial maturity of three months or
less to be cash equivalents.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
REVENUE RECOGNITION
Rental income, which includes scheduled increases over the lease term, is
recognized on a straight-line basis. Income recognized on a straight-line
basis differed from income that would have accrued in accordance with the
leases by $0. Rental payments received in advance are deferred until
earned.
PROPERTY AND DEPRECIATION
Real estate assets are stated at the lower of cost or fair value, as
appropriate, less accumulated depreciation.
Costs related to property acquisition and improvements are capitalized.
Typical capital items include new roofs, site improvements, various
exterior building improvements and major interior renovations. Funding for
capital improvements typically is provided by cash set aside at the time
the property was purchased.
Routine replacements and ordinary maintenance and repairs the do not
extend the life of the asset are expensed as incurred. Typical expense
items include interior painting, landscaping and minor carpet
replacements. Funding for repairs and maintenance items typically is
provided by cash flows from operating activities.
Depreciation is computed using the straight line method over the assets'
estimated useful lives as follows:
Category Years
-------- -----
Building - Commercial 39
Building - Improvements 15-39
Furniture and equipment 5-7
RESTRICTED CASH
Restricted cash consists of tenant security deposits. Tenant security
deposits are refunded when tenants vacate provided that the tenant has not
damaged the property.
CONCENTRATION OF CREDIT RISK
Cash, cash equivalents and short-term investments are financial
instruments that potentially subject the Company to a concentration of
credit risk. The Company maintains its cash balances and short term
investments principally in one bank which the Company believes to be
creditworthy. The Company periodically assesses the financial condition of
the bank and believes that the risk of loss is minimal. Cash balances held
with various financial institutions frequently exceed the insurance limit
of $100,000 provided by the Federal Deposit Insurance Corporation.
F-315
FSP Park Ten Corp.
Notes to Financial Statements
(Unaudited)
3. Basis of Presentation
The accompanying interim financial statements are unaudited; however, the
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America and in conjunction with the
rules and regulations of the Securities and Exchange Commission. In the opinion
of management, all adjustments necessary for a fair presentation of the
financial statements for these interim periods have been included. The results
of operations for the interim periods, or from inception to date, are not
necessarily indicative of the results to be obtained for other interim periods
or for the full fiscal year.
The Company has not presented financial information for any period prior to
June 27, 2002 as the information necessary to prepare these statements was not
available from the previous owner (Predecessor) of the Property.
4. Recent Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations," which addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This Statement requires that
the fair value of a liability for an asset retirement obligation be recognized
in the period in which it is incurred if a reasonable estimate of the fair value
can be made. The associated asset retirement costs are capitalized as part of
the carrying amount of the long-lived asset. This Statement will be effective at
the beginning of 2003. The Company has reviewed the provisions of SFAS 143 and
believes that the impact of adoption will not be material to its financial
position, results of operations and cash flows.
In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets". This Statement supersedes SFAS No. 121 and
requires that long-lived assets that are to be disposed of by sale be measured
at the lower of book value or fair value less costs to sell. SFAS No. 144
retains the fundamental provisions of SFAS 121 for (a) recognition and
measurement of the impairment of long-lived assets to be held and used, and (b)
measurement of long-lived assets to be disposed of by sale, but broadens the
definition of what constitutes a discontinued operation and how the results of a
discontinued operation are to be measured and presented. This Statement was
effective at the beginning of 2002. With the exception of reclassifying the
operations of certain real estate assets considered "held for sale" (and for
which no significant continuing involvement exists) to "Discontinued operations,
net of tax" in the consolidated statement of income, the impact of adoption is
not expected to have a material impact on the Company's financial position and
cash flows.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FAS Nos. 4, 44, and
64, Amendment of FAS 13, and Technical Corrections". This Statement rescinds
FASB No. 4, "Reporting Gains and Losses from Extinguishment of Debt", and an
amendment of that Statement, FASB No. 64, "Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements". This Statement amends FASB No. 13,
"Accounting for Leases". This Statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings or
describe their applicability under changed conditions. This statement will be
effective for the Company's fiscal year ending December 31, 2003. The Company
has reviewed the provisions of FASB 145 and believes that the impact of adoption
will not be material to its financial position, results of operations and cash
flows.
F-316
FSP Park Ten Corp.
Notes to Financial Statements
(Unaudited)
5. Leases
The Company, as lessor, has minimum future rentals due under a
non-cancellable operating lease as follows:
Year Ended
December 31, Amount
------------ ------------
2002 1,687,000
2003 3,378,000
2004 3,395,000
2005 3,520,000
2006 2,559,000
Thereafter 1,977,000
------------
$ 16,516,000
============
In addition, the lessees are liable for real estate taxes and operating
expenses as direct expenses to the lessees.
Upon acquiring the commercial rental property the Company was assigned the
lease agreements between the seller of the Property and the existing
tenants. The original lease periods range from four to ten years with
renewal options.
6. Income Taxes
The Company has elected and intends to maintain its election as a REIT under the
Internal Revenue Code of 1986, as amended. As a result, the Company generally
will not be subject to federal taxation to the extent it distributes 90% of its
REIT taxable income to its shareholders and satisfies certain other
requirements. Accordingly, no provision for federal or state income taxes has
been included in the accompanying financial statements.
7. Related Party Transactions
The Company executed a management agreement between the Company and FSP Property
Management LLC, an affiliate of FSP, that provides for a management fee equal to
1% of collected revenues. For the three and six months ended September 30, 2002,
fees earned under the agreement were $9,300.
In connection with the purchase of the real estate the Company entered into a
mortgage loan agreement with FSP and borrowed $22,300,000 with interest equal to
the Citizens Bank base rate (4.75%). The loan was subsequently repaid in August
2002. Interest expense amounted to approximately $1,787,000 and $1,797,000 for
the three and six months ended September 30, 2002.
F-317
FSP Park Ten Corp.
Notes to Financial Statements
(Unaudited)
8. Capital Stock
PREFERRED STOCK
Each holder of Shares of Preferred Stock is entitled to receive ratably all
dividends, if any, declared by the Board of Directors out of funds legally
available. The right to receive dividends shall be non-cumulative, and no right
to dividends shall accrue by reason of the fact that no dividend has been
declared in any prior year. Each holder of Shares will be entitled to receive,
to the extent that funds are available therefore, $100,000 per Share, before any
payment to the holder of Common Stock, out of distributions to stockholders upon
liquidation, dissolution or the winding up of the Company; the balance of any
such funds available for distribution will be distributed among the holders of
Shares and the holder of Common Stock, pro rata based on the number of shares
held by each; provided, however, that for these purposes, one share of Common
Stock will be deemed to equal one-tenth of a share of Preferred Stock.
In addition to certain voting rights provided in the corporate agreements, the
holder of Shares, acting by consent of at least 51%, shall have the further
right to approve or disapprove a proposed sale of the Property, the merger of
the Company with any other entity and amendments to the corporate charter. A
vote of the holders of 66.67% of the Shares is required for the issue of any
additional shares of capital stock. Holders of Shares have no redemption or
conversion rights.
COMMON STOCK
The Company has issued one share of common stock, of which Franklin Street
Properties Corp. (FSP) owns 99% and George Carter, the President of FSP owns the
other 1%. The Common Shareholder has the right, as one class together with the
holders of Preferred Stock, to vote to elect the directors of the Company and to
vote on all matters except those voted by the holders of Shares of Preferred
Stock. The Company shall not declare or pay any cash dividends on shares of
Common Stock subsequent to the completion of the offering of preferred shares.
9. Net Income Per Share
The Company follows SFAS No. 128, "Earnings per Share," which specifies the
computation, presentation and disclosure requirements for the Company's net
income per share. Basic net income per share is computed by dividing net income
by the weighted average number of Company shares outstanding during the period.
Diluted net income per share reflects the potential dilution that could occur if
securities or other contracts to issue shares/units were exercised or converted
into shares/units. There were no potential dilutive shares/units outstanding at
September 30, 2002.
The denominator used for calculating basic and diluted net income per share is
as follows:
For the Three Months For the Six Months
Ended September 30, Ended September 30,
-------------------- --------------------
2002 2002
-------------------- --------------------
Weighted average number of shares
outstanding:
Common shares 1 1
Preferred shares 275 275
F-318
SCHEDULE III
TARGET REITs
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2001
Initial Cost
------------------------------------
Costs
Capitalized
(Disposals)
Encumbrances Buildings & Subsequent to
Description (1) Land Improvements Acquisition
----------- ------------ ---- ------------ -----------
(in thousands)
Residential Apartments:
Gael, Houston, TX -- $ 3,312 $ 14,789 $ --
Commercial Properties:
Forest Park, Charlotte NC -- 1,210 4,817 354
Goldentop, San Diego, CA -- 4,427 15,183 --
Centennial, Colorado Springs, CO -- 1,305 12,152 --
Meadowpoint, Chantilly, VA -- 2,126 19,625 --
Timberlake, Chesterfield, MO -- 2,831 40,714 --
Federal Way, Federal Way, WA -- 2,509 13,603 --
Fair Lakes, Fairfax, VA -- 4,183 35,277 --
Northwest Point, Elk Grove Village, IL -- 3,242 27,955 --
----- ------- -------- ------
-- $25,145 $184,115 $ 354
===== ======= ======== ======
Historical Costs
-----------------------------------------------------------
Total
Costs,
Net of Depreciable
Buildings & Accumulated Accumulated Life Date of
Description Land Improvements Total(2) Depreciation Depreciation Years Acquisition
----------- ------ ------------ -------- ------------ ------------ ---------- -----------
(in thousands)
Residential Apartments:
Gael, Houston, TX $ 3,312 $ 14,789 $ 18,101 $ 784 $ 17,317 5-27 2000
Commercial Properties:
Forest Park, Charlotte NC 1,210 5,171 6,381 310 6,071 5-39 1999
Goldentop, San Diego, CA 4,427 15,183 19,610 503 19,107 5-39 2000
Centennial, Colorado Springs, CO 1,305 12,152 13,457 402 13,055 5-39 2000
Meadowpoint, Chantilly, VA 2,126 19,625 21,751 398 21,353 5-39 2001
Timberlake, Chesterfield, MO 2,831 40,714 43,545 652 42,893 5-39 2001
Federal Way, Federal Way, WA 2,509 13,603 16,112 102 16,010 5-39 2001
Fair Lakes, Fairfax, VA 4,183 35,277 39,460 264 39,196 5-39 2001
Northwest Point, Elk Grove Village, IL 3,242 27,955 31,197 30 31,167 5-39 2001
------- -------- -------- ------- --------
$25,145 $184,469 $209,614 $ 3,445 $206,169
======= ======== ======== ======= ========
(1) There are no encumbrances on the above properties.
(2) The aggregate cost for federal income tax purposes approximates total
historical costs
F-319
The following table summarizes the changes in the Partnership's real estate
investments and accumulated depreciation:
December 31,
-------------------------------------
2001 2000 1999
================================================================================
(in thousands)
Real estate investments, at cost:
Balance, beginning of period $ 57,195 $ 6,028 $ --
Acquisitions 152,065 51,167 6,028
Improvements 354 -- --
Dispositions -- -- --
--------------------------------------------------------------------------------
Balance, end of period $ 209,614 $ 57,195 $ 6,028
================================================================================
Accumulated depreciation:
Balance, beginning of period $ 630 $ 56 $ --
Depreciation 2,815 574 56
Dispositions -- -- --
--------------------------------------------------------------------------------
Balance, end of period $ 3,445 $ 630 $ 56
================================================================================
F-320
APPENDIX A
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
FRANKLIN STREET PROPERTIES CORP.
(THE "COMPANY")
AND
THE ENTITIES LISTED ON THE SIGNATURE PAGES HERETO
January 14, 2003
TABLE OF CONTENTS
-----------------
RECITALS.......................................................................1
ARTICLE 1 THE MERGERS.........................................................1
1.1 The Mergers.......................................................1
1.2 The Closing.......................................................1
1.3 Effective Time....................................................2
ARTICLE 2 MERGER CONSIDERATION................................................2
2.1 Cancellation of Target Stock......................................2
2.2 Merger Consideration..............................................2
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY.......................2
3.1 Due Organization; Authority.......................................3
3.2 Authorization; Validity; Effect of Agreement......................3
3.3 Capitalization....................................................3
3.4 No Violation......................................................3
3.5 FSP Investments LLC; Due Organization.............................4
3.6 Financial Statements..............................................4
3.7 SEC Documents.....................................................5
3.8 Litigation........................................................5
3.9 Taxes.............................................................5
3.10 Full Disclosure..................................................6
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE TARGET REITS..................7
4.1 Due Organization; Authority.......................................7
4.2 Authorization; Validity; Effect of Agreement......................7
4.3 Financial Statements..............................................7
4.4 Contracts and Commitments.........................................8
4.5 No Violation......................................................8
4.6 Litigation........................................................9
4.7 Title to Assets...................................................9
4.8 Real Property....................................................10
4.9 Real Property Leases.............................................11
4.10 Compliance with Laws; Permits; Environmental Matters............12
4.11 Taxes...........................................................13
4.12 Full Disclosure.................................................14
ARTICLE 5 COVENANTS..........................................................14
5.1 Conduct of Business..............................................14
5.2 Other Actions....................................................14
5.3 Approval of Company Stockholders and Target REIT Stockholders....15
5.4 Consents and Approvals...........................................15
ARTICLE 6 CONDITIONS TO EACH PARTY'S OBLIGATIONS TO EFFECT THE MERGERS.......15
ARTICLE 7 TERMINATION AND WAIVER.............................................17
7.1 Termination......................................................17
7.2 Effect of Termination............................................17
7.3 Extension; Waiver................................................17
7.4 No Survival of Representations and Warranties....................18
ARTICLE 8 MISCELLANEOUS......................................................18
8.1 Assignment.......................................................18
8.2 Risk of Loss.....................................................18
8.3 Fees and Expenses................................................18
8.4 Entire Agreement; Modifications; Amendments......................18
8.5 Notices..........................................................19
8.6 Interpretation...................................................20
8.7 Captions.........................................................20
8.8 Counterparts.....................................................20
8.9 Binding Effect...................................................20
8.10 Attorneys' Fees.................................................20
8.11 No Waiver; Severability.........................................21
8.12 No Joint and Several Liability..................................21
8.13 Applicable Law..................................................21
Exhibit A--List of Properties
Exhibit B--Merger Consideration
Exhibit C--Tax Representations
AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER (this "Agreement") is made and
entered into as of January 14, 2003 by and among Franklin Street Properties
Corp. (the "Company"), a Maryland corporation, and the other corporations, each
a Delaware corporation (each, a "Target REIT" and, collectively, the "Target
REITs"), listed on the signature pages hereto.
RECITALS
WHEREAS, the Target REITs are the owners of certain real properties
listed on Exhibit A hereto (each such property, including any buildings,
structures or other improvements situated thereon, a "Property" and,
collectively, the "Properties");
WHEREAS, the board of directors of the Company (the "Company Board")
and the board of the directors of each of the Target REITs (such boards of
directors, collectively, the "Target Boards of Directors") believe that it is in
the best interests of the Company and each of the Target REITs, respectively,
and their respective stockholders, to consummate, and have approved, the
business combination transaction provided for herein, pursuant to which each
Target REIT will be merged with and into the Company, with the Company
continuing as the surviving entity (each such transaction, a "Merger" and,
collectively, the "Mergers");
WHEREAS, the Company Board and the Target Boards of Directors have
agreed to effect the transactions provided for herein upon the terms and subject
to the conditions set forth herein;
WHEREAS, the Company and the Target REITs desire to make certain
representations, warranties and agreements in connection with the Mergers.
NOW, THEREFORE, in consideration of the foregoing and of the
representations, warranties, covenants and agreements contained herein, the
parties hereto hereby agree as follows:
ARTICLE 1 THE MERGERS
1.1 The Mergers. Subject to the terms and conditions of this Agreement, at
the Effective Time (as hereinafter defined), each Target REIT will be merged
with and into the Company in accordance with the applicable provisions of the
Maryland General Corporation Law ("MGCL") and the Delaware General Corporation
Law ("DGCL"), and the separate existence of each Target REIT shall thereupon
cease. The Company shall continue as the surviving entity of the Mergers.
1.2 The Closing. Subject to the terms and conditions of this Agreement,
the closing of the Mergers (the "Closing") shall take place at the offices of
Hale and Dorr LLP, 60 State
A-1
Street, Boston, Massachusetts at 9:00 a.m., local time, on April 1, 2003 or at
such other time and date following the day on which the last of the conditions
set forth in Article 6 shall be fulfilled or waived in accordance herewith as
the parties hereto may agree. The holders of preferred stock in the Target REITs
("Target Stock") are hereinafter referred to as the "Target REIT Stockholders."
The holders of common stock of the Company, $0.0001 par value per share ("Common
Stock"), are hereinafter referred to as the "Company Stockholders." The date on
which the Closing occurs is hereinafter referred to as the "Closing Date." After
giving effect to the Mergers, the Company is hereinafter referred to as the
"Combined Company."
1.3 Effective Time. If all of the conditions to a particular Merger set
forth in Article 6 shall have been fulfilled or waived in accordance herewith
with respect to the Company and the applicable Target REIT and this Agreement
shall not have been terminated as provided in Article 7 or Section 8.2(b), the
parties hereto shall promptly cause to be properly executed, verified and
delivered for filing on the Closing Date a certificate of merger satisfying the
requirements of the MGCL and the DGCL for such Merger (a "Certificate of
Merger"). A Merger shall become effective upon the acceptance for record of its
Certificate of Merger by (i) the State Department of Assessments and Taxation of
the State of Maryland in accordance with the MGCL and (ii) the Secretary of
State of the State of Delaware in accordance with the DGCL or at such later time
upon which the parties hereto shall have agreed and designated in such filing in
accordance with applicable law as the effective time of the Mergers (the
"Effective Time").
ARTICLE 2 MERGER CONSIDERATION
2.1 Cancellation of Target Stock. As a result of the Mergers and without
any action on the part of the Target REIT Stockholders, all Target Stock in each
Target REIT with respect to which a Merger has become effective shall cease to
be outstanding, shall be canceled and retired and shall cease to exist and each
Target REIT Stockholder shall thereafter cease to have any rights with respect
to such Target Stock.
2.2 Merger Consideration. At the Effective Time, by virtue of the Mergers
and without any further action by the Company or any Target REIT, each Target
REIT Stockholder in each Target REIT with respect to which a Merger has become
effective shall receive for each share (or fraction thereof) of Target Stock
such Target REIT Stockholder holds of record, that number of shares of Common
Stock in the Combined Company set forth on Exhibit B attached hereto opposite
the name of the applicable Target REIT or Target REITs (the "Merger
Consideration").
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Target REITs that the
statements contained in this Article 3 are true and correct, except as set forth
in the disclosure schedule delivered at or prior to the execution hereof to each
of the Target REITs (the "Company Disclosure Schedule"). The Company Disclosure
Schedule shall be arranged in paragraphs corresponding to the numbered and
letter paragraphs contained in this Article 3, and the
A-2
disclosures in any paragraph of the Company Disclosure Schedule shall also be
deemed to qualify all other paragraphs in this Article 3.
3.1 Due Organization; Authority.
(a) The Company is a corporation duly organized and validly existing
under the laws of the State of Maryland. The Company (i) has the authority to
conduct its business as currently conducted and to own and operate the
properties that it now owns and operates, and (ii) is duly licensed or qualified
to do business in, and is in good standing under the laws of, all jurisdictions
in which the transaction of its business makes such qualification necessary,
except where the failure to be so licensed or qualified would not reasonably be
expected to have a material adverse effect on the business, assets, prospects,
results of operations or financial condition of the Company (a "Company Material
Adverse Effect").
(b) The Company has provided each Target REIT with a true and
complete copy of its articles of incorporation and bylaws, each as amended to
date.
3.2 Authorization; Validity; Effect of Agreement. The Company has all
requisite power, authority and legal right to enter into this Agreement and to
consummate the Mergers. The execution and delivery of this Agreement by the
Company and, subject to the approval of this Agreement by the Company
Stockholders, the consummation by the Company of the Mergers have been duly
authorized by all necessary corporate action on the part of the Company, and
this Agreement is a legal, valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms.
3.3 Capitalization. The authorized capital stock of the Company consists
of 180,000,000 shares of Common Stock of which approximately 24,630,247 shares
are issued and outstanding as of the date hereof and 20,000,000 shares of
preferred stock, $0.0001 par value per share, of which no shares are issued and
outstanding as of the date hereof. Immediately following the consummation of the
Mergers, approximately 49,630,338 shares of Common Stock will be issued and
outstanding and no shares of preferred stock will be issued and outstanding.
3.4 No Violation.
(a) Neither the execution and delivery by the Company of this
Agreement, nor the consummation by the Company of the Mergers and compliance by
the Company with the provisions hereof, will: (i) conflict with or violate any
provision of the Company's articles of organization or bylaws, each as amended
to date; (ii) require on the part of the Company or any Subsidiary (as defined
below) any consent, approval or authorization of, or declaration, filing or
registration with, any governmental or regulatory authority, except (x) the
filing of the Certificates of Merger or (y) where the failure to obtain any such
consent, approval or authorization of, or declaration, filing or registration
with, any governmental or regulatory authority would not reasonably be expected
to have a Company Material Adverse Effect and would not adversely affect the
consummation of the transactions contemplated hereby; (iii)
A-3
conflict with, result in a breach of, constitute (with or without due notice or
lapse of time or both) a default under, result in the acceleration of
obligations under, create in any party the right to terminate, modify or cancel,
or require any notice, consent or waiver under, any contract or instrument to
which the Company or any Subsidiary is a party or by which the Company or any
Subsidiary is bound or to which any of their assets is subject, except for (A)
any conflict, breach, default, acceleration, termination, modification or
cancellation which would not have a Company Material Adverse Effect and would
not adversely affect the consummation of the transactions contemplated hereby or
(B) any notice, consent or waiver the absence of which would not have a Company
Material Adverse Effect and would not adversely affect the consummation of the
transactions contemplated hereby; (iv) result in the imposition of any mortgage,
pledge, security interest, encumbrance, charge or other lien (whether arising by
contract or by operation of law) upon any property or assets of the Company or
any Subsidiary; or (v) violate any order, writ, injunction, decree, statute,
rule or regulation applicable to the Company or any Subsidiary or any of their
properties or assets. For purposes of this Agreement, "Subsidiary" shall mean
any corporation, partnership, trust, limited liability company or other
non-corporate business enterprise in which the Company holds stock or other
ownership interests representing more than 50% of the voting power of all
outstanding stock or ownership interests of such entity.
(b) Except as expressly contemplated by this Agreement, no other
action is required to be taken by the Company to permit the execution, delivery
and performance of (i) this Agreement, (ii) all other documents and certificates
expressly contemplated hereby, and (iii) the Mergers, and no consent or approval
of any third party or governmental authority is or was required or appropriate
in connection with the execution of this Agreement, or to consummate the
transactions expressly contemplated hereunder, except such as have been obtained
or will be obtained prior to the Closing.
3.5 FSP Investments LLC; Due Organization. FSP Investments LLC ("FSP
Investments") is a limited liability company duly organized and validly existing
under the laws of the Commonwealth of Massachusetts. FSP Investments is duly
registered with the Securities and Exchange Commission (the "SEC") as a
broker/dealer pursuant to Section 15 of the Securities Exchange Act of 1934, as
amended.
3.6 Financial Statements.
(a) The Company has previously delivered to each of the Target REITs
the following financial statements (collectively, the "Company Financial
Statements"): (i) consolidated statements of income for the nine months ended
September 30, 2002 (unaudited), (ii) consolidated statements of cash flows for
the nine months ended September 30, 2002 (unaudited) and (iii) the consolidated
balance sheet as of September 30, 2002 (unaudited) (the "Company Balance
Sheet"). The Company Financial Statements have been prepared in accordance with
generally accepted auditing principals ("GAAP"), applied on a basis consistent
with prior periods (except as otherwise noted therein), and present fairly the
financial position and results of operations of the Company as of their
respective dates and for the periods
A-4
presented therein (subject, in the case of unaudited interim financial
statements, to normal year-end adjustments).
(b) The Company has no liability of any nature, whether known or
unknown, accrued or unaccrued, absolute or contingent, asserted or unasserted,
except liabilities (i) stated or adequately reserved against on the Company
Balance Sheet or the notes thereto, (ii) incurred in the ordinary course of
business and not required under GAAP to be reflected on the Company Balance
Sheet, (iii) incurred after the date of the Company Balance Sheet in the
ordinary course of business consistent with the terms of this Agreement or (iv)
which would not reasonably be expected to have a Company Material Adverse
Effect.
3.7 SEC Documents. The Company has filed all SEC Documents (as defined
below) on a timely basis. All of the SEC Documents (other than preliminary
materials) as of their respective filing dates, complied in all material
respects with all applicable requirements of the Securities Act of 1933, as
amended and the Securities Exchange Act of 1934, as amended and, in each case,
the rules and regulations promulgated thereunder applicable to such SEC
Documents. None of the SEC Documents, at the time of filing contained any untrue
statements of a material fact or omitted to state any material fact required to
be stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading, except to the
extent such statements have been modified or superseded by later SEC Documents
filed and publicly available. As used herein, "SEC Documents" shall mean all
reports, schedules, forms, statements and other documents required to be filed
by the Company with the Securities and Exchange Commission on or after January
1, 2002 and prior to the date hereof.
3.8 Litigation. There are (i) no continuing orders, injunctions or decrees
of any court, arbitrator or governmental authority to which the Company is a
party or by which it is bound or, to the knowledge of the Company, to which any
of its directors, officers, employees or agents, in such capacity, is a party
or, to the knowledge of the Company, by which any of them is bound, and (ii) no
actions, suits, investigations or proceedings pending against the Company, or,
to the knowledge of the Company, against any of its directors, officers,
employees or agents, in such capacity, or, to the knowledge of the Company,
threatened against the Company or any of its directors, officers, employees or
agents, in such capacity, at law or in equity, or before or by any federal,
state or local commission, board, bureau, agency or instrumentality that would,
individually or in the aggregate, reasonably be expected to have a Company
Material Adverse Effect.
3.9 Taxes.
(a) The Company has paid, caused to be paid or accrued all federal,
state, local, foreign and other taxes, including without limitation, income
taxes, estimated taxes, alternative minimum taxes, excise taxes, sales taxes,
use taxes, value-added taxes, gross receipt taxes, franchise taxes, capital
stock taxes, employment and payroll-related taxes, withholding taxes, stamp
taxes, transfer taxes, windfall profit taxes, property taxes and environmental
taxes,
A-5
whether or not measured in whole or in part by net income, and all deficiencies,
or other additions to tax, interest, fines and penalties (collectively,
"Taxes"), required to be paid or accrued by it through the date hereof;
(b) The Company has timely filed all federal, state, local and
foreign tax returns required to be filed by it through the date hereof, and all
such returns completely and accurately set forth the amount of any Taxes
relating to the applicable period;
(c) The Company has withheld and paid all taxes required to have
been withheld and paid in connection with amounts paid or owing to any employee,
independent contractor, creditor, stockholder or other party;
(d) For all periods from its inception, the Company has qualified to
be treated as a "real estate investment trust company" (a "REIT") within the
meaning of Sections 856-860 of the Internal Revenue Code of 1986, as amended
(the "Code"). For the periods described in the preceding sentence, the Company
has met all requirements necessary to be treated as a REIT for purposes of the
income tax provisions of those states in which the Company is subject to income
tax and which provide for the taxation of a REIT in a manner similar to the
treatment of REITs under Sections 856-860 of the Code.
(e) Neither the Internal Revenue Service (the "IRS") nor any other
governmental authority is now asserting by written notice to the Company or, to
the knowledge of the Company, threatening to assert against the Company any
deficiency or claim for additional Taxes. There is no dispute or claim
concerning any tax liability of the Company either claimed or raised in writing
by the IRS. There is no dispute or claim of a material nature concerning any tax
liability of the Company either claimed or raised in writing by any governmental
authority other than the IRS, or, to the knowledge of the Company, which may be
claimed or raised by any federal or state governmental authority. No written
claim has ever been made by a taxing authority in a jurisdiction where the
Company does not file reports and returns asserting that the Company is or may
be subject to taxation by that jurisdiction.
3.10 Full Disclosure. The representations of the Company contained in this
Agreement do not contain any untrue statement of a material fact or omit to
state any material fact necessary to make the statements made herein not
misleading, and none of the information supplied or to be supplied by the
Company for inclusion in the Proxy Statement to be distributed to Company
Stockholders (the "Proxy Statement") or in the Consent Solicitation/Offering
Memorandum to be distributed to Target REIT Stockholders, each pursuant to
Section 5.3 hereof (the "Consent Solicitation/Offering Memorandum") contains any
untrue statement of a material fact or omits to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they are made, not misleading. If at any
time prior to the Closing Date any event relating to the Company should occur
that is required to be described in an amendment of or supplement to the Proxy
Statement or the Consent Solicitation/Offering Memorandum, as the case may be,
the Company shall, in the case of the Proxy Statement, prepare, file and
disseminate such amendment or supplement and, in the
A-6
case of the Consent Solicitation/Offering Memorandum, shall, together with the
Target REITS, prepare and disseminate such amendment or supplement.
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE TARGET REITS
Each of the Target REITs individually represents and warrants to the
Company that the statements contained in this Article 4 are true and correct as
to itself, except as set forth in the disclosure schedules delivered at or prior
to the execution hereof by each of the Target REITs to the Company (each, a
"Target REIT Disclosure Schedule" and, collectively, the "Target REITs
Disclosure Schedules"). Each Target REIT Disclosure Schedule shall be arranged
in paragraphs corresponding to the numbered and letter paragraphs contained in
this Article 4, and the disclosures in any paragraph of any Target REIT
Disclosure Schedule shall also be deemed to qualify all other paragraphs in this
Article 4 with respect to that Target REIT.
4.1 Due Organization; Authority.
(a) The Target REIT is a corporation duly organized and validly
existing under the laws of the State of Delaware. The Target REIT (i) has the
authority to conduct its business as currently conducted and to own and operate
the properties that it now owns and operates, and (ii) is duly licensed or
qualified to do business in, and is in good standing under the laws of, all
jurisdictions in which the transaction of its business makes such qualification
necessary, except where the failure to be so licensed or qualified would not
reasonably be expected to have a material adverse effect on the business,
assets, prospects, results of operations or financial condition of the Target
REIT (a "Target REIT Material Adverse Effect").
(b) The Target REIT has provided the Company and each other Target
REIT with a true and complete copy of its certificate of incorporation and
bylaws, each as amended to date.
4.2 Authorization; Validity; Effect of Agreement.
(a) The Target REIT has all requisite power, authority and legal
right to enter into this Agreement and to consummate the Mergers. The execution
and delivery of this Agreement by the Target REIT and, subject to the approval
of this Agreement by its Target REIT Stockholders, the consummation by the
Target REIT of its Merger have been duly authorized by all necessary corporate
action on the part of the Target REIT, and this Agreement is a legal, valid and
binding obligation of the Target REIT, enforceable against the Target REIT in
accordance with its terms.
4.3 Financial Statements.
(a) The Target REIT has previously delivered to the Company the
following financial statements (collectively, the "Target REIT Financial
Statements"): (i) statement of income from date of inception through December
31, 2001 (audited); (ii) statement of cash flows
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from date of inception through December 31, 2001 (audited), (iii) a statement of
income for the nine months ended September 30, 2002 (unaudited), (iv) a
statement of cash flows for the nine months ended September 30, 2002 and (v) a
balance sheet for the nine months ended September 30, 2002 (unaudited) (the
"Target REIT Balance Sheet"), except that the Target REIT Financial Statements
for FSP Timberlake East Corp., FSP Merrywood Apartments Corp., FSP Plaza Ridge I
Corp. and FSP Park Ten Corp. consist solely of those financial statements
identified in clauses (iii), (iv) and (v) above. The Target REIT Financial
Statements have been prepared in accordance with GAAP, applied on a basis
consistent with prior periods (except as otherwise noted therein), and present
fairly the financial position and results of operations of the Target REIT as of
their respective dates and for the periods presented therein (subject, in the
case of unaudited interim financial statements, to normal year-end adjustments).
(b) The Target REIT has no liability of any nature, whether known or
unknown, accrued or unaccrued, absolute or contingent, asserted or unasserted,
except liabilities (i) stated or adequately reserved against on the Target REIT
Balance Sheet or the notes thereto, (ii) incurred in the ordinary course of
business and not required under GAAP to be reflected on the Target REIT Balance
Sheet, (iii) incurred after the date of the Target REIT Balance Sheet in the
ordinary course of business consistent with the terms of this Agreement or (iv)
which would not reasonably be expected to have a Target REIT Material Adverse
Effect.
4.4 Contracts and Commitments. The Target REIT has delivered to the
Company a correct and complete copy of each contract to which the Target REIT is
a party that is material to the Target REIT (each a "Target REIT Material
Contract"). Each Target REIT Material Contract is in full force and effect and
neither the Target REIT nor, to the knowledge of the Target REIT, the other
party thereto is in breach or default thereunder, other than breaches or
defaults which would not, individually or in the aggregate, reasonably be
expected to have a Target REIT Material Adverse Effect.
4.5 No Violation.
(a) Neither the execution and delivery by the Target REIT of this
Agreement, nor the consummation by the Target REIT of its Merger and compliance
by the Target REIT with the provisions hereof, will: (i) conflict with or
violate any provision of its certificate of incorporation or bylaws; (ii)
require on the part of the Target REIT any consent, approval or authorization
of, or declaration, filing or registration with, any governmental or regulatory
authority, except (x) the filing of the Certificates of Merger or (y) where the
failure to obtain any such consent, approval or authorization of, or
declaration, filing or registration with, any governmental or regulatory
authority would not reasonably be expected to have a Target REIT Material
Adverse Effect and would not adversely affect the consummation of the
transactions contemplated hereby; (iii) conflict with, result in a breach of,
constitute (with or without due notice or lapse of time or both) a default
under, result in the acceleration of obligations under, create in any party the
right to terminate, modify or cancel, or require any notice, consent or waiver
under, any contract or instrument to which the Target REIT is a party or by
which the
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Target REIT is bound or to which any of its assets is subject, except for (A)
any conflict, breach, default, acceleration, termination, modification or
cancellation which would not have a Target REIT Material Adverse Effect and
would not adversely affect the consummation of the transactions contemplated
hereby or (B) any notice, consent or waiver the absence of which would not have
a Target REIT Material Adverse Effect and would not adversely affect the
consummation of the transactions contemplated hereby; (iv) result in the
imposition of any mortgage, pledge, security interest, encumbrance, charge or
other lien (whether arising by contract or by operation of law) upon any
property or assets of the Target REIT; or (v) violate any order, writ,
injunction, decree, statute, rule or regulation applicable to the Target REIT or
any of its properties or assets.
(b) Except as expressly contemplated by this Agreement, no other
action is required to be taken by the Target REIT to permit the execution,
delivery and performance of (i) this Agreement, (ii) all other documents and
certificates expressly contemplated hereby, and (iii) the Mergers, and no
consent or approval of any third party or governmental authority is or was
required or appropriate in connection with the execution of this Agreement, or
to consummate the transactions expressly contemplated hereunder, except such as
have been obtained or will be obtained prior to the Closing.
4.6 Litigation. There are (i) no continuing orders, injunctions or decrees
of any court, arbitrator or governmental authority to which the Target REIT is a
party or by which it is bound or, to the knowledge of the Target REIT, to which
any of its directors, officers, employees or agents, in such capacity, is a
party or, to the knowledge of the Target REIT, by which any of them is bound,
and (ii) no actions, suits, investigations or proceedings pending against the
Target REIT, or, to the knowledge of the Target REIT, against any of its
directors, officers, employees or agents, in such capacity, or, to the knowledge
of the Target REIT, threatened against the Target REIT or any of its directors,
officers, employees or agents, in such capacity, at law or in equity, or before
or by any federal, state or local commission, board, bureau, agency or
instrumentality that would, individually or in the aggregate, reasonably be
expected to have a Target REIT Material Adverse Effect.
4.7 Title to Assets.
(a) The Target REIT has good and marketable title to the assets
reflected in the most recent Target REIT Balance Sheet and will hold good and
marketable title to such assets, and any assets acquired by the Target REIT
prior to the Effective Time, except for assets disposed of in the ordinary
course of business (which assets do not include the Property) and except as the
failure of the Target REIT to have such good and marketable title is not, in the
aggregate, material to the Target REIT. The assets reflected on the Target REIT
Balance Sheet include the Property. Except as otherwise disclosed in the Target
REIT Balance Sheet or related notes accompanying it, all the assets referred to
in the preceding sentence are owned free and clear of any and all material
adverse claims, security interests, charges or other encumbrances or
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restrictions of every nature, except liens for current taxes not yet due and
payable or landlords' liens as provided for in the relevant leases, or by
applicable law.
4.8 Real Property.
With respect to each parcel of Property owned by the Target REIT:
(a) the Target REIT has good and clear record and marketable title
to such parcel, insurable by a recognized national title insurance company at
standard rates, free and clear of any security interest, easement, covenant or
other restriction, except for recorded easements, covenants and other
restrictions which do not impair the uses, occupancy or value of such parcel as
an apartment complex, office building or warehouse/distribution center, as the
case may be (the "Intended Uses");
(b) there are no (i) pending or, to the knowledge of the Target
REIT, threatened condemnation proceedings relating to such parcel, (ii) pending
or, to the knowledge of the Target REIT, threatened litigation or administrative
actions relating to such parcel, or (iii) other matters affecting adversely the
Intended Uses, occupancy or value thereof;
(c) the legal description for such parcel contained in the deed
thereof describes such parcel fully and adequately; the buildings and
improvements may be used as of right under applicable zoning and land use laws
for the Intended Uses, and such buildings and improvements are located within
the boundary lines of the described parcels of land, are not in violation of
setback requirements applicable to them, zoning laws and ordinances and do not
encroach on any easement which may burden the land; the land does not serve any
adjoining property for any purpose inconsistent with the use of the land; and
such parcel is not located within any flood plain or subject to any similar type
restriction for which any permits or licenses necessary to the use thereof have
not been obtained;
(d) there are no leases, subleases, licenses or agreements, written
or oral, granting to any party or parties (other than the Target REIT and those
tenants under leases described in Section 4.9) the right of use or occupancy of
any portion of such parcel, except for leases, subleases, licenses or agreements
which do not impair the Intended Uses;
(e) there are no outstanding options or rights of first refusal to
purchase such parcel, or any portion thereof or interest therein;
(f) all facilities located on such parcel are supplied with
utilities and other services necessary for the operation of such facilities,
including gas, electricity, water, telephone, sanitary sewer and storm sewer,
all of which services are adequate for the Intended Uses and in accordance with
all applicable laws, ordinances, rules and regulations and are provided via
public roads or via permanent, irrevocable, appurtenant easements benefiting
such parcel;
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(g) such parcel abuts on and has direct vehicular access to a public
road or access to a public road via a permanent, irrevocable, appurtenant
easement benefiting such parcel;
(h) the Target REIT has received no notice of any, and, to the
knowledge of the Target REIT, there is no, proposed or pending proceeding to
change or redefine the zoning classification of all or any portion of the
parcels;
(i) the improvements constructed on the parcels are in good
condition and proper order, free of material roof leaks, untreated insect
infestation, and material construction defects, and all mechanical and utility
systems servicing such improvements are in good condition and proper working
order, free of material defects; and
(j) each parcel is an independent unit which does not rely on any
facilities (other than the facilities of public utility and water companies or
facilities as to which a permanent, irrevocable appurtenant easement exists
benefiting such parcel granting the use of such facilities) located on any other
property (i) to fulfill any zoning, building code or other municipal or
governmental requirement, (ii) for structural support or the furnishing of any
essential building systems or utilities, including, but not limited to electric,
plumbing, mechanical, heating, ventilating, and air conditioning systems, or
(iii) to fulfill the requirements of any lease. No building or other improvement
not included in the parcels relies on any part of the parcels to fulfill any
zoning, building code or other municipal or governmental requirement or for
structural support or the furnishing of any essential building systems or
utilities except with respect to utility or storm water facilities pursuant to
recorded easement agreements or declarations of common easements the use of
which do not impair the Intended Uses. Each of the parcels is assessed by local
property assessors as a tax parcel or parcels separate from all other tax
parcels.
4.9 Real Property Leases. The Target REIT has delivered to the Company
complete and accurate copies of the leases and subleases (as amended to date) of
its Property. With respect to each such lease and sublease:
(a) the lease or sublease is legal, valid, binding, enforceable and
in full force and effect;
(b) the lease or sublease will continue to be legal, valid, binding,
enforceable and in full force and effect immediately following the Effective
Time in accordance with the terms thereof as in effect immediately prior to the
Effective Time;
(c) neither the Target REIT nor, to the knowledge of the Target
REIT, any other party, is in breach or violation of, or default under, any such
lease or sublease, and no event has occurred, is pending or, to the knowledge of
the Target REIT, is threatened, which, after the giving of notice, with lapse of
time, or otherwise, would constitute a breach or default by the
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Target REIT or, to the knowledge of the Target REIT, any other party under such
lease or sublease;
(d) the Target REIT has not assigned, transferred, conveyed,
mortgaged, deeded in trust or encumbered any interest in the leasehold or
sublease hold; and
(e) the Target REIT is not aware of any Security Interest, easement,
covenant or other restriction applicable to the real property subject to such
lease, except for recorded easements, covenants and other restrictions which do
not materially impair the current uses or the occupancy by the Target REIT of
the property subject thereto.
4.10 Compliance with Laws; Permits; Environmental Matters.
(a) The Target REIT has complied with all applicable Environmental
Laws (as defined below), except for violations of Environmental Laws that do not
and will not, individually or in the aggregate, have a Target REIT Material
Adverse Effect. There is no pending or, to the knowledge of the Target REIT,
threatened civil or criminal litigation, written notice of violation, formal
administrative proceeding, or investigation, inquiry or information request by
any court, arbitrational tribunal, administrative agency or commission or other
governmental or regulatory authority or agency (a "Governmental Entity"),
relating to any Environmental Law involving the Target REIT, except for
litigation, notices of violations, formal administrative proceedings or
investigations, inquiries or information requests that will not, individually or
in the aggregate, have a Target REIT Material Adverse Effect. For purposes of
this Agreement, "Environmental Law" means any federal, state or local law,
statute, rule or regulation or the common law relating to the environment or
occupational health and safety, including without limitation any statute,
regulation, administrative decision or order pertaining to (i) treatment,
storage, disposal, generation and transportation of industrial, toxic or
hazardous materials or substances or solid or hazardous waste; (ii) air, water
and noise pollution; (iii) groundwater and soil contamination; (iv) the release
or threatened release into the environment of industrial, toxic or hazardous
materials or substances, or solid or hazardous waste, including without
limitation emissions, discharges, injections, spills, escapes or dumping of
pollutants, contaminants or chemicals; (v) the protection of wild life, marine
life and wetlands, including without limitation all endangered and threatened
species; (vi) storage tanks, vessels, containers, abandoned or discarded
barrels, and other closed receptacles; (vii) health and safety of employees and
other persons; and (viii) manufacturing, processing, using, distributing,
treating, storing, disposing, transporting or handling of materials regulated
under any law as pollutants, contaminants, toxic or hazardous materials or
substances or oil or petroleum products or solid or hazardous waste. As used
above, the terms "release" and "environment" shall have the meaning set forth in
the Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended ("CERCLA").
(b) There have been no releases in violation of Environmental Laws
of any Materials of Environmental Concern (as defined below) into the
environment at any parcel of real property or any facility formerly or currently
owned, operated or controlled by the Target
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REIT. With respect to any such releases of Materials of Environmental Concern,
the Target REIT has given all required notices to Governmental Entities (copies
of which have been provided to the Company). The Target REIT is not aware of any
releases of Materials of Environmental Concern at parcels of real property or
facilities other than those owned, operated or controlled by the Target REIT
that could reasonably be expected to have an impact on the real property or
facilities owned, operated or controlled by the Target REIT. For purposes of
this Agreement, "Materials of Environmental Concern" means any chemicals,
pollutants or contaminants, hazardous substances (as such term is defined under
CERCLA), solid wastes and hazardous wastes (as such terms are defined under the
Resource Conservation and Recovery Act), toxic materials, oil or petroleum and
petroleum products or any other material subject to regulation under any
Environmental Law.
(c) A complete and accurate copy of all documents (whether in hard
copy or electronic form) that contain any environmental reports, investigations
and audits relating to premises currently or previously owned or operated by the
Target REIT (whether conducted by or on behalf of the Target REIT or a third
party, and whether done at the initiative of the Target REIT or directed by a
Governmental Entity or other third party) which were issued or conducted during
the past five years and which the Target REIT has possession of or access to has
been provided to the Company.
(d) The Target REIT is not aware of any material environmental
liability of any solid or hazardous waste transporter or treatment, storage or
disposal facility that has been used by the Target REIT.
4.11 Taxes.
(a) The Target REIT has paid, caused to be paid or accrued all
federal, state, local, foreign and other Taxes, required to be paid or accrued
by it through the date hereof;
(b) The Target REIT has timely filed all federal, state, local and
foreign tax returns required to be filed by it through the date hereof, and all
such returns completely and accurately set forth the amount of any Taxes
relating to the applicable period;
(c) The Target REIT has withheld and paid all taxes required to have
been withheld and paid in connection with amounts paid or owing to any employee,
independent contractor, creditor, stockholder or other party;
(d) For all periods since its inception, the Target REIT has
qualified to be treated as a REIT within the meaning of Sections 856-860 of the
Code. For the periods described in the preceding sentence, the Target REIT has
met all requirements necessary to be treated as a REIT for purposes of the
income tax provisions of those states in which the Target REIT is subject to
income tax and which provide for the taxation of a REIT in a manner similar to
the treatment of REITs under Sections 856-860 of the Code.
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(e) Neither the IRS nor any other governmental authority is now
asserting by written notice to the Target REIT or, to the knowledge of the
Target REIT, threatening to assert against the Target REIT any deficiency or
claim for additional Taxes. There is no dispute or claim concerning any tax
liability of the Target REIT either claimed or raised in writing by the IRS.
There is no dispute or claim of a material nature concerning any tax liability
of the Target REIT either claimed or raised in writing by any governmental
authority other than the IRS, or, to the knowledge of the Target REIT, which may
be claimed or raised by any federal or state governmental authority. No written
claim has ever been made by a taxing authority in a jurisdiction where the
Target REIT does not file reports and returns asserting that the Target REIT is
or may be subject to taxation by that jurisdiction.
(f) Each of the representations set forth in Exhibit C is true,
accurate and complete.
4.12 Full Disclosure. The representations of the Target REIT contained in this
Agreement do not contain any untrue statement of a material fact or omit to
state any material fact necessary to make the statements made herein not
misleading, and none of the information supplied or to be supplied by the Target
REIT for inclusion in the Proxy Statement or the Consent Solicitation/Offering
Memorandum contains any untrue statement of a material fact or omits to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are made,
not misleading. If at any time prior to the Closing Date any event relating to
the Target REIT should occur that is required to be described in an amendment of
or supplement to the Proxy Statement or the Consent Solicitation/Offering
Memorandum, as the case may be, the Target REIT promptly shall inform the
Company and assist in the preparation, filing (if necessary), dissemination of
such amendment or supplement.
ARTICLE 5 COVENANTS
5.1 Conduct of Business. Prior to the Effective Time, or the earlier
termination of this Agreement, the Company and each Target REIT shall (i) carry
on its business in the ordinary course in substantially the same manner as
previously conducted, (ii) use its reasonable efforts to preserve intact its
present business organization and goodwill, (iii) maintain permits, licenses and
authorizations, (iv) preserve its relationships with third parties and (v) take
all actions necessary to continue to qualify as a REIT, including, without
limitations, the payment of dividends.
5.2 Other Actions. Neither the Company nor any Target REIT shall take or
omit to take any action that would result in any of the representations and
warranties of the Company or such Target REIT, respectively, made in or pursuant
to this Agreement becoming untrue or incomplete, in any of the covenants and
agreements of the Company or such Target REIT, respectively, being breached, or
in any of the conditions to the Closing not being satisfied; provided, however,
that nothing in this Agreement shall be construed to prohibit or restrict the
ability of the Company or any Target REIT to declare and/or pay, consistent with
past practice and custom, to the Company Stockholders or the Target REIT
Stockholders, as the case may be,
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dividends in respect of operations (collectively, the "Dividends") through the
Closing Date, each in accordance with the terms of the distributing entity's
organizational documents, each as amended to date; provided, further, that upon
the Effective Date, the Company shall assume the obligation to pay any dividend
declared but not paid by a Target REIT prior to the Effective Date.
5.3 Approval of Company Stockholders and Target REIT Stockholders.
Promptly following the execution of this Agreement, (i) the Company shall
prepare and file a Proxy Statement with the Securities and Exchange Commission,
and shall as promptly as practicable thereafter distribute the Proxy Statement
to the Company Stockholders, and (ii) the Company, together with the Target
REITs, shall distribute a Consent Solicitation/Offering Memorandum to the Target
REIT Stockholders, asking the Company Stockholders and the Target REIT
Stockholders, respectively, to vote upon the adoption of this Agreement and the
Mergers. The Proxy Statement shall contain the recommendation of the Company
Board that the Company Stockholders approve the adoption of this Agreement and
the Mergers. The Consent Solicitation/Offering Memorandum shall contain the
recommendation of the Target Boards of Directors that the Target REIT
Stockholders approve the adoption of this Agreement and the Mergers. Each of the
Company Board and the Target Boards of Directors, subject to and in accordance
with applicable law, shall use its respective reasonable best efforts to obtain
such approval described in this Section 5.3, including without limitation, by
timely mailing the Proxy Statement to the Company Stockholders or the Consent
Solicitation/Offering Memorandum to the Target REIT Stockholders of its
respective corporation.
5.4 Consents and Approvals. The Company and the Target REITs shall each
use all reasonable efforts to take, or cause to be taken, all actions and to do,
or cause to be done, all other things necessary, proper or advisable to
consummate and make effective as promptly as practicable the transactions
contemplated by this Agreement, to obtain in a timely manner all necessary
consents, waivers, approvals, authorizations and orders and to make all
necessary registrations and filings, and otherwise to satisfy or cause to be
satisfied all conditions precedent to its obligations under this Agreement.
ARTICLE 6 CONDITIONS TO EACH PARTY'S OBLIGATIONS TO EFFECT THE MERGERS.
The respective obligations of the parties hereto to consummate the
Mergers pursuant to the terms of this Agreement are subject to satisfaction of
the following conditions precedent on or prior to the Closing Date. In the event
that one or more of these conditions are not satisfied on or prior to the
Closing Date, the party or parties whose obligations hereunder are subject to
the satisfaction of such condition or conditions may either elect to terminate
this Agreement or waive the satisfaction of such condition. The conditions are:
(a) this Agreement and the Mergers shall have been approved by a
majority in interest of the Company Stockholders and of the Target REIT
Stockholders of each Target REIT
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other than a Target REIT with respect to which this Agreement has been
terminated in accordance with Section 8.2(b);
(b) (i) the number of Target REIT Stockholders who the Company does
not reasonably believe are not Accredited Investors (as defined in Rule 501(a)
of Regulation D of the Securities Act of 1933, as amended) shall not exceed 35
and (ii) each such non Accredited Investor has, either alone or with his/her/its
purchase representative, such knowledge and experience in business and financial
matters that he/she/it is capable of evaluating the merits of risks of the
Common Stock;
(c) all necessary consents, waivers, approvals, authorizations or
orders required to be obtained and the making of all filings required to be made
by any of the parties for the authorization, execution and delivery of this
Agreement and the consummation of the transactions contemplated thereby shall
have been obtained or made, as the case may be, on or prior to (and remaining in
effect at) the Closing Date;
(d) there shall not have occurred any material adverse change in the
overall business or prospects of any of the Company or the Target REITs or in
the tax or other regulatory provisions applicable to the Company, the Target
REITs or the Combined Company, and neither the Company Board nor the Target
Boards of Directors shall have become aware of any facts that, in their
respective reasonable judgment, have or are likely to have a material adverse
effect on the Company and the Target REITs, taken as a whole, the Mergers, or
the value of the Combined Company;
(e) FSP Corp. shall have received, on or prior to the Closing Date,
an opinion from Hale and Dorr LLP to the effect that the Mergers should be
treated for federal income tax purposes as reorganizations within the meaning of
Section 368(a) of the Code and confirming that in all material respects, as of
the Closing Date, the discussion set forth under "Federal Income Tax
Considerations" in the Proxy Statement and the Consent Solicitation/Offering
Memorandum, including any opinions expressed therein, to the extent that it
involves matters of law, is accurate;
(f) the President and Chief Executive Officer of the Company shall
have delivered to each of the Target REITs a certificate on behalf of the
Company, dated as of the Closing Date, to the effect that there have been no
material adverse changes in the financial condition of the Company between the
date of the most recent Company Financial Statements and the Closing Date, and
the President of each of the Target REITs shall have delivered to the Company a
certificate on behalf of each Target REIT, each dated as of the Closing Date, to
the effect that there have been no material adverse changes in the financial
condition of such Target REIT between the date of the most recent Target REIT
Financial Statements for such Target REIT and the Closing Date;
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(g) there shall have been no statute, rule, order or regulation
enacted or issued by the United States or any State thereof, or by a court, that
prohibits the consummation of the Mergers; and
(h) The representations set forth in Section 3 and Section 4 hereof
are true and complete in all material respects.
The conditions described in clauses (b), (c), (d) and (f), above, may be
waived by either the Company or the Target REITs, as the case may be, in whole
or in part if, in the opinion of either the Company or the Target REITs, as the
case may be, such waiver does not materially affect the terms of the
transaction.
ARTICLE 7 TERMINATION AND WAIVER
7.1 Termination. This Agreement may be terminated, and the Mergers may be
abandoned, at any time before the Closing Date, notwithstanding approval of the
Mergers by the Company Stockholders and/or the Target REIT Stockholders:
(a) by the mutual written consent of the parties;
(b) by the Company or any Target REIT if the Mergers have not been
consummated by July 31, 2003 (which date may be extended by mutual agreement of
the parties);
(c) by the Company or any Target REIT if the conditions to the
Mergers set forth in Article 6 of this Agreement are not satisfied or waived.
If a material casualty occurs with respect to the Property owned by a
particular Target REIT, the Company Board has the right to terminate the
Agreement with respect to such Target REIT and to consummate the Mergers with
the remaining Target REITs.
7.2 Effect of Termination. In the event of termination of this Agreement
as provided in Section 8.1 hereof, this Agreement shall become void and there
shall be no liability or obligation on the part of any party hereto or its
respective affiliates, partners, directors or officers, except (i) with respect
to payment of expenses as described in Section 8.3 and (ii) to the extent that
such termination results from the willful breach of a party hereto of any of its
representations, warranties, covenants or agreements made in or pursuant to this
Agreement.
7.3 Extension; Waiver. At any time prior to the Closing Date, the parties
hereto may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties hereto,
(ii) waive any inaccuracies in the representations and warranties of the other
parties hereto contained herein or made in connection herewith, and (iii) waive
compliance with any of the agreements of the other parties hereto contained
herein. Any
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agreement on the part of a party hereto to any such extension or waiver shall be
valid only if set forth in an instrument in writing signed on behalf of such
party.
7.4 No Survival of Representations and Warranties. None of the
representations and warranties contained in this Agreement shall survive the
Closing Date.
ARTICLE 8 MISCELLANEOUS
8.1 Assignment. The Company may not assign its rights under this Agreement
without the consent of the applicable Target REIT. None of the Target REITs may
assign their rights under this Agreement.
8.2 Risk of Loss.
(a) Risk of loss or damage to the assets owned by each Target REIT
(the "Assets") by condemnation, eminent domain or similar proceedings (or deed
in lieu thereof), or by fire or any other casualty, from the date hereof through
the Closing Date, will be on the Target REIT owning such Assets, and thereafter
will be on the Combined Company.
(b) In the event of loss or damage to the Assets that occurs prior
to the Closing Date, the applicable Target REIT shall use its best efforts to
effect a timely cure of such loss or damage prior to the Closing Date. If the
Target REIT is unable to effect such a timely cure, the Target REIT shall so
notify the Company, and thereafter, the Company may, at its option: (i) elect to
terminate this Agreement; (ii) unilaterally amend this Agreement to (A) reflect
a decrease in the amount of Merger Consideration to be issued with respect to
Target Stock in such Target REIT and (B) extend the term of this Agreement, and
resolicit the stockholders of such Target REIT with respect to participation in
the Mergers with the Merger Consideration adjusted to reflect such loss or
damage; or (iii) unilaterally amend this Agreement to terminate this Agreement
with respect to such Target REIT and consummate the Mergers with the remaining
Target REITs.
8.3 Fees and Expenses. The costs associated with each independent
third-party appraisal of the fair market value of each Target REIT's real estate
("Appraisal") obtained by the respective Target Boards of Directors shall be
paid by the Target REIT owning the real estate that is the subject of the
Appraisal. All other expenses related to the Mergers and the transactions
contemplated hereby, including, without limitation, consulting, legal,
accounting and administrative expenses, shall be paid by the Company.
8.4 Entire Agreement; Modifications; Amendments.
(a) This Agreement embodies and constitutes the entire understanding
between the parties with respect to the transactions contemplated herein, and
all prior or contemporaneous agreements, understandings, representations and
statements, oral or written, are merged into this Agreement. Except as expressly
otherwise provided herein, neither this
A-18
Agreement nor any provision hereof may be waived, modified, amended, discharged
or terminated except by an instrument in writing signed by the party against
which the enforcement of such waiver, modification, amendment, discharge or
termination is sought, and then only to the extent set forth in such instrument.
(b) Subject to applicable law, this Agreement may be amended by the
Company and the Target REITs at any time prior to the filing of the Certificates
of Merger with the Secretary of State of the State of Delaware and the State
Department of Assessment and Taxation of the State of Maryland; provided,
however, that after approval by Target REIT Stockholders holding a majority of
the Target Stock of a Target REIT, without further approval of the Target REIT
Stockholders of such Target REIT, no amendment may be made that alters or
changes (i) the amount or kind of Merger Consideration which the Target REIT
Stockholders in such Target REIT shall be entitled to receive, (ii) the
certificate of organization or bylaws of such Target REIT or (iii) the terms and
conditions of this Agreement, if such alteration or change would have a material
adverse effect on such Target REIT Stockholders.
8.5 Notices. All notices, demands or other writings in this Agreement
provided to be given or made or sent, or which may be given or made or sent, by
either party hereto to the other may be given personally or may be delivered by
depositing the same in the U.S. mail, certified, return receipt requested,
postage prepaid or by delivering the same to an air courier service, postage
prepaid, properly addressed and sent to the address of such party as set forth
below, or such other address as either party may from time to time designate by
written notice to the other. Notice given by mail shall be considered effective
upon the expiration of five business days after deposit. Notice given in any
other manner shall be effective only if and when received by the addressee.
If to the Company:
Franklin Street Properties Corp.
401 Edgewater Place, Suite 200
Wakefield, Massachusetts 01880
Attention: George J. Carter
President and Chief Executive Officer
Fax: (800) 950-6288
with a copy to:
Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109
Attention: Kenneth A. Hoxsie, Esq.
Fax: (617) 526-5000
A-19
If to a Target REIT:
c/o Franklin Street Properties Corp.
401 Edgewater Place, Suite 200
Wakefield, Massachusetts 01880
Attention: George J. Carter, President
Fax: (800) 950-6288
with a copy to:
Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109
Attention: Kenneth A. Hoxsie, Esq.
Fax: (617) 526-5000
8.6 Interpretation. Words of any gender used in this Agreement shall be
held and construed to include any other gender, and words of a singular number
shall be held to include the plural and vice versa, unless the context requires
otherwise.
8.7 Captions. The captions used in this Agreement are for convenience only
and shall not be deemed to construe or to limit the meaning of the language of
this Agreement.
8.8 Counterparts. This Agreement may be executed in any number of
identical counterparts. If so executed, each of such counterparts is to be
deemed an original for all purposes, and all such counterparts shall
collectively constitute one agreement, but in making proof of this Agreement it
shall not be necessary to produce or account for more than one such counterpart.
8.9 Binding Effect. Subject to the restrictions on assignment contained in
Section 8.1 hereof, this Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective heirs, legal representatives,
successors and assigns.
8.10 Attorneys' Fees. Subject to the requirements of Section 8.12 hereof,
should any party hereto employ an attorney or attorneys to enforce any of the
provisions hereof or to protect its interest in any manner arising under this
Agreement, or to recover damages for the breach hereof, the nonprevailing party
or parties in any action pursued in courts of competent jurisdiction (the
finality of which action is not legally contested) agrees to pay to the
prevailing party or parties all reasonable costs, damages and expenses,
including attorneys' fees, expended or incurred in connection therewith;
provided, however, that if more than one item is disputed and the final decision
is against each party as to one or more of the disputed items, then such costs,
expenses and attorneys' fees shall be apportioned in accordance with the
monetary values of the items decided against each party.
A-20
8.11 No Waiver; Severability. The failure of any party hereto to enforce
at any time any of the provisions of this Agreement shall in no way be construed
to be a waiver of any such provision, and shall in no way affect the validity of
this Agreement or any part hereof or the right of any party thereafter to
enforce each and every such provision. No waiver of any breach of this Agreement
shall be held to be a waiver of any other or subsequent breach. If any provision
of this Agreement, or the application thereof to any person or circumstances
shall, for any reason and to any extent, be invalid or unenforceable, but the
extent of the invalidity or unenforceability does not destroy the basis of the
bargain between the parties as contained herein, the remainder of this Agreement
and the application of such provision to other persons or circumstances shall
not be affected thereby but rather shall be enforced to the greatest extent
permitted by law.
8.12 No Joint and Several Liability. If one of the Target REITs defaults
under, or is in breach of, any of its representations, warranties or covenants
contained in this Agreement, such Target REIT shall be accountable to the
Company and shall be liable for the damages caused by such default or breach as
provided in this Agreement. Each Target REIT hereunder has undertaken
obligations and made representations, warranties, disclosures and covenants
herein and in and pursuant to the exhibits hereto solely with respect to itself
and the Property owned by it. Nothing contained herein, however, is intended to
make any of the Target REITs jointly and severally liable for the default or
breach by any of the other Target REITs, and with respect to any such default
and breach such shall be solely the obligation and responsibility of the Target
REIT responsible for the default or breach.
8.13 Applicable Law. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Massachusetts.
[Remainder of Page Intentionally Left Blank]
A-21
IN WITNESS WHEREOF, this Agreement has been executed by each of the parties as
of the date first set forth above.
COMPANY:
FRANKLIN STREET PROPERTIES CORP.
By: /s/ George J. Carter
--------------------
Name: George J. Carter
Title: President and Chief Executive Officer
TARGET REITS:
FSP FOREST PARK IV CORP.
By: /s/ George J. Carter
--------------------
Name: George J. Carter
Title: President
FSP GAEL APARTMENTS CORP.
By: /s/ George J. Carter
--------------------
Name: George J. Carter
Title: President
FSP GOLDENTOP TECHNOLOGY CENTER CORP.
By: /s/ George J. Carter
--------------------
Name: George J. Carter
Title: President
FSP CENTENNIAL TECHNOLOGY CENTER CORP.
By: /s/ George J. Carter
--------------------
Name: George J. Carter
Title: President
A-22
FSP MEADOW POINT CORP.
By: /s/ George J. Carter
--------------------
Name: George J. Carter
Title: President
FSP TIMBERLAKE CORP.
By: /s/ George J. Carter
--------------------
Name: George J. Carter
Title: President
FSP FEDERAL WAY CORP.
By: /s/ George J. Carter
--------------------
Name: George J. Carter
Title: President
FSP FAIR LAKES CORP.
By: /s/ George J. Carter
--------------------
Name: George J. Carter
Title: President
FSP NORTHWEST POINT CORP.
By: /s/ George J. Carter
--------------------
Name: George J. Carter
Title: President
FSP TIMBERLAKE EAST CORP.
By: /s/ George J. Carter
--------------------
Name: George J. Carter
Title: President
FSP MERRYWOOD APARTMENTS CORP.
By: /s/ George J. Carter
--------------------
Name: George J. Carter
Title: President
A-23
FSP PLAZA RIDGE I CORP.
By: /s/ George J. Carter
--------------------
Name: George J. Carter
Title: President
FSP PARK TEN CORP.
By: /s/ George J. Carter
--------------------
Name: George J. Carter
Title: President
A-24
APPENDIX B
GLOSSARY OF TERMS
Certain capitalized terms used in this Proxy Statement have the following
meanings unless the context otherwise requires:
"ADA" - the Americans With Disabilities Act and the regulations, rules and
orders that may be issued thereunder.
"A.G. Edwards" - A. G. Edwards, Inc.
"Appraisals" - the appraisals by third-party independent appraisers of the
real estate owned by each Target REIT.
"Appraisers" - Abbot & Associates, Inc.; D.F. Davis Real Estate, Inc.;
Dinan Real Estate Advisors, Inc.; Dyco Real Estate, Inc.; Fortenberry Lambert,
Inc.; Integra Realty Resources; Patrick O'Connor & Associates, L.P.; The Robert
Paul Jones Company, Ltd.; and Shorett KMS Valuation Adivsory Group.
"CAD" - cash available for distribution; FSP Corp. defines CAD as: net
income as computed in accordance with GAAP (i) plus certain non-cash items
included in the computation of net income (depreciation and amortization,
certain non-cash compensation expenses and straight line rent adjustments)
investment services proceeds received from controlled partnerships, the net
proceeds from the sale of land, (ii) less purchases of property and equipment
("Capital Expenditures") and payments for deferred leasing commissions, (iii)
plus proceeds from cash reserves established at the acquisition date of the
property. Depreciation and amortization, non-cash compensation and straight line
rents are an adjustment to CAD, as these are non-cash items included in net
income. Capital Expenditures, payments of deferred leasing commissions and the
proceeds from (payments to) the funded reserve are an adjustment to CAD, as they
represent cash items not reflected in income.
"Centennial"- FSP Centennial Technology Center Corp., a real estate
investment trust and Delaware corporation.
"Combined Company" - FSP Corp., its subsidiaries and the Target REITs,
after giving effect to the consummation of the Mergers.
"Commission" - the Securities and Exchange Commission.
"Conversion" - the merger, on January 1, 2002, of FSP Partnership with and
into FSP Corp., with FSP Corp. being the surviving entity.
"Effective Date" - the effective date of the Mergers, which is expected to
be on or about April 1, 2003.
"Equity Securities" - FSP Common Stock and Preferred Stock.
B-1
"Exchange Act" - Securities Exchange Act of 1934, as amended.
"Fair Lakes" - FSP Fair Lakes Corp., a real estate investment trust and
Delaware corporation.
"FASB" - the Financial Accounting Standards Board.
"Federal Way" - FSP Federal Way Corp., a real estate investment trust and
Delaware corporation.
"Forest Park" - FSP Forest Park IV Corp., a real estate investment trust
and Delaware corporation.
"FSP Board" - the Board of Directors of FSP Corp.
"FSP Common Stock" - the common stock of FSP Corp., $0.0001 par value per
share.
"FSP Corp." - Franklin Street Properties Corp., a Maryland corporation.
"FSP Corp.'s properties" - the real properties owned by the 17 Sponsored
Partnerships, all of which FSP Corp. now wholly owns, directly and indirectly.
"FSP General Partner" - FSP General partner LLC, a Massachusetts limited
liability company.
"FSP Holdings" - FSP Holdings LLC, a Delaware limited liability company.
"FSP Investments" - FSP Investments LLC, a Massachusetts limited liability
company.
"FSP Partnership" - Franklin Street Partners Limited Partnership, a
Massachusetts limited partnership.
"FSP Property Management" - FSP Property Management LLC, a Massachusetts
limited liability company.
"FSP Stockholders" - the stockholders of FSP Corp.
"FSP Unit" - units of limited partnership interest in FSP Partnership.
"GAAP" - generally accepted accounting principles.
"Goldentop" - FSP Golden Technology Center Corp., a real estate investment
trust and Delaware corporation.
"Meadow Point" - FSP Meadow Point Corp., a real estate investment trust
and Delaware corporation.
B-2
"Meeting" - the Special Meeting of Stockholders of FSP Corp. to be held on
March [28], 2003.
"Merger Agreement" - the agreement and plan of merger, dated January 14,
2003, entered into between FSP Corp. and the Target REITs.
"Merger Consideration" - the approximate 25,000,091 shares of FSP Common
Stock to be issued in connection with the Mergers.
"Mergers" - the acquisition, by merger, of each Target REIT by FSP Corp.
"Merrywood" - FSP Merrywood Apartments Corp., a real estate investment
trust and Delaware corporation.
"MGCL" - the Maryland General Corporation Law.
"Named Executive Officers" - George J. Carter, President and Chief
Executive Officer of FSP Corp., Richard R. Norris, Executive Vice President of
FSP Corp., R. Scott MacPhee, Executive Vice President of FSP Corp., William W.
Gribbell, Executive Vice President of FSP Corp. and Barbara J. Corinha, Vice
President, Chief Operating Officer, Treasurer and Secretary of FSP Corp.
"Northwest Point" - FSP Northwest Point Corp., a real estate investment
trust and Delaware corporation.
"Ownership Limit" - 9.8% of the number of shares or value of the
outstanding Equity Securities.
"Park Ten" - FSP Park Ten Corp., a real estate investment trust and
Delaware corporation.
"Plaza Ridge I" - FSP Plaza Ridge I Corp., a real estate investment trust
and Delaware corporation.
"Preferred Stock" - the preferred stock of FSP Corp., $0.0001 par value
per share.
"Prior Entities" - four Sponsored Partnerships, each of which had been
organized by the executive officers of the general partner of the FSP
Partnership prior to the formation of the FSP Partnership while they were
employed by another entity.
"SARs" - stock appreciation rights.
"Securities Act" - Securities Act of 1933, as amended.
"SFAS" - Statement of Financial Accounting Standards.
B-3
"Sponsored Entities" - investment vehicles organized by FSP Investments,
which are typically syndicated through private placements exempt from
registration under the Securities Act of 1933.
"Sponsored Partnerships" - Sponsored Entities organized as limited
partnerships.
"Sponsored REITs" - Sponsored Entities organized as corporations intended
to qualify for federal income tax purposes as real estate investment trusts,
including the Target REITs.
"Target Boards" - the boards of directors of the Target REITs,
collectively.
"Target REITs" - 13 real estate investment trusts, consisting of Forest
Park, The Gael, Goldentop, Centennial, Meadow Point, Timberlake, Federal Way,
Fair Lakes, Northwest Point, Timberlake East, Merrywood, Plaza Ridge I and Park
Ten.
"Target REIT Stockholders" - the holders of the Target Stock.
"Target Stock"- preferred stock of the Target REITs.
"The Gael" - FSP Gael Apartments Corp., a real estate investment trust and
Delaware corporation.
"Timberlake" - FSP Timberlake Corp., a real estate investment trust and
Delaware corporation.
"Timberlake East" - FSP Timberlake East Corp., a real estate investment
trust and Delaware corporation.
B-4
APPENDIX C
[LETTERHEAD OF A.G. EDWARDS & SONS, INC.]
October 1, 2002
The Board of Directors
Franklin Street Properties Corp.
401 Edgewater Place
Wakefield, MA 01880
Ladies and Gentlemen:
In accordance with our arrangement, we have reviewed the reasonableness of the
methodology ("Methodology") used in estimating a hypothetical range of values
for Franklin Street Properties Corp. ("FSP Corp." or the "Company") both prior
to and after giving effect to the possible acquisition by merger (the "Mergers")
to FSP Corp. of FSP Forest Park IV Corp., FSP Gael Apartments Corp., FSP
Goldentop Technology Center Corp., FSP Centennial Technology Center Corp., FSP
Meadow Point Corp., FSP Timberlake Corp., FSP Federal Way Corp., FSP Fair Lakes
Corp., FSP Northwest Point Corp., FSP Timberlake East Corp., FSP Merrywood
Apartments Corp., FSP Plaza Ridge I Corp. and FSP Park Ten Corp (collectively,
the "Target REITs"). The range of values is hypothetical in that it is
prospective and is limited to information available as of the date of this
report. Any values computed herein are based on economic, market, geopolitical
and company specific data as of September 10, 2002. Any changes in any one of
these items subsequent to September 10, 2002 could materially impact any
conclusion derived from utilizing any unadjusted Methodology. We understand that
the purpose of FSP Corp.'s determination of the range of values is to assist the
shareholders in their review of a potential Agreement and Plan of Merger (the
"Merger Agreement") by and among FSP Corp. and the Target REITs and the issuance
of common stock in FSP Corp. to existing shareholders of the Target REITs. We
further understand that the Transaction is expected to be consummated on or
about April 1, 2003.
A.G. Edwards & Sons, Inc. ("Edwards"), as part of its investment banking
business, is regularly engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, competitive biddings, secondary distributions of listed and
unlisted securities, private placements and valuations for estate, corporate or
other purposes. The Company has agreed to indemnify Edwards for certain
liabilities that may arise out of the rendering of this report and any related
activities as advisor to the Board of Directors. Edwards has also performed and
may continue to perform certain investment banking services for the Company.
Edwards is not aware of any present or contemplated relationship between Edwards
and the Company or any of the Company's affiliates, directors, officers or
shareholders or between Edwards and the Target REITs, their respective
affiliates, directors, officers or shareholders, which in our opinion would
affect our ability to render fair and independent advice in this matter.
In connection with this report, Edwards has reviewed and considered such
financial and other matters as we have deemed relevant, including, among other
things: financial projections of FSP Corp. and the Target REITs, publicly traded
REITs, attributes of the Company both positive and
C-1
The Board of Directors
Franklin Street Properties Corp.
October 1, 2002
Page 2
negative as well as other financial studies and analyses related to general
economic, market and monetary conditions and such other studies and analyses
that Edwards considered appropriate.
In preparing its report, Edwards has assumed and relied upon, without
independent verification, the accuracy and completeness of all financial and
other information publicly available or that was supplied or otherwise made
available to it by the Company and its representatives. Edwards has not been
engaged to, and therefore it has not, verified the accuracy or completeness of
any of such information. Edwards has relied upon the assurances of the
management of the Company that they are not aware of any facts that would make
such information materially inaccurate or misleading. Edwards has been informed
and assumed that the financial projections supplied to, discussed with or
otherwise made available to it reflect the best currently available estimates
and judgment of the management of the Company as to the expected future
financial performance of the Company and the Target REITs, in each case on a
stand-alone basis and after giving effect to the Mergers. Edwards has not
independently verified such information or assumptions, nor does it express any
opinion with respect thereto. Edwards has not made any independent valuation or
appraisal of the assets or liabilities of the Company or the Target REITs, nor
has it been furnished with any such appraisals. Edwards also did not
independently attempt to assess or value any intangible assets (including
goodwill) nor did it make any independent assumptions with respect to their
application in the Mergers. Edwards understands that with respect to all legal
and tax matters you have been advised by various legal and tax advisors to the
Board of Directors. Edwards has assumed that no legal or regulatory changes that
occur after the date hereof will have a material impact on the Company's
operations, financial condition and future prospects.
In performing its analysis, Edwards made numerous assumptions with respect to
interest rates, dividend rates, market conditions, general business conditions,
local and national real estate conditions, economic conditions and government
regulations, all as of September 10, 2002, which are beyond the control of the
Company and the Target REITs. The analysis performed by Edwards is not
necessarily indicative of actual values or actual future results, which may be
significantly more or less favorable than suggested by such analysis. Such
analysis was prepared solely as part of Edwards' analysis of the reasonableness
of the Methodology.
For the purposes of rendering its report, Edwards has assumed in all respects
material to its analysis that the representations and warranties of each party
contained in the Merger Agreement are true and correct, that each party will
perform all of the covenants and agreements required to be performed by it under
the Merger Agreement and that all conditions to the consummation of the
Transaction will be satisfied without any modification or waiver thereof.
Edwards has also assumed that all governmental, regulatory and other consents
and approvals contemplated by the Merger Agreement will be obtained and that in
the course of obtaining any of those consents, no restrictions will be imposed
or waivers made that would have an adverse effect on the contemplated Mergers.
C-2
The Board of Directors
Franklin Street Properties Corp.
October 1, 2002
Page 3
Edwards was not engaged to render, and its advice to you will not constitute,
nor is it expressing: (i) an independent valuation opinion or appraisal report
(as defined in ASA Business Valuation Standards (revised January, 1995)) of the
Company or the Target REITs or (ii) an opinion as to the fairness (a fairness
opinion) of the consideration offered in the Mergers to the shareholders of the
Company or the Target REITs. In preparing either a valuation opinion or
appraisal or in rendering a fairness opinion, certain additional extrinsic
analyses, tasks and judgments necessarily must be undertaken and completed. Such
analyses may include, but would not be limited to, the following: (1) review of
appraisals, prepared by independent appraisers, of each real property asset
owned by the Company and each of the Target REITs; (2) site inspections of all
owned properties to be contributed to the parent; (3) analyses of present
national and local economic conditions; (4) market analysis for properties held
in the Target REITs; (5) detailed due diligence on past results, current
operations, and future prospects of the business; (6) analysis of terms and
conditions on past sales of interests in the business enterprise and each of the
Target REITs; (7) a search and review of sales of similar businesses or
interests therein, whether closely-held or publicly-held; (8) random interviews
with key investors; (9) additional comparable company analysis; (10) discounted
cash flow analysis; (11) pro forma combination analysis; (12) analysis of
synergies; and (13) contribution analysis. Had such analyses and tasks been
undertaken and completed, they may or may not have results similar to the
results from the Methodology. We have not been requested by you to undertake,
nor have we undertaken, any of these foregoing analyses. In addition, we do not
express any qualitative assessment of the Methodology compared to other
methodologies that might be used to value the Company or the Target REITs, nor
does this report address the merits of the underlying decision by the Company to
engage in the Mergers.
In rendering its report, Edwards assumed that (a) the Mergers will be accounted
for in accordance with U.S. Generally Accepted Accounting Principles and (b) the
Mergers will be consummated on the terms contained in the Merger Agreement
without any waiver or modification of any material terms or conditions by the
parties.
Edwards' report is necessarily based on economic, market and other conditions as
in effect on, and the information made available to it, as of September 10,
2002. Edwards' opinion as expressed herein, in any event, is limited to the
reasonableness of the Methodology. It should be understood that, although
subsequent developments may affect Edwards' opinion, Edwards does not have any
obligation to update, revise or reaffirm its opinion and it expressly disclaims
any responsibility to do so.
It is understood that this letter is solely for the confidential use of the
Board of Directors and does not constitute a recommendation as to how any member
of the Board or shareholder should vote with respect to the Transaction. This
opinion may not be reproduced, summarized, described, characterized, excerpted
from, referred to or given to any other person for any purpose without Edwards'
prior written consent, except that this opinion may be included in its entirety
and the procedures followed in rendering this opinion may be summarized (subject
to the review
C-3
The Board of Directors
Franklin Street Properties Corp.
October 1, 2002
Page 4
and approval thereof by Edwards and its counsel) in a proxy statement to be
distributed to the shareholders of the Company and each of the Target REITs
regarding the Mergers.
The Methodology, attached as Exhibit A and included in the Proxy Statement as
Appendix D, which we have been asked to review, is principally based on two
assumptions: (1) applying a range of valuation multiples of national, publicly
traded REITs in sectors in which the Company has operations ("Public Company
Multiples") and (2) applying a discount factor for lack of marketability of the
Company's shares (the "Lack of Marketability Discount"). Edwards provided the
Company a summary of Public Company Multiples attached hereto as Exhibit B, as
well as a summary of various factors Edwards recommended the Board consider when
evaluating the appropriateness of such multiples attached hereto as Exhibit C.
Additionally, Edwards provided the Board a summary of the relevant factors,
attached as Exhibit D, to consider when determining an appropriate Lack of
Marketability Discount. Exhibits B, Exhibit C and Exhibit D were performed by
Edwards solely to evaluate the Company's Methodology for purposes of rendering
this report.
Subject to the foregoing and on the basis of the information that we gained in
the course of the performance of the services described herein, nothing that
came to our attention in the course of our review has caused us to believe that
the Methodology used to derive the range of values is unreasonable. We
appreciate the opportunity to be of service to Franklin Street Properties Corp.
in this matter, and look forward to working with you again in the future.
Sincerely,
A.G. EDWARDS & SONS, INC.
By: /s/ John M. Moriarty
-----------------------------
John M. Moriarty
Managing Director - Investment Banking
By: /s/ Michelle C. Matava
-----------------------------
Michelle C. Matava
Vice President - Investment Banking
C-4
Exhibit A
Franklin Street Properties Corp.
Valuation Overview
------------------------------------------------------------------------------------------------------------------------------------
9/10/2002 Without Merger
------------------------------------------------------------------------------------------------------------------------------------
Enterprise Value Low Mean High
-------------------------------- ----------------------------- ----------------------------- ------------------------------
CAD 32,242,000 32,242,000 32,242,000
Less: Interest Income on
Excess Cash (a) (270,000) (270,000) (270,000)
----------- ----------- -------------
Adjusted CAD 31,972,000 31,972,000 31,972,000
CAD Multiple 11.0x 12.0x 13.3x
----------- ----------- -------------
Sub-Total 351,692,000 383,664,000 425,227,600
Plus: Excess Cash 13,500,000 13,500,000 13,500,000
----------- ----------- -------------
Enterprise Value 365,192,000 397,164,000 438,727,600
=========== =========== =============
Marketability Discount 10% Discount 5% Discount 10% Discount 5% Discount 10% Discount 5% Discount
-------------------------------- ------------ ----------- ------------ ----------- ------------ -------------
Discount (36,519,200) (18,259,600) (39,716,400) (19,858,200) (43,872,760) (21,936,380)
------------ ----------- ------------ ----------- ------------ -------------
Fair Market Value 328,672,800 346,932,400 357,447,600 377,305,800 394,854,840 416,791,220
Fair Market Value Per Share
--------------------------------
Shares Outstanding 24,630,247 24,630,247 24,630,247
Fair Market Value / Share $13.34 $14.09 $14.51 $15.32 $16.03 $16.92
Estimated Valuation Range / Share $13.34 - $16.92
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
9/10/2002 Pro Forma for Merger
------------------------------------------------------------------------------------------------------------------------------------
Enterprise Value Low Mean High
-------------------------------- ----------------------------- ----------------------------- ------------------------------
CAD 63,047,000 63,047,000 63,047,000
Less: Interest Income on
Excess Cash (b) (520,000) (520,000) (520,000)
----------- ----------- -------------
Adjusted CAD 62,527,000 62,527,000 62,527,000
CAD Multiple 11.0x 12.0x 13.3x
----------- ----------- -------------
Sub-Total 687,797,000 750,324,000 831,609,100
Plus: Excess Cash 26,000,000 26,000,000 26,000,000
----------- ----------- -------------
Enterprise Value 713,797,000 776,324,000 857,609,100
Marketability Discount 10% Discount 5% Discount 10% Discount 5% Discount 10% Discount 5% Discount
Discount (71,379,700) (35,689,850) (77,632,400) (38,816,200) (85,760,910) (42,880,455)
------------ ----------- ------------ ----------- ------------ -------------
Fair Market Value 642,417,300 678,107,150 698,691,600 737,507,800 771,848,190 814,728,645
Estimated Valuation Range $642,417,300 - $814,728,645
------------------------------------------------------------------------------------------------------------------------------------
Notes
--------------------------------
(a) FSP Corp. has excess cash reserves of $13.5 million earning 2% annually
(b) FSP Corp. and the Target REITs have combined excess cash reserves of $26.0
million earning 2% annually
C-5
Exhibit B
Public Company
Cash Available for Distribution ("CAD") Multiples
As of September 10, 2002
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Current Price To
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Company '02E '03E
Name CAD CAD
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Apartments
Archstone-Smith Trust 13.5x 12.6x
AvalonBay Communities 12.1x 11.4x
Equity Residential Properties 12.5x 11.5x
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Mean 12.7x 11.8x
Median 12.5x 11.5x
===================================================
Office
Boston Properties 13.6x 12.0x
CarrAmerica Realty Corp. 10.8x 10.6x
Equity Office Properties 10.6x 10.4x
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Mean 11.7x 11.0x
Median 10.8x 10.6x
===================================================
Industrial
AMB Property 16.5x 15.6x
PS Business Parks 11.7x 10.8x
ProLogis Trust 14.5x 13.4x
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Mean 14.2x 13.3x
Median 14.5x 13.4x
===================================================
Office/Industrial
Duke Realty Corp. 12.7x 12.9x
Liberty Property Trust 11.1x 10.1x
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Mean 11.9x 11.5x
Median 11.9x 11.5x
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Overall Mean 12.7x 12.0x
Overall Median 12.5x 11.5x
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Notes
CAD figures per A.G. Edwards' Securities Research where available, otherwise per
Realty Stock Review
C-6
Exhibit C
MARKET MULTIPLE ANALYSIS
The Company's Methodology, as found in Exhibit A, uses a mean next fiscal year
Price/Cash Available for Distribution ("CAD") multiple of approximately 12.0x
and a range of mean Price/CAD multiples of 11.0x to 13.3x.
A.G. Edwards provided FSP Corp. Price/CAD multiples for several national,
publicly traded REITs in sectors in which FSP Corp. has operations as found in
Exhibit B. The sectors provided were based on the property holdings of FSP Corp.
and include the Apartment, Industrial, Office and Office/Industrial sectors. The
public market's CAD multiples for these REIT sectors range from a mean of 11.0x
for the Office sector to a mean of 13.3x for the Industrial sector. A
combination of the Apartment, Office, Industrial and Office/Industrial sectors
yields a mean CAD multiple of 12.0x. However, the above multiple assumes the
Company's shares would be publicly traded based on CAD without taking into
consideration adjustments, whether positive or negative, for FSP Corp. specific
factors, relative to the selected REITs, which would impact the Company's
valuation. Below are several factors that Edwards recommends FSP Corp.'s Board
consider when arriving at an adjusted CAD multiple for use in the Company's
Methodology.
Quantitative Factors
o Size. The equity market capitalization of the Company is about average
when compared to the broader real estate investment trust universe but
smaller when compared to the selected REITs. Adjustment: Negative.
o Growth. The Company has experienced a decline in its growth rate yet the
current and projected growth rates for FSP Corp., in today's weak economic
environment, still remain above average. In the REIT industry as with
other industries, there is a correlation between the implied future growth
rate and the CAD multiple. Adjustment: Positive.
o Liquidity. The Company has cash and cash reserves on the balance sheet.
Adjustment: Positive.
o Leverage. The Company has no debt. This gives the Company flexibility
versus other leveraged companies. Adjustment: Positive.
Qualitative Factors
o Management. The Company appears to have an experienced management team.
Adjustment: Positive.
o Diversification. The Company is diversified by both product type and by
geography. This can be viewed both positively and negatively as the
positive attributes of diversification across real estate markets in
C-7
several different product types is offset by the negative attributes of
investing throughout the country. Real estate is still a local business
and Edwards believes that it is difficult to be an expert in each locale
and across multiple product types. Adjustment: Neutral.
o Market Position/Share. The Company is a niche player and does not command
a dominant position in any single market. Adjustment: Negative.
o Ability to Raise Growth Capital. FSP Corp. has a substantial investor base
consisting of high-net-worth individuals. These investors have in the past
committed significant equity capital during market downturns, when other
sources of capital have been unavailable. FSP Corp. has consistently
demonstrated the ability to retain its existing investor base with a
significant number of repeat investors. FSP Corp. has also demonstrated
its ability and desire to attract a substantial number of new investors by
designating a portion of each deal to first-time investors and
consistently filling that allocation with new investor's equity.
Adjustment: Positive.
Based on the above factors, Edwards believes the Company's determination to use
a range of CAD multiples of 11.0x to 13.3x is not unreasonable.
C-8
Exhibit D
LACK OF MARKETABILITY DISCOUNT
Since FSP Corp. is not publicly traded and ownership is widely held, its
shareholders have no immediate access to an active liquid market in which to
dispose of their shares. Further, minority shareholders cannot force
registration to provide marketability. Without market access, a shareholder's
ability to control the timing of potential gains, to avoid losses and to
minimize the opportunity costs associated with the inability to direct funds to
more promising investments is impaired. However, in an attempt to increase
shareholders' liquidity, the Company has instituted a redemption plan whereby
shareholders are able, subject to available funds, to tender their shares once
each year for 90% of the fair market value of the shares as determined by the
Company. Outlined below, Edwards has summarized relevant factors that should be
considered in determining the amount of any discount from a publicly traded
security that may be afforded to FSP Corp.'s restricted securities to account
for lack of a "ready market" and the degree of illiquidity.
o "Put" Rights. FSP Corp. has incorporated a put right feature into their
investment structure. This right is a positive step in providing some
liquidity to shareholders. Shareholders have the right to "put" their
shares, once each year, to the Company for 90% of the fair market value of
their shares as determined by the Company. While shareholders only have
the ability to exercise this right infrequently and this right is subject
to available funds and may only be exercised at a discount, the
availability of this right is a positive relative to other private
securities. Adjustment: Positive.
o Dividend Payments. Very high payout of Cash Available for Distribution
(2003 estimated CAD payout ratio of 91.9%). Adjustment: Positive.
o Potential Buyers/Investors. Uncertainty exists regarding reception of the
Company's business model in the public markets. Currently, the only
potential buyer of an investor's shares is the Company. Adjustment:
Negative.
o Size of Block of Minority Shares. The Company has small blocks of minority
stock. Adjustment: Negative.
o Prospect of Public Offering or Sale of Company. The Company has indicated
its intent to list shares on a national exchange and allow them to become
publicly traded in the short to medium term assuming market reception.
Adjustment: Positive.
o High Dividend. The Company has a track record of paying a very high
dividend. Adjustment: Positive.
o Growth Prospects. While the Company's growth rate has moderated and the
growth prospects for the broader real estate market have declined due to
the economic slowdown, FSP Corp. has continued to achieve above average
growth relative to other REITs. Adjustment: Positive.
C-9
o Degree of Control, Swing Value. The shares subject to the Company's
Methodology are assumed to be minority shares and are widely held.
Individual shares of the Company do not possess any attributes of control
and are not distributed in such a way as to generate swing vote control
(i.e. the ability to control decisions based on the ability to be the
swing vote between two opposing sides). Adjustment: Negative.
o Buy-Sell Agreements. None. Adjustment: Negative.
o Stock's Quality Grade. Good profitability and growth prospects with a core
base of stable real estate revenues; average company size; no leverage.
Adjustment: Positive.
o Prospects for the Company. The Company seems to have found a niche in the
real estate market by syndicating unleveraged, single assets REIT shares.
The Company is lead by an experienced management team and has a history of
raising growth capital in both good and bad environments. Adjustment:
Positive.
o Prospects for the Real Estate Industry. The real estate market appears to
be as weak as is the overall economic environment. Adjustment: Negative.
o Prevailing Mood of Investing Public. The market for real estate securities
has gained increasing attention and credibility among non-dedicated
investors during the economic slowdown due to the sector's consistent
growth in cash flows and dividends. The sector also posted total returns
that outpaced the broader market in 2001 and has continued to do so in
2002. Adjustment: Positive.
A typical discount for the lack of marketability for a privately held company
would be approximately 35%. However, when taking into account the factors
discussed above, Edwards believes the Company's determination to use a lower
discount is not unreasonable. These factors include the low leverage and thus
higher quality income stream of FSP Corp., the redemption plan initiated by the
Company providing shareholders limited liquidity for their shares, the potential
liquidity event within the short to medium term and the high dividend payout
ratio.
Based on the above factors, Edwards believes the Company's determination to use
a lack of marketability discount of 5% to 10% of the Company's marketable
minority equity value is not unreasonable.
C-10
APPENDIX D
Franklin Street Properties Corp.
Valuation Overview
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9/10/2002 Without Merger
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Enterprise Value Low Mean High
-------------------------------- ----------------------------- ----------------------------- ------------------------------
CAD 32,242,000 32,242,000 32,242,000
Less: Interest Income on
Excess Cash (a) (270,000) (270,000) (270,000)
----------- ----------- -------------
Adjusted CAD 31,972,000 31,972,000 31,972,000
CAD Multiple 11.0x 12.0x 13.3x
----------- ----------- -------------
Sub-Total 351,692,000 383,664,000 425,227,600
Plus: Excess Cash 13,500,000 13,500,000 13,500,000
----------- ----------- -------------
Enterprise Value 365,192,000 397,164,000 438,727,600
=========== =========== =============
Marketability Discount 10% Discount 5% Discount 10% Discount 5% Discount 10% Discount 5% Discount
-------------------------------- ------------ ----------- ------------ ----------- ------------ -------------
Discount (36,519,200) (18,259,600) (39,716,400) (19,858,200) (43,872,760) (21,936,380)
------------ ----------- ------------ ----------- ------------ -------------
Fair Market Value 328,672,800 346,932,400 357,447,600 377,305,800 394,854,840 416,791,220
Fair Market Value Per Share
--------------------------------
Shares Outstanding 24,630,247 24,630,247 24,630,247
Fair Market Value / Share $13.34 $14.09 $14.51 $15.32 $16.03 $16.92
Estimated Valuation Range / Share $13.34 - $16.92
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9/10/2002 Pro Forma for Merger
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Enterprise Value Low Mean High
-------------------------------- ----------------------------- ----------------------------- ------------------------------
CAD 63,047,000 63,047,000 63,047,000
Less: Interest Income on
Excess Cash (b) (520,000) (520,000) (520,000)
----------- ----------- -------------
Adjusted CAD 62,527,000 62,527,000 62,527,000
CAD Multiple 11.0x 12.0x 13.3x
----------- ----------- -------------
Sub-Total 687,797,000 750,324,000 831,609,100
Plus: Excess Cash 26,000,000 26,000,000 26,000,000
----------- ----------- -------------
Enterprise Value 713,797,000 776,324,000 857,609,100
Marketability Discount 10% Discount 5% Discount 10% Discount 5% Discount 10% Discount 5% Discount
Discount (71,379,700) (35,689,850) (77,632,400) (38,816,200) (85,760,910) (42,880,455)
------------ ----------- ------------ ----------- ------------ -------------
Fair Market Value 642,417,300 678,107,150 698,691,600 737,507,800 771,848,190 814,728,645
Estimated Valuation Range $642,417,300 - $814,728,645
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Notes
--------------------------------
(a) FSP Corp. has excess cash reserves of $13.5 million earning 2% annually
(b) FSP Corp. and the Target REITs have combined excess cash reserves of $26.0
million earning 2% annually
D-1
PROXY
FRANKLIN STREET PROPERTIES, CORP.
SPECIAL MEETING OF STOCKHOLDERS
March [28], 2003
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned, revoking all prior proxies, hereby appoints George J.
Carter and Barbara J. Corinha and each of them, with full power of substitution,
as Proxies to represent and vote as designated hereon all shares of stock of
Franklin Street Properties, Corp. (the "Company") which the undersigned would be
entitled to vote if personally present at the Special Meeting of Stockholders of
the Company to be held on Friday, March [28], 2003, at [9:00] a.m., Boston time,
at the offices of the Company, 401 Edgewater Place, Suite 200, Wakefield,
Massachusetts and at any adjournment thereof with respect to the matters set
forth on the reverse side hereof.
PLEASE FILL IN, DATE, SIGN AND MAIL THIS PROXY
IN THE ENCLOSED POST-PAID RETURN ENVELOPE.
------------- -------------
SEE REVERSE SEE REVERSE
SIDE CONTINUED AND TO BE SIGNED ON REVERSE SIDE SIDE
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|X| Please mark
votes as in
this example.
IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED IN FAVOR OF THE
PROPOSALS SET FORTH BELOW.
1. Agreement and Plan of Merger, dated FOR AGAINST ABSTAIN
January 14, 2003, by and among the
Company and 13 real estate |_| |_| |_|
investment trusts.
MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT. |_|
In their discretion, the Proxies are
authorized to vote upon such other
business as may properly come before
the meeting or any adjournment thereof.
Please sign exactly as your name
appears hereon. If the stock is
registered in the names of two or more
persons, each should sign. Executors,
administrators, trustees, guardians,
attorneys and corporate officers should
add their titles.
Signature: _________________________________ Date: ______________________
Signature: _________________________________ Date: ______________________