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. 2)
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.
|_| 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:
(ii) Aggregate number of securities to which transaction applies:
(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):
(iv) Proposed maximum aggregate value of transaction:
(v) Total fee paid:
|*| Fee paid previously with preliminary materials.
*
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|_| 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:
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(4) Date Filed:
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* Franklin Street Properties Corp. previously paid the Commission a fee of
$73,750 upon the filing of its preliminary proxy statement on January 15,
2003.
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 with 13 real estate
investment trusts (the "Target REITs"), providing for FSP Corp. to acquire the
Target REITs by merger.
We will hold a special meeting of stockholders at 401 Edgewater Place,
Suite 200, Wakefield, Massachusetts, the corporate offices of FSP Corp., on
Wednesday, May [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. This proxy statement and
accompanying proxy card are being mailed on or about ________________, 2003 to
all stockholders of FSP Corp. entitled to notice of and to vote at the special
meeting. 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, to the holders of
preferred stock of the Target REITs.
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 73 to 77
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. The
Target REIT stockholders will own 50.37% of the voting power and
percentage ownership in FSP Corp. following the consummation of the
mergers. Of course, the mergers will also substantially increase the
assets owned by FSP Corp. (See page 7 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 page 43 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. The FSP Board did not
establish a committee of independent representatives to evaluate and
approve the mergers on behalf of FSP Corp. Under Maryland law, the
FSP Board cannot delegate to a third party its fiduciary duties
relating to the determination to approve or not approve the mergers.
Because all of the members of the FSP Board have significant
conflicts of interest, as described above, and none can, therefore,
be considered "independent", the FSP Board determined it could not
establish a committee of independent representatives to evaluate and
approve the mergers on behalf of FSP Corp. The FSP Board determined
that appointing independent representatives to negotiate the terms
of the mergers and to make recommendations to the FSP Board would
not be worth the anticipated cost, since the FSP Board would still
be obligated to make its own independent determinations. (See pages
38 to 43 of the enclosed proxy statement for additional
information.)
Q: Will the investment objectives and policies of FSP Corp. change?
A: No. (See pages 74 to 76 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 entities whose
syndication it sponsors 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 5 to 6 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 32 to 34
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 15 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 June 1, 2003. (See
page 21 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. The affirmative vote of the holders of a
majority of the shares of FSP common stock issued, outstanding and
entitled to vote at the special meeting is required to approve the
mergers. If one or more Target REITs does not obtain the vote
required for the consummation of the merger with such Target REIT,
FSP Corp. will not proceed with the mergers of
any other Target REIT. The affirmative vote of a majority of the
common stock in each Target REIT is also required to effectuate the
applicable merger. FSP Corp. is the sole stockholder of the common
stock of each Target REIT, and will vote those shares in favor of
the respective mergers. (See page 19 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 Wednesday, May
[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 Board 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 3.
Very truly yours,
George J. Carter
President and Chief Executive
Officer
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 73 to 77)
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 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 Property Management LLC, a
Massachusetts limited liability company, and FSP Holdings LLC, a Delaware
limited liability company. 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 mergers will not cause the Combined Company to incur any
additional fees for management of its investments.
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.
i
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. As a result of the mergers, fee income received
by FSP Property Management from the 13 Target REITs will be eliminated on the
consolidated financial statements of the Combined Company for accounting
purposes.
FSP Corp. holds all of its interests in real property through the 17
Sponsored Partnerships that it has acquired, each of which owns or owned real
property. FSP Holdings, which is a wholly-owned subsidiary of FSP Corp., is the
general partner of each Sponsored Partnership, and FSP Corp. is the sole limited
partner of each Sponsored Partnership.
FSP Corp. holds a nominal interest in each of the Sponsored REITs through
its ownership of 100% of the common stock of each Sponsored REIT. The preferred
stock interests in each Sponsored REIT are held by investors who acquired their
interests in an offering exempt from registration pursuant to Section 4(2) of
the Securities Act and Regulation D promulgated thereunder. The Sponsored REITs
include the 13 Target REITs. After the consummation of the mergers, FSP Corp.
will continue to own all of the interests in the 17 Sponsored Partnerships. The
Target REITs will merge with and into FSP Corp., with FSP Corp. as the surviving
corporation, and will therefore no longer exist after the consummation of the
mergers. The remaining three Sponsored REITs will be unaffected by the mergers.
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 115 to 125)
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. FSP Forest Park IV Corp. holds
an office building in Charlotte, North Carolina; FSP Gael Apartments Corp. holds
an apartment complex in Houston, Texas; FSP Goldentop Technology Center Corp.
holds a research and development/office building in San Diego, California; FSP
Centennial Technology Center Corp. holds "flex" office buildings in Colorado
Springs, Colorado; FSP Meadow Point Corp. holds an office building in Chantilly,
Virginia; FSP Timberlake Corp. holds office buildings in Chesterfield, Missouri;
FSP Federal Way Corp. holds office buildings in Federal Way, Washington; FSP
Fair Lakes Corp. holds an office building in Fairfax, Virginia; FSP Northwest
Point Corp. holds an office building in Elk Grove Village, Illinois; FSP
Timberlake East Corp. holds an office building in Chesterfield, Missouri; FSP
Merrywood Apartments Corp. holds an apartment complex in Katy, Texas; FSP Plaza
Ridge I Corp. holds an office building in Herndon, Virginia; and FSP Park Ten
Corp. 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 December 31,
2002 and the weighted average annual rent per net rentable square foot for the
year ended December 31, 2002:
ii
Weighted Annual Average
Percentage of Rentable Rent/Net Rentable
Square Feet Leased as Rentable Square Foot for Year
of 12/31/02 Square Feet Ended 12/31/02
----------- ----------- --------------
Forest Park 87% 61,291 $14.14/sf
The Gael 95% 187,338 $14.15/sf
Goldentop 100% 141,405 $17.05/sf
Centennial 100% 110,730 $16.54/sf
Meadow Point 100% 134,849 $26.82/sf
Timberlake 100% 232,722 $26.35/sf
Federal Way 100% 117,227 $15.10/sf
Fair Lakes 100% 210,993 $30.85/sf
Northwest Point 100% 176,848 $28.99/sf
Timberlake East 92% 116,361 $22.78/sf
Merrywood 95% 231,363 $11.34/sf
Plaza Ridge I 100% 158,018 $34.58/sf
Park Ten 100% 155,715 $24.05/sf
Votes Required (Page 19)
The affirmative vote of the holders of a majority of the shares of FSP
Common Stock issued, outstanding and entitled to vote at the special 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 applicable merger.
If one or more Target REITs does not obtain the vote required for the
consummation of the merger with such Target REIT, FSP Corp. will not proceed
with the mergers of any other Target REIT. Each Target REIT will solicit the
vote of its stockholders separately. The affirmative vote of a majority of the
common stock in each Target REIT is also required to effectuate the applicable
merger. FSP
iii
Corp. is the sole stockholder of the common stock of each Target REIT, and will
vote those shares in favor of the respective mergers.
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
stock of each Target REIT vote to approve the mergers.
The executive officers and directors of FSP Corp. hold an aggregate of
3,705,307.01 shares of FSP common stock, constituting approximately 15.04% of
the outstanding 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.
FSP stockholders will incur substantial dilution to their 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 as a result of the mergers.
The Target REIT stockholders will own 50.37% of the voting power and percentage
ownership in FSP Corp. following the consummation of the mergers.
Recommendation to FSP Stockholders (Page 19)
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 15 to 23)
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 Boards of Directors of the Target
REITs (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, which is expected to be on or about June 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.
iv
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. FSP Corp. expects to issue
fractional shares of FSP common stock as merger consideration.
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
None of the shares of FSP common stock to be issued as merger
consideration to the Target REIT stockholders will be placed into escrow or
otherwise withheld as a source of potential compensation to FSP Corp. should the
Combined Company discover, after the consummation of the mergers, that any of
the Target REITs incurred any undisclosed liabilities prior to the consummation
of the mergers.
v
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
stock of each Target REIT vote to approve the mergers.
The following table sets forth: (i) the value ascribed to each Target REIT
for purposes of the merger consideration, and (ii) the sum of the appraised
value of the property held by each Target REIT and the estimated cash reserve
balances as of September 30, 2002.
Target REIT Value Ascribed Appraised Value (1)
----------- -------------- ---------------
Forest Park $ 8,398,178.30 $ 7,975,000
The Gael $ 21,864,114.98 $ 19,475,000
Goldentop $ 24,935,572.23 $ 23,650,000
Centennial $ 16,093,407.58 $ 14,120,000
Meadow Point $ 26,523,256.48 $ 23,600,000
Timberlake $ 51,556,660.30 $ 44,025,000
Federal Way $ 19,999,997.00 $ 17,050,000
Fair Lakes $ 48,181,948.80 $ 41,200,000
Northwest Point $ 37,249,994.41 $ 31,650,000
Timberlake East $ 25,188,759.38 $ 21,675,000
Merrywood $ 20,827,428.64 $ 18,000,000
Plaza Ridge I $ 40,249,977.00 $ 34,525,000
Park Ten $ 27,682,040.38 $ 23,750,000
--------------- ------------
Total $368,751,335.48 $320,695,000
(1) As of September 30, 2002, includes cash reserve balances and amounts
have been rounded to the nearest $25,000.
The FSP Board determined the value ascribed to the Target REITs on the
basis of the value the acquisition of the Target REITs would add to FSP Corp. as
determined on an "enterprise" or "on-going concern" basis. These aggregate
values exceed the aggregate appraised values of the Target REITs by
approximately $48 million. FSP Corp. has used the enterprise or on-going concern
method of valuing acquisitions in the past and believes that this method, rather
than the appraised value method, is the customary method to value REITs.
Conditions Precedent to the Mergers (Pages 35 to 36)
The respective obligations of each party to effect the mergers are subject
to the fulfillment on or before the effective date of the mergers of certain
conditions, including the following:
o the approval of the merger agreement and the mergers by the
FSP stockholders and the Target REIT stockholders;
vi
o that FSP Corp. reasonably believes 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;
o the receipt of all necessary consents, waivers, approvals,
authorizations or orders and the making of all required
filings;
o that 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 applicable tax or other regulatory
provisions;
o that 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; and
o that the representations of FSP Corp. and the Target REITs set
forth in the merger agreement are true and complete in all
material respects as of the closing date of the mergers.
Expected Benefits from the Mergers (Pages 28 to 30)
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 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.
vii
Fairness of the Mergers (Pages 38 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 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.
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. Given that no
member of the FSP Board is "independent" and each member has
significant conflicts of interest in connection with the
mergers, as described below, the FSP Board determined that it
could not establish an independent committee to evaluate and
approve the mergers. Under Maryland law, the FSP Board cannot
delegate to a third party its fiduciary duties relating to the
decision to approve or not approve the mergers. The FSP Board
determined that appointing independent representatives to
negotiate the terms of the mergers and to make recommendations
to the FSP Board would not be worth the anticipated cost,
since the FSP Board would still be obligated to make its own
independent determinations. The FSP Board did consider
obtaining a fairness opinion from a third party but determined
that the estimated cost of obtaining such an opinion exceeded
its anticipated benefits to FSP Corp. The FSP Board used the
same methodology to value FSP Corp. and the Combined Company
that FSP Corp.'s predecessor-in-interest, the FSP Partnership,
used in connection with its acquisition of Sponsored
Partnerships, which involved similar conflicts of interest.
o FSP Corp.'s management retained A.G. Edwards, Inc. 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. A.G. Edwards' report only
addressed the methodology used by management to value FSP
Corp. and the Combined Company, and did not constitute an
opinion as to the fairness of the transaction to the FSP
stockholders (a "fairness opinion"). In rendering a fairness
opinion, certain additional extrinsic analyses, tasks and
judgments necessarily must be undertaken and completed. These
include, among other things: an independent review of
appraisals; site inspections; analyses of local and national
economic conditions, Target REIT properties, past transactions
and comparable companies; detailed due diligence; a review of
comparable transactions; random interviews with key investors;
and analysis of discounted cash flow, pro forma financial
statements, synergies upon merger and each party's
contribution to such synergies. In addition, A.G. Edwards
would have charged substantially more to render a fairness
opinion than for a report on the methodology used to value FSP
Corp. and Combined Company.
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. The FSP Board
took into account the relative values set forth in these
appraisals in allocating the merger consideration among the
Target REITs.
viii
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 and considered FSP Corp.'s management's
recommendation of ranges of estimated values of FSP Corp. and
the Combined Company as set forth in the Valuation Overview
attached hereto as Appendix D.
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 did not establish a committee of independent
representatives to evaluate and approve the mergers on behalf
of FSP Corp. Under Maryland law, the FSP Board cannot delegate
to a third party its fiduciary duties relating to the
determination to approve or not approve the mergers. Because
all of the members of the FSP Board have significant conflicts
of interest, as described above, and none can, therefore, be
considered "independent", the FSP Board determined it could
not establish a committee of independent representatives to
evaluate and approve the Mergers on behalf of FSP Corp. The
FSP Board determined that appointing independent
representatives to negotiate the terms of the mergers and to
make recommendations to the FSP Board would not be worth the
anticipated cost, since the FSP Board would still be obligated
to make its own independent determinations. 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.
ix
Determination of Merger Consideration (Pages 38 to 40)
The FSP Board determined the amount of merger consideration by first estimating
a value for FSP Corp. of approximately $363,296,000, which fell within the range
of values of $328 million to $416 million submitted to the FSP Board by the
management of FSP Corp. The FSP Board then estimated a value for the Combined
Company of approximately $732,047,000, which fell within the range of values of
$642 million to $815 million submitted to the FSP Board by the management of FSP
Corp. In determining these estimated values, the FSP Board took into account the
assets and liabilities of FSP Corp. and the Combined Company, their expected
cash available for distribution, the multiples to cash available for
distribution commonly used in valuing REITs and the limited liquidity of FSP
common stock. The FSP Board did not derive these values by applying a mechanical
formula, but instead exercised its judgement in good faith after consideration
of the relevant factors.
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
$368,751,000. The increase in the estimated value of the Combined Company over
the estimated value of FSP Corp. derives from the increased cash available for
distribution of the Combined Company and the increased percentage of revenue
attributable to real estate assets rather than transactional business. Because
both the increased cash available for distribution and the higher percentage of
revenue generated by real estate assets are attributable to the Target REITs,
the FSP Board determined that it would be fair to the FSP stockholders to fix
the merger consideration in an amount equal to the increase in estimated value.
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 $368,751,000 estimated value differential divided by the
$14.75 per share current estimated value of FSP Corp.
Third Party Reports (Pages 44 to 50)
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 (as described in "Fairness of the Mergers")
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 performing its analysis, A.G. 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. A.G. Edwards also assumed in all respects material to
its analysis that the representations and warranties of each party contained in
the merger agreement were true and correct, that each party would 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 mergers would be
satisfied without any modification or waiver thereof. A.G. Edwards also assumed
that all governmental, regulatory
x
and other consents and approvals contemplated by the merger agreement would be
obtained and that in the course of obtaining any of those consents, no
restrictions would be imposed or waivers made that would have an adverse effect
on the contemplated mergers. A.G. Edwards also assumed that the mergers would be
accounted for in accordance with generally accepted accounting principles and
that the mergers would be consummated on the terms contained in the merger
agreement without any waiver or modification of any material terms or conditions
by the parties.
In particular, A.G. Edwards received the "Valuation Overview" prepared by
FSP Corp, and attached to this proxy statement as Appendix D. FSP Corp.
determined the values set forth in the Valuation Overview on August 15, 2002.
A.G. Edwards concluded that the methodology techniques used in the Valuation
Overview, the range of multiples applied to cash available for distribution 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 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
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.
xi
FSP Corp. took the appraisals into account in allocating the merger
consideration among the Target REITs. See "Fairness of the Mergers - Fairness
of the Merger Consideration - Allocation of Merger Consideration".
Conflicts of Interest (Pages 51 to 52)
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.
No unaffiliated representatives were appointed to negotiate the terms of
the mergers on behalf of FSP Corp. Moreover, no committee of independent
representatives was established to evaluate and approve the mergers on behalf of
FSP Corp. Under Maryland law, the FSP Board cannot delegate to a third party its
fiduciary duties relating to the determination to approve or not approve the
mergers. Because all of the members of the FSP Board have significant conflicts
of interest and none are, therefore, considered "independent", the FSP Board
determined it could not establish a committee of independent representatives to
evaluate and approve the mergers on behalf of FSP Corp. The FSP Board determined
that appointing independent representatives to negotiate the terms of the
mergers and to make recommendations to the FSP Board would not be worth the
anticipated cost, since the FSP Board still would be obligated to make its own
independent determinations.
Mr. Silverstein and Mr. McGillicuddy are the only officers or directors of
FSP Corp. who are not also officers or directors of any Target REIT. The
remainder of the officers and directors of FSP Corp. serve as a director and/or
officer, in the positions listed above, of each Target REIT.
xii
Upon completion of the mergers, Mr. Silverstein's percentage ownership
interest of FSP Corp. will increase from 4.66% to 10.68%, Mr. McGillicuddy's
percentage ownership interest will increase from 4.02% to 5.21%, and the
percentage ownership of the current directors and executive officers as a group
will increase from 15.04% to 19.06%.
Dissenters' Rights of FSP Stockholders (Page 114)
No FSP stockholder will be entitled to dissenters' rights in connection
with the mergers.
Material United States Federal Income Tax Considerations (Pages 144 to 159)
The mergers are intended to qualify as reorganizations within the meaning
of Section 368(a) of the Internal Revenue Code of 1986, as amended. If the
mergers qualify as reorganizations, there will be no direct United States
federal income tax consequences to FSP Corp. as a result of the mergers.
However, as a result of the combination of FSP Corp. with the Target REITs
pursuant to the mergers, FSP Corp. might no longer qualify as a real estate
investment trust under Section 856 of the Internal Revenue Code. FSP Corp. could
lose its ability to so qualify for a variety of reasons relating to the nature
of the assets acquired from the Target REITs, the identity of the shareholders
of the Target REITs who become shareholders of FSP Corp. or the failure of one
or more of the Target REITs to have previously qualified as a real estate
investment trust.
There should be no United States federal income tax consequences of the
mergers to FSP Stockholders, subject to certain risks described more fully in
"Material United States Federal Income Tax Considerations."
Accounting Treatment (Pages 19 to 20)
Each of the mergers will be accounted for as a purchase under generally
accepted accounting principles.
Dividends in Respect of First Quarter 2003 (Pages 6 to 7)
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. Pursuant to the merger agreement, such dividends will
be paid in an amount consistent with past practice and custom of the relevant
Target REIT. 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 of
the mergers. In addition, FSP Corp. expects to declare in the first quarter of
2003 and pay to its stockholders in the second quarter of 2003 dividends in
respect of first quarter 2003 operations. Such dividends will be payable to
holders of FSP common stock as of a record date prior to the effective date of
the mergers and, therefore, target stockholders will only receive such dividends
to the extent that they are also FSP stockholders and only to the extent of
their holdings of FSP common stock. The cash available for this dividend and
xiii
possibly for future dividends to the FSP stockholders will be reduced by the
amount of expenses related to the mergers paid by FSP Corp.
Expenses of the Mergers (Page 23)
The expenses payable by FSP Corp. in connection with the mergers are
estimated to be $900,000.
xiv
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 Wednesday, May [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 Wednesday,
May [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 Wednesday, May [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 "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. FSP Corp. expects to issue
fractional shares of FSP Common Stock as Merger Consideration.
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
-------------
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
RISK FACTORS...................................................................3
Risks Relating to the Mergers...............................................3
General Risks...............................................................8
THE MERGERS...................................................................15
Overview...................................................................15
The Parties................................................................15
Effect of the Mergers on Certain FSP Stockholders..........................17
Votes Required.............................................................19
Board Approvals............................................................19
Accounting Treatment.......................................................19
Interests of Certain Persons in the Mergers................................20
Material United States Federal Income Tax Considerations...................21
Timing and Effectiveness of the Mergers....................................21
Comparison of Ownership Rights.............................................21
Market Information.........................................................22
Independent Accountants....................................................23
Expenses of the Mergers....................................................23
BACKGROUND AND REASONS FOR THE MERGERS........................................24
History of FSP Corp. and the Target REITs..................................24
Background of the Mergers..................................................26
Reasons for the Mergers....................................................28
Consequences if Mergers not Completed......................................31
THE MERGER AGREEMENT..........................................................32
The Mergers................................................................32
Representations and Warranties.............................................34
Covenants..................................................................34
Conduct of Business Pending the Effective Date.............................35
Conditions Precedent to the Mergers........................................35
Termination................................................................36
Effect of Termination......................................................37
FAIRNESS OF THE MERGERS.......................................................38
Conclusions of the FSP Board...............................................38
Determination of Merger Consideration......................................38
Fairness of the Merger Consideration.......................................40
ADVICE OF FINANCIAL ADVISORS AND APPRAISALS...................................44
Advice of A.G. Edwards.....................................................44
Appraisals of the Target REITs' Properties.................................46
Conclusions as to Value....................................................50
CONFLICTS OF INTEREST.........................................................51
Common Composition of Directors and Officers...............................51
Ownership of FSP Stock.....................................................52
Consequences of Merger with Fair Lakes.....................................52
SELECTED FINANCIAL INFORMATION OF FSP CORP....................................53
SELECTED PRO FORMA CONSOLIDATED FINANCIAL DATA................................54
NOTES TO CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS..........................57
Organization and Operations................................................57
Basis of Presentation......................................................57
ASSUMPTIONS...................................................................57
COMPARATIVE PER share DATA....................................................61
DESCRIPTION OF FSP CORP.......................................................73
Business...................................................................73
Investment Objectives......................................................74
Policies...................................................................76
Competition................................................................76
Employees..................................................................77
Legal Proceedings..........................................................77
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS....................................................................78
Overview...................................................................78
Critical Accounting Policies...............................................80
Basis of Presentation......................................................80
Recent Accounting Standards................................................82
Financing and Other Commitments............................................84
Investments in Non-consolidated Entities...................................84
Results of Operations......................................................85
Trends and Uncertainties...................................................92
Liquidity and Capital Resources as of December 31, 2002....................94
Liquidity and Capital Resources as of December 31, 2001....................95
Liquidity and Capital Resources as of December 31, 2000....................95
Sources and Uses of Funds..................................................96
Related Party Transactions.................................................97
DESCRIPTION OF FSP CORP. CAPITAL STOCK........................................99
General....................................................................99
FSP Common Stock...........................................................99
Preferred Stock...........................................................100
Ownership Limits..........................................................100
Unregistered Shares.......................................................101
Redemption................................................................101
Classification of the FSP Board...........................................102
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...................103
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE...................................................................104
BENEFICIAL OWNERSHIP OF VOTING STOCK.........................................105
EXECUTIVE COMPENSATION.......................................................107
Certain Relationships and Related Transactions............................109
Employment Agreements.....................................................111
Compensation of Directors.................................................111
DIRECTORS AND EXECUTIVE OFFICERS.............................................112
NO DISSENTERS' APPRAISAL RIGHTS..............................................114
BUSINESS AND PROPERTIES OF THE TARGET REITs..................................115
SELECTED FINANCIAL INFORMATION FOR TARGET REITS..............................126
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF
TARGET REITS..............................................................134
Results of Operations (of the Target REITs on a combined basis)...........134
Trends and Uncertainties (for the Target REITs on a combined basis).......140
Liquidity and Capital Resources as of December 31, 2002
(for the Target REITs on a combined basis)................................141
Liquidity and Capital Resources as of December 31, 2001
(for the Target REITs on a combined basis)................................141
Liquidity and Capital Resources as of December 31, 2000
(for the Target REITs on a combined basis)................................142
Sources and Uses of Funds (for the Target REITs on a combined basis)......143
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS.....................144
LEGAL MATTERS................................................................160
STOCKHOLDER PROPOSALS........................................................160
FINANCIAL STATEMENTS
FSP Corp. Years ended December 31, 2002, 2001 and 2000............ F-2
Forest Park Year ended December 31, 2002............................ F-30
Year ended December 31, 2001............................ F-46
Year ended December 31, 2000............................ F-55
Period from date of inception to December 31, 1999...... F-65
The Gael Year ended December 31, 2002............................ F-76
Year ended December 31, 2001............................ F-90
Period from date of inception to December 31, 2000...... F-99
Goldentop Year ended December 31, 2002............................ F-109
Year ended December 31, 2001............................ F-125
Period from date of inception to December 31, 2000...... F-134
Centennial Year ended December 31, 2002............................ F-144
Year ended December 31, 2001............................ F-160
Period from date of inception to December 31, 2000...... F-169
Meadow Point Year ended December 31, 2002............................ F-179
Period from date of inception to December 31, 2001...... F-195
Timberlake Year ended December 31, 2002............................ F-204
Period from date of inception to December 31, 2001...... F-221
Federal Way Year ended December 31, 2002............................ F-230
Period from date of inception to December 31, 2001...... F-247
Fair Lakes Year ended December 31, 2002............................ F-256
Period from date of inception to December 31, 2001...... F-273
Northwest Point Year ended December 31, 2002............................ F-282
Period from date of inception to December 31, 2001...... F-299
Timberlake East Period from date of inception to December 31, 2002...... F-309
Merrywood Period from date of inception to December 31, 2002...... F-328
Plaza Ridge I Period from date of inception to December 31, 2002...... F-344
Park Ten Period from date of inception to December 31, 2002...... F-363
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 Wednesday, May [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 shares of FSP Common Stock entitled to cast votes at a
meeting 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 issued, outstanding, and entitled to vote 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,
Suite 200, Wakefield, Massachusetts
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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 or
forecasts 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 3. 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.
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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 LLC, a Massachusetts limited liability company
("FSP Property Management"), a subsidiary of FSP Corp.,
pursuant to Management Services Agreements under which FSP
Corp. receives certain fees for its management services.
No unaffiliated representatives were appointed to negotiate the terms of
the Mergers on behalf of FSP Corp. Moreover, no committee of independent
representatives was established to evaluate and approve the Mergers on behalf of
FSP Corp. Under Maryland law, the FSP Board cannot delegate to a third party its
fiduciary duties relating to the determination to approve or not approve the
Mergers. Because all of the members of the FSP Board have significant conflicts
of interest and none are, therefore, considered "independent", the FSP Board
determined it could
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not establish a committee of independent representatives to evaluate and approve
the Mergers on behalf of FSP Corp. The FSP Board determined that appointing
independent representatives to negotiate the terms of the Mergers and to make
recommendations to the FSP Board would not be worth the anticipated cost, since
the FSP Board would still be obligated to make its own independent
determinations.
Mr. Silverstein and Mr. McGillicuddy are the only officers or directors of
FSP Corp. who are not also officers or directors of any Target REIT. The
remainder of the officers and directors of FSP Corp. serve as a director and/or
officer, in the positions listed above, of each Target REIT.
Upon completion of the Mergers, Mr. Silverstein's percentage ownership
interest of FSP Corp. will increase from 4.66% to 10.68%, Mr. McGillicuddy's
percentage ownership interest will increase from 4.02% to 5.21%, and the
percentage ownership of the current directors and executive officers as a group
will increase from 15.04% to 19.06%.
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
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.
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 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 FSP Board did not obtain a fairness opinion from a third party in connection
with the Mergers.
The FSP Board did not obtain a fairness opinion from a third party in
connection with the Mergers. Had the FSP Board obtained a fairness opinion from
a third party, FSP Stockholders would have had some assurance that an
independent third party had determined that the Merger Consideration paid to the
Target REIT Stockholders was fair to the FSP Stockholders and been able to rely
on such opinion in making their decision of whether to vote for the Mergers,
rather than only relying on the FSP Board's recommendation. Moreover, it is
possible that no independent third party would have delivered a fairness
opinion, in which case FSP Stockholders
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would have been able to consider that fact in their determination to vote for or
against 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
16 real properties. Immediately following the consummation of the Mergers, FSP
Corp. will own 29 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.
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 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
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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; however, the Merger Agreement provides that such dividends will be
paid in an amount consistent with past practice and custom of the relevant
Target REIT. 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 of the mergers (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. Such dividends will be payable to holders of FSP Common Stock
as of a record date prior to the Effective Date and, therefore, Target
Stockholders will only receive such dividends to the extent that they are also
FSP Stockholders and only to the extent of their holdings of FSP Common Stock.
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. 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.
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The Combined Company will hold 29 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 officers and directors of FSP Corp. will have an increased level of voting
control after the Mergers.
The officers and directors of FSP Corp. currently own 15.04% of FSP Corp.
Specifically, Mr. Silverstein and Mr. McGillicuddy own 4.66% and 4.02%,
respectively, of FSP Corp. After the Mergers the directors and officers of the
Combined Company will own 19.06% of the Combined Company. Messrs. Silverstein
and McGillicuddy will own 10.68% and 5.21%, respectively, of the Combined
Company. The greater concentration of ownership in the officers and directors of
the Combined Company may make it easier for the Board of Directors, or
management, of the Combined Company to obtain in the future shareholder approval
of corporate actions or election of the Combined Company's nominees as
directors.
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.
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Following the consummation of the Mergers, the Combined Company may not longer
qualify as a REIT.
As a result of the combination of FSP Corp. with the Target REITs pursuant
to the Mergers, FSP Corp. might no longer qualify as a real estate investment
trust under Section 856 of the Internal Revenue Code of 1986, as amended (the
"Code"). FSP Corp. could lose its ability to so qualify for a variety of reasons
relating to the nature of the assets acquired from the Target REITs, the
identity of the shareholders of the Target REITs who become shareholders of FSP
Corp. or the failure of one or more of the Target REITs to have previously
qualified as a real estate investment trust.
If the Combined Company's line of credit is substantially increased, the
Combined Company may borrow more than it is capable of reasonably repaying.
One expected benefit from the Mergers is that the Combined Company's
increased asset base should give it the flexibility to increase FSP Corp.'s
$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 to finance their acquisition of real property. However, if the Combined
Company borrows heavily against any increased line of credit, the Combined
Company may experience difficulties repaying such line of credit, particularly
if the Combined Company's cash flows are substantially reduced for any reason.
An increased line of credit may create a greater likelihood that the Combined
Company will not be able to sustain its debt obligations under such line of
credit and cause a default thereunder.
General 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
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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.
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.
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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.
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 - 28%; Northeast - 30%; Midwest - 19%;
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 - 21% and Washington, DC - 13%.
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.
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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. Thirteen out of the 17
FSP Corp. properties' percentage of rentable square feet leased was in excess of
95% as of December 31, 2002 and 11 out of 13 of the Target REITs' properties
percentage of rentable square feet leased was in excess of 95% as of December
31, 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
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. Each Target REIT obtained a Phase I
environmental assessment for the property held by it at the time of acquisition
of such property. FSP Corp. (through its subsidiaries) has been involved in the
operation of each such property since that acquisition, and is not aware of any
material changes to the environmental conditions at any of the properties held
by the Target REITs since their acquisition. However, 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;
11
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. The property held by each Target REIT was inspected for compliance
with the ADA at the time of acquisition of such property and was found to be in
material compliance. FSP Corp. (through its subsidiaries) has been involved in
the operation of each such property since that acquisition, and is not aware of
any alterations to the properties that were not made in compliance with the ADA.
There are significant conditions to the Combined Company's obligation to redeem
shares of FSP Common Stock, and any such redemption will result in the
stockholders tendering shares receiving less than their fair market value.
Under the Combined Company's redemption plan, the Combined Company is only
obligated to use its best efforts to redeem shares of FSP Common Stock from
stockholders wishing to have them redeemed. There are significant conditions to
the Combined Company's obligation to redeem shares of FSP Common Stock
including:
o the Combined Company cannot be insolvent or be rendered
insolvent by the redemption;
o redemption cannot impair the capital or operations of the
Combined Company;
12
o the redemption cannot contravene any provision of federal or
state securities laws;
o the redemption cannot result in the Combined Company's failing
to qualify as a REIT; and
o the Combined Company's management must determine that the
redemption is in the best interests of the Combined Company.
Any redemption effected by the Combined Company under this plan would
result in the stockholders tendering shares of FSP Common Stock receiving 90% of
the fair market value, as determined by the FSP Board in its sole and absolute
discretion, of such shares and not their full fair market value.
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.
13
The officers and directors of FSP Corp. may have significant conflicts of
interest.
FSP Corp. is subject to potential conflicts of interest arising from the real
estate activities of existing and future Sponsored REITs. The officers of FSP
Corp., who are also officers of the Sponsored REITs and are expected to be
officers of future Sponsored REITs, will not be spending full time in connection
with the management of the business of FSP Corp. and will be actively engaged in
supervising the acquisition and/or operation of properties that may be acquired
by Sponsored REITs and that may be in competition with properties owned by FSP
Corp. The fact that these officers will be actively engaged in the operation of
Sponsored REITs may affect their ability to perform their respective obligations
to FSP Corp. It is possible that FSP Corp. may be presented with business
opportunities that might be appropriately pursued by it or by an existing or
newly-formed Sponsored REIT. Finally, two of the directors of FSP Corp., Barry
Silverstein and Dennis J. McGillicuddy, own a significant number of shares in
the Sponsored REITs and may own shares in future Sponsored REITs.
14
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. The Merger Agreement provides for the merger of
each Target REIT with and into FSP Corp., with FSP Corp. being the surviving
corporation.
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 June 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 Franklin Street Partners Limited Partnership, a
Massachusetts limited partnership (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 LLC, a
Massachusetts limited liability company ("FSP Investments"), 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) 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. The Mergers will
not cause the Combined Company to incur any additional fees for management of
its investments. 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.
15
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. As a result of the Mergers, fee income received
by FSP Property Management from the 13 Target REITs will be eliminated on the
consolidated financial statements of the Combined Company for accounting
purposes.
As of December 31, 2002, FSP Corp. had sponsored 33 Sponsored Entities, 17
of which are Sponsored Partnerships and 16 of which are Sponsored REITs, and
each of which owns or owned real property. In February 2003, FSP Corp.
consummated the sale of the property owned by a Sponsored Partnership, thereby
reducing to 16 the number of Sponsored Partnerships owning real property. FSP
Holdings, which is a wholly-owned subsidiary of FSP Corp., is the general
partner of each Sponsored Partnership. The FSP Partnership acquired all limited
partners' interest in the Sponsored Partnerships pursuant to mergers effective
January 1, 1999, January 1, 2000 and October 1, 2000. In connection with these
mergers, the FSP Partnership issued units of the FSP Partnership to the limited
partners of the Sponsored Partnerships. As a result of the Conversion, FSP Corp.
is now the sole limited partner of each Sponsored Partnership. Reference in this
Proxy Statement to FSP Corp.'s properties means the real properties owned by
these Sponsored Partnerships.
FSP Corp. holds a nominal interest in each of the Sponsored REITs through
its ownership of 100% of the common stock of each Sponsored REIT. The preferred
stock interests in each Sponsored REIT are held by investors who acquired their
interests in an offering exempt from registration pursuant to Section 4(2) of
the Securities Act and Regulation D promulgated thereunder. The Sponsored REITs
include the 13 Target REITs. After the consummation of the Mergers, FSP Corp.
will continue to own all of the interests in the 17 Sponsored Partnerships. The
Target REITs will merge with and into FSP Corp., with FSP Corp. as the surviving
corporation, and will therefore no longer exist after the consummation of the
Mergers. The remaining three Sponsored REITs will be unaffected by the Mergers.
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.
16
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.
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, (ii) each director of FSP
Corp. and (iii) all directors and executive officers as a group as follows:
17
Percentage of
Number of Shares Outstanding FSP
Beneficially Owned Common Stock After
After Consummation Consummation of the
of Mergers(1)(2) 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................... 259,055.99 *
Barbara J. Corinha.................. 25,522.71 *
Janet P. Notopoulos................. 12,574.59 *
All current directors and executive
officers as a group (8 persons)...... 9,459,158.99 19.06%
----------
* 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.
(2) See Notes to table entitled "Beneficial Ownership of Voting Stock" on page
105 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).
18
Votes Required
FSP Corp. The affirmative vote of the holders of a majority of the shares
of FSP Common Stock issued, outstanding and entitled to vote 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
3,705,307.01 shares of FSP Common Stock, constituting approximately 15.04% of
the outstanding 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
applicable Mergers. If one or more Target REITs does not obtain the vote
required for the consummation of the Merger with such Target REIT, FSP Corp.
will not proceed with the Mergers of any other Target REIT. Each Target REIT
will solicit the vote of its Target REIT Stockholders separately. The
affirmative vote of the holders of a majority of the common stock in each Target
REIT is also required to effectuate the applicable Merger. FSP Corp. is the sole
stockholder of the common stock of each Target REIT, and will vote those shares
in favor of the respective Mergers.
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.
FSP Stockholders will incur substantial dilution to their 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 as a result of the Mergers.
The Target REIT Stockholders will own 50.37% of the voting power and percentage
ownership in FSP Corp. following the consummation of the Mergers.
Board Approvals
The FSP Board has voted to approve the Merger Agreement, providing for the
Mergers and the issuance of the Merger Consideration.
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".
FSP Corp. believes that the fair value of the real estate assets
(appraised value of the properties) plus the other assets and liabilities of
each Target REIT acquired is more readily
19
determinable than the fair market value of the consideration being given by FSP
Corp. in connection with the Mergers. The assets of each Target REIT are
comprised principally of real estate assets. Each Target REIT's other assets and
liabilities are those ordinarily occurring in real estate operations. The
valuation of FSP Corp.'s stock is more complex as it is based on a model that
includes both an investment banking business, which is transactional in nature,
as well as an asset-driven real estate business.
Accordingly, upon merger, the assets and liabilities of each Target REIT
will be recorded at their fair values. The financial statements of FSP Corp.
will reflect the consolidated 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.
No unaffiliated representatives were appointed to negotiate the terms of
the Mergers on behalf of FSP Corp. Moreover, no committee of independent
representatives was established to evaluate and approve the Mergers on behalf of
FSP Corp. Under Maryland law, the FSP Board cannot delegate to a third party its
fiduciary duties relating to the determination to approve or not approve the
Mergers. Because all of the members of the FSP Board have significant conflicts
of interest and none are, therefore, considered "independent", the FSP Board
determined it could
20
not establish a committee of independent representatives to evaluate and approve
the Mergers on behalf of FSP Corp. The FSP Board determined that appointing
independent representatives to negotiate the terms of the Mergers and to make
recommendations to the FSP Board would not be worth the anticipated cost, since
the FSP Board would still be obligated to make its own independent
determinations.
Mr. Silverstein and Mr. McGillicuddy are the only officers or directors of
FSP Corp. who are not also officers or directors of any Target REIT. The
remainder of the officers and directors of FSP Corp. serve as a director and/or
officer, in the positions listed above, of each Target REIT.
Upon completion of the Mergers, Mr. Silverstein's percentage ownership
interest will increase from 4.66% to 10.68%, Mr. McGillicuddy's percentage
ownership interest will increase from 4.02% to 5.21%, and the percentage
ownership of the current directors and executive officers as a group will
increase from 15.04% to 19.06%.
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.
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 of the Mergers (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 June 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.
21
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 31, 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 $0.31 per share of FSP Common Stock
payable to stockholders of record as of January 24, 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
3/31/03 $0.31
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.
22
(c)
Number of Securities
Available for Future
(a) (b) Issuance Under Equity
Number of Securities to be Weighted-Average Exercise Compensation Plans
Issued Upon Exercise of Price of Outstanding (Excluding 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.
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.
23
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. As a result of
the Mergers, income and expenses directly related to the four Target REITs that
were syndicated in 2002 will be eliminated on the pro forma consolidated
financial statements of the Combined Company for accounting purposes.
FSP Property Management manages, either directly or through a third party,
each Sponsored Entity. 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. As a result of the Mergers, fee
income received by FSP Property Management and expenses paid by the 13 Target
REITs will be eliminated on the pro forma consolidated financial statements of
the Combined Company for accounting purposes.
FSP Corp. holds all of its interests in real property through the 17
Sponsored Partnerships that it has acquired, each of which owns or owned real
property. FSP Holdings, which is a wholly-owned subsidiary of FSP Corp., is the
general partner of each Sponsored Partnership, and FSP Corp. is the sole limited
partner of each Sponsored Partnership.
FSP Corp. holds a nominal interest in each of the Sponsored REITs through
its ownership of 100% of the common stock of each Sponsored REIT. The preferred
stock interests in each Sponsored REIT are held by investors who acquired their
interests in an offering exempt from registration pursuant to Section 4(2) of
the Securities Act and Regulation D promulgated thereunder. As of December 31,
2002, FSP Investments had consummated the offering of 16 Sponsored REITs, which
include the 13 Target REITs. After the consummation of the Mergers, the Target
REITs will merge with and into FSP Corp., with FSP Corp. as the surviving
corporation, and will therefore no longer exist after the consummation of the
Mergers. The remaining four Sponsored REITs will be unaffected by the Mergers.
Also unaffected by the Mergers, except for the elimination of any intercompany
transactions, are the 17 Sponsored Partnerships, FSP Investments, FSP Holdings
and FSP Property Management.
Set forth below is information regarding each of the existing Sponsored
Partnerships, each of which has been acquired by FSP Corp., and the Sponsored
REITs.
24
SPONSORED PARTNERSHIPS
Percentage of
Total Gross Rentable Square
Proceeds of Feet Leased as
Name Offering Property Location Property Type of 12/31/02
---- -------- ----------------- ------------- -----------
Essex $12,300,000 Houston, Texas Apartments 99%
Reata 13,000,000 Houston, Texas Apartments 96%
One Technology Drive 10,925,000 Peabody, Massachusetts Warehouse/Distribution Ctr. 100%
North Andover 10,000,000 North Andover, Massachusetts Office 97%
Weslayan Oaks (1) 5,400,000 Houston, Texas Apartments 96%
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 63%
Silverside Plantation 21,800,000 Baton Rouge, Louisiana Apartments 97%
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. 0%
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%
(1) Property held by Sponsored Partnership sold on February 7, 2003
25
SPONSORED REITS
Percentage of
Total Gross Rentable Square
Proceeds of Feet Leased as
Name Offering Property Location Property Type of 12/31/02
---- -------- ----------------- ------------- ---------
Forest Park $7,800,000 Charlotte, North Carolina Office 87%
The Gael 21,250,000 Houston, Texas Apartments 98%
Goldentop 23,150,000 San Diego, California R&D/Office 100%
Centennial 15,800,000 Colorado Springs, Colorado Flex Office 100%
Willow Bend(1) 20,600,000 Plano, Texas 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%
Montague(1) 33,400,000 San Jose, California Office 100%
Addison Circle(1) 63,600,000 Addison, Texas Office 100%
TOTAL: $690,300,000
(1) This Sponsored REIT is not a Target REIT
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.
Three of the Sponsored REITs in existence as of December 31, 2002 are not
Target REITs. Syndication of two of these Sponsored REITs had not commenced when
the management of FSP Corp. began consideration of a possible transaction in
August 2002 and, hence, these two Sponsored REITs were never considered for
inclusion as Target REITs. The third Sponsored REIT was considered for a period
of time to be included as a Target REIT; however, a tenant leasing 91% of the
space at the property owned by that Sponsored REIT declared bankruptcy, and the
management of FSP Corp. concluded that this Sponsored REIT was not an
appropriate candidate for acquisition.
26
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, Inc. ("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.
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 independent third party appraisers
("the 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").
In late August the management of FSP Corp. and the management of the
Target REITs (who are the same persons) reached an agreement amongst themselves
on a methodology to value the proposed transaction. Because the same persons
serve in the senior management of FSP Corp. and the Target REITs, no true
negotiations occurred. The members of senior management attempted in good faith
to fulfill their duties to each of the entities involved. On October 1, 2002,
A.G. Edwards delivered its report to the management of FSP Corp.
On December 16, 2002, Messrs. 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.
27
In late December the management of FSP Corp. and the Target REITs reached
agreement amongst themselves on the amount of Merger Consideration that would be
paid and the terms of the Merger Agreement. Because the same persons serve in
the senior management of FSP Corp. and the Target REITs, no true negotiations
occurred. The members of senior management attempted in good faith to fulfill
their duties to each of the entities involved.
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.
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 to finance their acquisition of
real property.
28
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.
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 by 50.37% 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 FSP Board on an on-going basis evaluates strategic alternatives
available to FSP Corp. In seeking to achieve the benefits that the FSP Board
expects will result from the Mergers, the FSP Board did not consider any
specific alternatives to the Mergers.
The affirmative vote of the holders of a majority of the shares of FSP
Common Stock issued, outstanding and entitled to vote 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.
29
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
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.
30
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.
31
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 June 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. FSP Corp. expects to issue
fractional shares of FSP Common Stock as Merger Consideration.
Shares of FSP
Common Stock Total Shares of FSP
Total Number of Issuable in Exchange Common Stock Issuable
Shares of Target for Each Share of to Target 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
32
None of the shares of FSP Common Stock to be issued as Merger
Consideration to the Target REIT Stockholders will be placed into escrow or
otherwise withheld as a source of potential compensation to FSP Corp. should the
Combined Company discover, after the consummation of the Mergers, that any of
the Target REITs incurred any undisclosed liabilities prior to the consummation
of the Mergers.
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: (i) the value ascribed to each Target REIT
for purposes of the Merger Consideration, and (ii) the sum of the appraised
value of the property held by each Target REIT and the estimated cash reserve
balances as of September 30, 2002.
Target REIT Value Ascribed Appraised Value (1)
----------- -------------- ---------------
Forest Park $8,398,178.30 $7,975,000
The Gael $21,864,114.98 $19,475,000
Goldentop $24,935,572.23 $23,650,000
Centennial $16,093,407.58 $14,120,000
Meadow Point $26,523,256.48 $23,600,000
Timberlake $51,556,660.30 $44,025,000
Federal Way $19,999,997.00 $17,050,000
Fair Lakes $48,181,948.80 $41,200,000
Northwest Point $37,249,994.41 $31,650,000
Timberlake East $25,188,759.38 $21,675,000
Merrywood $20,827,428.64 $18,000,000
Plaza Ridge I $40,249,977.00 $34,525,000
Park Ten $27,682,040.38 $23,750,000
--------------- ------------
Total $368,751,335.48 $320,695,000
(1) As of September 30, 2002, includes cash reserve balances and amounts
have been rounded to the nearest $25,000.
The FSP Board determined the value ascribed to the Target REITs on the
basis of the value the acquisition of the Target REITs would add to FSP Corp. as
determined on an "enterprise" or "on-going concern" basis. This aggregate
value exceeds the aggregate appraised values of the Target REITs by
approximately $48 million. FSP Corp. has used the enterprise or on-going concern
method of valuing acquisitions in the past and believes that this method, rather
than the appraised value method, is the customary method to value REITs.
33
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.
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
3,705,307.01 shares of FSP Common Stock, constituting approximately 15.04% of
the outstanding 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
34
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:
(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
issued, outstanding and entitled to vote 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;
35
(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. In the
event of such a waiver, FSP Corp. will promptly notify all FSP Stockholders of
such waiver. If the waiver has a material adverse effect on the FSP
Stockholders, FSP Corp. will resolicit shareholder approval of the Mergers and
the Merger Agreement. 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.
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.
36
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.
37
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. 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
Methodology Used to Determine 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 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. A.G. Edwards' report only addressed the methodology used by
management to value FSP Corp. and the Combined Company, and did not constitute
an opinion as to the fairness of the transaction to the FSP Stockholders (a
"fairness opinion"). In rendering a fairness opinion, certain additional
extrinsic analyses, tasks and judgments necessarily must be undertaken and
completed. These include, among other things: an independent review of
appraisals; site inspections; analyses of local and national economic
conditions, Target REIT properties, past transactions and comparable companies;
detailed due diligence; a review of comparable transactions; random interviews
with key investors; and analysis of discounted cash flow, pro forma financial
statements, synergies upon merger and each party's contribution to such
synergies. In addition, A.G. Edwards would have charged substantially more to
render a fairness opinion than for its report on the methodology used to value
FSP Corp. and the Combined Company.
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, that the appropriate method for FSP Corp.
was to use the "enterprise" or "on-going concern" method. This method, which
uses a cash available for distribution ("CAD") multiple, is a commonly accepted
38
valuation approach used by comparable companies with publicly traded securities.
Although neither FSP Corp. nor any of the Target REITs is a publicly traded
company, the FSP Board determined that the "enterprise" or "on-going concern"
method was still the appropriate method to use as it is the method used by most
other REITs. Moreover, this method was the method previously used by FSP Corp.'s
predecessor-in-interest, the FSP Partnership, to value itself and its targets in
conection with the acquisition of Sponsored Entities. Finally, the FSP Board
believes that if FSP's Common Stock is ever listed for trading on an exchange,
stock analysts will value the Combined Company based on an enterprise or
on-going concern methodology. For all these reasons, the FSP Board did not
consider any other method in valuing the proposed Mergers. 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 individual Appraisals
of the real estate owned by the Target REITs into consideration, but used the
Appraisals only as guides in making the allocation.
Management's Forecasts. FSP Corp.'s management prepared financial
forecasts in order to determine a range of estimated hypothetical values of FSP
Corp. prior to the Mergers and of the Combined Company following the
consummation of the Mergers. The financial information underlying these
forecasts for FSP Corp. and the Combined Company is set forth in the "Valuation
Overview" (attached hereto as Appendix D). The financial information analyzed by
FSP Corp. for both FSP Corp. and the Target REITs consisted of the following
financial elements:
CAD;
Interest income on excess cash held by FSP Corp. and the Target REITs;
Multiples of CAD commonly used in valuing REITs; and
Excess cash held by FSP Corp. and the Target REITs.
CAD represents the estimated cash available for distribution for each of
FSP Corp. and the Target REITs determined as of August 15, 2002. Interest income
on excess cash represents the (i) estimate of the amount of interest as a
percentage paid (based on a monthly average on August 15, 2002, the date of the
forecasts) and (ii) the current excess cash of $13.5 million held by FSP Corp.
and the amount of cash held respectively by each Target REIT on August 15, 2002,
the date of the forecasts. The multiples of CAD commonly used in valuing REITs
are multiples derived from standard practice in the REIT industry. FSP Corp.'s
management determined that, based on the set of assumptions of CAD multiples and
financial forecasts, 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. Excess cash represents (i) cash balances from operations in excess of
current operating expenses and (ii) cash balances established during the
original syndication of each Sponsored Entity as capital reserves. The amount of
excess cash included in the forecasts was as of August 15, 2002, the date of the
forecasts.
39
In preparing these financial forecasts, FSP Corp. assumed (i) a modest
growth in the level of gross proceeds raised by Sponsored REITs in syndicated
offerings from 2002 to 2003 and (ii) rental revenue and net income from rental
operations of FSP Corp. and the Target REITs that would be consistent with prior
years.
Range of Estimated Values. FSP Corp.'s management used these forecasts to
determine a range of estimated hypothetical enterprise values of FSP Corp. prior
to the consummation of the Mergers and of the Combined Company following the
consummation of the Mergers. FSP Corp.'s management determined these ranges by
applying multiples of 11, 12 and 13.3 to FSP Corp.'s estimated 2002 CAD (not
giving effect to the Mergers) and to the Combined Company's twelve-month pro
forma CAD. These multiples are representative of the ranges of multiples applied
to estimated 2002 and 2003 CAD for office REITs, apartment REITs and industrial
REITs, as set forth in Exhibit B to A.G. Edwards' report attached hereto as
Appendix C. Next, FSP Corp.'s management applied market discounts of 5% and 10%
to each of the enterprise values derived from the CAD multiples discussed above.
FSP Corp.'s management considered these market discounts to constitute a
reasonable range of discounts to reflect the lack of liquidity of FSP Common
Stock. FSP Corp.'s predecessor-in-interest, the FSP Partnership, used the same
range of discounts in valuing itself in connection with the acquisition of
Sponsored Entities.
The estimated hypothetical values produced by FSP Corp.'s management and
set forth in the Valuation Overview resulted in 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. In determining the Merger Consideration to recommend to the FSP Board,
FSP Corp.'s management reviewed its forecasts as discussed herein and also
considered the Appraisals of the Target REITs in recommending allocations of the
Merger Consideration among the Target REITs. At no time did FSP Corp.'s
management use a mechanical formula to determine either the value of FSP Corp.,
the Target REITs or the Combined Company.
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
Corp. and the Combined Company. After reviewing the Valuation Overview, the FSP
Board first estimated a value for FSP Corp. prior to the consummation of the
Mergers. This estimated value was approximately $363,296,000 and falls within
the range of $328 million to $416 million set forth in the Valuation Overview.
In determining this estimated value, the FSP Board took into account the assets
and liabilities of FSP Corp., its expected CAD, the multiples to CAD commonly
used in valuing REITs (as set forth in Exhibit B to the A.G. Edwards' report
attached to this Proxy Statement as Appendix C) and the limited liquidity of FSP
Common Stock. The FSP Board did not derive this value by applying CAD multiples
or any other mathematical formula but instead exercised its judgment in good
faith after consideration of the relevant factors. Although the FSP Board did
not apply a mechanical formula in determining this estimated value, by way of
illustration, this value equated to a multiple of approximately 11.3 of
forecasted 2002 CAD. From this estimated value, the FSP Board calculated a FSP
Common Stock per share value of $14.75.
40
The FSP Board then estimated a value for FSP Corp. following consummation
of the Mergers. This estimated value was approximately $732,047,000 and falls
within the range of $642 million and $815 million set forth in the Valuation
Overview. In determining this estimated value, the FSP Board took into account
the assets and liabilities of the Combined Company, its expected CAD, the
application of multiples to CAD commonly used to value REITs (as set forth in
Exhibit B to the A.G. Edwards' report attached to this Proxy Statement as
Appendix C) and the limited liquidity of FSP Common Stock. The FSP Board did not
derive this value by applying CAD multiples or any other mathematical formula
but instead exercised its judgment in good faith after consideration of the
relevant factors. Although the FSP Board did not apply a mechanical formula in
determining this estimated value, by way of illustration, this value equated to
a multiple of approximately 11.6 of forecasted pro forma 2003 CAD of the
Combined Company. The FSP Board determined that, based on the same set of
assumptions (including application of the same discount for lack of liquidity),
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
$368,751,000. The increase in the estimated value of the Combined Company over
the estimated value of FSP Corp. derives from the increased CAD of the Combined
Company and the increased percentage of revenue attributable to real estate
assets rather than transactional business. Because both the increased CAD and
the higher percentage of revenue generated by real estate assets are
attributable to the Target REITs, the FSP Board determined that it would be fair
to the FSP Stockholders to fix the Merger Consideration in an amount equal to
the increase in estimated value. 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 $368,751,000
estimated value differential divided by the $14.75 per share current estimated
value of FSP Corp.
The amount of the Merger Consideration exceeds the aggregate of the values
set forth in the Appraisals together with the Target REITs' cash reserves by
approximately $48 million. This discrepancy between the Merger Consideration and
the Appraisals' values is the result of using the enterprise or on-going concern
method to value FSP Corp. and the Combined Company. The FSP Board adopted this
method for the reasons set forth under "Methodology Used to Determine Merger
Consideration" above. Based on the directors' experience in the real estate
industry, the FSP Board believes that appraisal values of the type set forth in
the Appraisals are not the customary basis on which transactions similar to the
Merger are valued. The FSP Board used the Appraisals only in determining the
allocation of the Merger Consideration among the Target REITs and not in
determining the amount of Merger Consideration.
41
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 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
$368,751,000 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
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 did not allocate the Merger Consideration based solely on
the Appraisals and the amount of cash held by each Target REIT because the FSP
Board determined that these two factors alone would not adequately reflect the
relative value of each Target REIT or take into account the potential future
cash flow from each Target REIT or the appreciation in real estate value
experienced by each Target REIT following the date of the Appraisals. 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
$368,751,000 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 decision of the FSP Board not to obtain a fairness
opinion, (iii) the risks that the benefits sought to be achieved by the Mergers
may not be realized, (iv) the immediate and substantial dilution in voting power
and percentage ownership to the FSP Stockholders, (v) the possibility that the
real estate holdings of the Target REITs would decline in value and (vi) the
fact that none of the shares of FSP Common Stock constituting the Merger
Consideration will be placed in escrow or otherwise withheld as a potential
source of compensation should any of the Target REITs have any undisclosed
liabilities. 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.
42
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. The FSP Board
determined that appointing independent representatives to negotiate the terms of
the Mergers and to make recommendations to the FSP Board would not be worth the
anticipated cost, since the FSP Board would still be obligated to make its own
independent determinations. 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 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. A.G. Edwards did not make any independent valuation
or appraisal of the assets or liabilities of FSP Corp. or the Target REITs, nor
was it furnished with any such appraisals. A.G. 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.
In particular, A.G. Edwards received the "Valuation Overview" prepared by
FSP Corp, and attached to this Proxy Statement as Appendix D. FSP Corp.
determined the values set forth in the "Valuation Overview" on August 15, 2002.
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.
In performing its analysis, A.G. 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. A.G. Edwards also assumed in all respects material to
its analysis that the representations and warranties of each party contained in
the Merger Agreement were true and correct, that each party would 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 Mergers would be
satisfied without any modification or waiver thereof. A.G. Edwards also assumed
that all governmental, regulatory and other consents and approvals contemplated
by the Merger Agreement would be obtained and that in the course of obtaining
any of those consents, no restrictions would be imposed or waivers made that
would have an adverse effect on the contemplated Mergers. A.G. Edwards also
assumed that the Mergers would be accounted for in accordance with generally
accepted accounting principles ("GAAP") and that the
44
Mergers would be consummated on the terms contained in the Merger Agreement
without any waiver or modification of any material terms or conditions by the
parties.
A.G. Edwards has furnished a written report to FSP Corp. This report is
attached to this Proxy Statement as Appendix C. A.G. Edwards was not engaged to
render, and its advice to FSP Corp. 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 FSP Corp. or the Target
REITs or (ii) an opinion as to the fairness of the consideration (i.e., a
fairness opinion) 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 did not play any role
in determining or selecting the methodology techniques used by the FSP Board in
the Valuation Overview, nor does it 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. A.G. Edwards' written report does not address the merits of the
underlying decision by FSP Corp. to engage in the Mergers. A.G. Edwards also
played no role in determining the methodology used by the FSP Board to allocate
the Merger Consideration among the Target REITs.
Consistent with the scope of A.G. Edwards' engagement, FSP Corp. asked
A.G. Edwards to opine only as to the reasonableness of the FSP Board's valuation
methodology, provided no instructions to A.G. Edwards other than those indicated
above and imposed no limitations as to A.G. Edwards' review. A.G. Edwards has
informed FSP Corp. that in the view of A.G. Edwards an opinion that the FSP
Board's valuation methodology was "reasonable" would require the equivalent
amount of work as a fairness opinion, which, as described above, would be a
substantial amount of additional work. A.G. Edwards has also informed FSP Corp.
that such an opinion would cost FSP Corp. an additional $475,000. FSP Corp. has
considered obtaining such an opinion but concluded that obtaining an opinion
that the valuation methodology used was "reasonable" as opposed to "not
reasonable" was not worth $475,000.
Solely for the purpose of evaluating FSP Corp.'s methodology and in order
to render its report, A.G. Edwards provided FSP Corp. a summary of CAD multiples
for national, publicly traded REITs in sectors in which FSP Corp. has
operations, which is included as Exhibit B to Appendix C. A.G. Edwards also
recommended to the Board certain factors to consider when evaluating the
appropriateness of such multiples. A summary of such factors is included as
Exhibit C to Appendix C, and includes a company's size, growth rate, liquidity,
leverage, quality of management, diversification, market position and share, and
ability to raise capital. A.G. Edwards considered FSP Corp.'s evaluation of such
factors in FSP Corp.'s determination of a CAD multiple and concluded that, given
the applicability of such factors to FSP Corp., FSP Corp.'s determination was
not unreasonable. A.G. Edwards also summarized and provided to the FSP Board a
list of relevant factors to consider when determining a discount for the lack of
a public market for FSP Common Stock, which is included as Exhibit D to Appendix
C. Such factors include the "put" right available to FSP Stockholders pursuant
to the FSP Corp. Articles of Organization, FSP Corp.'s estimated dividend as a
proportion of CAD, the existence of any potential buyers of FSP Common Stock
other than FSP Corp., the existence of any blocks of
45
minority interests in FSP Corp., the prospects for a public offering of FSP
Common Stock or a sale of FSP Corp., the historical dividend paid by FSP Corp.,
the growth prospects for FSP Corp., the existence of any "swing vote control,"
the existence of any buy-sell agreements, the "quality grade" of the FSP Common
Stock, FSP Corp.'s general prospects, prospects for the real estate industry and
the mood of the investing public as a whole. A.G. Edwards considered FSP Corp.'s
evaluation of such factors in FSP Corp.'s determination of a lack of
marketability discount and concluded that, given the applicability of such
factors to FSP Corp., FSP Corp.'s determination was not unreasonable.
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. selected A.G. Edwards based on this national
reputation and its previous experience with A.G. Edwards. 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. in connection with (i) FSP Corp.'s
predecessor-in-interest, the FSP Partnership's, engagement of A.G. Edwards in
August 2001 to provide a valuation on a going concern basis of FSP Corp. as of
September 30, 2001 for which A.G. Edwards was paid $175,000 and for its expenses
and (ii) FSP Corp.'s predecessor-in-interest, the FSP Partnership's, engagement
of A.G. Edwards in June 2000 to render a report as to the reasonableness of the
methodology used by the management of FSP Corp. in the determination of a value
for FSP Corp. prior to and after giving effect to certain mergers for which A.G.
Edwards was paid $125,000 and for its expenses, 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 the respective Target REITs, 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"). Each Appraiser has a national reputation for
providing businesses with appraisals of real estate properties of the size and
type of the property it appraised. 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.
46
FSP Corp. took the appraisals into account in allocating the Merger
Consideration among the Target REITs. See "Fairness of the Mergers - Fairness of
the Merger Consideration - Allocation of Merger Consideration".
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 to be produced by the consummation of the Mergers.
-----------------------------------------------------------------------------------------------
Sum of Fair Market Value
set forth in Appraisal
and Estimated Cash
Reserve Balances as of
Target REIT Appraiser September 30, 2002(1) Date of Appraisal
----------- --------- --------------------- -----------------
-----------------------------------------------------------------------------------------------
Forest Park Fortenberry Lambert, $7,975,000 September 3, 2002
Inc.
-----------------------------------------------------------------------------------------------
The Gael Abbot & Associates, $19,475,000 August 23, 2002
Inc.
-----------------------------------------------------------------------------------------------
Goldentop D.F. Davis Real $23,650,000 September 4, 2002
Estate, Inc.
-----------------------------------------------------------------------------------------------
Centennial Dyco Real Estate, Inc. $14,120,000 September 5, 2002
-----------------------------------------------------------------------------------------------
Meadow Point The Robert Paul Jones $23,600,000 September 3, 2002
Company, Ltd.
-----------------------------------------------------------------------------------------------
Timberlake Dinan Real Estate $44,025,000 August 26, 2002
Advisors, Inc.
-----------------------------------------------------------------------------------------------
Federal Way Shorett KMS Valuation $17,050,000 September 4, 2002
Advisory Group
-----------------------------------------------------------------------------------------------
Fair Lakes The Robert Paul Jones $41,200,000 September 3, 2002
Company
-----------------------------------------------------------------------------------------------
Northwest Point Integra Realty $31,650,000(2) October 1, 2002
Resources
-----------------------------------------------------------------------------------------------
47
-----------------------------------------------------------------------------------------------
Sum of Fair Market Value
set forth in Appraisal
and Estimated Cash
Reserve Balances as of
Target REIT Appraiser September 30, 2002(1) Date of Appraisal
----------- --------- --------------------- -----------------
-----------------------------------------------------------------------------------------------
Timberlake East Dinan Real Estate $21,675,000 September 16, 2002
Advisors, Inc.
-----------------------------------------------------------------------------------------------
Merrywood (3) Patrick O'Connor & $18,000,000 March 13, 2002
Associates, LP
-----------------------------------------------------------------------------------------------
Plaza Ridge I (3) The Robert Paul Jones $34,525,000 April 3, 2002
Company
-----------------------------------------------------------------------------------------------
Park Ten (3) Patrick O'Connor & $23,750,000 June 6, 2002
Associates, LP
-----------------------------------------------------------------------------------------------
(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
48
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. The
Appraisers' analysis included (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.
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
49
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.
50
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;
51
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.
No unaffiliated representatives were appointed to negotiate the terms of
the Mergers on behalf of FSP Corp. Moreover, no committee of independent
representatives was established to evaluate and approve the Mergers on behalf of
FSP Corp. Under Maryland law, the FSP Board cannot delegate to a third party its
fiduciary duties relating to the determination to approve or not approve the
Mergers. Because all of the members of the FSP Board have significant conflicts
of interest and none are, therefore, considered "independent", the FSP Board
determined it could not establish a committee of independent representatives to
evaluate and approve the Mergers on behalf of FSP Corp. The FSP Board determined
that appointing independent representatives to negotiate the terms of the
Mergers and to make recommendations to the FSP Board would not be worth the
anticipated cost, since the FSP Board would still be obligated to make its own
independent determinations.
Mr. Silverstein and Mr. McGillicuddy are the only officers or directors of
FSP Corp. who are not also officers or directors of any Target REIT. The
remainder of the officers and directors of FSP Corp. serve as a director and/or
officer, in the positions listed above, of each Target REIT.
Upon completion of the Mergers, Mr. Silverstein's percentage ownership
interest will increase from 4.66% to 10.68%, Mr. McGillicuddy's percentage
ownership interest will increase from 4.02% to 5.21%, and the percentage
ownership of the current directors and executive officers as a group will
increase from 15.04% to 19.06%.
Ownership of FSP Stock
The executive officers and directors of FSP Corp. hold an aggregate of
3,705,307.01 shares of FSP Common Stock, constituting approximately 15.04% of
the outstanding 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.
52
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 78 to 97 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.
Year Ended December 31,
------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(In thousands, except per unit or
share amounts)
Operating Data:
Total revenue ............................... $ 56,838 $ 55,052 $ 34,793 $ 18,048 $ 11,555
Net income (loss) ........................... 27,312 25,368 8,914 1,139 (1,675)
Basic and diluted net income
(loss) per limited and
general partnership unit/share ............ 1.11 1.03 0.47 0.09 (0.88)
Distributions declared per
unit/share outstanding (1) ............... 1.24 1.18 1.02 0.86 1.05
As of December 31,
------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Balance Sheet Data (at period end):
Total assets ................................ $201,936 $204,117 $219,923 $190,486 $ 95,886
Total liabilities ........................... 4,771 4,354 19,280 28,821 1,294
Minority interests in
consolidated entities ..................... -- -- 63 78,090 89,593
Total shareholders'/partners' capital ....... 197,165 199,763 200,580 83,575 4,999
(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 FSP 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 78 to 97 of this Proxy Statement.
53
SELECTED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following unaudited 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 consolidated balance sheets have
been presented as if the Mergers occurred as of December 31, 2002. The pro forma
consolidated statements of operations for the year ended December 31, 2002 are
presented as if the Mergers occurred at the beginning of the period presented.
The unaudited 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 period
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 unaudited
pro forma consolidated financial statement data should be read in conjunction
with all financial statements and pro forma financial statements included
elsewhere herein.
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 applicable Merger.
If one or more Target REIT does not obtain the vote required for the
consummation of the Merger with such Target REIT, FSP Corp. will not proceed
with the Mergers of any other Target REIT.
54
Consolidated Pro Forma Balance Sheets
December 31, 2002
(Unaudited)
Historical Historical Post Merger
(in thousands) (FSP Corp.) (The Target REITs) Adjustments Pro Forma
===========================================================================================================
Assets:
Real estate assets, net $ 173,276 $ 284,349 $ 12,347(d) $ 469,972
Cash and cash equivalents 22,316 24,359 (900)(e) 45,775
Restricted cash 483 502 -- 985
Tenant rent receivables, net 327 243 -- 570
Step rent receivable, net 3,057 3,199 (3,199)(j) 3,057
Prepaid expenses 743 338 -- 1,081
Deposits on real estate assets 841 -- -- 841
Deferred leasing commissions, net 659 82 -- 741
Provision for favorable leases, net -- 1,509 -- 1,509
Deferred lease origination costs, net -- 5,674 3,846(d) 9,520
Office computers and equipment, net 234 -- -- 234
-----------------------------------------------------------------------------------------------------------
Total assets $ 201,936 $ 320,255 $ 12,094 $ 534,285
===========================================================================================================
Liabilities and Owners' Capital
Liabilities:
Accounts payable and accrued expenses $ 3,001 $ 3,249 $ -- $ 6,250
Accrued compensation 1,287 -- -- 1,287
Dividend payable -- 7,357 -- 7,357
Tenant security deposits 483 502 -- 985
Deferred leases -- 407 -- 407
-----------------------------------------------------------------------------------------------------------
Total liabilities 4,771 11,515 -- 16,286
-----------------------------------------------------------------------------------------------------------
Owners' capital:
Preferred Stock -- -- -- --
Common Stock 2 -- 3(g) 5
Additional paid in capital 192,743 333,330 (12,499)(g) 513,574
Retained earnings (deficit) 4,420 (24,590) 24,590(k) 4,420
-----------------------------------------------------------------------------------------------------------
Total owners' capital 197,165 308,740 12,094 517,999
-----------------------------------------------------------------------------------------------------------
Total liabilities and owners' capital $ 201,936 $ 320,255 $ 12,094 $ 534,285
===========================================================================================================
See accompanying notes to consolidated pro forma financial statements
55
Consolidated Pro Forma Statements of Operations
(Unaudited)
For the year ended
December 31, 2002
----------------------------------------------------------------
(in thousands, except per share amounts)
Historical Historical Post Merger
(FSP Corp.) (The Target REITs) Adjustments Pro Forma
===========================================================================================================
Revenue:
Rental income $ 27,408 $ 40,458 $ 4,050 (l) $ 67,866
Syndication fees 13,720 -- (7,535)(h) 6,185
Transaction fees 13,091 -- (7,068)(h) 6,023
Sponsored REIT income 1,387 -- (724)(i) 663
Interest and other income 1,232 361 (546)(f,l) 1,036
-----------------------------------------------------------------------------------------------------------
Total revenue 56,838 40,819 (11,823) 81,773
-----------------------------------------------------------------------------------------------------------
Expenses:
Selling, general and administrative 5,094 -- -- 5,094
Commissions 6,824 -- (3,534)(h) 3,290
Shares issued as compensation 604 -- -- 604
Rental operating expenses 6,466 7,173 698 (f,l) 13,242
Real estate taxes and insurance 3,130 5,322 587 (l) 8,452
Depreciation and amortization 4,947 7,042 1684 (d,l) 12,855
Sponsored REIT expenses 868 -- (453)(i) 415
Interest 894 6,732 6,799 (f,h,l) 734
-----------------------------------------------------------------------------------------------------------
Total expenses 28,827 26,269 (7,817) 44,686
-----------------------------------------------------------------------------------------------------------
Income (loss) before taxes and
dividends to common shareholder 28,011 14,550 (4,006) 37,087
Taxes on income 699 -- -- 699
Dividends to common shareholder of
Target REITs -- 271 (271)(i) --
-----------------------------------------------------------------------------------------------------------
Net income $ 27,312 $ 14,279 $ (3,735) $ 37,856
===========================================================================================================
Weighted average shares outstanding,
basic and diluted 24,606 3,636 21,364 (g) 49,606
===========================================================================================================
Basic and diluted net income per share $ 1.11 -- -- $ 0.76
===========================================================================================================
See accompanying notes to consolidated pro forma financial statements
56
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 unaudited 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 December 31, 2002. The pro forma Statements of
Operations for the year ended December 31, 2002 are presented as if the Mergers
occurred as of January 1, 2002.
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 "Historical 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. Schedules summarizing the balance
sheets and Statements of Operations for the Target REITs are located on pages 72
to 79 of this Proxy Statement. Four Target REITs were organized in 2002. These
four Target REITs show operations from the date the REIT was organized and will
reflect less than twelve months operations in the Consolidated Pro forma
Statements of Operations for the Year Ended December 31, 2002. In order to
reflect a full year of operations for the four Target REITs an entry was made in
the "Adjustments" column in the pro forma Statement of Operations to reflect the
operation of the predecessor companies.
The Mergers will be treated as purchase of assets and each Target REIT's
assets and liabilities will be recorded on FSP Corp.'s books at their fair 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.
(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 of operations 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.
57
(c) FSP Corp. converted from a partnership into a corporation effective
January 1, 2002. FSP Partnership units were converted to corporate
shares on a one-to-one basis. This conversion has no effect on the
Pro forma financial statements.
(d) At the Effective Date, for each Target REIT, any difference between
the appraised value of the property and the historical cost of the
property ("step-up") has been recorded as an increase in real estate
assets. 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.
The following schedule shows the allocation of the step-up of
$16,193,000 and the incremental amount of depreciation and
amortization expense for the year ended December 31, 2002:
(in thousands) Depreciation and
Category Amount Life Amortization
--------------------------------------------------------------------
Land $ 1,921 n/a $ --
Buildings and improvements 10,426 27-39 291
-------------------------------------
Real estate investments 12,347 291
Lease origination costs 3,846 4-10 575
--------------------------------------------------------------------
Total $ 16,193 $ 866
====================================================================
(e) Expenses of the Mergers are estimated at $900,000 and are reflected
as paid in the year ended December 31, 2002 and are capitalized to
real estate assets.
(f) Management fees and interest charged by FSP Corp. to the Target
REITs have been eliminated from revenue and expenses as follows:
Management fees $397,000
Interest 160,000
--------
Total $557,000
========
(g) Approximately 25 million shares of FSP Common Stock with a par value
of $0.0001 will be issued in exchange for the 3,636 outstanding
shares of Target Stock in connection with the Mergers.
(h) Income and expenses directly related to the syndication of the four
Target REITs in 2002 have been eliminated in the pro forma Statement
of Operations. A summary of these items is as follows:
Revenue directly related to the syndication of the four Target REITs
in 2002 that is included in FSP Corp.'s financial statements is as
follows:
Transaction fees $ 7,068,000
Syndication fees 7,535,000
-----------
Total $14,603,000
===========
58
The four Target REITs have accounted for these fees in their
financial statements as follows:
Interest expense $ 6,732,000
Real estate acquisition costs 336,000
-----------
7,068,000
Recorded as an offset to
Additional paid in capital 7,535,000
-----------
Total $14,603,000
===========
In connection with the syndication of the four Target REITs in 2002,
FSP Corp. incurred commission expense of $3,534,000 which is
eliminated in the pro forma Statement of Operations.
(i) Eliminates duplicate earnings, expenses and dividends in 2002
attributable to FSP Corp. prior to the syndication of the four
Sponsored REITs.
(j) Cumulative straight-line rents of the Target REITs would be
eliminated at acquisition.
(k) The cumulative deficit of the Target REITs would be eliminated at
acquisition.
(l) Four Target REITs were organized in 2002 and reflect less than
twelve months of operations in the "Historical (Target REITs)"
column. The following schedule reflects the unaudited revenues and
expenses of the predecessor companies to these four Target REITs and
are included in the "Adjustments" column in order to reflect twelve
months of operations in the pro forma statements of operations.
These schedules are also included under the caption "Statement of
Predecessor's Operations" in the annual financial statements for
each of those four Target REITs, which are located elsewhere in this
Proxy Statement.
59
Four Target REITs
Statements of Operations
(unaudited)
Merrywood Timberlake East Plaza Ridge Park Ten Total
---------------------------------------------------------------------------------------------------------------------------------
For the period For the period For the period For the period
Jan. 1, 2002 to Jan. 1, 2002 to Jan. 1, 2002 to Jan. 1, 2002 to
(in thousands) April 23, 2002 March 3, 2002 May 22, 2002 June 26, 2002
---------------------------------------------------------------------------------------------------------------------------------
Revenue:
Rental $ 833 $ 468 $ 958 $ 1,791 $ 4,050
Interest and other 3 2 6 -- 11
---------------------------------------------------------------------------------------------------------------------------------
Total revenue 836 470 964 1,791 4,061
---------------------------------------------------------------------------------------------------------------------------------
Expenses:
Rental operating expenses 219 118 390 368 1,095
Depreciation and amortization 180 65 304 269 818
Real estate taxes and insurance 180 60 107 240 587
Interest -- 93 -- -- 93
---------------------------------------------------------------------------------------------------------------------------------
Total expenses 579 336 801 877 2,593
---------------------------------------------------------------------------------------------------------------------------------
Net income $ 257 $ 134 $ 163 $ 914 $ 1,468
---------------------------------------------------------------------------------------------------------------------------------
60
COMPARATIVE PER SHARE DATA
The following tables present on a per share basis:
(a) Basic and diluted net income (loss), book value, and dividends
declared for FSP Corp. and each of the Target REITs on a historical basis.
(b) Consolidated pro forma basic and diluted net income (loss) per share,
book value per share and dividends per share for FSP Corp. This shows the effect
of the Mergers from the perspective of an owner of one share of FSP Common
Stock.
(c) Equivalent pro forma basic and diluted net income per share,
equivalent pro forma book value per share and equivalent pro forma dividends per
share for each of the Target REITs. This shows the effect of the Mergers from
the perspective of an owner of one share of stock of a Target REIT. The
consolidated pro forma data are multiplied by the number of shares of FSP Common
Stock issuable in exchange for each share of Target Stock, as shown on page (v)
(the "Exchange Ratio").
The pro forma financial data and equivalent pro forma data are unaudited
and are not necessarily indicative of the operating results that would have been
achieved had the Mergers occurred as of the beginning of the period and should
not be construed as representative of future operations.
FSP Corp. calculates 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.
FSP Corp. calculates consolidated pro forma net income per share data for
FSP Corp. as if the merger occurred on January 1, 2002 and resulted in weighted
average shares of 49,606,000 for the year ended December 31, 2002.
FSP Corp. calculates consolidated pro forma book value per share data for
FSP Corp. as if the merger occurred on December 31, 2002 and resulted in an
ending number of shares of 49,630,000.
FSP Corp. calculates consolidated pro forma per share by adding the total
dividends declared by FSP Corp. ($30,527,000) plus dividends declared by the
Target REITs ($25,736,000) and dividing this sum by 49,606,000 shares.
FSP Corp. calculates equivalent pro forma net income per share for each
Target REIT by multiplying the consolidated pro forma net income per share by
the Exchange Ratio.
FSP Corp. calculates equivalent pro forma book value per share for each
Target REIT by multiplying the consolidated pro forma book value per share by
the Exchange Ratio.
FSP Corp. calculates equivalent pro forma dividends per share for each
Target REIT by multiplying the consolidated pro forma dividends per share by the
Exchange Ratio.
61
For the purposes of the consolidated pro forma net income per share and book
value per share data. FSP Corp.'s historical financial data at and for the year
ended December 31, 2002 have been consolidated with the Target REITs' financial
data at and for the year ended December 31, 2002.
62
At and for the year ended
December 31, 2002
-----------------
Pro forma Pro Forma
Historical Consolidated Equivalent
--------------------------------------
Net income (loss) per share
basic and diluted
FSP Corp. $ 1.11 $ 0.76 $ --
Forest Park $ 6,244 -- $ 5,548
Gael $ 4,598 -- $ 5,301
Goldentop $ 7,028 -- $ 5,550
Centennial $ 7,146 -- $ 5,248
Meadow Point $ 7,557 -- $ 5,307
Timberlake $ 6,699 -- $ 5,158
Federal Way $ 6,555 -- $ 5,153
Fair Lakes $ 7,038 -- $ 5,172
NW Point $ 6,048 -- $ 5,153
Timberlake E $ (1,264) -- $ 5,191
Merrywood $ (3,102) -- $ 5,209
Plaza Ridge $ (1,035) -- $ 5,185
Park Ten $ (3,309) -- $ 5,187
Book value per share
FSP Corp. $ 8.01 $10.44 $ --
Forest Park $ 87,269 -- $ 76,208
Gael $ 81,656 -- $ 72,825
Goldentop $ 85,836 -- $ 76,239
Centennial $ 85,329 -- $ 72,094
Meadow Point $ 86,691 -- $ 72,905
Timberlake $ 85,734 -- $ 70,858
Federal Way $ 83,700 -- $ 70,780
Fair Lakes $ 84,581 -- $ 71,048
NW Point $ 84,174 -- $ 70,780
Timberlake E $ 83,780 -- $ 71,314
Merrywood $ 83,956 -- $ 71,561
Plaza Ridge $ 86,173 -- $ 71,222
Park Ten $ 84,905 -- $ 71,248
63
Dividends declared per share
FSP Corp. $ 1.24 $ 1.13 $ --
Forest Park $ 7,449 -- $ 8,249
Gael $ 7,167 -- $ 7,882
Goldentop $ 8,346 -- $ 8,252
Centennial $ 8,570 -- $ 7,803
Meadow Point $ 8,276 -- $ 7,891
Timberlake $ 8,099 -- $ 7,669
Federal Way $ 8,135 -- $ 7,661
Fair Lakes $ 8,075 -- $ 7,690
NW Point $ 7,903 -- $ 7,661
Timberlake E $ 6,584 -- $ 7,719
Merrywood $ 4,777 -- $ 7,746
Plaza Ridge $ 4,765 -- $ 7,709
Park Ten $ 3,858 -- $ 7,712
64
Target REITs
Statements of Operations
Year ended December 31, 2002
Forest Meadow Federal
Park Gael Goldentop Centennial Point Timberlake Way
------ ---- --------- ---------- ------ ---------- -------
Revenue:
Rental $ 863 $ 2,628 $ 2,410 $ 1,832 $ 3,617 $ 6,155 $ 1,810
Interest 17 23 27 16 30 43 25
------- ------- ------- ------- ------- ------- -------
Total Revenue 880 2,651 2,437 1,848 3,647 6,198 1,835
------- ------- ------- ------- ------- ------- -------
Expenses:
Rental operating expenses 181 604 89 262 863 896 39
Real estate taxes and insurance 70 532 332 146 334 804 49
Depreciation and amortization 142 538 389 311 504 1,048 436
Interest 0 0 0 0 0 0 0
------- ------- ------- ------- ------- ------- -------
Total expenses 393 1,674 810 719 1,701 2,748 524
------- ------- ------- ------- ------- ------- -------
Income (loss) before dividends to
Common shareholder 487 977 1,627 1,129 1,946 3,450 1,311
Dividends to common shareholder 0 0 0 0 0 0 0
------- ------- ------- ------- ------- ------- -------
Net Income (loss) attributable to
Preferred shareholders $ 487 $ 977 $ 1,627 $ 1,129 $ 1,946 $ 3,450 $ 1,311
======= ======= ======= ======= ======= ======= =======
Weighted average number of
preferred shares 78 212.5 231.5 158 257.5 515 200
======= ======= ======= ======= ======= ======= =======
Net income(loss) per
preferred share $ 6,244 $ 4,598 $ 7,028 $ 7,146 $ ,557 $ 6,699 $ 6,555
======= ======= ======= ======= ======= ======= =======
Total
Fair Plaza Target
Lakes NW Point Timberlake E. Merrywood Ridge Park Ten REITs
----- -------- ------------- --------- ----- -------- -----
Revenue:
Rental $ 6,514 $ 5,127 $ 2,403 $ 1,811 $ 3,358 $ 1,930 $ 40,458
Interest 48 40 42 10 27 13 361
------- ------- ------- ------- ------- ------- --------
Total Revenue 6,562 5,167 2,445 1,821 3,385 1,943 40,819
------- ------- ------- ------- ------- ------- --------
Expenses:
Rental operating expenses 1,606 628 531 483 593 398 7,173
Real estate taxes and insurance 504 1,435 307 365 184 260 5,322
Depreciation and amortization 1,061 851 451 383 523 405 7,042
Interest 13 0 1,457 1,203 2,400 1,659 6,732
------- ------- ------- ------- ------- ------- --------
Total expenses 3,184 2,914 2,746 2,434 3,700 2,722 26,269
------- ------- ------- ------- ------- ------- --------
Income (loss) before dividends to
Common shareholder 3,378 2,253 (301) (613) (315) (779) 14,550
Dividends to common shareholder 0 0 15 26 99 131 271
------- ------- ------- ------- ------- ------- --------
Net Income (loss) attributable to
Preferred shareholders $ 3,378 $ 2,253 $ (316) $ (639) $ (414) $ (910) $ 14,279
======= ======= ======= ======= ======= ======= ========
Weighted average number of
preferred shares 480 372.5 250 206 400 275 3,636
======= ======= ======= ======= ======= ======= ========
Net income(loss) per
preferred share $ 7,038 $ 6,048 $(1,264) $(3,102) $(1,035) $ 3,309) $ 4,002
======= ======= ======= ======= ======= ======= ========
65
Target REITs
Statements of Operations
Year ended December 31, 2001
Forest Meadow Federal
Park Gael Goldentop Centennial Point Timberlake Way
------ ---- --------- ---------- ------ ---------- -------
Revenue:
Rental $ 852 $ 2,582 $ 2,439 $ 1,817 $ 2,788 $ 3,641 $ 528
Interest and other 33 46 54 37 37 45 8
------- ------- ------- ------- ------- ------- -------
Total Revenue 885 2,628 2,493 1,854 2,825 3,686 536
------- ------- ------- ------- ------- ------- -------
Expenses:
Rental operating expenses 175 574 96 237 707 546 43
Real estate taxes and insurance 63 510 297 137 255 479 16
Depreciation and amortization 139 538 389 312 398 652 102
Interest 0 0 0 0 1,047 2,060 1,166
------- ------- ------- ------- ------- ------- -------
Total expenses 377 1,622 782 686 2,407 3,737 1,327
------- ------- ------- ------- ------- ------- -------
Income (loss) before dividends to
Common shareholder 508 1,006 1,711 1,168 418 (51) (791)
Dividends to common shareholder 0 0 0 0 13 90 15
------- ------- ------- ------- ------- ------- -------
Net Income (loss) attributable to
Preferred shareholders $ 508 $ 1,006 $ 1,711 $ 1,168 $ 405 $ (141) $ (806)
======= ======= ======= ======= ======= ======= =======
Weighted average number
of preferred shares 78 212.5 231.5 158 257.5 515 200
======= ======= ======= ======= ======= ======= =======
Net income (loss) per
preferred share $ 6,513 $ 4,734 $ 7,391 $ 7,392 $ 1,573 $ (274) $(4,030)
======= ======= ======= ======= ======= ======= =======
Total
Fair Plaza Target
Lakes NW Point Timberlake E. Merrywood Ridge Park Ten REITs
----- -------- ------------- --------- ----- -------- -----
Revenue:
Rental $ 1,831 $ 351 $ 0 $ 0 $ 0 $ 0 $ 16,829
Interest and other 13 7 0 0 0 0 280
------- ------- ------- ------- ------- ------- --------
Total Revenue 1,844 358 0 0 0 0 17,109
------- ------- ------- ------- ------- ------- --------
Expenses:
Rental operating expenses 493 89 0 0 0 0 2,960
Real estate taxes and insurance 148 60 0 0 0 0 1,965
Depreciation and amortization 264 30 0 0 0 0 2,824
Interest 2,941 2,187 0 0 0 0 9,401
------- ------- ------- ------- ------- ------- --------
Total expenses 3,846 2,366 0 0 0 0 17,150
------- ------- ------- ------- ------- ------- --------
Income (loss) before dividends to
Common shareholder (2,002) (2,008) 0 0 0 0 (41)
Dividends to common shareholder 111 26 0 0 0 0 255
------- ------- ------- ------- ------- ------- --------
Net Income (loss) attributable to
Preferred shareholders $(2113) $(2034) $ 0 $ 0 $ 0 $ 0 $ (296)
======= ======= ======= ======= ======= ======= ========
Weighted average number
of preferred shares 480 372.5 0 0 0 0 2,505
======= ======= ======= ======= ======= ======= ========
Net income (loss) per
preferred share $(4,402) $(5,460) $ 0 $ 0 $ 0 $ 0 $ (118)
======= ======= ======= ======= ======= ======= ========
66
Target REITs
Statements of Operations
Year ended December 31, 2000
Forest Meadow Federal
Park Gael Goldentop Centennial Point Timberlake Way
------ ---- --------- ---------- ------ ---------- -------
Revenue:
Rental $ 660 $ 1,033 $ 670 $ 414 $ 0 $ 0 $ 0
Interest 69 28 15 5 0 0 0
------- ------- ------- ------- ------- ------- -------
Total Revenue 729 1,061 685 419 0 0 0
------- ------- ------- ------- ------- ------- -------
Expenses:
Rental operating expenses 154 282 64 81 0 0 0
Depreciation and amortization 124 246 113 91 0 0 0
Real estate taxes and insurance 57 202 81 27 0 0 0
Interest 0 792 809 698 0 0 0
------- ------- ------- ------- ------- ------- -------
Total expenses 335 1,522 1,067 897 0 0 0
------- ------- ------- ------- ------- ------- -------
Income (loss) before dividends to
Common shareholder $ 394 $ (461) $ (382) $ (478) $ 0 $ 0 $ 0
Dividends to common shareholder 0 0 0 0 0 0 0
------- ------- ------- ------- ------- ------- -------
Net Income (loss) attributable to
Preferred shareholders 394 61) 382) 478) 0 0 0
======= ======= ======= ======= ======= ======= =======
Weighted average number
of preferred shares 78 212.5 231.5 158 0 0 0
======= ======= ======= ======= ======= ======= =======
Net income (loss) per
preferred share $ 5,051 $(2,169) $(1,650) $(3,025) $ 0 $ 0 $ 0
======= ======= ======= ======= ======= ======= =======
Total
Fair Plaza Target
Lakes NW Point Timberlake E. Merrywood Ridge Park Ten REITs
----- -------- ------------- --------- ----- -------- -----
Revenue:
Rental $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 2,777
Interest 0 0 0 0 0 0 117
------- ------- ------- ------- ------- ------- --------
Total Revenue 0 0 0 0 0 0 2,894
------- ------- ------- ------- ------- ------- --------
Expenses:
Rental operating expenses 0 0 0 0 0 0 581
Depreciation and amortization 0 0 0 0 0 0 574
Real estate taxes and insurance 0 0 0 0 0 0 367
Interest 0 0 0 0 0 0 2,299
------- ------- ------- ------- ------- ------- --------
Total expenses 0 0 0 0 0 0 3,821
------- ------- ------- ------- ------- ------- --------
Income (loss) before dividends to
Common shareholder $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ (927)
Dividends to common shareholder 0 0 0 0 0 0 0
------- ------- ------- ------- ------- ------- --------
Net Income (loss) attributable to
Preferred shareholders 0 0 0 0 0 0 (927)
======= ======= ======= ======= ======= ======= ========
Weighted average number
of preferred shares 0 0 0 0 0 0 680
======= ======= ======= ======= ======= ======= ========
Net income (loss) per
preferred share $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ (1,363)
======= ======= ======= ======= ======= ======= ========
67
Target REITs
Statements of Operations
Year ended December 31, 1999
Forest Meadow Federal
Park Gael Goldentop Centennial Point Timberlake Way
------ ---- --------- ---------- ------ ---------- -------
Revenue:
Rental $ 309 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Interest 35 0 0 0 0 0 0
------- ------- ------- ------- ------- ------- -------
Total Revenue 344 0 0 0 0 0 0
------- ------- ------- ------- ------- ------- -------
Expenses:
Rental operating expenses 93 0 0 0 0 0 0
Depreciation and amortization 57 0 0 0 0 0 0
Real estate taxes and insurance 23 0 0 0 0 0 0
Interest 2 0 0 0 0 0 0
------- ------- ------- ------- ------- ------- -------
Total expenses 175 0 0 0 0 0 0
------- ------- ------- ------- ------- ------- -------
Income (loss) before dividends to
Common shareholder 169 0 0 0 0 0 0
Dividends to common shareholder 0 0 0 0 0 0 0
------- ------- ------- ------- ------- ------- -------
Net Income attributable to
Preferred shareholders $ 169 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
======= ======= ======= ======= ======= ======= =======
Weighted average number of
preferred shares 78 0 0 0 0 0 0
======= ======= ======= ======= ======= ======= =======
Net income per
preferred share $ 2,167 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
======= ======= ======= ======= ======= ======= =======
Total
Fair Plaza Target
Lakes NW Point Timberlake E. Merrywood Ridge Park Ten REITs
----- -------- ------------- --------- ----- -------- -----
Revenue:
Rental $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 309
Interest 0 0 0 0 0 0 35
------- ------- ------- ------- ------- ------- --------
Total Revenue 0 0 0 0 0 0 344
------- ------- ------- ------- ------- ------- --------
Expenses:
Rental operating expenses 0 0 0 0 0 0 93
Depreciation and amortization 0 0 0 0 0 0 57
Real estate taxes and insurance 0 0 0 0 0 0 23
Interest 0 0 0 0 0 0 2
------- ------- ------- ------- ------- ------- --------
Total expenses 0 0 0 0 0 0 175
------- ------- ------- ------- ------- ------- --------
Income (loss) before dividends to
Common shareholder 0 0 0 0 0 0 169
Dividends to common shareholder 0 0 0 0 0 0 0
------- ------- ------- ------- ------- ------- --------
Net Income attributable to
Preferred shareholders $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 169
======= ======= ======= ======= ======= ======= ========
Weighted average number of
preferred shares 0 0 0 0 0 0 78
======= ======= ======= ======= ======= ======= ========
Net income per
preferred share $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 2,167
======= ======= ======= ======= ======= ======= ========
68
Target REITs
Balance Sheet
December 31, 2002
Forest Meadow Federal
Park Gael Goldentop Centennial Point Timberlake Way
------ ---- --------- ---------- ------ ---------- -------
Assets:
Land $ 1,210 $ 3,312 $ 4,427 $ 1,305 $ 2,126 $ 2,831 $ 2,509
Building 5,171 14,789 15,183 12,152 19,625 40,714 13,141
------- ------- ------- ------- ------- ------- -------
Real Estate Investments, cost 6,381 18,101 19,610 13,457 21,751 43,545 15,650
Less Accumulated Depreciation 443 1,322 892 714 902 1,696 439
------- ------- ------- ------- ------- ------- -------
Real Estate Investments, net 5,938 16,779 18,718 12,743 20,849 41,849 15,211
Cash and equivalents 347 399 512 540 771 1,201 558
Cash - Funded Reserve 656 574 841 470 896 1,759 1,038
Restricted Cash -- 61 -- 13 271 8 --
Tenant rent receivable 13 5 64 --
Step rent receivable 138 289 210 525 470 142
Prepaid expenses 6 41 20 9 22 7 2
Deferred leasing commissions 47 -- -- -- -- 28 --
Accumulated amortization (19) -- -- -- -- (4) --
Provision for favorable leases -- -- -- -- -- -- --
Accumulated amortization -- -- -- -- -- -- --
Deferred lease origination costs -- -- -- -- -- -- 461
Accumulated amortization -- -- -- -- -- -- (99)
------- ------- ------- ------- ------- ------- -------
Total Assets $ 7,113 $17,854 $20,393 $13,985 $23,339 $45,382 $17,313
======= ======= ======= ======= ======= ======= =======
Liabilities and Stockholders' Equity:
Accounts payable and accrued
expenses $ 172 $ 85 $ 25 $ 152 $ 183 $ 92 $ 161
Dividends payable 134 356 497 338 562 1,129 412
Tenant security deposits -- 61 -- 13 271 8 --
Deferred Rent -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Total Liabilities 306 502 522 503 1,016 1,229 573
------- ------- ------- ------- ------- ------- -------
Preferred Stock -- -- -- -- -- -- --
Common Stock -- -- -- -- -- -- --
Additional paid in capital 7,115 19,435 21,221 14,459 23,624 47,253 18,329
Deficit and distributions in
excess of earnings (308) (2,083 ) (1,350) (977) (1,301) (3,100) (1,589)
------- ------- ------- ------- ------- ------- -------
Total Stockholders' equity 6,807 17,352 19,871 13,482 22,323 44,153 16,740
------- ------- ------- ------- ------- ------- -------
Total Liabilities &
Stockholders' Equity $ 7,113 $17,854 $20,393 $13,985 $23,339 $45,382 $17,313
======= ======= ======= ======= ======= ======= =======
Total
Fair Plaza Target
Lakes NW Point Timberlake E. Merrywood Ridge Park Ten REITs
----- -------- ------------- --------- ----- -------- -----
Assets:
Land $ 4,183 $ 3,242 $ 2,931 $ 2,318 $ 4,055 $ 1,367 $ 35,816
Building 33,791 26,555 16,525 14,867 25,210 20,509 258,232
------- ------- ------- ------- ------- ------- --------
Real Estate Investments, cost 37,974 29,797 19,456 17,185 29,265 21,876 294,048
Less Accumulated Depreciation 1,130 711 334 383 404 329 9,699
------- ------- ------- ------- ------- ------- --------
Real Estate Investments, net 36,844 29,086 19,122 16,802 28,861 21,547 284,349
Cash and equivalents 1,200 1,492 868 499 1,506 865 10,758
Cash - Funded Reserve 1,801 1,498 778 500 1,729 1,061 13,601
Restricted Cash -- -- 17 79 53 502
Tenant rent receivable 38 -- 73 -- 37 13 243
Step rent receivable 599 339 108 -- 299 80 3,199
Prepaid expenses 31 49 4 25 106 16 338
Deferred leasing commissions -- -- 35 -- -- -- 110
Accumulated amortization -- -- (5) -- -- -- (28)
Provision for favorable leases -- -- -- -- 1,646 -- 1,646
Accumulated amortization -- -- -- -- (137) -- (137)
Deferred lease origination costs 1,486 1,400 705 -- 1,737 656 6,445
Accumulated amortization (195) (170) (112) -- (119) (76) (771)
------- ------- ------- ------- ------- ------- --------
Total Assets $41,804 $33,694 $21,593 $17,905 $35,665 $24,215 $320,255
======= ======= ======= ======= ======= ======= ========
Liabilities and Stockholders' Equity:
Accounts payable and accrued
expenses $ 250 $ 1,216 $ 131 $ 208 $ 324 $ 250 $ 3,249
Dividends payable 955 716 500 323 872 563 7,357
Tenant security deposits -- -- 17 79 -- 53 502
Deferred Rent -- 407 -- -- -- -- 407
------- ------- ------- ------- ------- ------- --------
Total Liabilities 1,205 2,339 648 610 1,196 866 11,515
------- ------- ------- ------- ------- ------- --------
Preferred Stock -- -- -- -- -- -- --
Common Stock -- -- -- -- -- -- --
Additional paid in capital 44,045 34,186 22,892 18,892 36,690 25,189 333,330
Deficit and distributions in
excess of earnings (3,446) (2,831) (1,947) (1,597) (2,221) (1,840) (24,590)
------- ------- ------- ------- ------- ------- --------
Total Stockholders' equity 40,599 31,355 20,945 17,295 34,469 23,349 308,740
------- ------- ------- ------- ------- ------- --------
Total Liabilities &
Stockholders' Equity $41,804 $33,694 $21,593 $17,905 $35,665 $24,215 $320,255
======= ======= ======= ======= ======= ======= ========
69
Target REITs
Balance Sheet
December 31, 2001
Forest Meadow Federal
Park Gael Goldentop Centennial Point Timberlake Way
------ ---- --------- ---------- ------ ---------- -------
Assets:
Land $ 1,210 $ 3,312 $ 4,427 $ 1,305 $ 2,126 $ 2,831 $ 2,509
Building 5,171 14,789 15,183 12,152 19,625 40,714 13,141
------- ------- ------- ------- ------- ------- -------
Real Estate Investments, cost 6,381 18,101 19,610 13,457 21,751 43,545 15,650
Less Accumulated Depreciation 310 784 503 403 398 652 98
------- ------- ------- ------- ------- ------- -------
Real Estate Investments, net 6,071 17,317 19,107 13,054 21,353 42,893 15,552
Cash and equivalents 199 429 534 535 607 948 560
Cash - Funded Reserve 656 581 852 470 896 1,787 1,038
Restricted Cash -- 66 -- 13 268 8 --
Tenant rent receivable 111 -- -- -- 1 149 --
Step rent receivable -- -- 193 131 267 185 26
Prepaid expenses 5 28 15 19 25 13 1
Deferred leasing costs 46 -- -- -- -- -- --
Accumumlated Amortization (9) -- -- -- -- -- --
Deferred lease origination costs -- -- -- -- -- -- 461
Accumumlated Amortization -- -- -- -- -- -- (4)
------- ------- ------- ------- ------- ------- -------
Total Assets $ 7,079 $18,421 $20,701 $14,222 $23,417 $45,983 $17,634
======= ======= ======= ======= ======= ======= =======
Liabilities and Stockholders' Equity:
Accounts payable and accrued
expenses $ 35 $ 58 $ 45 $ 173 $ 130 $ 80 $ 173
Dividends payable 143 399 480 329 511 1,021 405
Tenant security deposits -- 66 -- 13 268 8 --
Deferred Lease origination costs -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Total Liabilities 178 523 525 515 909 1,109 578
------- ------- ------- ------- ------- ------- -------
Preferred Stock -- -- -- -- -- -- --
Common Stock -- -- -- -- -- -- --
Additional paid in capital 7,006 19,435 21,221 14,459 23,624 47,253 18,329
Deficit and distributions
in excess of earnings (105) (1,537) (1,045) (752) (1,116) (2,379) (1,273)
------- ------- ------- ------- ------- ------- -------
Total Stockholders' Equity 6,901 17,898 20,176 13,707 22,508 44,874 17,056
------- ------- ------- ------- ------- ------- -------
Total Liabilities &
Stockholders' Equity $ 7,079 $18,421 $20,701 $14,222 $23,417 $45,983 $17,634
======= ======= ======= ======= ======= ======= =======
Total
Fair Plaza Target
Lakes NW Point Timberlake E. Merrywood Ridge Park Ten REITs
----- -------- ------------- --------- ----- -------- -----
Assets:
Land $ 4,183 $ 3,242 $ -- $ -- $ -- $ -- $ 25,145
Building 33,791 26,555 -- -- -- -- 181,121
------- ------- ------- ------- ------- ------- --------
Real Estate Investments, cost 37,974 29,797 -- -- -- -- 206,266
Less Accumulated Depreciation 253 28 -- -- -- -- 3,429
------- ------- ------- ------- ------- ------- --------
Real Estate Investments, net 37,721 29,769 -- -- -- -- 202,837
Cash and equivalents 1,050 657 -- -- -- -- 5,519
Cash - Funded Reserve 1,801 1,498 -- -- -- -- 9,579
Restricted Cash -- -- -- -- -- -- 355
Tenant rent receivable 99 -- -- -- -- -- 360
Step rent receivable 154 -- -- -- -- -- 956
Prepaid expenses 6 37 -- -- -- -- 149
Deferred leasing costs -- -- -- -- -- -- 46
Accumumlated Amortization -- -- -- -- -- -- (9)
Deferred lease origination costs 1,486 1,400 -- -- -- -- 3,347
Accumumlated Amortization (11) (2) -- -- -- -- (17)
------- ------- ------- ------- ------- ------- --------
Total Assets $42,306 $33,359 $ -- $ -- $ -- $ -- $223,122
======= ======= ======= ======= ======= ======= ========
Liabilities and Stockholders' Equity:
Accounts payable and accrued
expenses $ 285 $ 790 $ -- $ -- $ -- $ -- $ 1,769
Dividends payable 924 132 4,344
Tenant security deposits -- -- -- -- -- -- 355
Deferred Lease origination costs -- 391 -- -- -- -- 391
------- ------- ------- ------- ------- ------- --------
Total Liabilities 1,209 1,313 -- -- -- -- 6,859
------- ------- ------- ------- ------- ------- --------
Preferred Stock -- -- -- -- -- -- --
Common Stock -- -- -- -- -- -- --
Additional paid in capital 44,045 34,186 -- -- -- -- 229,558
Deficit and distributions
in excess of earnings (2,948) (2,140) -- -- -- -- (13,295)
------- ------- ------- ------- ------- ------- --------
Total Stockholders' Equity 41,097 32,046 -- -- -- -- 216,263
------- ------- ------- ------- ------- ------- --------
Total Liabilities &
Stockholders' Equity $42,306 $33,359 $ -- $ -- $ -- $ -- $223,122
======= ======= ======= ======= ======= ======= ========
70
Target REITs
Balance Sheets
December 31, 2000
Forest Meadow Federal
Park Gael Goldentop Centennial Point Timberlake Way
------ ---- --------- ---------- ------ ---------- -------
Assets:
Land $ 1,210 $ 3,312 $ 4,427 $ 1,305 $ 0 $ 0 $ 0
Building 4,818 14,789 15,183 12,152 0 0 0
Real Estate Investments, cost 6,028 18,101 19,610 13,457 0 0 0
Less Accumulated Depreciation 180 246 114 91 0 0 0
Real Estate Investments, net 5,848 17,855 19,496 13,366 0 0 0
Cash and equivalents 111 901 528 244 0 0 0
Cash - Funded Reserve 1,123 616 835 470 0 0 0
Restricted Cash 0 0 0 0 0 0 0
Tenant rent receivable 76 0 0 0 0 0 0
Step rent receivable 0 0 0 0 0 0 0
Prepaid expenses 5 28 74 3 0 0 0
Deferred leasing costs 46 0 0 0 0 0 0
Accumumlated Amortization (2) 0 0 0 0 0 0
Deferred lease origination costs 0 0 0 0 0 0 0
Accumumlated Amortization 0 0 0 0 0 0 0
------- ------- ------- ------- ------- ------- -------
Total Assets $ 7,207 $19,400 $20,933 $14,083 $ 0 $ 0 $ 0
======= ======= ======= ======= ======= ======= =======
Liabilities and Stockholders' equity:
Accounts payable and accrued
expenses $ 85 $ 497 $ 93 $ 88 $ 0 $ 0 $ 0
Dividends payable 116 372 474 125 0 0 0
Tenant security deposits 0 86 0 13 0 0 0
Deferred Lease origination costs 0 0 0 0 0 0 0
------- ------- ------- ------- ------- ------- -------
Total Liabilities 201 955 567 226 0 0 0
------- ------- ------- ------- ------- ------- -------
Preferred Stock/Partners Equity 7,006 0 0 0 0 0 0
Common Stock 0 0 0 0 0 0 0
Additional paid in capital 0 19,435 21,221 14,459 0 0 0
Deficit and distributions in
excess of earnings 0 (990) (855) (602) 0 0 0
------- ------- ------- ------- ------- ------- -------
Total stockholders equity 7,006 18,445 20,366 13,857 0 0 0
------- ------- ------- ------- ------- ------- -------
Total Liabilities &
Stockholders' Equity $ 7,207 $19,400 $20,933 $14,083 $ 0 $ 0 $ 0
======= ======= ======= ======= ======= ======= =======
Total
Fair Plaza Target
Lakes NW Point Timberlake E. Merrywood Ridge Park Ten REITs
----- -------- ------------- --------- ----- -------- -----
Assets:
Land $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 10,254
Building 0 0 0 0 0 0 46,942
Real Estate Investments, cost 0 0 0 0 0 0 57,196
Less Accumulated Depreciation 0 0 0 0 0 0 631
Real Estate Investments, net 0 0 0 0 0 0 56,565
Cash and equivalents 0 0 0 0 0 0 1,784
Cash - Funded Reserve 0 0 0 0 0 0 3,044
Restricted Cash 0 0 0 0 0 0 0
Tenant rent receivable 0 0 0 0 0 0 76
Step rent receivable 0 0 0 0 0 0 0
Prepaid expenses 0 0 0 0 0 0 110
Deferred leasing costs 0 0 0 0 0 0 46
Accumumlated Amortization 0 0 0 0 0 0 (2)
Deferred lease origination costs 0 0 0 0 0 0 0
Accumumlated Amortization 0 0 0 0 0 0 0
------- ------- ------- ------- ------- ------- --------
Total Assets $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 61,623
======= ======= ======= ======= ======= ======= ========
Liabilities and Stockholders' equity:
Accounts payable and accrued
expenses $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 763
Dividends payable 0 0 0 0 0 0 1,087
Tenant security deposits 0 0 0 0 0 0 99
Deferred Lease origination costs 0 0 0 0 0 0 0
------- ------- ------- ------- ------- ------- --------
Total Liabilities 0 0 0 0 0 0 1,949
------- ------- ------- ------- ------- ------- --------
Preferred Stock/Partners Equity 0 0 0 0 0 0 7,006
Common Stock 0 0 0 0 0 0 0
Additional paid in capital 0 0 0 0 0 0 55,115
Deficit and distributions in
excess of earnings 0 0 0 0 0 0 (2,447)
------- ------- ------- ------- ------- ------- --------
Total stockholders equity 0 0 0 0 0 0 59,674
------- ------- ------- ------- ------- ------- --------
Total Liabilities &
Stockholders' Equity $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 61,623
======= ======= ======= ======= ======= ======= ========
71
Target REITs
Balance Sheets
December 31, 1999
Forest Meadow Federal
Park Gael Goldentop Centennial Point Timberlake Way
------ ---- --------- ---------- ------ ---------- -------
Assets:
Land $ 1,210 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Building 4,818 0 0 0 0 0 0
Real Estate Investments, cost 6,028 0 0 0 0 0 0
Less Accumulated Depreciation 56 0 0 0 0 0 0
------- ------- ------- ------- ------- ------- -------
Real Estate Investments, net 5,972 0 0 0 0 0 0
Cash and equivalents 0 0 0 0 0 0 0
Cash - Funded Reserve 179 0 0 0 0 0 0
Restricted Cash 1,066 0 0 0 0 0 0
Tenant rent receivable 0 0 0 0 0 0 0
Step rent receivable 23 0 0 0 0 0 0
Prepaid expenses 0 0 0 0 0 0 0
Deferred leasing costs 1 0 0 0 0 0 0
Accumumlated Amortization 0 0 0 0 0 0 0
Deferred lease origination costs 0 0 0 0 0 0 0
Accumumlated Amortization 0 0 0 0 0 0 0
------- ------- ------- ------- ------- ------- -------
Total Assets $ 7,241 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
======= ======= ======= ======= ======= ======= =======
Liabilities and Stockholders' Equity:
Accounts payable and accrued
expenses $ 63 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Dividends payable 0
Tenant security deposits 0 0 0 0 0 0 0
Deferred Lease origination costs 0 0 0 0 0 0 0
------- ------- ------- ------- ------- ------- -------
Total Liabilities 63 0 0 0 0 0 0
------- ------- ------- ------- ------- ------- -------
Preferred Stock/Partners Equity 7,178 0 0 0 0 0 0
0 0 0 0 0 0 0
0 0 0 0 0 0 0
0 0 0 0 0 0 0
------- ------- ------- ------- ------- ------- -------
Total Stockholders' Equity 7,178 0 0 0 0 0 0
------- ------- ------- ------- ------- ------- -------
Total Liabilities &
Stockholders' Equity $ 7,241 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
======= ======= ======= ======= ======= ======= =======
Total
Fair Plaza Target
Lakes NW Point Timberlake E. Merrywood Ridge Park Ten REITs
----- -------- ------------- --------- ----- -------- -----
Assets:
Land $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 1,210
Building 0 0 0 0 0 0 4,818
Real Estate Investments, cost 0 0 0 0 0 0 6,028
Less Accumulated Depreciation 0 0 0 0 0 0 56
------- ------- ------- ------- ------- ------- --------
Real Estate Investments, net 0 0 0 0 0 0 5,972
Cash and equivalents 0 0 0 0 0 0 0
Cash - Funded Reserve 0 0 0 0 0 0 179
Restricted Cash 0 0 0 0 0 0 1,066
Tenant rent receivable 0 0 0 0 0 0 0
Step rent receivable 0 0 0 0 0 0 23
Prepaid expenses 0 0 0 0 0 0 0
Deferred leasing costs 0 0 0 0 0 0 1
Accumumlated Amortization 0 0 0 0 0 0 0
Deferred lease origination costs 0 0 0 0 0 0 0
Accumumlated Amortization 0 0 0 0 0 0 0
------- ------- ------- ------- ------- ------- --------
Total Assets $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 7,241
======= ======= ======= ======= ======= ======= ========
Liabilities and Stockholders' Equity:
Accounts payable and accrued
expenses $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 63
Dividends payable 0
Tenant security deposits 0 0 0 0 0 0 0
Deferred Lease origination costs 0 0 0 0 0 0 0
------- ------- ------- ------- ------- ------- --------
Total Liabilities 0 0 0 0 0 0 63
------- ------- ------- ------- ------- ------- --------
Preferred Stock/Partners Equity 0 0 0 0 0 0 7,178
0 0 0 0 0 0 0
0 0 0 0 0 0 0
0 0 0 0 0 0 0
------- ------- ------- ------- ------- ------- --------
Total Stockholders' Equity 0 0 0 0 0 0 7,178
------- ------- ------- ------- ------- ------- --------
Total Liabilities &
Stockholders' Equity $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 7,241
======= ======= ======= ======= ======= ======= ========
72
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. FSP
Corp. is self-managed. 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
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, FSP Corp. had sponsored 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.
73
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 or owned 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
net 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 Corp. obtained foreign terrorism
insurance as of November 26, 2002, but has not yet obtained domestic terrorism
insurance.
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 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
74
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 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 16 properties FSP Corp. owns, three are apartment
complexes, 11 are office buildings and two are industrial; three 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. and managing them after
acquisition:
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.
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 an unsecured 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
75
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 or gain
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
or 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.
With respect to its real estate investments, FSP Corp. faces competition
in each of the markets where the properties are located. As of December 31,
2002, 12 of FSP Corp.'s 17 properties had a percentage of leased space in excess
of 95% and four properties had percentages of leased space ranging from 63-94%.
One property became vacant as of November 30, 2002, and was still unleased as of
December 31, 2002.
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
76
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.
77
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
FSP Corp. at the three years ended December 31, 2002, 2001 and 2000.
December 31,
-----------------------------------
2002 2001 2000
-----------------------------------
Residential
Number of Properties.............. 4 4 4
Number of Apartment Units......... 642 642 642
Commercial
Number of Properties.............. 13 13 13
Square Footage.................... 1,433,300 1,433,300 1,433,300
As described in Note 4 to FSP Corp.'s financial statements, FSP Corp.'s
predecessor-in-interest, the FSP Partnership, consummated three series of
mergers. 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
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
78
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 that the real estate portfolio
is more diverse, both geographically and with respect to property type and by
tenant business, investment banking services account for a smaller percentage of
FSP Corp.'s revenues, 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 (1) 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
(1) The sale of this Sponsored Partnership was consummated on February 7,
2003.
During 2002, 2001 and 2000, FSP Corp. retained ownership interests in 17,
ten and three Sponsored REITs, respectively, for nominal consideration in
connection with the organization and syndication of such Sponsored REITs.
However, FSP Corp. had completed the syndication of only 16 of the Sponsored
REITs of which it retained ownership interests as of December 31, 2002.
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. Prior to the completion of
the offering of the preferred shares of the Sponsored REITs, FSP Corp.'s share
of net income in the
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Sponsored REITs was $519,000, $255,000, and $0, for the years ended December 31,
2002, 2001 and 2000, respectively. Subsequent to the completion of the offering
of the preferred shares, FSP Corp. did not share in any of the Sponsored REITs'
earnings for the years ended December 31, 2002, 2001 and 2000.
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 have not obtained and do not contemplate obtaining 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, except for two
non-management directors of FSP Corp., 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 cash distributions subsequent to the completion
of the offering of the preferred shares. However, upon liquidation of a
Sponsored REIT, FSP Corp. will be entitled to its percentage interest in any
proceeds remaining after the preferred stockholders 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 the 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
FSP Corp. has certain critical accounting policies that are subject to
judgments and estimates by FSP Corp. and uncertainties of outcome that affect
the application of these policies. FSP Corp. bases its estimates on historical
experience and on various other assumptions FSP Corp. believes to be reasonable
under the circumstances. On an on-going basis, FSP Corp. evaluates its
estimates. In the event estimates or assumptions prove to be different from
actual results, adjustments are made in subsequent periods to reflect more
current information. The material accounting policies that FSP Corp. believes
are most critical to the understanding of its financial position and results of
operations that require significant management estimates and judgments are
discussed below.
Basis of Presentation
The consolidated financial statements of FSP Corp. include the accounts of
the FSP Partnership (as predecessor-in-interest 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, 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.
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Real Estate Assets
Real estate assets are stated at the lower of depreciated cost or fair
value. The cost of buildings and improvements include the purchase price of
property, legal fees and other acquisition costs. Typical capital improvements
include new roofs, site improvements, various exterior building improvements and
major renovations. Funding for capital improvements typically is provided by
cash reserves.
FSP Corp. periodically reviews its properties to determine if its carrying
amounts will be recovered from future operating cash flows. The evaluation of
anticipated cash flows is highly subjective and is based in part on assumptions
regarding future occupancy, rental rates and capital requirements that could
differ materially from actual results in future periods. Since cash flows on
properties considered to be "long-lived assets to be held and used" as defined
by FAS 144 are considered on an undiscounted basis to determine whether an asset
has been impaired, FSP Corp.'s established strategy of holding properties over
the long term directly decreases the likelihood of recording an impairment loss.
If FSP Corp.'s strategy changes or market conditions otherwise dictate an
earlier sale or disposal date, an impairment loss may be recognized. If FSP
Corp. determines that impairment has occurred, the affected assets must be
reduced to their fair value. No such impairment losses have been recognized to
date.
FSP Corp. classifies a property as "held for sale" upon the execution of a
purchase and sale agreement provided that there are no significant contingencies
to the sale and management believes that the sale or disposition is probable
within one year. FSP Corp. reports the results of operations of its properties
classified as discontinued operations in its statements of income if no
significant continuing involvement exists after the sale or disposition.
FSP Corp. typically retains a common stock ownership in a Sponsored REIT
following a syndication, and earns an ongoing asset and/or property management
fee; accordingly, transaction fee revenue and the results of operations are not
classified as discontinued operations due to its continuing involvement.
Revenue Recognition
Rental revenue is reported on a straight-line basis over the terms of the
respective leases. Straight-line rent represents rental income earned in excess
of rent payments received pursuant to the terms of the individual lease
agreements.
FSP Corp. maintains an allowance against straight-line rent for future
potential tenant credit losses. The credit assessment is based on the estimated
straight-line rental income that is recoverable over the term of the lease. The
computation of this allowance is based on the tenants' payment history and
current credit status. If FSP Corp.'s estimates of collectibility differ from
the cash received, the timing and amount of its reported revenue would likely be
impacted.
Investment banking services revenue (Syndication and Transaction fees)
from the syndication of Sponsored REITs is recognized pursuant to the provisions
of Statement of Financial Standards No. 66 "Accounting for Sales of Real
Estate", and Statement of Position 92-1
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"Accounting for Real Estate Syndication Income". Revenue is recognized provided
the criteria for sale accounting in SFAS 66 are met.
Depreciation expense
FSP Corp. computes depreciation on its properties using the straight-line
method based on an estimated useful life of 27.5 years for residential property
and 39 years for non-residential property. The portion of the acquisition cost
allocated between land and building for each property may vary based on
estimated land value and other factors. FSP Corp. computes depreciation on
building improvements on an estimated useful life of 15 to 39 years, and on
furniture and fixtures on an estimated useful life of 5-7 years. The allocation
of a property's acquisition costs to buildings and the determination of the
asset's useful life are based on management's estimates.
Repairs and maintenance expenses
Routine replacements and ordinary maintenance and repairs are expensed as
incurred. Typical expense items include residential interior painting,
landscaping, minor carpet replacements and residential appliances. The
determination to expense an item rather than to capitalize and subsequently
depreciate the item is based upon management's judgment of whether the repair
extends the useful life of the asset. Funding for routine replacements, repairs
and maintenance items are typically provided by cash flows from operating
activities.
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 was
effective at the beginning of 2002. The impact of adoption did not have a
material impact on FSP Corp.'s financial position, results of operations
82
and cash flows. FSP Corp. does not have any real estate assets that it considers
"held for sale" at December 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 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
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. FAS No. 146 supersedes Emerging Issues Task Force Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity," which in some cases required certain costs to be
recognized before a liability was actually incurred. The adoption of this
standard is not expected to have a material impact on FSP Corp.'s results of
financial position, results of operations or cash flow.
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 disclosure requirements of FIN 45 are effective
for the Corporation as of December 31, 2002, and require disclosure of the
nature of the guarantee, the maximum potential amount of future payments that
the guarantor could be required to make under the guarantee, and the current
amount of the liability, if any, for the guarantor's obligations under the
guarantee. The recognition requirements of FIN 45 are to be applied
prospectively to guarantees issued or modified after December 31, 2002. FSP
Corp. has reviewed the provisions of FIN 45 and believes that the impact of
adoption will not be material to its financial position, results of operations
and cash flow.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities. The objective of this
interpretation is to provide guidance on how to identify a variable interest
entity ("VIE") and determine when the assets, liabilities, noncontrolling
interests, and results of operations of a VIE need to be included in a company's
consolidated financial statements. A company that holds variable interests in an
entity will need to consolidate the entity if the company's interest in the VIE
is such that the company will absorb a majority of the VIE's expected losses
and/or receive a majority of the entity's expected residual returns, if they
occur. FIN 46 also requires additional disclosures by primary beneficiaries and
83
other significant variable interest holders. The provisions of this
interpretation became effective upon issuance. The adoption of this standard is
not expected to have a material impact on FSP Corp.'s results of financial
position, results of operations or cash flow.
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 no borrowings by FSP Corp.
outstanding under the line of credit at December 31, 2002. FSP Corp. is in
compliance with all bank covenants required by this line of credit. The maturity
date of the line of credit is June 23, 2003. It is FSP Corp.'s intention to seek
to renew the line of credit when it matures.
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 December
31, 2002 are (in thousands): 2003 - $15,189; 2004 - $12,513; 2005 - $8,875; 2006
- $5,715; 2007 - $3,992 and $7,936 thereafter.
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 December 31, 2002 are (in thousands): 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. Subsequent to the completion of the
offering of preferred shares of such Sponsored REITs, these ownership interests
have virtually no economic benefit or risk. At December 31, 2002, 2001 and 2000,
FSP Corp. had ownership interests in 17, ten and three Sponsored REITs,
respectively. However, FSP Corp. sponsored only 16 of the Sponsored REITs for
which it retained ownership interests as of December 31, 2002. The Sponsored
REITs include the 13 Target REITs. During 1999 and 2000, FSP Corp. acquired 100%
of the non-owned interests of the 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,
2002 2001 2000
------------------------------------------
(in thousands)
Balance Sheet Data:
Real estate, net $ 385,907 $222,232 $ 56,565
Other assets 39,465 19,048 5,058
Total liabilities (6,554) 6,755 1,950
------------------------------------------
Shareholders equity $ 418,818 $234,525 $ 59,673
==========================================
84
(unaudited) December 31,
2002 2001 2000
------------------------------------------
(in thousands)
Operating Data:
Rental revenues $ 46,836 $ 19,816 $ 2,778
Other revenues 543 354 117
Operating and maintenance
Expenses 14,191 5,973 948
Depreciation and amortization 7,220 3,191 574
Interest expense 13,395 9,916 2,298
-----------------------------------------
Net income (loss) $ 12,577 $ 1,090 $ (925)
==========================================
Results of Operations
The following table shows the variance in dollars for FSP Corp.'s
operations for the years ended December 31, 2002 and 2001, the years ended
December 31, 2001 and 2000 and the years ended December 31, 2000 and 1999.
Variance in Dollars
(in thousands) For the Year Ended December 31,
2002 and 2001 2001 and 2000 2000 and 1999
-----------------------------------------------
Revenue
Rental revenue
Rental income $ 643 $ 1,331 $ 9,119
Sponsored REIT revenue 527 860 --
Interest and Other (458) (71) 771
-----------------------------------------------
Total rental revenue 712 2,120 9,890
-----------------------------------------------
Investment Services Revenue
Syndication fees 720 8,964 3,592
Transaction fees 390 9,163 3,193
Interest and Other (36) 12 70
-----------------------------------------------
Total investment services revenue 1,074 18,139 6,855
-----------------------------------------------
Total Revenue 1,786 20,259 16,745
-----------------------------------------------
Expenses
Rental expenses
Rental operating expenses (560) 537 2,060
Real estate taxes and insurance 230 427 1,025
Depreciation and amortization 51 196 1,350
Selling and administration (225) 692 (1,137)
Sponsored REIT expenses 263 605 --
Interest expense 76 (42) 561
-----------------------------------------------
Total rental expense (165) 2,415 3,859
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Variance in Dollars
(in thousands) For the Year Ended December 31,
2002 and 2001 2001 and 2000 2000 and 1999
-----------------------------------------------
Investment services expenses
Selling and administration 91 1,464 1,621
Commissions 299 3,103 788
Depreciation and amortization 98 (12) 32
Shares/units issued as compensation (1,140) (556) 2,300
-----------------------------------------------
Total investment services expenses (652) 3,999 4,741
-----------------------------------------------
Total expenses (817) 6,414 8,600
-----------------------------------------------
Income attributable to Minority Interests (40) (2,609) 370
Taxes on income 699 -- --
-----------------------------------------------
Net income $ 1,944 $ 16,454 $ 7,775
-----------------------------------------------
Comparison of the year ended December 31, 2002 to the year ended
December 31, 2001
FSP Corp. syndicated six Sponsored REITs with total gross proceeds of
$210.1 million in 2002; an increase of $7.0 million compared to six Sponsored
REITs syndicated in 2001 with total gross proceeds of $203.1 million. FSP Corp.
owned seventeen properties in both years.
Revenue
Total revenues increased $1.8 million, or 3.2%, to $56.8 million for the
year ended December 31, 2002, as compared to $55.0 million for the year ended
December 31, 2001.
Income from rental operations was $29.9 million for the year ended
December 31, 2002, an increase of $0.7 million, or 2.4%, compared to the year
ended December 31, 2001. The increase is attributable to:
o An increase in straight-line rent revenue of $0.9 million,
relating to new or renewed leases during the year;
o An increase in reimbursable expenses of $0.5 million; and
o An increase of $0.5 million in Sponsored REIT income relating
to the revenues of the Sponsored REITs prior to syndication.
The increase was offset by:
o A decrease in income from leases of $0.7 million as a result
of a rental allowance of $0.9 million given to a tenant as
part of lease extension, partially offset by a net increase of
$0.2 million in rents (less vacancies) in the remaining
properties;
o A decrease in other lease income of $0.1 million; and
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o A decrease of $0.5 million in interest and other income
primarily due to lower interest rates in 2002.
Investment banking services revenue (Syndication and Transaction fees) was
$26.8 million for the year ended December 31, 2002; an increase of $1.1 million,
or 4.1%, compared to the year ended December 31, 2001. This increase is
attributable to:
o An increase in Syndication and Transaction fees of $1.1
million as a result of an increase of $7 million of gross
proceeds from offerings of the Sponsored REITs; and
o No significant change in interest and other income.
Expenses
Total expenses were $28.8 million for the year ended December 31, 2002, a
decrease of $0.8 million, or 2.8%, compared to the year ended December 31, 2001.
Expenses for rental operations were $17.2 million for the year ended
December 31, 2002, a net decrease of $0.2 million, or 0.9%, compared to the year
ended December 31, 2001. The decrease is attributable to:
o A decrease in rental operating expenses of $0.6 million
primarily attributable to costs associated with leasing
activity in 2001 that did not repeat in 2002; and
o A decrease in general and administrative expenses of $0.2
million, primarily attributable to reduced professional fees
allocated to rental operations.
The decrease was offset by:
o An increase in real estate taxes and insurance of $0.2
million, as a result of tax rate increases on the existing
properties and increases in the price and difficulty of
obtaining insurance; and
o An increase in Sponsored REIT expenses of $0.3 million
primarily as a result of increased syndications in 2002
compared with 2001.
There were no significant changes to depreciation and amortization expense
or interest expense related to rental operations.
Expenses for Investment banking services were $11.6 million for the year
ended December 31, 2002, a net decrease of $0.6 million, or 5.3%, compared to
the year ended December 31, 2001. The decrease is attributable to a decrease in
expenses relating to shares/units issued as compensation of $1.1 million.
The decrease was offset by:
87
o An increase in selling and administrative expenses of $0.1
million, primarily attributable to the increase in syndication
proceeds in 2002;
o An increase in commission expense $0.3 million, attributable
to the increase in syndication proceeds in 2002; and
o An increase in depreciation and amortization expense of $0.1
million.
There was no income applicable to minority interests in 2002.
There was no tax on income in 2001. The tax rate for 2002 on the taxable
REIT subsidiary was approximately 22%. This rate included certain benefits that
will not occur in the future. FSP Corp. expects a tax rate of approximately 41%
for the taxable REIT subsidiary in the future.
Comparison of the year ended December 31, 2001 to the year ended
December 31, 2000
FSP Corp. syndicated six Sponsored REITs with total gross proceeds of
$203.1 million in 2001, an increase of $95.5 million compared to the syndication
in 2000 of three Sponsored REITs with total gross proceeds of $60.2 million and
three Sponsored Partnerships with total gross proceeds of $47.1 million. The
revenue associated with the syndication of the three Sponsored Partnerships in
2000 with total gross proceeds of $47.4 million has been eliminated in the
consolidated statements of income. FSP Corp. owned seventeen properties in 2001
and sixteen properties for all of 2000 and one property for part of 2000.
Revenue
Total revenues increased $20.3 million, or 58%, to $55.1 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 $29.2 million for the year
ended December 31, 2001.
The increase in rental income of $2.1 million, or 7.8%, 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 An increase in revenues of approximately $0.8 million as a
result of rent increases on existing properties; and
o An increase in revenues from the Sponsored REITs of $0.9
million resulting from the fact that there was no rental
revenue from Sponsored REITs in 2000.
The increase was offset by a decrease in interest income of less than $0.1
million.
88
The increase in Investment banking 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.
Interest and other income of $0.1 million was consistent with the previous
year.
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) including:
o An increase in payroll and related expenses of $1.5 million;
o An increase in consulting and professional fees of
approximately $0.6 million; and
o An increase in 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; and
89
o Tax rate increases on FSP Corp.'s existing properties of
approximately $0.3 million.
There were no Sponsored REIT expenses in 2000.
Interest expense of $0.8 million was consistent with the prior year.
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 the financial statements.
Comparison of the year ended December 31, 2000 to the year ended
December 31, 1999
FSP Corp. syndicated three Sponsored REITs in 2000 with total gross
proceeds of $60.2 million, an increase of $52.4 million compared to the
syndication of one unconsolidated partnership in 1999 with total gross proceeds
of $7.8 million. The revenue associated with the syndication of three Sponsored
Partnerships in 2000 with total gross proceeds of $47.4 million has been
eliminated in the consolidated statements of income. The revenue associated with
the syndication of five Sponsored Partnerships in 1999 with total gross proceeds
of $57.1 million has been eliminated in the consolidated statements of income.
FSP Corp. owned sixteen properties for a full year and one property for part of
the year in 2000. FSP Corp. owned nine properties for a full year and seven
properties for part of the year in 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; and
o An increase in revenue of approximately $0.5 million as a
result of rent increases and other miscellaneous fees on
existing properties.
The increase in Investment banking 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 Sponsored REITs in 2000
(with aggregate gross proceeds of $60.2 million)
90
compared to the syndication of one Sponsored Partnership 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 resulting from an increase in payroll and related expenses of
$0.7 million, offset by decreases in 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; and
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:
91
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; and
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.
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 began to decline, in part due to
seasonal variations and in part due to overall market conditions. 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, including in the form of
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 signed, other tenants
continue to reduce their space needs 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 in
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
92
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.
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 that the portfolio 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 coverage 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
In February 2003, FSP Corp. completed the sale of its Weslayan Oaks
apartment complex in Houston, Texas. The net selling price was approximately
$6.2 million and FSP Corp. realized a gain of approximately $1.2 million on the
sale.
Proposed Sale of Vacant Land in Southfield, Michigan
An offer to sell a parcel of vacant land in Southfield, Michigan was
accepted in December, but a purchase and sale agreement is still being
negotiated and has not been 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 both the number of Sponsored REIT
93
syndications completed and the amount of equity raised. 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. The larger-than-normal spreads may be caused by differing views
of the strength and timing of a national economic recovery as well as low
interest rate carrying costs on debt-financed properties. Without the ability to
acquire properties at attractive prices on behalf of Syndicated REITs, FSP
Corp.'s investment banking activities may suffer.
Further, FSP Corp. continues to rely solely on its in-house investment
executives to access interested investors who have capital they can afford to
place in an illiquid position for an indefinite period of time (i.e., investment
in Sponsored REITs). 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 clients, of raising the amount
of capital invested in Sponsored REITs 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 REITs.
Liquidity and Capital Resources as of December 31, 2002
Cash and cash equivalents were $22.3 million and $24.3 million at December
31, 2002 and December 31, 2001, respectively. This decrease of $2.0 million is
attributable to $30.5 million used for financing activities plus $2.6 million
used for investing activities offset by $31.1 million provided by operating
activities.
Operating Activities
The cash provided by FSP Corp.'s operating activities of $30.5 million is
primarily attributable to net income of $27.3 million plus the add-back of $5.5
million from non-cash activity less a $2.4 million net change in operating
assets and liabilities.
Investing Activities
FSP Corp.'s cash used for investing activities of $2.0 million is
attributable to $1.2 million for the purchase of real estate assets, office
computers and furniture and $0.8 million for a deposit on real estate
investments.
Financing Activities
FSP Corp.'s cash used by financing activities of $30.5 million is all
attributable to distributions to shareholders.
Liquidity and Capital Resources as of December 31, 2001
94
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
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 $16.7 million relating to advances to a Sponsored REIT
which were subsequently repaid in February 2001; $9.9 million for the purchase
of property and equipment, partially offset by proceeds of $0.9 million from the
sale of land; and $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
95
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.
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 expenses associated with
indebtedness. As of December 31, 2002 FSP Corp. had approximately $4.8 million
in liabilities. 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 December 31, 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 December 31, 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 that were set aside when the Sponsored
Partnerships that the FSP Partnership acquired were originally syndicated 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.
96
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.
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 17 Sponsored REITs but
had only completed the syndication of 16 of these 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. had 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 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
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Partnership 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. 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 Bank to senior officers. FSP Corp. will not incur any other
expenses or pay any amounts on behalf of its officers in connection with such
loans from Citizens Bank to FSP Corp.'s 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
automatically to a trust, the beneficiary of which will be one or more qualified
charitable organizations selected
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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
fair market value of the shares purchased, as determined by the FSP
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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 Combined Company's management must determine that the
redemption is 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 year ended December 31, 2002.
FSP Corp. borrows from time to time upon its line of credit. These
borrowings bear interest at a variable rate. As of December 31, 2002, $0 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)...................... 256,891.63 1.04%
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)........... 3,710,625.01 15.04%
---------------
* 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.
105
(6) Includes 245,910.13 shares of FSP Common Stock owned by the Richard R.
Norris Living Trust and 5,318.00 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 5,318 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, 2002 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 2002 (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 ....................... 2002 $120,000 $255,000(4) -- --
President and Chief Executive Officer 2001 $120,000 $759,652(6) -- $ 815,585(5)
2000 $120,000 $ 40,746 -- $1,703,770(7)
Richard R. Norris ...................... 2002 -- -- $2,062,432 $ 7,500(8)
Executive Vice President 2001 -- $ 21,428 $2,298,737 $ 448,436(9)
2000 -- $ 5,453 $1,545,750 $ 233,190(10)
R. Scott MacPhee ....................... 2002 -- $ 13,640 $1,632,250 $ 611,100(11)
Executive Vice President 2001 -- $ 11,023 $2,202,483 $ 232,196(12)
2000 -- $ 4,329 $ 981,338 $ 186,360(13)
William W. Gribbell .................... 2002 -- -- $1,331,975 $ 7,000(8)
Executive Vice President 2001 -- $ 7,021 $ 898,993 $ 152,274(14)
2000 -- $ 2,176 $ 701,358 $ 96,680(15)
Barbara J. Corinha ..................... 2002 $ 75,000 $285,000(16) -- $ 7,000(8)
Vice President, Chief Operating Officer, 2001 $ 60,000 $287,974(17) -- $ 66,500(18)
Treasurer and Secretary 2000 $ 60,000 $191,200(19) -- $ 56,000(20)
(1) Amounts reported represent annual compensation paid to the Named Executive
Officers by the FSP Partnership, FSP Corp.'s predecessor, for the fiscal
years 2000 and 2001.
(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
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by the general partner based on the value ascribed to each FSP Unit in
connection with 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) Represents a bonus accrued in 2002 and paid in 2003.
(5) Includes $800,000 in FSP Units, a $6,500 FSP Partnership contribution to a
Simple IRA plan and $9,085 of life insurance.
(6) Includes a bonus of $720,000 accrued in 2001 and paid in 2002.
(7) Includes $1,697,770 in FSP Units and a $6,000 FSP Partnership contribution
to a Simple IRA plan.
(8) Represents a contribution to a Simple IRA plan.
(9) Includes $423,320 in FSP Units, a $6,500 FSP Partnership contribution to a
Simple IRA plan and $9,616 of life insurance.
(10) Includes $227,190 in FSP Units and a $6,000 FSP Partnership contribution
to a Simple IRA plan.
(11) Consists of $604,100 in FSP Common Stock and a $7,000 contribution to a
Simple IRA plan.
(12) Includes $222,400 in FSP Units, a $6,500 FSP Partnership contribution to a
Simple IRA plan and $3,296 of life insurance.
(13) Includes $180,360 in FSP Units and a $6,000 FSP Partnership contribution
to a Simple IRA plan.
(14) Includes $145,280 in FSP Units, a $6,500 FSP Partnership contribution to a
Simple IRA plan and $494 of life insurance.
(15) Includes $90,680 in FSP Units and a $6,000 FSP Partnership contribution to
a Simple IRA plan.
(16) Represents a bonus accrued in 2002 and paid in 2003.
(17) Represents a bonus accrued in 2001 and paid in 2002.
(18) Includes $60,000 in FSP Units and a $6,500 FSP Partnership contribution to
a Simple IRA plan.
(19) Represents a bonus accrued in 1999 and paid in 2000.
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(20) 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 2002. 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 2002.
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
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 and $1,005,000 for the years ended December 31, 2001
and 2002, respectively. Sales commissions earned from the sale of Sponsored REIT
preferred shares amounted to approximately $13,000,000 and $13,720,000 for the
years ended December 31, 2001 and 2002, respectively.
During 2001 and 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 and $12,081,000 for the
years ended December 31, 2001 and 2002, respectively. Interest income earned
from the Sponsored REITs amounted to approximately $549,000 and $429,000 for the
years ended December 31, 2001 and 2002, respectively. 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:
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Total Amount
Financing Outstanding
Original Commitment Interest as of
Principal Average Fees Earned Income Earned Date of December 31,
Date of Loan Amount of Note Interest Rate by FSP Corp. by FSP Corp. Repayment 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 and $315,000 for the years ended December 31, 2001 and
2002, respectively. 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 and $27,235,000 for the years ended December 31, 2001 and 2002,
respectively.
FSP Corp. had 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 were for the purpose of paying income taxes
on equity interests in FSP Corp. issued to such senior officers as compensation.
Each borrower 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. 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 Bank to senior officers. FSP Corp. will not
incur any other expenses or pay any amounts on behalf of its officers in
connection with such loans from Citizens Bank to FSP Corp.'s 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 year ended
December 31, 2002, he received total compensation of $226,000 (including salary,
cash bonus and contribution to a Simple IRA plan).
110
Mr. Norris's son, Adam R. Norris, is a sales assistant for FSP
Investments. During 2001, he received total compensation (including salary,
sales commission, cash bonus and contribution to a Simple IRA plan) of $187,551.
For the year ended December 31, 2002, he received total compensation of $287,560
(including salary, sales commission, cash bonus and contribution to a Simple IRA
plan).
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.
111
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 February 15, 2003.
Name Age Position
---- --- --------
George J. Carter (5) 54 President, Chief Executive Officer and Director
Vice President, Chief Operating Officer, Treasurer, Secretary
Barbara J. Corinha (1), (2), (4), (6) 47 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
(6) Ms. Corinha is responsible for FSP Corp.'s accounting and financial
reporting functions.
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 47, 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
112
Corp. and its affiliates. Ms. Corinha is also responsible for FSP Corp.'s
accounting and financial reporting functions. Prior to the Conversion, Ms.
Corinha was the Vice President, Chief Operating 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).
113
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
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 has been a full-time employee of FSP
Corp. or its predecessor for the past five fiscal years.
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.
114
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.
There is no established public trading market for the preferred stock of
any of the Target REITs.
The following table indicates the number of holders of record of preferred
stock in each of the Target REITs as of December 31, 2002, based upon the number
of record holders reflected in the corporate records of FSP Corp.
Target REIT Number of Record Holders
----------- ------------------------
Forest Park 104
The Gael 182
Goldentop 155
Centennial 142
Meadow Point 138
Timberlake 349
Federal Way 190
Fair Lakes 269
Northwest Point 232
Timberlake East 248
Merrywood 193
Plaza Ridge I 341
Park Ten 191
Set forth below are the distributions per share of preferred stock that
each Target REIT has made in each quarter since the quarter ended March 31, 2001
or since such Target REIT was syndicated, if such syndication occurred after
March 31, 2001.
Dividends Distributed per Share of Preferred Stock (in $)
Target REIT Quarter Ended
----------- -------------
3/31/01 6/30/01 9/30/01 12/31/01 3/31/02 6/30/02 9/30/02 12/31/02 3/31/03
------- ------- ------- -------- ------- ------- ------- -------- -------
Forest Park $1,488.00 $2,064.00 $1,972.00 $1,981.00 $1,838.00 $1,857.00 $2,001.12 $1,866.00 $1,720.00
The Gael 1,752.53 1,742.00 1,804.00 1,883.00 1,880.00 1,916.00 1,836.00 1,740.00 1,674.00
Goldentop 2,017.79 2,082.00 2,023.00 2,067.00 2,075.00 2,034.00 2,019.00 2,146.00 2,145.00
Centennial 788.11 2,083.00 2,091.00 2,086.00 2,081.00 2,095.00 2,162.00 2,177.00 2,137.00
Meadow Point 1,962.00 1,962.00 1,985.00 2,029.00 2,036.00 2,027.00 2,184.00
Timberlake 395.74 1,958.27 1,975.33 1,950.43 1,912.57 2,021.15 2,183.52
Federal Way 307.71 2,025.00 2,026.00 2,016.00 2,035.00 2,059.00
Fair Lakes 1,740.63 2,080.00 1,986.00 2,019.00 1,990.00
Northwest Point 284.05 1,999.00 1,985.00 1,998.00 1,921.00
Timberlake East 450.42 2,081.00 1,991.00 1,999.00
Merrywood 1,155.54 1,929.00 1,569.00
Plaza Ridge I 281.28 2,055.00 2,179.00
Park Ten 1,336.00 2,047.00
115
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. Pursuant to the Merger Agreement, such dividends will
be paid in an amount consistent with past practice and custom of the relevant
Target REIT. 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. As the Target
REITs will cease to exist upon consummation of the Mergers, FSP does not expect
that they will continue to pay quarterly dividends after such consummation.
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, 2001 and 2002 (to the extent applicable).
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
December 31, 2002 87.1% $14.14
--------------------------------------------------------------------------------
The Gael
--------------------------------------------------------------------------------
December 31, 2000 97.6% $0.00
December 31, 2001 98.6% $13.78
December 31, 2002 98.1% $14.15
--------------------------------------------------------------------------------
Goldentop
--------------------------------------------------------------------------------
December 31, 2000 100% $17.13
December 31, 2001 100% $17.25
December 31, 2002 100% $17.05
--------------------------------------------------------------------------------
Centennial
--------------------------------------------------------------------------------
December 31, 2000 100% $14.37
December 31, 2001 100% $16.41
December 31, 2002 100% $16.54
--------------------------------------------------------------------------------
Meadow Point
--------------------------------------------------------------------------------
December 31, 2001 100% $25.84
December 31, 2002 100% $26.82
--------------------------------------------------------------------------------
116
Weighted Annual Average
Rent/Net Rentable
Target REIT Percentage of Leased Space Square Foot
----------- -------------------------- -----------
Timberlake
--------------------------------------------------------------------------------
December 31, 2001 100% $25.72
December 31, 2002 100% $26.35
--------------------------------------------------------------------------------
Federal Way
--------------------------------------------------------------------------------
December 31, 2001 100% $14.65
December 31, 2002 100% $15.10
--------------------------------------------------------------------------------
Fair Lakes
--------------------------------------------------------------------------------
December 31, 2001 100% $29.88
December 31, 2002 100% $30.85
--------------------------------------------------------------------------------
Northwest Point
--------------------------------------------------------------------------------
December 31, 2001 100% $26.86
December 31, 2002 100% $28.99
--------------------------------------------------------------------------------
Timberlake East
--------------------------------------------------------------------------------
December 31, 2002 92.2% $22.78
--------------------------------------------------------------------------------
Merrywood
--------------------------------------------------------------------------------
December 31, 2002 95.6% $11.34
--------------------------------------------------------------------------------
Plaza Ridge I
--------------------------------------------------------------------------------
December 31, 2002 100% $34.58
--------------------------------------------------------------------------------
Park Ten
--------------------------------------------------------------------------------
December 31, 2002 100% $24.05
--------------------------------------------------------------------------------
117
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:
--------------------------------------------------------------------------------
Number of
Tenants Leasing Principal Businesses
10% or More of Nature of Tenants' Carried on in the
Target REIT Space Business Property
--------------------------------------------------------------------------------
Forest Park Two Humanitarian organization Fundraising and
disaster relief
efforts, though no
logistic efforts are
performed on the
property
--------------------------------------------------------------------------------
Wireless telephone General office and
service provider sales use
--------------------------------------------------------------------------------
Goldentop One Defense contractor Research and development
--------------------------------------------------------------------------------
Centennial Two Provider of computing Accounting and
and imaging solutions financial administration
for business and home
--------------------------------------------------------------------------------
Hearing aid Hearing aid
manufacturing and manufacturing
related services
--------------------------------------------------------------------------------
Meadow Point One Information technology Information technology
product and services consulting services on
provider a contract basis
--------------------------------------------------------------------------------
Timberlake Two Reinsurance General administration
of reinsurance business
--------------------------------------------------------------------------------
Provider of software Providing consulting
products and services to and information
communications companies technology services to
communications
companies and general
office administration
--------------------------------------------------------------------------------
Federal Way One Forest products Forest products
--------------------------------------------------------------------------------
Fair Lakes One Consulting services Professional services
--------------------------------------------------------------------------------
118
--------------------------------------------------------------------------------
Number of
Tenants Leasing Principal Businesses
10% or More of Nature of Tenants' Carried on in the
Target REIT Space Business Property
--------------------------------------------------------------------------------
Northwest Point One Communications and Research, development
electronics and manufacture of
electronics for
automobile system
suppliers
--------------------------------------------------------------------------------
Timberlake East Four Provider of computer Consulting, sales and
software and consulting administration
--------------------------------------------------------------------------------
Provider of application Research and
management solutions development of
applications software
and general office
administration
--------------------------------------------------------------------------------
Reinsurance General office and
sales use for
reinsurance business
--------------------------------------------------------------------------------
Securities broker Retail securities
brokerage and financial
consulting
--------------------------------------------------------------------------------
Plaza Ridge I Two Project management and Research, development
systems engineering and sales of
information systems and
contract administration
--------------------------------------------------------------------------------
Engineering and Engineering consulting
information systems firm
--------------------------------------------------------------------------------
Park Ten Two Oil and gas design and Design, development and
project management; home management of offshore
construction 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):
119
Current Base Rent
Per Annum and
Percentage of
Target REIT Tenant Square Feet Leased Expiration Date Renewal Options
----------- ------ ------------------ --------------- ---------------
Forest Park American Red Cross $630,479 February 28, 2009 Three 5-year options to renew
65% at fair market rent
------------------------------------------------------------------------------------------------------------------------------------
CELLCO, DBA Verizon $150,371 February 28, 2009 One 5-year option to extend
23%
------------------------------------------------------------------------------------------------------------------------------------
Goldentop Northrop Grumman $2,057,052 June 30, 2007 Three 5-year options to renew
100% at 95% of fair market rent
------------------------------------------------------------------------------------------------------------------------------------
Centennial Hewlett-Packard $1,121,706 February 28, 2010 Three 3-year options to renew
82%
------------------------------------------------------------------------------------------------------------------------------------
Starkey Laboratories, Inc. $172,463 June 30, 2004 One 5-year option to renew
18%
------------------------------------------------------------------------------------------------------------------------------------
Meadow Point CACI, Inc. -- Federal $3,255,977 November 30, 2009 Two 5-year options to renew at
100% 95% of fair market rent
------------------------------------------------------------------------------------------------------------------------------------
Timberlake Reinsurance Group of America, Inc. $2,144,533 August 31, 2009 Two 5-year options to renew,
50% right of first offer to
purchase building
------------------------------------------------------------------------------------------------------------------------------------
AMDOCS, Inc. $3,011,982 May 31, 2006 Two 5-year options to renew
48%
------------------------------------------------------------------------------------------------------------------------------------
Federal Way Weyerhaeuser Company $1,682,207 September 13, 2006 Two 5-year options to renew
100%
------------------------------------------------------------------------------------------------------------------------------------
120
Current Base Rent
Per Annum and
Percentage of
Target REIT Tenant Square Feet Leased Expiration Date Renewal Options
----------- ------ ------------------ --------------- ---------------
Fair Lakes International Business Machines $3,876,743 December 31, 2009 Two 5-year options to renew
Corporation 100%
------------------------------------------------------------------------------------------------------------------------------------
Northwest Point Motorola $2,955,130 March 31, 2010 Two options to extend the term
100% for either three or five years
------------------------------------------------------------------------------------------------------------------------------------
Timberlake East Computer Associates $619,245 May 31, 2005 Two 3-year options to renew at
International, Inc. 21% 95% of fair market value
------------------------------------------------------------------------------------------------------------------------------------
Quest Software, Inc. $628,144 October 31, 2006 One 5-year option to renew
21%
------------------------------------------------------------------------------------------------------------------------------------
Reinsurance Group of America, Inc. $375,599 August 31, 2009 Two 5-year options to renew
17%
------------------------------------------------------------------------------------------------------------------------------------
Prudential Securities Incorporated $361,107 December 31, 2010 One 5-year options to renew at
12% 95% of fair market value
------------------------------------------------------------------------------------------------------------------------------------
Plaza Ridge I Scitor Corporation $2,943,120 June 30, 2012 Two 5-year options to renew
69%
------------------------------------------------------------------------------------------------------------------------------------
Juniper Networks, Inc. $1,740,494 April 13, 2009 One 5-year options to renew
31%
------------------------------------------------------------------------------------------------------------------------------------
Park Ten Mustang Engineering, L.P. $2,791,777 February 28, 2007 Two 5-year options to renew
82%
------------------------------------------------------------------------------------------------------------------------------------
TMI, Inc. aka Trendmaker Homes $430,559 April 30, 2010 Two 5-year options to renew at
13% 95% of fair market value
------------------------------------------------------------------------------------------------------------------------------------
121
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:
--------------------------------------------------------------------------------------------
Percentage
Number of Lease Total Square Total Annual of Annual
Target REIT Expirations Feet Contract Rent Gross 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
--------------------------------------------------------------------------------------------
122
--------------------------------------------------------------------------------------------
Percentage
Number of Lease Total Square Total Annual of Annual
Target REIT Expirations Feet Contract Rent Gross Rent
--------------------------------------------------------------------------------------------
Meadow Point
--------------------------------------------------------------------------------------------
2003
2004
2005
2006
2007
2008 One 132,897 $ 3,255,977 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
--------------------------------------------------------------------------------------------
123
--------------------------------------------------------------------------------------------
Percentage
Number of Lease Total Square Total Annual of Annual
Target REIT Expirations Feet Contract Rent Gross Rent
--------------------------------------------------------------------------------------------
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
--------------------------------------------------------------------------------------------
124
--------------------------------------------------------------------------------------------
Percentage
Number of Lease Total Square Total Annual of Annual
Target REIT Expirations Feet Contract Rent Gross Rent
--------------------------------------------------------------------------------------------
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.
125
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 134 to 143 of this Proxy
Statement and with the Target REITs financial statements and related notes
thereto included elsewhere in this Proxy Statement.
COMBINED
Year Ended December 31,
---------------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
(In thousands, except per share amounts)
Operating Data:
Total Revenues................. $ 40,818 $ 17,094 $ 2,893 $ 344 N/A
Net Income (loss).............. 14,550 (41) (927) 169 N/A
Basic and diluted net income
(loss) per share............... N/M N/M N/M N/M N/A
Dividends per share............ N/M N/M N/M N/M N/A
N/M - Not meaningful
As of December 31,
-------------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
Balance Sheet Data
(at period end):
Total assets................... $320,255 $241,972 $61,623 7,241 N/A
Total liabilities.............. 11,515 6,562 1,949 63 N/A
Total stockholder's equity..... 308,740 235,410 59,674 7,718 N/A
126
FOREST PARK
Year Ended December 31,
----------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
(In thousands, except per share amounts)
Operating Data:
Total Revenues................. $ 880 $ 885 $ 729 $ 344 N/A
Net Income (loss).............. 487 508 394 169 N/A
Basic and diluted net income
(loss) per share............... 6,244 6,513 5,051 2,168 N/A
Dividends per share............ 7,444 7,855 5,834 2,783 N/A
As of December 31,
----------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
Balance Sheet Data
(at period end):
Total assets................... $ 7,113 $ 7,079 $ 7,207 7,241 N/A
Total liabilities.............. 306 178 201 63 N/A
Total stockholder's equity..... 6,807 6,901 7,006 7,718 N/A
THE GAEL
Year Ended December 31,
-----------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
(In thousands, except per unit or share amounts)
Operating Data:
Total Revenues................. $2,651 $2,628 $1,061 N/A N/A
Net Income (loss).............. 977 1,006 (460) N/A N/A
Basic and diluted net income
(loss) per share............... 4,598 4,734 (2,165) N/A N/A
Dividends per share............ 7,166 7,309 2,488 N/A N/A
As of December 31,
-----------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
Balance Sheet Data
(at period end):
Total assets................... $17,854 $18,421 $19,400 N/A N/A
Total liabilities.............. 502 523 955 N/A N/A
Total stockholder's equity..... 17,352 17,898 18,445 N/A N/A
127
CENTENNIAL
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
(In thousands, except per unit or share amounts)
Operating Data:
Total Revenues................. $1,848 $1,854 $ 419 N/A N/A
Net Income (loss).............. 1,129 1,168 (478) N/A N/A
Basic and diluted net income
(loss) per share............... 7,146 7,392 (3,025) N/A N/A
Dividends per share............ 8,571 8,341 788 N/A N/A
As of December 31,
-----------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
Balance Sheet Data
(at period end):
Total assets................... $13,985 $14,222 $14,083 N/A N/A
Total liabilities.............. 503 515 226 N/A N/A
Total stockholder's equity..... 13,482 13,707 13,857 N/A N/A
GOLDENTOP
Year Ended December 31,
------------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
Operating Data:
Total Revenues................. $2,437 $2,493 $ 685 N/A N/A
Net Income (loss).............. 1,627 1,711 (382) N/A N/A
Basic and diluted net
income (loss) per share........ 7,028 7,391 (1,650) N/A N/A
Dividends per share............ 8,344 8,247 2,046 N/A N/A
As of December 31,
------------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
Balance Sheet Data
(at period end):
Total assets................... $20,393 $20,701 $20,933 N/A N/A
Total liabilities.............. 522 525 568 N/A N/A
Total stockholder's equity..... 19,871 20,176 20,366 N/A N/A
128
MEADOW POINT
Year Ended December 31,
-----------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
(In thousands, except per unit or share amounts)
Operating Data:
Total Revenues................. $3,647 $2,825 N/A N/A N/A
Net Income (loss).............. 1,946 418 N/A N/A N/A
Basic and diluted net income
(loss) per share............... 7,557 1,625 N/A N/A N/A
Dividends per share............ 8,276 5,909 N/A N/A N/A
As of December 31,
----------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
Balance Sheet Data
(at period end):
Total assets................... $23,339 $23,417 N/A N/A N/A
Total liabilities.............. 1,016 909 N/A N/A N/A
Total stockholder's equity..... 22,323 22,508 N/A N/A N/A
TIMBERLAKE
Year Ended December 31,
----------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
Operating Data:
Total Revenues................. $ 6,198 $ 3,686 N/A N/A N/A
Net Income (loss).............. 3,450 (51) N/A N/A N/A
Basic and diluted net
income (loss) per share........ 6,699 (99) N/A N/A N/A
Dividends per share............ 8,099 4,346 N/A N/A N/A
As of December 31,
----------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
Balance Sheet Data
(at period end):
Total assets................... $ 45,382 $45,983 N/A N/A N/A
Total liabilities.............. 1,229 1,109 N/A N/A N/A
Total stockholder's equity..... 44,153 44,874 N/A N/A N/A
129
FAIR LAKES
Year Ended December 31,
-------------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
(In thousands, except per unit or share amounts)
Operating Data:
Total Revenues................. $ 6,562 $ 1,845 N/A N/A N/A
Net Income (loss).............. 3,378 (2,001) N/A N/A N/A
Basic and diluted net income
(loss) per share............... 7,038 (4,170) N/A N/A N/A
Dividends per share............ 8,075 1,924 N/A N/A N/A
As of December 31,
------------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
Balance Sheet Data
(at period end):
Total assets................... $41,804 $42,306 N/A N/A N/A
Total liabilities.............. 1,205 1,209 N/A N/A N/A
Total stockholder's equity..... 40,599 41,097 N/A N/A N/A
FEDERAL WAY
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
(In thousands, except per unit or share amounts)
Operating Data:
Total Revenues................. $1,835 $ 536 N/A N/A N/A
Net Income (loss).............. 1,311 (791) N/A N/A N/A
Basic and diluted net income
(loss) per share............... 6,555 (3,955) N/A N/A N/A
Dividends per share............ 8,136 2,333 N/A N/A N/A
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
Balance Sheet Data
(at period end):
Total assets................... 17,313 $17,634 N/A N/A N/A
Total liabilities.............. 573 578 N/A N/A N/A
Total stockholder's equity..... 16,740 17,056 N/A N/A N/A
130
NORTHWEST
Year Ended December 31,
-------------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
(In thousands, except per unit or share amounts)
Operating Data:
Total Revenues................. $ 5,167 $ 358 N/A N/A N/A
Net Income (loss).............. 2,253 (2,008) N/A N/A N/A
Basic and diluted net income
(loss) per share............... 6,048 (5,390) N/A N/A N/A
Dividends per share............ 7,903 355 N/A N/A N/A
As of December 31,
-------------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
Balance Sheet Data
(at period end):
Total assets................... $33,694 $33,359 N/A N/A N/A
Total liabilities.............. 2,339 1,313 N/A N/A N/A
Total stockholder's equity..... 31,355 32,046 N/A N/A N/A
TIMBERLAKE EAST
Year Ended December 31,
-----------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
(In thousands, except per unit or share amounts)
Operating Data:
Total Revenues................. $ 2,445 N/A N/A N/A N/A
Net Income (loss).............. (301) N/A N/A N/A N/A
Basic and diluted net income
(loss) per share............... (1,204) N/A N/A N/A N/A
Dividends per share............ 6,584 N/A N/A N/A N/A
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
Balance Sheet Data
(at period end):
Total assets................... $21,593 N/A N/A N/A N/A
Total liabilities.............. 648 N/A N/A N/A N/A
Total stockholder's equity..... 20,945 N/A N/A N/A N/A
131
MERRYWOOD
Year Ended December 31,
------------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
(In thousands, except per unit or share amounts)
Operating Data:
Total Revenues................. $ 1,821 N/A N/A N/A N/A
Net Income (loss).............. (613) N/A N/A N/A N/A
Basic and diluted net income
(loss) per share............... (2,976) N/A N/A N/A N/A
Dividends per share............ 4,779 N/A N/A N/A N/A
As of December 31,
-------------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
Balance Sheet Data
(at period end):
Total assets................... $ 17,905 N/A N/A N/A N/A
Total liabilities.............. 610 N/A N/A N/A N/A
Total stockholder's equity..... 17,295 N/A N/A N/A N/A
PLAZA RIDGE I
Year Ended December 31,
-----------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
(In thousands, except per unit or share amounts)
Operating Data:
Total Revenues................. $ 3,385 N/A N/A N/A N/A
Net Income (loss).............. (315) N/A N/A N/A N/A
Basic and diluted net income
(loss) per share............... (788) N/A N/A N/A N/A
Dividends per share............ 4,766 N/A N/A N/A N/A
As of December 31,
-----------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
Balance Sheet Data
(at period end):
Total assets................... $ 35,665 N/A N/A N/A N/A
Total liabilities.............. 1,196 N/A N/A N/A N/A
Total stockholder's equity..... 34,469 N/A N/A N/A N/A
132
PARK TEN
Year Ended December 31,
-----------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
(In thousands, except per unit or share amounts)
Operating Data:
Total Revenues................. $ 1,943 N/A N/A N/A N/A
Net Income (loss).............. (779) N/A N/A N/A N/A
Basic and diluted net income
(loss) per share.............. (2,833) N/A N/A N/A N/A
Dividends per share............ 3,859 N/A N/A N/A N/A
As of December 31,
-----------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
Balance Sheet Data
(at period end):
Total assets................... $ 24,215 N/A N/A N/A N/A
Total liabilities.............. 866 N/A N/A N/A N/A
Total stockholder's equity..... 23,349 N/A N/A N/A N/A
133
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. Tables summarizing the results of operations
for the Target REITs are located at pages 126 to 133 of this Proxy Statement.
The results of the Target REITs are presented on a combined basis rather than
for each individual Target REIT. Management believes that this presentation is
more useful because the combined results are the basis for the pro forma
financial statements located at pages 63 to 64 of this Proxy Statement, FSP
Corp. will not proceed with the Mergers unless each Target REIT approves its
respective Merger and no Target REIT performed in a manner that would cause the
presentation on a combined basis to be misleading.
Results of Operations (of the Target REITs on a combined basis)
The following tables show the variance in dollars between the year ended
December 31, 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 Year Ended
December 31,
2002 and 2001 2001 and 2000 2000 and 1999
-------------------------------------------
Rental Revenue
Rental $ 23,629 $ 14,038 $ 2,468
Interest 81 162 82
-------------------------------------------
TOTAL REVENUE $ 23,710 $ 14,200 $ 2,550
===========================================
Expenses
Rental operating expenses $ 4,213 $ 2,955 $ 488
Depreciation and amortization 4,218 1,663 517
Real estate taxes and insurance 3,357 1,594 344
Interest expense (2,669) 7,102 2,297
-------------------------------------------
TOTAL EXPENSES $ 9,119 $ 13,314 $ 3,646
===========================================
Net Income $ 14,591 $ 886 $ (1,096)
===========================================
Comparison of the year Ended December 31, 2002 to the year ended
December 31, 2001
Revenue
Total revenues increased $23.7 million, to $40.8 million for the year
ended December 31, 2002, as compared to $17.1 million for the year ended
December 31, 2001.
The increase in rental income of $23.6 million, compared to the year ended
December 31, 2001, is attributable to:
134
o four Target REITs which were organized in 2002 contributed
revenue for various periods in 2002, as compared with no
revenue in 2001, resulting in $9.5 million in incremental
revenues;
o five Target REITs which were organized in 2001 contributed
revenue for a full year in 2002, as compared to only various
periods in 2001, resulting in $14.1 million in incremental
revenues; and
o four Target REITs which were syndicated prior to 2001 and in
operation for both full years had no significant changes in
rental income.
Interest income increased less than $0.1 million for the year ended
December 31, 2002 compared to the year ended December 31, 2001.
Expenses
Total expenses increased $9.1 million for the year ended December 31,
2002, compared to the same period in 2001. The increase for the year is
attributable to a $4.2 million increase in rental operating expenses, a $4.2
million increase in depreciation and amortization, and a $3.4 million increase
in real estate taxes and insurance, offset by a $2.7 million decrease in
interest expense.
The increase in rental operations expenses of $4.3 million, compared to
the year ended December 31, 2001, is attributable to:
o four Target REITs which were organized in 2002 incurred
expenses for various periods in 2002, as compared with no
expenses in 2001, resulting in $2.0 million in incremental
expenses;
o five Target REITs which were organized in 2001 incurred
expenses for a full year in 2002, as compared to only various
periods in 2001, resulting in $2.2 million in incremental
expenses; and
o four Target REITs which were syndicated prior to 2001 and in
operation for both full years had no significant change in
expenses.
The increase in depreciation and amortization expenses of $4.2 million,
compared to the year ended December 31, 2001, is attributable to:
o four Target REITs which were organized in 2002 incurred
expenses for various periods in 2002, as compared with no
expenses in 2001, resulting in $1.8 million in incremental
expenses;
o five Target REITs which were organized in 2001 incurred
expenses for a full year in 2002, as compared to only various
periods in 2001, resulting in $2.4 million in incremental
expenses; and
135
o four Target REITs which were syndicated prior to 2001 and in
operation for both full years had no significant change in
expenses.
The increase in real estate tax and insurance expenses of $3.4 million,
compared to the year ended December 31, 2001, is attributable to:
o four Target REITs which were organized in 2002 incurred
expenses for various periods in 2002, as compared with no
expenses in 2001, resulting in $1.1 million in incremental
expenses;
o five Target REITs which were organized in 2001 incurred
expenses for a full year in 2002, as compared to only various
periods of 2001, resulting in $2.2 million in incremental
expenses; and
o four Target REITs which were syndicated prior to 2001 and in
operation for both full years had an increase of less than
$0.1 million.
Interest expense is typically incurred when the Target REIT is organized
and borrows funds to acquire the real estate. After the completion of the
syndication of preferred stock in the Target REIT, the loan is repaid. None of
the Target REITs have had to borrow funds after the original real estate loan
has been repaid. The decrease in interest expenses of $2.7 million, compared to
the year ended December 31, 2001, is attributable to:
o four Target REITs which were organized in 2002 incurred
interest expense in 2002, as compared with no expenses in
2001, resulting in $6.7 million in incremental expenses;
o offset by $9.4 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; and
o four Target REITs which were syndicated prior to 2001 and in
operation for both full years which 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 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;
136
o three Target REITs which were organized in 2000 contributed
revenue for a full year in 2001, as compared to various
periods in 2000, resulting in $4.7 million in incremental
revenues; and
o one Target REIT which was syndicated prior to 2000 and in
operation for both full years, 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 a $2.9 million increase in rental operating expenses, a $1.7
million increase in depreciation and amortization, a $1.6 million increase in
real estate taxes and insurance, and a $7.1 million increase in interest
expense.
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 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 incurred
expenses for a full year in 2001, as compared to various
periods in 2000, resulting in $0.5 million in increased
expenses; and
o one Target REIT which was syndicated prior to 2000 and in
operation for both full years 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 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 incurred
expenses for a full year in 2001, as compared to various
periods in 2000, resulting in $0.8 million in increased
expenses; and
o one Target REIT which was syndicated prior to 2000 and in
operation for both full years had no signicant change in
expenses.
The increase in real estate tax and insurance expenses of $1.6 million,
compared to the year ended December 31, 2001, is attributable to:
137
o five Target REITs which were organized in 2001 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 incurred
expenses for a full year in 2001, as compared to various
periods in 2000, resulting in $0.7 million in increased
expenses;
o one Target REIT which was syndicated prior to 2000 and in
operation for both full years had no significant change in
expenses.
Interest expense is typically incurred when the Target REIT is organized
and borrows funds to acquire the real estate. After the completion of the
syndication of preferred stock in the Target REIT, 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:
o five Target REITs which were organized in 2001 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; and
o one Target REIT which was syndicated prior to 2000 and in
operation for both full years 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 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; and
o one Target REIT which was organized in 1999 contributed
revenue for a full year in 2000, as compared to about six
months 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 a $0.5 million increase in rental operating expenses, a $0.5
million increase in depreciation and amortization, a
138
$0.3 million increase in real estate taxes and insurance, and a $2.3 million
increase in interest expense.
The increase in rental operations expenses of $0.5 million, compared to
the year ended December 31, 1999, is attributable to:
o three Target REITs which were organized in 2000 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; and
o one Target REIT which was organized in 1999 incurred expenses
for a for a full year in 2000, as compared to about six months
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:
o three Target REITs which were organized in 2000 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; and
o one Target REIT which was organized in 1999 incurred expenses
for a for a full year in 2000, as compared to about six months
in 1999, resulting in $0.1 million in increased expenses.
The increase in real estate tax and insurance expenses of $0.3 million,
compared to the year ended December 31, 1999, is attributable to:
o three Target REITs which were organized in 2000 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; and
o one Target REIT which was organized in 1999 incurred expenses
for a full year in 2000, as compared to about six months in
1999, resulting in $0.1 million in increased expenses.
Interest expense is typically incurred when the Target REIT is organized
and borrows funds to acquire the real estate. After the completion of the
syndication of preferred stock in the Target REIT, 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, 1999, is attributable to:
139
o three Target REITs which were organized in 2000, incurred
interest expense in 2000, as compared with no expenses in
1999, resulting in $2.3 million in incremental expenses;
o 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 (for the Target REITs on a combined basis)
All real estate markets have been weaker in 2002 along with the general
economy, and it is uncertain when they 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; however, because most
of the Target REITs that hold commercial property have one or two creditworthy
tenants with medium-term to long-term leases who occupy the majority of the
leased space, they have less exposure to current and short term market
conditions. In this weaker economy, however, even large tenants with strong
credit seek to reduce expenses, and cuts in tenant operating expenses or staff
may decrease the ancillary income to the Target REIT, such as fees received for
additional services. Some tenants have cut staff and have excess space, and have
asked the management of the applicable Target REIT to consider allowing
subletting or to accept termination fees. The leases do not require the Target
REIT to do so, and the management of each Target REITs will only approve those
subleases or accept those termination offers that make economic sense and
improve its position.
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
increases in base year expenses, then the net income from such properties will
decrease.
Both apartment properties owned by Target REITs 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 the lease with
PricewaterhouseCoopers LLP to International Business Machines Corporation, but
PricewaterhouseCoopers LLP remains obligated for payments under the lease.
PricewaterhouseCoopers LLP has notified FSP Corp. 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" relating to its dealings with FSP Corp.. At that time, FSP Corp.
will have to either release PricewaterhouseCoopers LLP from its obligation under
the lease or choose another auditing firm.
Liquidity and Capital Resources as of December 31, 2002 (for the Target REITs on
a combined basis)
140
Cash and cash equivalents were $10.8 million and $5.5 million at December
31, 2002 and December 31, 2001, respectively. This increase of $5.2 million is
attributable to $16.8 million provided by operating activities plus $80.9
million provided by financing activities offset by $92.5 million used for
investing activities.
Operating Activities
The cash provided by the Target REITs' operating activities of $16.8
million is primarily attributable to net income of $14.5 million plus the
add-back of $7.2 million from non-cash activity less a net change of $4.9
million in operating assets and liabilities, of which $4.0 million was used to
establish the "Cash - funded reserve" accounts for the four Target REITs that
were organized in 2002.
Investing Activities
The Target REITs' cash used for investing activities of $92.5 million is
attributable to the purchase of real estate assets by the four Target REITs
organized in 2002.
Financing Activities
The Target REITs' cash provided by financing activities of $92.5 million
is attributable to $103.8 million of proceeds from the sale of stock for the
four Target REITs organized in 2002, offset by $22.8 million of distributions to
shareholders.
Liquidity and Capital Resources as of December 31, 2001 (for the Target REITs on
a combined basis)
Cash and cash equivalents were $5.5 million and $1.8 million at December
31, 2001 and December 31, 2000, respectively. This increase of $3.7 million is
attributable to $159.9 million provided by financing activities offset by $3.7
million used for operating activities and $152.4 million used for investing
activities.
Operating Activities
The cash used by the Target REITs' operating activities of $3.7 million is
primarily attributable to a net loss of $41,000 plus the add-back of $2.8
million from non-cash activity less a net change of $6.5 million in operating
assets and liabilities. The net loss is attributable to an aggregate loss of
$4.4 million for the five Target REITs organized in 2001, offset by aggregate
net income of $4.4 million for the four Target REITs that were organized prior
to 2001. The net change of $6.5 million in operating assets and liabilities is
primarily attributable to $7.0 million used to establish the "Cash - funded
reserve" account for the five Target REITs organized in 2001.
Investing Activities
The Target REITs' cash used for investing activities of $152.4 million is
attributable to the purchase of real estate assets by the five Target REITs
organized in 2001.
141
Financing Activities
The Target REITs' cash provided by financing activities of $159.9 million
is attributable to $167.4 million of proceeds from the sale of stock for the
five Target REITs organized in 2001, offset by $7.5 million of distributions to
shareholders.
Liquidity and Capital Resources as of December 31, 2000 (for the Target REITs on
a combined basis)
Cash and cash equivalents were $1.8 million and $0.2 million at December
31, 2000 and December 31, 1999, respectively. This increase of $1.6 million is
attributable to $54.5 million provided by financing activities offset by $1.7
million used for operating activities and $51.2 million used for investing
activities.
Operating Activities
The cash used by the Target REITs' operating activities of $1.7 million is
primarily attributable to a net loss of $0.9 million plus the add-back of $0.6
million from non-cash activity less a net change of $1.4 million in operating
assets and liabilities. The net loss is attributable to an aggregate loss of
$1.3 million for the three Target REITs organized in 2000, offset by net income
of $0.4 million for the one Target REITs that were organized in 1999. The net
change of $1.4 million in operating assets and liabilities is primarily
attributable to $1.9 million used to establish the "Cash - funded reserve"
account for the three Target REITs organized in 2000.
Investing Activities
The Target REITs' cash used for investing activities of $51.2 million is
attributable to the purchase of real estate assets by the three Target REITs
organized in 2000.
Financing Activities
The Target REITs' cash provided by financing activities of $54.5 million
is attributable to $54.9 million of proceeds from the sale of stock for the
three Target REITs organized in 2000, offset by $0.4 million of distributions to
shareholders.
140
Sources and Uses of Funds (for the Target REITs on a combined basis)
The Target REITs' principal demands for liquidity are cash for operations
and dividends to equity holders. As of December 31, 2002, the Target REITs had
approximately $11.5 million in liabilities of which $7.4 million represents
dividends payable to shareholders. The Target REITs have no permanent, long-term
debt and have not established a line of credit. Liquidity is generated from
funds from ongoing real estate operations.
The Target REITs' sources of funds are proceeds from the sale of preferred
stock, proceeds from a loan from FSP Corp. and funds from operations.
Typically, the Target REIT borrows funds in its first year of operations
to purchase real estate assets and repays this loan upon the sale of preferred
stock in the Target REIT within a few months of borrowing. No Target REIT has
borrowed funds subsequent to the repayment of the original loan used to acquire
the real estate. No Target REIT had any loans outstanding as of December 31,
2002.
The Target REITs' real properties generate rental income to cover the
ordinary, annual operating expenses of the properties and to fund distributions
to equity holders. For the year ended December 31, 2002, the rental income
exceeded the operating expenses for each of the Target REITs.
In addition to rental income, each Target REIT maintains cash reserves
that are typically used to fund capital improvements, leasing commissions or
extraordinary expenses. These cash reserves were set aside when each Target REIT
was originally syndicated. As of December 31, 2002, each Target REIT has cash
reserves in excess of its known needs for extraordinary expenses or capital
improvements for its real property for 2003. There are no external restrictions
on these reserves and they may be used for any corporate purpose.
Each Target REIT believes that it has adequate funds for future needs and
adequate reserves for extraordinary expenses or capital improvements. Each
Target REIT's ability to maintain or increase its level of distributions to
stockholders, however, depends upon the level of rental income from each Target
REIT's real property.
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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
144
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".
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."
As part of its due diligence in connection with the Mergers, FSP Corp. has
reviewed the specific assets held by the Target REITs, the Target REITs'
organizational documents and financial records, and the identity of the
shareholders of the Target REITs in order to determine whether the Mergers would
potentially cause the Combined Company to fail to qualify as a REIT. In
addition, each Target REIT has given extensive representations relating to
factual circumstances that could adversely impact the qualification of the
Combined Company as a REIT. Nevertheless, because certain REIT-qualification
requirements are dependent upon the identity of the shareholders of the Target
REIT and the interests they may have in other entities, there can be no
certainty that the Mergers would not adversely affect the Combined Company's
ability to qualify as a REIT.
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 will 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. No opinion of Hale and Dorr LLP or other counsel regarding the
qualification of FSP Corp. or the Combined Company as a REIT has been requested
or will be rendered in connection with the Mergers.
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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:
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.
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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.
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
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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);
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.
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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 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 it 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.
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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");
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
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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.
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
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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.
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
152
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
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,
153
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.
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
154
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
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
155
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
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.
156
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
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.
157
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
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
158
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:
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.
159
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.
STOCKHOLDER PROPOSALS
Proposals of stockholders intended to be included in FSP Corp.'s proxy
statement for the 2004 Annual Meeting of Stockholders must be received by FSP
Corp. at its principal office not later than December [19], 2003.
If a stockholder who wishes to make a proposal at the 2004 Annual
Meeting--other than one that will be included in FSP Corp.'s proxy
materials--does not notify FSP Corp. by January [18], 2004, the proxies that
management solicits for the meeting will have discretionary authority to vote on
the stockholder's proposal if it is properly brought before the meeting.
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.
160
Index to Financial Statements
Entity Period covered Page
------ -------------- ----
FSP Corp. Years ended December 31, 2002, 2001 and 2000............ F-2
Forest Park Year ended December 31, 2002............................ F-30
Year ended December 31, 2001............................ F-46
Year ended December 31, 2000............................ F-55
Period from date of inception to December 31, 1999...... F-65
The Gael Year ended December 31, 2002............................ F-76
Year ended December 31, 2001............................ F-90
Period from date of inception to December 31, 2000...... F-99
Goldentop Year ended December 31, 2002............................ F-109
Year ended December 31, 2001............................ F-125
Period from date of inception to December 31, 2000...... F-134
Centennial Year ended December 31, 2002............................ F-144
Year ended December 31, 2001............................ F-160
Period from date of inception to December 31, 2000...... F-169
Meadow Point Year ended December 31, 2002............................ F-179
Period from date of inception to December 31, 2001...... F-195
Timberlake Year ended December 31, 2002............................ F-204
Period from date of inception to December 31, 2001...... F-221
Federal Way Year ended December 31, 2002............................ F-230
Period from date of inception to December 31, 2001...... F-247
Fair Lakes Year ended December 31, 2002............................ F-256
Period from date of inception to December 31, 2001...... F-273
Northwest Point Year ended December 31, 2002............................ F-282
Period from date of inception to December 31, 2001...... F-299
Timberlake East Period from date of inception to December 31, 2002...... F-309
Merrywood Period from date of inception to December 31, 2002...... F-328
Plaza Ridge I Period from date of inception to December 31, 2002...... F-344
Park Ten Period from date of inception to December 31, 2002...... F-363
F-1
Franklin Street Properties Corp.
Index to Consolidated Financial Statements
Reports of Independent Certified Public Accountants ...................... F-3
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 2002, 2001 and 2000 ....... F-5
Consolidated Statements of Partners' Capital for the years ended
December 31, 2002, 2001 and 2000 ................................... F-7
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000 ................................... F-8
Notes to Consolidated Financial Statements ............................... F-9
Financial Statement Schedule -- Schedule III ............................. F-28
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-2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Franklin Street Properties Corp.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income and cash flows present fairly, in all material
respects, the financial position of Franklin Street Properties Corp. (the
"Company") at December 31, 2002 and 2001, and the results of its operations and
its cash flows for each of the two years in the period ended December 31, 2002
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 Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits 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 audits provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 5, 2003
F-3
Report of Independent Certified Public Accountants
To the Partners of
Franklin Street Partners Limited Partnership
Wakefield, Massachusetts
We have audited the accompanying consolidated statements of income and cash
flows of Franklin Street Partners Limited Partnership and subsidiaries for the
year ended December 31, 2000. We have also audited the schedule listed in the
accompanying index as it relates to the December 31, 2000 year end. These
financial statements and schedule 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 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 and schedule are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and schedule. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the financial statements and schedule.
We believe that our audits provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Franklin Street Partners Limited Partnership and subsidiaries for the year ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States of America.
Also, in our opinion, the schedule, as it relates to the December 31, 2000 year
end, presents fairly, in all material respects, the information set forth
therein.
BDO Seidman, LLP
Boston, Massachusetts
February 27, 2001, except Note 4
which is as of December 31, 2001
F-4
Franklin Street Properties Corp.
Consolidated Balance Sheets
December 31,
------------------------
(in thousands, except share/unit and par value amounts) 2002 2001
===================================================================================================
(Limited
(REIT) Partnership)
Assets:
Real estate assets:
Land $ 39,560 $ 39,560
Buildings and improvements 154,785 153,632
Fixtures and equipment 930 920
---------------------------------------------------------------------------------------------------
195,275 194,112
Less accumulated depreciation 21,999 17,419
---------------------------------------------------------------------------------------------------
Real estate assets, net 173,276 176,693
Cash and cash equivalents 22,316 24,357
Restricted cash 483 495
Tenant rent receivables, less allowance for doubtful accounts
of $202 and $210, respectively 327 63
Straight-line rent receivable, less allowance for doubtful accounts
of $360 and $0, respectively 3,057 1,371
Prepaid expenses 743 504
Deposits on real estate assets 841 --
Office computers and furniture, net of accumulated
depreciation of $389 and $215, respectively 234 397
Deferred leasing commissions, net of accumulated amortization
of $289, and $96, respectively 659 237
---------------------------------------------------------------------------------------------------
Total assets $ 201,936 $ 204,117
===================================================================================================
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
Franklin Street Properties Corp.
Consolidated Balance Sheets
December 31,
-----------------------
(in thousands, except share/unit and par value amounts) 2002 2001
===================================================================================================
(Limited
(REIT) Partnership)
Liabilities and Stockholders' Equity/Partners' Capital:
Liabilities:
Accounts payable and accrued expenses $ 3,001 $ 2,112
Accrued compensation 1,287 1,747
Tenant security deposits 483 495
---------------------------------------------------------------------------------------------------
Total liabilities 4,771 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 4,420 --
---------------------------------------------------------------------------------------------------
Total Stockholders' Equity/Partners' Capital 197,165 199,763
---------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity/Partners' Capital $ 201,936 $ 204,117
===================================================================================================
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
Franklin Street Properties Corp.
Consolidated Statements of Income
For the Year Ended
December 31,
---------------------------------------
(in thousands, except per share/unit amounts) 2002 2001 2000
===================================================================================================
(Limited (Limited
(REIT) Partnership) Partnership)
Revenue:
Rental $ 27,408 $ 26,765 $ 25,434
Syndication fees 13,720 13,000 4,036
Transaction fees 13,091 12,701 3,538
Sponsored REIT income 1,387 860 --
Interest and other 1,232 1,726 1,785
---------------------------------------------------------------------------------------------------
Total revenue 56,838 55,052 34,793
---------------------------------------------------------------------------------------------------
Expenses:
Selling, general and administrative 5,094 5,229 3,073
Commissions 6,824 6,525 3,422
Shares/units issued as compensation 604 1,744 2,300
Rental operating expenses 6,466 7,026 6,489
Depreciation and amortization 4,947 4,797 4,613
Real estate taxes and insurance 3,130 2,900 2,473
Sponsored REIT expenses 868 605 --
Interest 894 818 860
---------------------------------------------------------------------------------------------------
Total expenses 28,827 29,644 23,230
---------------------------------------------------------------------------------------------------
Income before minority interests 28,011 25,408 11,563
Income applicable to minority interests -- 40 2,649
---------------------------------------------------------------------------------------------------
Income before taxes 28,011 25,368 8,914
Taxes on income 699 -- --
---------------------------------------------------------------------------------------------------
Net income $ 27,312 $ 25,368 $ 8,914
===================================================================================================
Allocation of net income to:
Common Shareholders $ 27,312 $ -- $ --
Limited Partners -- 24,386 8,539
General Partner -- 982 375
---------------------------------------------------------------------------------------------------
$ 27,312 $ 25,368 $ 8,914
===================================================================================================
Weighted average number of shares/units outstanding,
respectively, basic and diluted 24,606 24,512 18,974
===================================================================================================
Net income per share and per limited and general
partnership unit, respectively, basic and diluted $ 1.11 $ 1.03 $ .47
===================================================================================================
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
Franklin Street Properties Corp.
Consolidated Statements of Cash Flows
For the Year Ended December 31,
-----------------------------------------
2002 2001 2000
=====================================================================================================================
(in thousands)
Cash flows from operating activities:
Net income $ 27,312 $ 25,368 $ 8,914
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 4,947 4,797 4,613
Shares/units issued as compensation 604 1,744 2,300
Minority interests -- 40 2,649
Changes in operating assets and liabilities:
Restricted cash 12 4 (10)
Tenant rent receivables (264) (196) (665)
Straight-line rents, net (1,686) -- --
Prepaid expenses and other assets, net (239) 162 (601)
Accounts payable and accrued expenses (858) 537 (2,865)
Accrued compensation 1,287 1,041 336
Tenant security deposits (12) (4) 10
Payment of deferred leasing commissions (615) (87) (144)
---------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 30,488 33,406 14,537
---------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets and office computer and furniture (1,174) (733) (9,952)
Deposits on real estate assets (841) -- --
Distributions from (investment in) affiliated Sponsored Entity -- 16,734 (16,734)
Proceeds from (purchase of) marketable securities -- 5,322 (5,322)
Proceeds received on sales of land -- 442 927
---------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities (2,015) 21,765 (31,081)
---------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Distributions to stockholders/partners (30,514) (27,929) (16,558)
Distributions to minority interests in consolidated entities -- (103) (4,506)
Borrowings under bank note payable -- -- 16,500
Repayments of bank note payable -- (16,500) (23,522)
Capital contributions from minority interest holders -- -- 39,829
---------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities (30,514) (44,532) 11,743
---------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (2,041) 10,639 (4,801)
Cash and cash equivalents, beginning of year 24,357 13,718 18,519
---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 22,316 $ 24,357 $ 13,718
=====================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 894 $ 818 $ 860
Taxes on income $ 390 $ -- $ --
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 $6.6 million during the year
ended December 31, 2000.
The accompanying notes are an integral part of these
consolidated financial statements.
F-8
Franklin Street Properties Corp.
Notes to the Consolidated Financial Statements
1. Organization
Franklin Street Properties Corp. (the "Company", formally known as Franklin
Street Partners Limited Partnership, the "Partnership", prior to January 1,
2002) 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 FSP
Investments and FSP Property Management for approximately $30,000. The Company
also has a non-controlling common stock interest in sixteen corporations
organized to operate as Real Estate Investment Trusts ("REITs").
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 REIT
entities subsequent to July, 2000 (the "Sponsored REITs") and limited
partnerships prior to June, 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 Sponsored Partnerships. FSP Property Management
provides asset management and property management services for the Sponsored
Entities.
During 1999 and 2000, a total of seventeen 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 merged 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 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 elected to be a taxable REIT subsidiary and will
incur income taxes at normal tax rates.
The REIT will be taxed under Sections 856 through 860 of the Internal Revenue
Code of 1986, as amended, commencing with its taxable year ended December 31,
2002.
2. Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements include all of the accounts
of the Company and majority-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Prior to the mergers in 2000 and 1999, 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
Statement of Position 78-9 and these entities were consolidated into the
Partnership's financial statements.
Business Segments
The Company 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 its financial statements.
F-9
Franklin Street Properties Corp.
Notes to the Consolidated Financial Statements
2. Significant Accounting Policies (continued)
Minority Interests in Consolidated Entities
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 $0, $103,000, and $4,506,000 for the years ended
December 31, 2002, 2001, and 2000, respectively.
Estimates and Assumptions
The Company prepares its financial statements and related notes in conformity
with accounting principles generally accepted in the United States of America
("GAAP"). 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 2001 and 2000 financial statements have been
reclassified to conform to the 2002 presentation.
Investments in REITs
Common stock investments in Sponsored REITs are accounted for using the equity
method as the Company exercises significant influence over, but does not
control, these entities. Under the equity method of accounting, the Company's
cost is subsequently adjusted by its share of the Sponsored REITs' earnings.
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.
Subsequent to the completion of the offering of preferred shares, there were no
dividends received or income recognized, from the Sponsored REITs for the years
ended December 31, 2002, 2001 and 2000.
Real Estate and Depreciation
Real estate assets are stated at the lower of cost, less accumulated
depreciation, or fair value, as appropriate, which in the opinion of management
are not in excess of an individual property's estimated undiscounted cash flow.
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 acquired by
the Sponsored Entity.
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
F-10
Franklin Street Properties Corp.
Notes to the Consolidated Financial Statements
2. Significant Accounting Policies (continued)
Real Estate and Depreciation (continued)
The Company accounts for properties as held for sale under the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets", which typically occurs upon:
the execution of a purchase and sale agreement; and, management believes that
the sale or disposition is probable of occurrence within one year. Upon
determining that a property is held for sale, the Company discontinues
depreciating the property and reflects the property at the lower of its carrying
amount or fair value less the cost to sell in its consolidated balance sheets.
The Company reports the results of operations of its properties classified as
discontinued operations in its statements of income if no significant continuing
involvement exists after the sale or disposition. As the Company typically
retains a common stock ownership in a Sponsored Entity following syndication,
and earns an ongoing asset and property management fee, transaction fee revenue
and the results of operations are not classified as discontinued operations due
to its continuing involvement.
The Company periodically reviews its properties to determine if their carrying
amounts will be recovered from future operating cash flows. The evaluation of
anticipated cash flows is highly subjective and is based in part on assumptions
regarding future occupancy, rental rates and capital requirements that could
differ materially from actual results in future periods. Since cash flows are
considered on an undiscounted basis in the analysis that the Company conducts to
determine whether an asset has been impaired, the Company's strategy of holding
properties over the long term directly decreases the likelihood of recording an
impairment loss. If the Company's strategy changes or market conditions
otherwise dictate an earlier sale date, an impairment loss may be recognized. If
the Company determines that an impairment has occurred, the affected assets must
be reduced to their fair value. No such impairment losses have been recognized
to date.
Cash and Cash Equivalents
The Company considers all highly liquid debt 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 Securities
The Company accounts for investments in debt securities under the provisions of
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". The Company classified its debt securities as available-for-sale.
There were no investments in marketable securities at December 31, 2002 or 2001.
Concentration of Credit Risks
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.
Financial Instruments
The Company 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.
F-11
Franklin Street Properties Corp.
Notes to the Consolidated Financial Statements
2. Significant Accounting Policies (continued)
Straight-line Rent Receivable
Certain leases provide for fixed rent increases over the life of the lease.
Rental revenue is recognized on a straight-line basis over the related lease
term; however, billings by the Company are based on required minimum rentals in
accordance with the lease agreements. Straight-line rent receivable, which is
the cumulative revenue recognized in excess of amounts billed by the Company, is
$3,057,000 and $1,371,000 at December 31, 2002 and 2001, respectively. The
Company provides an allowance for doubtful accounts based on its estimate of a
tenant's ability of its tenants to make future rent payments. The computation of
this allowance is based in part on the tenants' payment history and current
credit status.
Deferred Leasing Commissions
Deferred leasing commissions represent direct and incremental external leasing
costs incurred in the leasing of commercial space. These costs are capitalized
and are amortized on a straight-line basis over the terms of the related lease
agreements. Amortization expense was approximately $193,000, $222,000 and
$146,000 for the years ended December 31, 2002, 2001 and 2000, respectively.
Revenue Recognition
Rental Revenue - Rental revenue includes income from leases, certain
reimbursable expenses, straight-line rent adjustments and other income
associated with renting the property. A summary of rental revenue is shown in
the following table:
Year Ending
(in thousands) December 31,
---------------------------------------
2002 2001 2000
=====================================================================
Income from leases $ 22,151 $ 22,832 $ 22,260
Straight-line rent adjustment 1,686 797 185
Reimbursable expenses 3,393 2,875 2,811
Other 178 261 178
---------------------------------------------------------------------
Total $ 27,408 $ 26,765 $ 25,434
=====================================================================
Rental Revenue, Commercial Properties -- The Company has retained substantially
all of the risks and benefits of ownership of the Company's commercial
properties and accounts for its leases as operating leases. Rental income from
leases, which include rent concessions (including free rent and tenant
improvement allowances) and scheduled increases in rental rates during the lease
term, is recognized on a straight-line basis. The Company does not have any
percentage rent arrangements with its commercial property tenants. Reimbursable
costs are included in rental income in the period earned.
Rental Revenue, Residential Apartments -- The Company'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 Company 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. There is typically more than one investor closing in the syndication of
a Sponsored Entity.
F-12
Franklin Street Properties Corp.
Notes to the Consolidated Financial Statements
2. Significant Accounting Policies (continued)
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.
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".
Sponsored REIT Income and Expenses
Sponsored REIT rental revenue and Sponsored REIT rental expense represent
revenues and expenses from a Sponsored REIT prior to the final syndication of
preferred shares.
Interest and Other
Interest income and other income, including property and asset management fees,
are recognized when the related services are performed and the earnings process
is complete.
Income Taxes
Taxes on income for the year ended December 31, 2002 represent taxes incurred by
a subsidiary of the Company that has elected to be a taxable REIT subsidiary. No
provision has been made for Federal or state income taxes in the consolidated
financial statements in 2001 and 2000 of the Partnership.
Net Income Per Share/Unit
The Company follows Statement of Financial Accounting Standards No. 128
"Earnings per Share", which specifies the computation, presentation and
disclosure requirements for the Company's net income per share/partnership unit.
Basic net income per share/unit is computed by dividing net income by the
weighted average number of shares/units outstanding during period. Diluted net
income per share/unit 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, 2002,
2001, and 2000. The denominator used for calculating basic and diluted net
income per share/unit is as follows:
Year Ended December 31,
-----------------------------------------
2002 2001 2000
========================================================================
Weighted average number of
shares/units outstanding
Common shares 24,606,405 -- --
Limited partners -- 23,563,079 18,025,059
General partner -- 948,499 948,499
------------------------------------------------------------------------
24,606,405 24,511,578 18,973,558
========================================================================
F-13
Franklin Street Properties Corp.
Notes to the Consolidated Financial Statements
2. Significant Accounting Policies (continued)
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. 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. The impact of adoption did not have a
material impact on the Company's financial position, results of operations and
cash flows. The Company does not have any real estate assets that it considers
"held for sale" at December 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.
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. FAS No. 146
supersedes Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity,"
which in some cases required certain costs to be recognized before a liability
was actually incurred. The adoption of this standard is not expected to have a
material impact on the Company's results of financial position, results of
operations or cash flow.
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 disclosure requirements of FIN 45 are effective
for the Corporation as of December 31, 2002, and require disclosure of the
nature of the guarantee, the maximum potential amount of future payments that
the guarantor could be required to make under the guarantee, and the current
amount of the liability, if any, for the guarantor's obligations under the
guarantee. The recognition requirements of FIN 45 are to be applied
prospectively to guarantees issued or modified after December 31, 2002. The
Company has reviewed the provisions of FIN 45 and believes that the impact of
adoption will not be material to its financial position, results of operations
and cash flow.
F-14
Franklin Street Properties Corp.
Notes to the Consolidated Financial Statements
2. Significant Accounting Policies (continued)
Recent Accounting Standards (continued)
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities. The objective of this
interpretation is to provide guidance on how to identify a variable interest
entity ("VIE") and determine when the assets, liabilities, noncontrolling
interests, and results of operations of a VIE need to be included in a company's
consolidated financial statements. A company that holds variable interests in an
entity will need to consolidate the entity if the company's interest in the VIE
is such that the company will absorb a majority of the VIE's expected losses
and/or receive a majority of the entity's expected residual returns, if they
occur. FIN 46 also requires additional disclosures by primary beneficiaries and
other significant variable interest holders. The provisions of this
interpretation became effective upon issuance. The adoption of this standard is
not expected to have a material impact on the Company's results of financial
position, results of operations or cash flow.
3. 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 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
Company's segments are located in the United States of America. The Company
previously reported the performance of its 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 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 (payments to) 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.
The funded reserve represents funds that the Company has set aside in
anticipation of future capital needs. These reserves are typically used for the
payment of Capital Expenditures, deferred leasing commissions and certain tenant
allowances; however, there is no legal restrictions on their use and they may be
used for any Company purpose. 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.
F-15
Franklin Street Properties Corp.
Notes to the Consolidated Financial Statements
3. Business Segments (continued)
The calculation of CAD by business segment is shown in the following table:
(in thousands):
Rental Investment Intercompany Total
Operations Services Total Eliminations Consolidated
=========================================================================================================================
Year ended December 31, 2002:
Net Income $ 24,787 $ 2,525 $ 27,312 $ -- $ 27,312
Depreciation and amortization 4,778 169 4,947 -- 4,947
Straight-line rent (1,686) -- (1,686) -- (1,686)
Non-cash compensation expenses -- 604 604 -- 604
Capital expenditures (1,163) (11) (1,174) -- (1,174)
Payment of deferred leasing commissions (615) -- (615) -- (615)
Proceeds from funded reserves 3,200 -- 3,200 -- 3,200
Proceeds from sale of land -- -- -- -- --
-------------------------------------------------------------------------------------------------------------------------
Cash Available for Distribution $ 29,301 $ 3,287 $ 32,588 $ -- $ 32,588
=========================================================================================================================
Year ended December 31, 2001:
Net Income $ 21,381 $ 3,987 $ 25,368 $ -- $ 25,368
Depreciation and amortization 4,726 71 4,797 -- 4,797
Straight-line rent (797) -- (797) -- (797)
Non-cash compensation expenses -- 1,744 1,744 -- 1,744
Capital expenditures (566) (167) (733) -- (733)
Payment of deferred leasing commissions (87) -- (87) -- (87)
Proceeds from funded reserves 581 -- 581 -- 581
Proceeds from sale of land 442 -- 442 -- 442
-------------------------------------------------------------------------------------------------------------------------
Cash Available for Distribution $ 25,680 $ 5,635 $ 31,315 $ -- $ 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 4,530 83 4,613 -- 4,613
Straight-line rent (185) -- (185) -- (185)
Non cash compensation expenses -- 2,300 2,300 -- 2,300
Capital expenditures (1,243) (135) (1,378) -- (1,378)
Payment of deferred leasing commissions (144) -- (144) -- (144)
Proceeds from funded reserves 875 -- 875 -- 875
Proceeds from sale of land 1,068 -- 1,068 -- 1,068
-------------------------------------------------------------------------------------------------------------------------
Cash Available for Distribution $ 16,252 $ 5,037 $ 21,289 $ -- $ 21,289
=========================================================================================================================
(1) The Partnership received syndication and transaction fees 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 partners of the Partnership.
F-16
Franklin Street Properties Corp.
Notes to the Consolidated Financial Statements
3. Business Segments (continued)
The Company's cash distributions from operations for the years ended December
31, 2002, 2001 and 2000 are summarized as follows:
Distribution Total Cash
Quarter paid Per Share/Unit Distributions
=========================================================================
(in thousands)
Second quarter of 2002 $ .31 $ 7,622
Third quarter of 2002 .31 7,635
Fourth quarter of 2002 .31 7,635
First quarter of 2003 (A) .31 7,635
-------------------------------------------------------------------------
$ 1.24 $ 30,527
=========================================================================
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 .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
=========================================================================
(A) Represents dividends declared and paid by the Company in the first quarter
of 2003.
Cash dividends per share are declared and paid based on the total outstanding
shares as of the record date and are typically paid in the quarter following the
quarter that CAD is generated.
Cash distributions per partnership unit were 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, was 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 CAD generated
in the fourth quarter of 2001 was declared and paid in the first quarter of
2002. The cash distribution of approximately $6,597,000 for the CAD generated in
the fourth quarter of 2000 was declared and paid in 2001.
F-17
Franklin Street Properties Corp.
Notes to the Consolidated Financial Statements
3. Business Segments (continued)
The following table is a summary of other financial information by business
segment:
Rental Investment
Operations Services Total
=========================================================================
(in thousands)
December 31, 2002:
Revenue $ 40,876 $ 14,730 $ 55,606
Interest and other income 1,157 75 1,232
Interest expense 894 -- 894
Capital expenditures 1,163 11 1,174
Identifiable assets 194,996 6,940 201,936
December 31, 2001:
Revenue $ 37,244 $16,082 $ 53,326
Interest and other income 1,615 111 1,726
Interest expense 818 -- 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 and other 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
4. Merger Transactions
The merger transactions described below involved the exchange of the
Partnership's limited partner units for the minority interest holder's limited
partnership units in seventeen Sponsored Partnerships. The Partnership recorded
the minority interest acquisitions based on the fair value of assets and
liabilities acquired. Costs incurred in connection with the mergers have been
reflected as a cost of the minority interest acquisitions. The 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.
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.
F-18
Franklin Street Properties Corp.
Notes to the Consolidated Financial Statements
4. Merger Transactions (continued)
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 period presented:
(in thousands, except per unit amounts) Year ended
(unaudited) December 31, 2000
==========================================================================
Revenue $ 34,793
Net income $ 10,987
Basic and diluted net income per limited
and general partnership unit $ 0.47
5. Related Party Transactions
Investment in Affiliated Sponsored REITs
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 December 31, 2002 and 2001, the
Company had ownership interests of $41,000 and $0 in sixteen and ten Sponsored
REITs, respectively, and is included in "Prepaid expenses and other assets" in
the Consolidated Balance Sheets. 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.
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 legal or any other enforceable obligation to acquire or to offer to acquire
any Sponsored REIT at December 31, 2002. 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.
Summarized financial information for the Sponsored REITs is as follows:
December 31,
(unaudited) 2002 2001
-------------------------------
(in thousands)
Balance Sheet Data:
Real estate, net $ 385,907 $ 222,232
Other assets 39,465 19,048
Total liabilities (6,554) (6,755)
---------- ----------
Shareholders' equity $ 418,818 234,525
========== ==========
F-19
Franklin Street Properties Corp.
Notes to the Consolidated Financial Statements
5. Related Party Transactions (continued)
For the Year Ended
(in thousands) December 31,
--------------------------------------
2002 2001 2000
--------------------------------------
Operating Data:
Rental revenues $ 46,836 $ 19,816 $ 2,778
Other revenues 543 354 117
Operating and maintenance
expenses (14,191) (5,973) (948)
Depreciation and amortization (7,220) (3,191) (574)
Interest expense (13,395) (9,916) (2,298)
--------------------------------------
Net income (loss) $ 12,573 $ 1,090 $ (925)
======================================
The Company's proportionate share of net income (loss) prior to completion of
the syndication from these Sponsored REITs is shown in the following table:
Year Ended
December 31,
(in thousands) 2002 2001 2000
-----------------------------------
Revenue $ 1,387 $ 860 $ --
Expenses (868) (605) --
------- ------- -------
Net income $ 519 $ 255 $ --
======= ======= =======
Interest
The Company is typically entitled to interest on funds advanced to syndicated
REITs. The Company recognized interest income of $429,000, $552,000 and $402,000
for the years ended December 31, 2002, 2001 and 2000, respectively, relating to
these loans.
Sponsored Entity Fees
The Company has provided syndication and real estate acquisition advisory
services for the Sponsored REITs in 2002 and 2001 and Sponsored Partnerships
prior to June 2000. Syndication and transaction fees from non-consolidated
related entities amounted to approximately $26,811,000, $25,701,000 and
$7,574,000 for the years ended December 31, 2002, 2001 and 2000, respectively.
Management Fees
Management fees range from 1% to 5% of collected rents and the applicable
contracts are cancelable with 30 days' notice. Total management fee income from
non-consolidated entities amounted to approximately $503,000, $412,000 and
$178,000 for the years ended December 31, 2002, 2001 and 2000, respectively, and
is included in "Interest and other" in the Consolidated Statements of Income.
6. Bank Note Payable
The Company has a revolving line of credit agreement (the "Loan Agreement") with
a bank providing for borrowings at the Company'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. There were no borrowings outstanding under
the Loan Agreement as of December 31, 2002 and 2001.
F-20
Franklin Street Properties Corp.
Notes to the Consolidated Financial Statements
6. Bank Note Payable (continued)
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 Company was in
compliance with the Loan Agreement's financial covenants as of December 31, 2002
and 2001. The Loan Agreement matures on February 23, 2003.
The Company had 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 were 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 had a term of one year and bear
interest at the bank's prime rate plus 50 basis points. Each borrower 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 $0 and $1,625,000 were outstanding to senior
officers of the Company at December 31, 2002 and 2001, respectively. The Company
had 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.
At December 31, 2002 all repurchase agreements have been terminated and the
Company has no obligation relating to such loans.
7. Shareholders' and Partners' Capital
General
In connection with the REIT conversion on January 1, 2002, the Partnership
converted to a corporate entity. The changes in partners' capital prior to the
REIT conversion were as follows:
Total Partners
Limited Partners General Partner Capital
----------------------- ------------------ -----------------------
(in thousands, except share/unit amounts) Units Amount Units Amount Units Amount
==========================================================================================================================
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
==========================================================================================================================
F-21
Franklin Street Properties Corp.
Notes to the Consolidated Financial Statements
7. Shareholders' and Partners' Capital (continued)
Changes in stockholders' equity as a result of and following the conversion to a
corporation were as follows:
Additional Total
Paid-in Retained Stockholders'
Common Preferred Capital Earnings Equity
Shares Amount
=============================================================================================================================
Balance, December 31, 2001 -- $ -- $ -- $ -- $ -- $ --
Exchange Partnership units for shares 24,586,249 2 -- 199,761 -- 199,763
Net Income -- -- -- -- 27,312 27,312
Dividends -- -- -- (7,622) (22,892) (30,514)
Shares issued as compensation 43,998 -- -- 604 -- 604
-----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 24,630,247 $ 2 $ -- $ 192,743 $ 4,420 $ 197,165
=============================================================================================================================
In connection with the conversion to a corporation, 23,637,750 limited
partnership units and 948,499 general partnership units were converted into
common stock of the Company on a one-for-one basis.
In accordance with the terms of the Partnership's partnership agreement (the
"Partnership Agreement"), the general partner was authorized to make quarterly
distributions of cash. Cash distributions of approximately $7.6 million
consisting of 2001 earnings, which were declared and paid as a common stock
dividend in 2002, have been recorded as a reduction of the Company's additional
paid in capital.
Partnership
Prior to the conversion of the Partnership into a corporation the Partnership's
general partner had 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 did not take part in management and did 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, could 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 were
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
were allocated as follows:
Net Profit -- The Partnership's net profits were 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 -- The Partnership's net losses were allocated 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 were distributed to the limited partners
and the general partner based on each partner's percentage interest in the
Partnership.
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
consisted of receiving cash distributions from the Partnership and paying such
amounts to its members. The members of the General Partner functioned as
officers and/or directors of the Partnership. The Partnership paid no fees or
other compensation to the General Partner.
F-22
Franklin Street Properties Corp.
Notes to the Consolidated Financial Statements
7. Shareholders' and Partners' Capital (continued)
Equity-Based Compensation
In July 2002, July 2001, January 2001 and April 2000, the Company issued 43,998
shares, 149,131 units, 2,522 units and 230,000 units with a fair value of
approximately $604,000, $1,715,000, $29,000 and $2,300,000, respectively to
certain officers and employees of the Company. These units/shares were fully
vested on the date of issuance. Equity-based compensation charges of $604,000,
$1,744,000 and $2,300,000 are reported in the accompanying Consolidated
Statements of Income for the years ended December 31, 2002, 2001, and 2000,
respectively.
8. Federal Income Tax Reporting
General
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
taxable 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, FSP Investments,
elected to be treated as a TRS. As a result, FSP Investments operates as a
taxable corporation under the Code and has accounted for income taxes in
accordance with the provisions of Statement of Financial Accounting Standard
("SFAS") No. 109, Accounting for Income Taxes. Taxes are provided when FSP
Investments has net profits for both financial statements and income tax
purposes.
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.
Tax Components
The income tax expense reflected in the consolidated statement of income relates
only to the TRS. The expense differs from the amounts computed by applying the
Federal statutory rate of 35% to income before taxes as follows:
For the
Year Ended
(in thousands) December 31,
2002
----------------------
Federal income tax expense at statutory rate $ 1,128 35.0%
Increase (decrease) in taxes resulting from:
State income taxes, net of federal impact 197 6.1%
Other (626) (19.4%)
-------- -------
Taxes on income $ 699 21.7%
======== =======
"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.
Taxes on income are a current tax expense. No deferred income taxes were
provided as there were no temporary differences between the financial reporting
basis and the tax basis of the TRS.
F-23
Franklin Street Properties Corp.
Notes to the Consolidated Financial Statements
8. Federal Income Tax Reporting (continued)
Reconciliation Between GAAP Net Income and Taxable Income subject to dividend
requirements.
At December 31, 2002 and 2001, the Company's net tax basis of its real estate
assets is less than the amount set forth in the Company's Consolidated Balance
Sheets by $39,181,000 and $39,163,000, respectively.
The following reconciles GAAP net income to taxable income subject to dividend
requirements for the year ended December 31, 2002. The Partnership was not
subject to a minimum dividend requirement.
Year Ended
(in thousands) December 31, 2002
-----------------
GAAP net income $ 27,030
Less: GAAP net income of Taxable TRS (2,525)
--------
GAAP net income from REIT operations 24,505
Add: Book depreciation and amortization 4,699
Less: Tax depreciation and amortization (3,824)
Straight-line rents (1,151)
Deferred rent, net (368)
Other book/tax differences, net 187
--------
Taxable income subject to dividend requirement $ 24,048
========
Dividends Paid Deduction
The following reconciles cash dividends paid during the year to the dividends
paid deduction allowed on the Company's tax return:
Year Ended
December 31, 2002
Per Weighted-
(in thousands) Total Average Share
-------------------------
Cash dividends paid $ 30,514 $ 1.24
Plus: Dividends designated from following year -- --
Less: Portion designated capital gain distribution -- --
Less: Return of Capital (6,466) (0.26)
-------------------------
Dividends paid deduction $ 24,048 $ 0.98
=========================
Partnership Taxes
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.
The difference between Partners' capital for financial reporting purposes and
for income tax purposes is approximately as follows (in thousands):
2001
----------
Partnership capital - financial reporting purposes $199,763
Partnership's cumulative tax reporting differences,
primarily relating to non-deductible expenses,
depreciation and other temporary differences
and the effects of mergers (17,217)
--------------------------------------------------------------------------
Partners' capital -- income tax purposes $182,546
==========================================================================
F-24
Franklin Street Properties Corp.
Notes to the Consolidated Financial Statements
9. Commitments
The Company'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. The following
is a schedule of approximate future minimum rental income on non-cancelable
operating leases as of December 31, 2002:
Rentals Under Operating Leases
Year ended
(in thousands) December 31,
=========================================================
2003 $ 15,189
2004 12,513
2005 8,875
2006 5,715
2007 3,992
Thereafter 7,936
---------------------------------------------------------
$ 54,220
=========================================================
Office Lease
The Company 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 Company's share of taxes and operating costs.
Future minimum lease payments are approximately as follows:
(in thousands) Year ended
December 31,
=========================================================
2003 $ 203
2004 209
2005 97
---------------------------------------------------------
$ 509
=========================================================
Rent expense was approximately $206,000, $196,000 and $184,000 for the years
ended December 31, 2002, 2001 and 2000, respectively, and is included in
selling, general and administration expenses in the Consolidated Statement of
Income.
Retirement Plan
During 1999, the Company formed a retirement savings plan for eligible
employees. Under the plan, the Company matches participant contributions up to
$6,500 ($6,000 in 2000) annually per participant. The Company's total
contribution under the plan amounted to approximately $105,000, $76,000 and
$53,000 for the years ended December 31, 2002, 2001 and 2000, respectively.
10. Equity-Based Incentive Compensation 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.
F-25
Franklin Street Properties Corp.
Notes to the Consolidated Financial Statements
10. Equity-Based Incentive Compensation Plan (continued)
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.
An aggregate 43,998 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
Sponsored REIT, in July 2002 under the 2002 Stock Incentive Plan.
A summary of shares available and granted under the plan and the related
compensation costs is shown in the following table:
Shares Available Compensation
for Grant Cost
------------------- ----------------
Balance, December 31, 2001 -- $ --
Shares approved for grant 2,000,000 --
Shares granted (43,998) 604,000
------------------- ----------------
Balance, December 31, 2002 1,956,002 $ 604,000
=================== ================
11. Subsequent Events
Dividends
On January 24, 2003, the Company declared a dividend of $.31 per share of Common
Stock payable to stockholders of record as of January 24, 2003.
Merger
In January 2003 the Company entered into a merger agreement with thirteen
Sponsored REITs ("Target REITs') providing for the acquisition by the Company of
the Target REITs. The merger requires the approval of the shareholders of the
Company as well as the shareholders of the Target REITs. If approved, the
Company will issue approximately 25 million shares of its common stock for a
100% ownership interest in the Target REITs.
Sale of Property
In February 2003 the Company completed the sale of its Weslayan Oaks apartment
complex in Houston, Texas. The net selling price was approximately $6.2 million
and the Company realized a gain of approximately $1.2 million on the sale.
F-26
Franklin Street Properties Corp.
Notes to the Consolidated Financial Statements
Quarterly Financial Information (unaudited)
2001
----------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in thousands, except per unit data)
Revenue $12,787 $13,496 $11,302 $17,467
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
2002
----------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in thousands, except per unit data)
Revenue $ 9,987 $14,889 $15,167 $16,795
Net income 4,097 7,469 7,127 8,619
Basic and diluted net income per share 0.17 0.30 0.29 0.35
Weighted average number of shares outstanding 24,586 24,586 24,623 24,630
F-27
SCHEDULE III
FRANKLIN STREET PROPERTIES CORP.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2002
Initial Cost
-----------------------------------
Costs
Capitalized
(Disposals)
Subsequent
Encumbrances Buildings & to
Description (1) Land Improvements Acquisition
------------ ---- ------------ -----------
(in thousands)
Residential Apartments:
Essex House, Houston, TX -- $ 2,920 $ 9,367 $ 648
Reata, Houston, TX -- 3,399 9,657 655
Weslayan Oaks, Houston, TX -- 1,658 3,990 71
Silverside Plantation, Baton Rouge, LA -- 2,000 17,082 119
Commercial Properties:
One Technology Drive, Peabody, MA -- 1,658 10,246 (450)
North Andover Office Park, No. Andover, MA -- 1,311 8,136 907
Park Seneca, Charlotte, NC -- 1,915 7,817 95
Piedmont Center, Greenville, SC -- 1,449 9,839 915
4995 Patrick Henry, Santa Clara, CA -- 3,274 4,130 58
Hillview Center, Milpitas, CA -- 2,203 2,813 7
Telecom Business Center, San Diego, CA -- 5,035 11,363 456
Southfield Centre, Southfield, MI -- 4,344 11,455 418
Blue Ravine, Folsom, CA -- 846 5,450 22
Bollman Place, Savage, MD -- 1,585 4,121 46
Austin N.W., Austin, TX -- 708 10,494 427
10 Lyberty Way, Westford, MA -- 1,315 8,862 178
Gateway Crossing 95, Columbia, MD -- 4,453 15,931 (123)
-------- ------- -------- -------
-- $40,073 $150,753 $ 4,449
======== ======= ======== =======
Historical Costs
---------------------------------------------------------
Total Costs,
Net of Depreciable Date of
Buildings & Accumulated Accumulated Life Acquisition
Description Land Improvements Total(2) Depreciation Depreciation Years (3)
---- ------------ -------- ------------ ------------ ----------- -----------
Residential Apartments:
Essex House, Houston, TX $ 2,920 $ 10,015 $ 12,935 $ 3,317 $ 9,618 5-27 1993
Reata, Houston, TX 3,399 10,312 13,711 2,724 10,987 5-27 1994
Weslayan Oaks, Houston, TX 1,658 4,061 5,719 887 4,832 5-27 1997
Silverside Plantation, Baton Rouge, LA 2,021 17,180 19,201 2,605 16,596 5-27 1998
Commercial Properties:
One Technology Drive, Peabody, MA 1,658 9,796 11,454 1,638 9816 5-39 1995
North Andover Office Park, No. Andover, MA 1,311 9,043 10,354 1,980 8,374 5-39 1996
Park Seneca, Charlotte, NC 1,815 8,012 9,827 963 8,864 5-39 1997
Piedmont Center, Greenville, SC 1,449 10,754 12,203 1,375 10,828 5-39 1998
4995 Patrick Henry, Santa Clara, CA 3,274 4,188 7,462 552 6,910 5-39 1997
Hillview Center, Milpitas, CA 2,203 2,820 5,023 286 4,737 5-39 1999
Telecom Business Center, San Diego, CA 5,035 11,819 16,854 1,162 15,692 5-39 1999
Southfield Centre, Southfield, MI 4,344 11,873 16,217 997 15,220 5-39 1999
Blue Ravine, Folsom, CA 846 5,472 6,318 448 5,870 5-39 1999
Bollman Place, Savage, MD 1,585 4,167 5,752 330 5,422 5-39 1999
Austin N.W., Austin, TX 708 10,921 11,629 817 10,812 5-39 1999
10 Lyberty Way, Westford, MA 1,315 9,040 10,355 609 9,746 5-39 2000
Gateway Crossing 95, Columbia, MD 4,019 16,242 20,261 1,309 18,952 5-39 1999
------- -------- -------- ------- --------
$39,560 $155,715 $195,275 $21,999 $173,276
======= ======== ======== ======= ========
(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-28
The following table summarizes the changes in the Company's real estate
investments and accumulated depreciation:
December 31,
---------------------------------------
(in thousands) 2002 2001 2000
==========================================================================
Real estate investments, at cost:
Balance, beginning of period $ 194,112 $ 193,988 $ 178,294
Acquisitions -- -- 15,982
Improvements 1,163 546 639
Dispositions -- (422) (927)
--------------------------------------------------------------------------
Balance, end of period $ 195,275 $ 194,112 $ 193,988
==========================================================================
Accumulated depreciation:
Balance, beginning of period $ 17,419 $ 12,917 $ 8,526
Depreciation 4,580 4,502 4,391
Dispositions -- -- --
--------------------------------------------------------------------------
Balance, end of period $ 21,999 $ 17,419 $ 12,917
==========================================================================
F-29
FSP Forest Park IV Corp.
Financial Statements
December 31, 2002
Table of Contents
Page
----
Financial Statements
Independent Auditor's Report ............................................. F-31
Balance Sheets as of December 31, 2002 and 2001 .......................... F-32
Statements of Operations for the years ended December 31, 2002,
2001 and 2000 ...................................................... F-33
Statements of Changes in Partners' Capital/Stockholders' Equity
for the years ended December 31, 2002, 2001 and 2000 ............... F-34
Statements of Cash Flows for the years ended December 31, 2002,
2001 and 2000 ...................................................... F-35
Notes to the Financial Statements ........................................ F-36
Schedule of Real Estate and Accumulated Depreciation ..................... F-45
F-30
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
FSP Forest Park IV Corp.
(a Delaware Corporation)
We have audited the accompanying balance sheets of FSP Forest Park IV Corp. (a
Delaware Corporation) as of December 31, 2002 and 2001, and the related
statements of operations, changes in stockholders' equity and cash flows, as
well as the financial statement schedule listed in the accompanying index, for
each of the three years in the period ended December 31, 2002. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
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 audits to obtain reasonable assurance about whether the financial
statements and financial statement schedule are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements and financial statement schedule. 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 provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial statement schedule
referred to above present fairly, in all material respects, the financial
position of FSP Forest Park IV Corp. as of December 31, 2002 and 2001, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2002 in conformity with accounting principles
generally accepted in the United States of America.
/s/ Braver and Company, P.C.
Newton, Massachusetts
February 7, 2003
F-31
FSP Forest Park IV Corp.
Balance Sheets
December 31, December 31,
(in thousands, except shares and par value amounts) 2002 2001
==============================================================================================================
(REIT) (REIT)
Assets:
Real estate investments, at cost:
Land $ 1,210 $ 1,210
Buildings and improvements 5,171 5,171
--------------------------------------------------------------------------------------------------------------
6,381 6,381
Less accumulated depreciation 443 310
--------------------------------------------------------------------------------------------------------------
Real estate investments, net 5,938 6,071
Cash and cash equivalents 347 199
Cash-funded reserve 656 656
Step rent receivable 138 111
Prepaid expenses and other assets 6 5
Deferred leasing commissions, net of accumulated amortization of $19 and $9 28 37
--------------------------------------------------------------------------------------------------------------
Total assets $ 7,113 $ 7,079
==============================================================================================================
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and accrued expenses $ 172 $ 35
Dividends payable 134 143
--------------------------------------------------------------------------------------------------------------
Total liabilities 306 178
--------------------------------------------------------------------------------------------------------------
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 deficit and dividends in excess of earnings (308) (214)
--------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 6,807 6,901
--------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 7,113 $ 7,079
==============================================================================================================
See accompanying notes to financial statements.
F-32
FSP Forest Park IV Corp.
Statements of Operations
For the Years Ended
December 31,
--------------------------------------
(in thousands, except shares and per share amounts) 2002 2001 2000
-------------------------------------------------------------------------------------------------
(REIT) (REIT) (Limited Partnership)
Revenue:
Rental $ 863 $ 852 $ 661
Interest and other 17 33 69
-------------------------------------------------------------------------------------------------
Total revenue 880 885 730
-------------------------------------------------------------------------------------------------
Expenses:
Rental operating expenses 181 175 155
Depreciation and amortization 142 139 124
Real estate taxes and insurance 70 63 57
-------------------------------------------------------------------------------------------------
Total expenses 393 377 336
-------------------------------------------------------------------------------------------------
Net income before common dividends 487 508 394
Dividends paid to common shareholders prior to
syndication of preferred shares -- -- --
-------------------------------------------------------------------------------------------------
Net income attributable to preferred shareholders $ 487 $ 508 $ 394
=================================================================================================
Weighted average number of preferred shares outstanding,
basic and diluted 78 78 78
=================================================================================================
Net income per preferred share, basic and diluted $6,244 $6,513 $5,051
=================================================================================================
See accompanying notes to financial statements.
F-33
FSP Forest Park IV Corp.
Statements of Changes in
Partners' Capital/Stockholders' Equity
For the Years Ended
December 31, 2002, 2001 and 2000
Retained Deficit Total
Additional and Dividends Partners' Capital/
Preferred Common Paid in in Excess of Stockholders'
(in thousands, except shares) Stock Stock Capital Earnings Equity
======================================================================================================================
Balance, December 31, 1999 $ -- $ -- $ -- $ -- $ 7,178
Distributions -- -- -- -- (566)
Net Income -- -- -- -- 394
----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 $ -- $ -- $ -- $ -- $ 7,006
======================================================================================================================
January 1, 2001 $ -- $ -- $ -- $ -- $ --
Exchange Partnership Units for Shares -- -- 7,006 -- 7,006
Dividends -- -- -- (613) (613)
Net Income -- -- -- 508 508
----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 -- -- 7,006 (105) 6,901
Dividends -- -- -- (581) (581)
Net Income -- -- -- 487 487
----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 $ -- $ -- $7,006 $(199) $ 6,807
======================================================================================================================
In connection with the conversion to a corporation, 78 limited partnership units
were converted into preferred stock of the company on a one-for-one basis.
See accompanying notes to financial statements.
F-34
FSP Forest Park IV Corp.
Statements of Cash Flows
For the Years Ended
December 31,
----------------------------------------
(in thousands) 2002 2001 2000
=================================================================================================
(REIT) (REIT) (Limited Partnership)
Cash flows from operating activities:
Net income $ 487 $ 508 $ 394
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 142 139 124
Changes in operating assets and liabilities:
Cash-funded reserve -- 468 (57)
Step rent receivable (27) (35) (68)
Prepaid expenses and other assets (1) (3) 14
Accounts payable and accrued expenses 137 (50) 22
Payment of deferred leasing commissions -- -- (47)
-------------------------------------------------------------------------------------------------
Net cash provided by operating activities 738 1,027 382
-------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets -- (353) --
-------------------------------------------------------------------------------------------------
Net cash used for investing activities -- (353) --
-------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Dividends to stockholders (590) (586) (450)
-------------------------------------------------------------------------------------------------
Net cash used for financing activities (590) (586) (450)
-------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 148 88 (68)
Cash and cash equivalents, beginning of year 199 111 179
-------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 347 $ 199 $ 111
=================================================================================================
Supplemental disclosure of cash flow information:
Disclosure of non-cash financing activities:
Dividends declared but not paid $ 134 $ 143 $ 116
See accompanying notes to financial statements.
F-35
FSP Forest Park IV Corp.
Notes to Financial Statements
1. 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 Caroline (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.
2. Summary of Significant Accounting Policies
ESTIMATES AND ASSUMPTIONS
The Company prepares its financial statements and related notes in conformity
with accounting principles generally accepted in the United States of America
("GAAP"). 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 2001 and 2000 financial statements have been
reclassified to conform to the 2002 presentation.
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 improvement
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 15-39
Furniture and equipment 5-7
F-36
FSP Forest Park IV Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
REAL ESTATE AND DEPRECIATION (continued)
The following schedule reconciles the cost of the property as shown in the
Offering Memorandum as to the amounts shown on the Company's Balance Sheet:
(in thousands)
Price per Offering Memorandum $ 6,215
Plus: Acquisition fees 117
Plus: Other 49
----------------------------------------------------------
Total Acquisition Costs $ 6,381
==========================================================
These costs are reported in the Company's Balance Sheet as follows:
Land $ 1,210
Building 5,171
----------------------------------------------------------
Total reported in Balance Sheet $ 6,381
==========================================================
The Company 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, 2002, 2001
and 2000 no such indicators of impairment were identified.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with an initial
maturity of three months or less to be cash equivalents.
CASH-FUNDED RESERVES
The Company has set aside funds in anticipation of future capital needs of the
property. Although these funds typically are used for the payment of real estate
assets and deferred leasing commissions, there is no legal restriction on their
use and they may be used for any company purpose.
MARKETABLE SECURITIES
The Company accounts for investments in debt securities under the provisions of
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". The Company typically has classified its debt securities as
available-for-sale.
There were no investments in marketable securities at December 31, 2002, 2001
and 2000.
CONCENTRATION OF CREDIT RISKS
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.
For the years ended December 31, 2002, 2001 and 2000 rental income was derived
from two tenants, The American Red Cross at 81% and Verizon at 19%. For the year
ended December 31, 2000, rental income consisted solely of income received form
The American Red Cross. As such, future receipts are dependent upon the
financial strength of the lessees and their ability to perform under the lease
agreements.
F-37
FSP Forest Park IV Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
FINANCIAL INSTRUMENTS
The Company estimates that the carrying value of cash and cash equivalents,
cash-funded reserves and restricted cash approximate their fair values based on
their short-term maturity and prevailing interest rates.
STEP RENT RECEIVABLE
Certain leases provide for fixed increases over the life of the lease. Rental
revenue is recognized on the straight-line basis over the related lease term;
however, billings by the Company are based on required minimum rentals in
accordance with the lease agreements. Step rent receivable, which is the
cumulative revenue recognized in excess of amounts billed by the Company, is
$138,000, $111,000 and $68,000 at December 31, 2002, 2001 and 2000,
respectively.
DEFERRED LEASING COMMISSIONS
Deferred leasing commissions represent external leasing costs incurred in the
leasing of commercial space. These costs are capitalized and are amortized on a
straight-line basis over the weighted-average remaining life of the related
leases. Amortization expense of approximately $9,300, $9,300 and $0 is included
in the Company's Statement of Operations for the years ended December 31, 2002,
2001 and 2000, respectively.
Payments for deferred leasing commissions in 2002, 2001 and 2000 amounted to $0,
$0 and $47,000, respectively, which is being amortized over five years in
respect of the leases. Details of the deferred leasing commissions as of
December 31:
2002 2001 2000
----------------------------------------------
(REIT) (REIT) (Limited
Partnership)
Cost $ 47,000 $ 47,000 $ 47,000
Accumulated amortization 18,600 9,300 --
Book value $ 28,400 $ 37,700 $ 47,000
==============================================
The estimated annual amortization expense for the five years succeeding December
31, 2002 are as follows:
2003 $ 9,300
2004 $ 9,300
2005 $ 9,300
2006 $ 500
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
$685,000 have been reported as a reduction in the Stockholders' Equity in the
Company's Balance Sheets.
F-38
FSP Forest Park IV Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
REVENUE RECOGNITION
The Company has retained substantially all of the risks and benefits of
ownership of the Company's commercial property and aaccounts for its leases as
operating leases. Rental income from leases, which may include rent concession
(including free rent and tenant improvement allowances) and scheduled increases
in rental rates during the lease term, is recognized on a straight-line basis.
The Company does not have any percentage rent arrangements with its commercial
property tenants. Reimbursable costs are included in rental income in the period
earned. A schedule showing the components of rental revenue is shown below.
Year Ended
December 31,
(in thousands) 2002 2001 2000
=======================================================================
(REIT) (REIT) (Limited
Partnership)
Income from leases $ 780 $ 764 $ 608
Straight-line rent adjustment 27 43 45
Reimbursable expenses 56 45 8
-----------------------------------------------------------------------
Total 863 852 661
=======================================================================
INTEREST AND OTHER
Interest income and other income are recognized when the related services are
performed and the earnings process is complete.
INCOME TAXES
The Company has elected to be taxed as a REIT under the Internal Revenue Code of
1986, 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 taxable income
that must be distributed annually.
NET INCOME PER SHARE
The Company follows Statement of Financial Accounting Standards 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
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 December 31, 2002, 2001 and 2000. Subsequent to the
completion of the offering of preferred shares, the holders of common stock are
not entitled to share in any income. The denominator used for calculating basic
and diluted net income per share is shown for preferred shares only and is as
follows:
Year Ended
December 31,
2002 2001 2000
==========================================================================
(REIT) (REIT) (Limited
Partnership)
Weighted average number of preferred
shares outstanding 78 78 78
F-39
FSP Forest Park IV Corp.
Notes to Financial Statements
3. 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. 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. The impact of adoption did not have a
material impact on the Company's financial position, results of operations and
cash flows. The Company does not have any real estate assets that it considers
"held for sale" at December 31, 2002.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statement Nos.
4, 44, and 64, Amendment of SFAS 13, and Technical Corrections". This Statement
rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt",
and an amendment of that Statement, SFAS No. 64, "Extinguishments of Debt Made
to Satisfy Sinking-Fund Requirements". This Statement amends SFAS 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 SFAS 145 and believes that the impact of adoption
will not be material to its financial position, results of operations and cash
flows.
In July 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities". This statement was 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 position, results of operations and cash flows.
4. Income Taxes
The Company files as a REIT under Sections 856-860 of the Internal Revenue Code
of 1986, as amended. In order to qualify as a REIT, the Company is required to
distribute at least 90% of its taxable income to shareholders and to meet
certain asset and income tests as well as certain other requirements. The
Company will generally not be liable for federal income taxes, provided it
satisfies their requirements. Even as a qualified REIT, the Company is subject
to certain state and local taxes on its income and property.
At December 31, 2002, 2001 and 2000, the Company's net tax basis of its real
estate assets approximates the amount set forth in the Company's Balance Sheet.
F-40
FSP Forest Park IV Corp.
Notes to Financial Statements
4. Income Taxes (continued)
The following schedule reconciles GAAP Net Income to Taxable Income subject to
dividend requirements:
Years Ended
December 31,
(in thousands) 2002 2001 2000
=========================================================================================================
(REIT) (REIT) (Limited
Partnership)
GAAP net income $ 487 $ 508 $ 394
Add: Book depreciation and amortization 142 139 124
Deferred rent 124 -- --
Less: Tax depreciation and amortization (138) (136) (124)
Straight-line rents (27) (43) (45)
---------------------------------------------------------------------------------------------------------
Taxable income (loss) subject to dividend requirement $ 588 $ 468 $ 349
=========================================================================================================
The following schedule reconciles cash dividends paid to the dividends paid
deduction:
Years Ended
December 31,
(in thousands) 2002 2001 2000
======================================================================================================
(REIT) (REIT) (Limited
Partnership)
Cash dividends paid $ 590 $ 586 $ 450
Plus: Dividends designated from following year -- -- --
Less: Portion designated capital gain distribution -- -- --
Less: Return of Capital (2) (118) (450)
------------------------------------------------------------------------------------------------------
Dividends paid deduction $ 588 $ 468 $ --
======================================================================================================
5. Cash Available for Distribution
The Company evaluates its performance based on Cash Available for Distribution
("CAD") as management believes that CAD represents the most accurate measure of
the Company's activity. CAD 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 funds raised by the issuance of shares; plus the net proceeds
from the sale of land; less purchases of real estate assets, property and
equipment ("Capital Expenditures") payments for deferred leasing commissions and
payments for deferred lease origination costs; plus (less) proceeds from
(payments to) cash reserves established at the acquisition date of the property
(cash-funded reserves). 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 payments for deferred lease origination costs 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 financial statements.
F-41
FSP Forest Park IV Corp.
Notes to Financial Statements
5. Cash Available for Distribution (continued)
The calculation of CAD is shown in the following table:
December 31,
(in thousands) 2002 2001 2000
=========================================
(REIT) (REIT) (Limited
Partnership)
Net Income $ 487 $ 508 $ 394
Depreciation and amortization 142 139 124
Straight line rent (27) (43) (45)
Purchase of land and building and improvements -- (353) --
Establish funded reserve -- 468 (57)
Payment of deferred leasing commissions -- -- (47)
-----------------------------------------------------------------------------------------------
Cash Available for Distribution $ 602 $ 719 $ 369
===============================================================================================
The Company's cash distributions are summarized as follows:
Total Cash
Dividends
Quarter Paid 2002 2001 2000
=========================================================================
(REIT) (REIT) (Limited
Partnership)
First Quarter $ 143 $ 116 $ 111
Second Quarter 145 161 103
Third Quarter 156 154 114
Fourth Quarter 146 155 122
-------------------------------------------------------------------------
Dividends paid $ 590 $ 586 $ 450
=========================================================================
Cash distributions are declared and paid based on the total outstanding shares
as of the record date and are typically paid in the quarter following the
quarter that CAD is generated.
6. Capital Stock
PREFERRED STOCK
Generally, each holder of Shares of Preferred Stock is entitled to receive
ratably all income and 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.
Subsequent to the completion of the offering of the preferred shares the holders
of common shares are not entitled to receive any income, nor shall the Company
declare or pay any cash dividends on shares of Common Stock.
F-42
FSP Forest Park IV Corp.
Notes to Financial Statements
7. Related Party Transactions
The Company executed a management agreement with FSP Property Management LLC, an
affiliate of FSP, that provides for a management fee equal to 1% of collected
revenues and is cancelable with 30 days notice by either party. For the years
ended December 31, 2002, 2001 and 2000 fees incurred under the agreement were
$7,840, $5,730 and $6,073, respectively.
8. Commitments and Contingencies
The Company, as lessor, has minimum future rentals due under non-cancelable
operating leases as follows:
Year Ended
December 31, Amount
------------ --------
(in thousands)
2003 $ 796
2004 813
2005 830
2006 678
2007 691
Thereafter 763
-------
$ 4,571
=======
In addition, the lessees are liable for real estate taxes and certain operating
expenses of the property.
Upon acquiring the commercial rental property in July, 1999, the Company was
assigned the lease agreement between the seller of the Property and the existing
tenant. The Company has also signed a new lease since the purchase of the
property. The original lease periods range from five to ten years with renewal
options.
9. Subsequent Event
The Company has entered into a merger agreement with its common shareholder,
Franklin Street Properties Corp ("FSP"). In January 2003 FSP filed a proxy
statement with the United States Securities and Exchange Commission indicating
its intent to acquire the preferred stock interests of the Company and twelve
additional REITs. The merger requires the approval of the shareholders of the
Company as well as the shareholders of the twelve additional REITs and the
shareholders of FSP. If approved, FSP will issue shares of its common stock in
exchange for a 100% ownership interest in the Company.
F-43
SCHEDULE III
FSP FOREST PARK IV CORP.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2002
(in thousands)
Initial Cost
------------------------------------
Costs
Capitalized
(Disposals)
Subsequent
Encumbrances Buildings & to
Description (1) Land Improvements Acquisition
------------ ---- ------------ -----------
Forest Park IV, Corp., Charlotte,
North Carolina -- $ 1,210 $ 5,171 $ --
========= ======== ========== =========
Historical Costs
-----------------------------------------------------------
Total Costs,
Net of Depreciable
Buildings & Accumulated Accumulated Life Date of
Description Land Improvements Total(2) Depreciation Depreciation Years Acquisition
---- ------------ -------- ------------ ------------ ----- -----------
Forest Park IV, Corp., Charlotte,
North Carolina $ 1,210 $ 5,171 $ 6,381 $ 443 $ 5,938 15-39 July, 1999
======== ============ ======= =========== ===========
(1) There are no encumbrances on the above property.
(2) The aggregate cost for Federal Income Tax purposes approximates total
historical costs
F-44
FSP FOREST PARK IV CORP.
REAL ESTATE AND ACCUMULATED DEPRECIATION
The following table summarizes the changes in the Company's real estate
investment and accumulated depreciation:
December 31,
2002 2001 2000
================================================================================
(in thousands) (REIT) (REIT) (Limited
Partnership)
Real estate investments, at cost:
Balance, beginning of period $ 6,381 $ 6,028 $ 6,028
Acquisitions -- -- --
Improvements -- 353 --
Dispositions -- -- --
--------------------------------------------------------------------------------
Balance, end of period $ 6,381 $ 6,381 $ 6,028
================================================================================
Accumulated depreciation:
Balance, beginning of period $ 310 $ 180 $ 56
Depreciation 133 130 124
Dispositions -- -- --
--------------------------------------------------------------------------------
Balance, end of period $ 443 $ 310 $ 180
================================================================================
F-45
FSP FOREST PARK IV CORP.
(A DELAWARE CORPORATION)
FINANCIAL STATEMENTS
DECEMBER 31, 2001
CONTENTS
PAGE
Independent auditors' report F-47
Financial statements:
Balance sheet F-48
Statement of operations F-49
Statement of changes in stockholders' equity F-50
Statement of cash flows F-51
Notes accompanying financial statements F-52
F-46
[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-47
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-48
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-49
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-50
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-51
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-52
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-53
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-54
FSP FOREST PARK IV LIMITED PARTNERSHIP
(a Massachusetts Limited Partnership)
For the Year Ended December 31, 2000
CONTENTS
--------------------------------------------------------------------------------
Page
Independent Auditors' Report F-56
Financial Statements:
Balance Sheet F-57
Statement of Operations F-58
Statement of Changes in Partners' Equity F-59
Statement of Cash Flows F-60
Notes to Financial Statements F-61
F-55
[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.
Boston, Massachusetts
January 31, 2001
F-56
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-57
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-58
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-59
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-60
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-61
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-62
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-63
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-64
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-65
FSP FOREST PARK IV LIMITED PARTNERSHIP
(a Massachusetts Limited Partnership)
CONTENTS
--------------------------------------------------------------------------------
Page
Independent Auditors Report F-67
Financial Statements:
Balance Sheet F-68
Statement of Operations F-69
Statement of Changes in Partners' Equity F-70
Statement of Cash Flows F-71
Notes to Financial Statements F-72
F-66
[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-67
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-68
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-69
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-70
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-71
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-72
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-73
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-74
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-75
FSP Gael Apartments Corp.
Financial Statements
December 31, 2002
Table of Contents
Page
----
Financial Statements
Independent Auditor's Report.............................................. F-77
Balance Sheets as of December 31, 2002 and 2001........................... F-78
Statements of Operations for the years ended December 31, 2002 and 2001
and for the period May 30, 2000 (date of inception) to
December 31, 2000................................................... F-79
Statements of Change in Stockholders' Equity for the years ended
December 31, 2002 and 2001 and for the period May 30, 2000
(date of inception) to December 31, 2000............................ F-80
Statements of Cash Flows for the years ended December 31, 2002 and 2001
and for the period May 30, 2000 (date of inception) to
December 31, 2000................................................... F-81
Notes to the Financial Statements......................................... F-82
Schedule of Real Estate and Accumulated Depreciation...................... F-89
F-76
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
FSP Gael Apartments Corp.
(a Delaware Corporation)
We have audited the accompanying balance sheets of FSP Gael Apartments Corp. (a
Delaware Corporation) as of December 31, 2002 and 2001, and the related
statements of operations, changes in stockholders' equity and cash flows, as
well as the financial statement schedule listed in the accompanying index, for
the years ended December 31, 2002 and 2001, and for the period from May 30, 2000
(date of inception) to December 31, 2000. These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
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 audits to obtain reasonable assurance about whether the financial
statements and financial statement schedule are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements and financial statement schedule. 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 provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial statement schedule
referred to above present fairly, in all material respects, the financial
position of FSP Gael Apartments Corp. as of December 31, 2002 and 2001, and the
results of its operations and its cash flows for the years ended December 31,
2002 and 2001, and for the initial period ended December 31, 2000 in conformity
with accounting principles generally accepted in the United States of America.
/s/ Braver and Company, P.C.
Newton, Massachusetts
February 7, 2003
F-77
FSP Gael Apartments Corp.
Balance Sheets
December 31, 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 1,322 784
-------------------------------------------------------------------------------------------
Real estate investments, net 16,779 17,317
Cash and cash equivalents 399 429
Cash-funded reserve 574 581
Restricted cash 61 66
Prepaid expenses and other assets 41 28
-------------------------------------------------------------------------------------------
Total assets $ 17,854 $ 18,421
===========================================================================================
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and accrued expenses $ 85 $ 58
Dividends payable 356 399
Tenant security deposits 61 66
-------------------------------------------------------------------------------------------
Total liabilities 502 523
-------------------------------------------------------------------------------------------
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 deficit and dividends in excess of earnings (2,083) (1,537)
-------------------------------------------------------------------------------------------
Total Stockholders' Equity 17,352 17,898
-------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 17,854 $ 18,421
===========================================================================================
See accompanying notes to financial statements.
F-78
FSP Gael Apartments Corp.
Statements of Operations
For the Period
For the May 30, 2000
Years Ended (date of inception)
December 31, to December 31,
(in thousands, except shares and per share amounts) 2002 2001 2000
========================================================================================================================
Revenue:
Rental $2,628 $2,582 $ 1,033
Interest and other 23 46 28
------------------------------------------------------------------------------------------------------------------------
Total revenue 2,651 2,628 1,061
------------------------------------------------------------------------------------------------------------------------
Expenses:
Rental operating expenses 604 574 281
Depreciation 538 538 246
Real estate taxes and insurance 532 510 202
Interest -- -- 792
------------------------------------------------------------------------------------------------------------------------
Total expenses 1,674 1,622 1,521
------------------------------------------------------------------------------------------------------------------------
Net income (loss) before common dividends 977 1,006 (460)
Dividends paid to common shareholders prior to syndication of preferred shares -- -- --
------------------------------------------------------------------------------------------------------------------------
Net income (loss) attributable to preferred shareholders $ 977 $1,006 $ (460)
========================================================================================================================
Weighted average number of preferred shares outstanding,
basic and diluted 212.5 212.5 212.5
========================================================================================================================
Net income (loss) per preferred share, basic and diluted $4,598 $4,734 $(2,165)
========================================================================================================================
See accompanying notes to financial statements.
F-79
FSP Gael Apartments Corp.
Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 2002
and 2001 and For the Period May 30, 2000 (date
of inception) to December 31, 2000
Retained Deficit
Additional and Dividends Total
Preferred Common Paid in in Excess of Stockholders'
(in thousands, except shares) Stock Stock Capital Earnings Equity
=====================================================================================================================
Private offering of 212.5 shares, net $ -- $ -- $19,435 $ -- $ 19,435
Dividends -- -- -- (530) (530)
Net Loss -- -- -- (460) (460)
---------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 -- -- 19,435 (990) 18,445
Dividends -- -- -- (1,553) (1,553)
Net Income -- -- -- 1,006 1,006
---------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 -- -- 19,435 (1,537) 17,898
Dividends -- -- -- (1,523) (1,523)
Net Income -- -- -- 977 977
---------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 $ -- $ -- $19,435 $(2,083) $ 17,352
=====================================================================================================================
See accompanying notes to financial statements.
F-80
FSP Gael Apartments Corp.
Statements of Cash Flows
For the Period
For the May 30, 2000
Years Ended (date of inception)
December 31, to December 31,
(in thousands) 2002 2001 2000
========================================================================================================
Cash flows from operating activities:
Net income (loss) $ 977 $ 1,006 $ (460)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation 538 538 246
Changes in operating assets and liabilities:
Cash-funded reserve 7 34 (616)
Restricted cash 5 20 (86)
Prepaid expenses and other assets (13) 1 (28)
Accounts payable and accrued expenses 27 (439) 496
Tenant security deposits (5) (20) 86
--------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 1,536 1,140 (362)
--------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets -- -- (18,101)
--------------------------------------------------------------------------------------------------------
Net cash used for investing activities -- -- (18,101)
--------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of company stock -- -- 21,250
Syndication costs -- -- (1,815)
Dividends to stockholders (1,566) (1,526) (157)
Proceeds from long-term debt -- -- 17,500
Principal payments on long-term debt -- -- (17,500)
--------------------------------------------------------------------------------------------------------
Net cash (used for) provided by financing activities (1,566) (1,526) 19,278
--------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (30) (386) 815
Cash and cash equivalents, beginning of year 429 815 --
--------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 399 $ 429 $ 815
========================================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ -- $ -- $ 792
Disclosure of non-cash financing activities:
Dividends declared but not paid $ 356 $ 399 $ 372
See accompanying notes to financial statements.
F-81
FSP Gael Apartments Corp.
Notes to Financial Statements
1. Organization
FSP Gael Apartments Corp. (the "Company") was organized on May 30, 2000 as a
Corporation under the laws of the State of Delaware to purchase, own and operate
a luxury apartment complex located in Houston, Texas (the "Property"). The
Property consists of 210 luxury apartments that total 187,000 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.
2. Summary of Significant Accounting Policies
ESTIMATES AND ASSUMPTIONS
The Company prepares its financial statements and related notes in conformity
with accounting principles generally accepted in the United States of America
("GAAP"). 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 information in the 2001 and 2000 financial statements have been
reclassified to conform to the 2002 presentation.
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 improvement
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 - Apartments 27.5
Building Improvements 15 - 27.5
Furniture and equipment 5-7
F-82
FSP Gael Apartments Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with an initial
maturity of three months or less to be cash equivalents.
CASH-FUNDED RESERVES
The Company has set aside funds in anticipation of future capital needs of the
property. Although these funds typically are used for the payment of real estate
assets and deferred leasing commissions, there is no legal restriction on the
use and they may be used for any company purpose.
RESTRICTED CASH
Restricted cash consists of tenant security deposits.
MARKETABLE SECURITIES
The Company accounts for investments in debt securities under the provisions of
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". The Company typically has classified its debt securities as
available-for-sale.
There were no investments in marketable securities at December 31, 2002, 2001
and 2000.
CONCENTRATION OF CREDIT RISKS
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.
FINANCIAL INSTRUMENTS
The Company estimates that the carrying value of cash and cash equivalents,
cash-funded reserves and restricted cash approximate their fair values based on
their short-term maturity and prevailing interest rates.
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 in the
Company's Balance Sheets.
REVENUE RECOGNITION
The Company'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.
INTEREST AND OTHER
Interest income and other income are recognized when the related services are
performed and the earnings process is complete.
F-83
FSP Gael Apartments Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
INCOME TAXES
The Company has elected to be taxed as a REIT under the Internal Revenue Code of
1986, 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 taxable income
that must be distributed annually.
NET INCOME PER SHARE
The Company follows Statement of Financial Accounting Standards 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
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 December 31, 2002. The denominator used for calculating
basic and diluted net income per share is as follows:
Year Ended
December 31,
2002 2001 2000
======================================================================
Weighted average number of preferred
shares outstanding 212.5 212.5 212.5
3. 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. 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. The impact of adoption did not have a
material impact on the Company's financial position, results of operations and
cash flows. The Company does not have any real estate assets that it considers
"held for sale" at December 31, 2002.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements Nos.
4, 44, and 64, Amendment of SFAS 13, and Technical Corrections". This Statement
rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt",
and an amendment of that Statement, SFAS No. 64, "Extinguishments of Debt Made
to Satisfy Sinking-Fund Requirements". This Statement amends SFAS 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 SFAS 145 and believes that the impact of adoption
will not be material to its financial position, results of operations and cash
flows.
F-84
FSP Gael Apartments Corp.
Notes to Financial Statements
3. Recent Accounting Standards (continued)
In July 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities". This statement was 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 position, results of operations and cash flows.
4. Income Taxes
The Company files as a REIT under Sections 856-860 of the Internal Revenue Code
of 1986, as amended. In order to qualify as a REIT, the Company is required to
distribute at least 90% of its taxable income to shareholders and to meet
certain asset and income tests as well as certain other requirements. The
Company will generally not be liable for federal income taxes, provided it
satisfies their requirements. Even as a qualified REIT, the Company is subject
to certain state and local taxes on its income and property.
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.
At December 31, 2002, 2001 and 2000 the Company's net tax basis of its real
estate assets approximates the amount set forth in the Company's Balance Sheet.
The following schedule reconciles GAAP Net Income to Taxable Income subject to
dividend requirements:
Years Ended Period Ended
December 31, December 31,
(in thousands) 2002 2001 2000
=================================================================================================
GAAP net income (loss) $ 977 $ 1,006 $ (460)
Add: Book depreciation 538 538 246
Deferred rents 25 -- 21
Less: Tax depreciation and amortization (369) (370) (143)
Deferred rents -- (12) --
Other book/tax differences, net (12) -- --
-------------------------------------------------------------------------------------------------
Taxable income (loss) subject to dividend requirement(1) $ 1,159 $ 1,162 $ (336)
=================================================================================================
(1) A tax loss is not subject to a dividend requirement.
The following schedule reconciles cash dividends paid to the dividends paid
deduction:
Years Ended Period Ended
December 31, December 31,
(in thousands) 2002 2001 2000
====================================================================================================
Cash dividends paid $ 1,566 $ 1,526 $ 157
Plus: Dividends designated from following year -- -- --
Less: Portion designated capital gain distribution -- -- --
Less: Return of Capital (407) (364) (157)
----------------------------------------------------------------------------------------------------
Dividends paid deduction $ 1,159 $ 1,162 $ --
====================================================================================================
F-85
FSP Gael Apartments Corp.
Notes to Financial Statements
5. Cash Available for Distribution
The Company evaluates its performance based on Cash Available for Distribution
("CAD") as management believes that CAD represents the most accurate measure of
the Company's activity. CAD 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 certain non-cash compensation expenses); plus funds raised by the issuance
of shares; plus the net proceeds from the sale of land; less purchases of real
estate assets, property and equipment ("Capital Expenditures"), plus (less)
proceeds from (payments to) cash reserves established at the acquisition date of
the property (cash funded reserves). Depreciation and non-cash compensation are
an adjustment to CAD, as these are non-cash items included in net income.
Capital Expenditures 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 financial statements.
The calculation of CAD is shown in the following table:
December 31,
(in thousands) 2002 2001 2000
=============================================================================================
Net income (loss) $ 977 $ 1,006 $ (460)
Depreciation 538 538 246
Proceeds from offering of shares -- -- 19,435
Purchase of land and building and improvements -- -- (18,101)
Establish funded reserve -- -- (616)
---------------------------------------------------------------------------------------------
Cash Available for Distribution $ 1,515 $ 1,544 $ 504
=============================================================================================
The Company's cash distributions are summarized as follows:
(in thousands)
Total Cash
Dividends
Quarter Paid 2002 2001 2000
======================================================================
First Quarter $ 400 $ 372 $ --
Second Quarter 406 370 --
Third Quarter 390 384 --
Fourth Quarter 370 400 157
----------------------------------------------------------------------
Dividends paid $ 1,566 $ 1,526 $ 157
======================================================================
Cash distributions are declared and paid based on the total outstanding shares
as of the record date and are typically paid in the quarter following the
quarter that CAD is generated.
F-86
FSP Gael Apartments Corp.
Notes to Financial Statements
6. Capital Stock
PREFERRED STOCK
Generally each holder of Shares of Preferred Stock is entitled to receive
ratably all income and 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.
Subsequent to the completion of the offering of the preferred shares the holders
of common shares are not entitled to receive any income, nor shall the Company
declare or pay any cash dividends on shares of Common Stock.
7. Related Party Transactions
The Company executed a management agreement with FSP Property Management LLC, an
affiliate of FSP, that provides for a management fee equal to 1% of collected
revenues and is cancelable with 30 days notice by either party. For the years
ended December 31, 2002 and 2001 and the period ended December 31, 2000, fees
incurred under the agreement were $27,000, $26,000 and $10,000, respectively.
An acquisition fee of $425,000 and other costs totaling $141,000 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 in 2000 to an affiliate of the Common
Shareholder for services related to syndication of the Company's preferred
stock.
During 2000, the Company borrowed and repaid in full:
Note payable to FSP, principal of $17,500,000 with interest equal to the
Citizens Bank base rate (9.5%). Interest paid to the affiliate was
$101,000.
A commitment fee of $691,000 was paid for obtaining the first mortgage
loan. Such amount is included in interest expense on the Statement of
Operations.
8. Subsequent Event
The Company has entered into a merger agreement with its common shareholder,
Franklin Street Properties Corp ("FSP"). In January 2003 FSP filed a proxy
statement with the United States Securities and Exchange Commission indicating
its intent to acquire the preferred stock interests of the Company and twelve
additional REITs. The merger requires the approval of the shareholders of the
Company as well as the shareholders of the twelve additional REITs and the
shareholders of FSP. If approved, FSP will issue shares of its common stock in
exchange for a 100% ownership interest in the Company.
F-87
SCHEDULE III
FSP GAEL APARTMENTS CORP.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2002
(in thousands)
Initial Cost
-----------------------------------
Costs
Capitalized
(Disposals)
Subsequent
Encumbrances Buildings & to
Description (1) Land Improvements Acquisition
------------ ---- ------------ -----------
Gael, Houston, Texas -- $3,312 $ 14,789 $ --
============ ====== ============ ===========
(in thousands)
Historical Costs
----------------------------------------------------------
Total
Costs, Net
of Depreciable
Buildings & Accumulated Accumulated Life Date of
Description Land Improvements Total(2) Depreciation Depreciation Years Acquisition
---- ------------ -------- ------------ ------------ ----------- -----------
Gael, Houston, Texas $3,312 $ 14,789 $18,101 $ 1,322 $ 16,779 $ 15-27.5 July, 2000
====== ============ ======== ============ ===========
(1) There are no encumbrances on the above property.
(2) The aggregate cost for Federal Income Tax purposes approximates total
historical costs.
F-88
FSP GAEL APARTMENTS CORP.
REAL ESTATE AND ACCUMULATED DEPRECIATION
The following table summarizes the changes in the Company's real estate
investment and accumulated depreciation:
December 31,
(in thousands) 2002 2001 2000
================================================================================
Real estate investments, at cost:
Balance, beginning of period $ 18,101 $ 18,101 $ --
Acquisitions -- -- 18,101
Improvements -- -- --
Dispositions -- -- --
--------------------------------------------------------------------------------
Balance, end of period $ 18,101 $ 18,101 $ 18,101
================================================================================
Accumulated depreciation:
Balance, beginning of period $ 784 $ 246 $ --
Depreciation 538 538 246
Dispositions -- -- --
--------------------------------------------------------------------------------
Balance, end of period $ 1,322 $ 784 $ 246
================================================================================
F-89
FSP GAEL APARTMENTS CORP.
(A DELAWARE CORPORATION)
FINANCIAL STATEMENTS
DECEMBER 31, 2001
CONTENTS
PAGE
Independent auditors' report F-91
Financial statements:
Balance sheet F-92
Statement of operations F-93
Statement of changes in stockholders' equity F-94
Statement of cash flows F-95
Notes accompanying financial statements F-96
F-90
[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-91
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-92
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-93
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-94
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-95
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-96
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-97
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-98
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-100
Financial Statements:
Balance Sheet F-101
Statement of Operations F-102
Statement of Changes in Stockholders' Equity F-103
Statement of Cash Flows F-104
Notes to Financial Statements F-105
F-99
[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.
Boston, Massachusetts
January 30, 2001
(Except for Note 6, as to which the date is March 23, 2001)
F-100
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-101
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-102
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-103
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-104
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-105
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-106
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-107
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-108
FSP Goldentop Technology Center Corp.
Financial Statements
December 31, 2002
Table of Contents
Page
----
Financial Statements
Independent Auditor's Report ............................................. F-110
Balance Sheets as of December 31, 2002 and 2001 .......................... F-111
Statements of Operations for the years ended December 31, 2002 and
2001 and for the period August 16, 2000 (date of inception) to
December 31, 2000 .................................................. F-112
Statements of Stockholders' Equity for the years ended December 31, 2002
and 2001 and for the period August 16, 2000 (date of inception) to
December 31, 2000 .................................................. F-113
Statements of Cash Flows for the years ended December 31, 2002 and 2001
and for the period August 16, 2000 (date of inception) to
December 31, 2000 .................................................. F-114
Notes to the Financial Statements ........................................ F-115
Schedule of Real Estate and Accumulated Depreciation ..................... F-123
F-109
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
FSP Goldentop Technology Center Corp.
(a Delaware Corporation)
We have audited the accompanying balance sheets of FSP Goldentop Technology
Center Corp. (a Delaware Corporation) as of December 31, 2002 and 2001, and the
related statements of operations, changes in stockholders' equity and cash
flows, as well as the financial statement schedule listed in the accompanying
index, for the years ended December 31, 2002 and 2001, and for the period from
August 16, 2000 (date of inception) to December 31, 2000. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
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 audits to obtain reasonable assurance about whether the financial
statements and financial statement schedule are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements and financial statement schedule. 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 provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial statement schedule
referred to above present fairly, in all material respects, the financial
position of FSP Goldentop Technology Center Corp. as of December 31, 2002 and
2001, and the results of its operations and its cash flows for the years ended
December 31, 2002 and 2001, and for the initial period ended December 31, 2000
in conformity with accounting principles generally accepted in the United States
of America.
/s/ Braver and Company, P.C.
Newton, Massachusetts
February 7, 2003
F-110
FSP Goldentop Technology Center Corp.
Balance Sheets
December 31, December 31,
(in thousands, except shares and par value amounts) 2002 2001
========================================================================================
Assets:
Real estate investments, at cost:
Land $ 4,427 $ 4,427
Buildings and improvements 15,183 15,183
----------------------------------------------------------------------------------------
19,610 19,610
Less accumulated depreciation 892 503
----------------------------------------------------------------------------------------
Real estate investments, net 18,718 19,107
Cash and cash equivalents 512 534
Cash-funded reserve 841 852
Tenant receivables 13 --
Step rent receivable 289 193
Prepaid expenses and other assets 20 15
----------------------------------------------------------------------------------------
Total assets $ 20,393 $ 20,701
========================================================================================
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and accrued expenses $ 25 $ 45
Dividends payable 497 480
----------------------------------------------------------------------------------------
Total liabilities 522 525
----------------------------------------------------------------------------------------
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 deficit and dividends in excess of earnings (1,350) (1,045)
----------------------------------------------------------------------------------------
Total Stockholders' Equity 19,871 20,176
----------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 20,393 $ 20,701
========================================================================================
See accompanying notes to financial statements.
F-111
FSP Goldentop Technology Center Corp.
Statements of Operations
For the Period
August 16, 2000
For the (date of inception)
Years Ended to
December 31, December 31,
(in thousands, except shares and per share amounts) 2002 2001 2000
=====================================================================================================
Revenue:
Rental $2,410 $2,439 $ 670
Interest and other 27 54 15
-----------------------------------------------------------------------------------------------------
Total revenue 2,437 2,493 685
-----------------------------------------------------------------------------------------------------
Expenses:
Rental operating expenses 89 96 64
Depreciation 389 389 113
Real estate taxes and insurance 332 297 81
Interest -- -- 809
-----------------------------------------------------------------------------------------------------
Total expenses 810 782 1,067
-----------------------------------------------------------------------------------------------------
Net income (loss) before common dividends 1,627 1,711 (382)
Dividends paid to common shareholders prior to
syndication of preferred shares -- -- --
-----------------------------------------------------------------------------------------------------
Net income (loss) attributable to preferred shareholders $1,627 $1,711 $ (382)
=====================================================================================================
Weighted average number of preferred shares outstanding,
basic and diluted 231.5 231.5 231.5
=====================================================================================================
Net income (loss) per preferred share, basic and diluted $7,028 $7,391 $(1,650)
=====================================================================================================
See accompanying notes to financial statements.
F-112
FSP Goldentop Technology Center Corp.
Statements of Changes in Stockholders' Equity
For the Years Ended
December 31, 2002 and 2001 and
For the Period August 16, 2000 (date of inception)
to December 31, 2000
Retained Deficit
Additional and Dividends Total
Preferred Common Paid in in Excess of Stockholders'
(in thousands, except shares) Stock Stock Capital Earnings Equity
====================================================================================================================
Private offering of 231.5 shares, net $ -- $ -- $21,221 $ -- $ 21,221
Dividends -- -- -- (473) (473)
Net Loss -- -- -- (382) (382)
--------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 -- -- 21,221 (855) 20,366
Dividends -- -- -- (1,901) (1,901)
Net Income -- -- -- 1,711 1,711
--------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 -- -- 21,221 (1,045) 20,176
Dividends -- -- -- (1,932) (1,932)
Net Income -- -- -- 1,627 1,627
--------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 $ -- $ -- $21,221 $(1,350) $ 19,871
====================================================================================================================
See accompanying notes to financial statements.
F-113
FSP Goldentop Technology Center Corp.
Statements of Cash Flows
For the Period
August 16, 2000
For the (date of inception)
Years Ended to
December 31, December 31,
(in thousands) 2002 2001 2000
===================================================================================================================
Cash flows from operating activities:
Net income (loss) $ 1,627 $ 1,711 $ (382)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation 389 389 113
Changes in operating assets and liabilities:
Cash-funded reserve 11 (16) (834)
Tenant receivables (13) -- --
Step rent receivable (96) (151) (42)
Prepaid expenses and other assets (5) 17 (32)
Accounts payable and accrued expenses (20) (48) 94
-------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 1,893 1,902 (1,083)
-------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets -- -- (19,610)
-------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities -- -- (19,610)
-------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of company stock -- -- 23,150
Syndication costs -- -- (1,929)
Dividends to stockholders (1,915) (1,896) --
Proceeds from long-term debt -- -- 18,900
Principal payments on long-term debt -- -- (18,900)
-------------------------------------------------------------------------------------------------------------------
Net cash (used for) provided by financing activities (1,915) (1,896) 21,221
-------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (22) 6 528
Cash and cash equivalents, beginning of year 534 528 --
-------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 512 $ 534 $ 528
===================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ -- $ -- $ 809
Disclosure of non-cash financing activities:
Dividends declared but not paid $ 497 $ 480 $ 474
See accompanying notes to financial statements.
F-114
FSP Goldentop Technology Center Corp.
Notes to Financial Statements
1. Organization
FSP Goldentop Technology Center Corp. (the "Company") 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 office building located in San Diego,
California (the "Property"). The Property consists of a two-story
R&D/Office/Corporate Headquarters facility containing 141,000 total square feet
of space situated on 8 acres of land. The Company acquired the Property on
September 22, 2000.
2. Summary of Significant Accounting Policies
ESTIMATES AND ASSUMPTIONS
The Company prepares its financial statements and related notes in conformity
with accounting principles generally accepted in the United States of America
("GAAP"). 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 information in the 2001 and 2000 financial statements have been
reclassified to conform to the 2002 presentation.
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 improvement
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 15-39
Furniture and equipment 5-7
F-115
FSP Goldentop Technology Center Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
REAL ESTATE AND DEPRECIATION (continued)
The following schedule reconciles the cost of the property as shown in the
Offering Memorandum as to the amounts shown on the Company's Balance Sheet:
(in thousands)
Price per Offering Memorandum $ 18,900
Plus: Acquisition fees 463
Plus: Other acquisition costs 247
-------------------------------------------------------------------
Total Acquisition Costs $ 19,610
===================================================================
These costs are reported in the Company's Balance Sheet as follows :
Land $ 4,427
Building 15,183
-------------------------------------------------------------------
Total reported in Balance Sheet $ 19,610
===================================================================
The Company 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, 2002, 2001
and 2000, no such indicators of impairment were identified.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with an initial
maturity of three months or less to be cash equivalents.
CASH-FUNDED RESERVES
The Company has set aside funds in anticipation of future capital needs of the
property. Although these funds typically are used for the payment of real estate
assets and deferred leasing commissions, there is no legal restriction on their
use and they may be used for any company purpose.
RESTRICTED CASH
Restricted cash consists of tenant security deposits.
MARKETABLE SECURITIES
The Company accounts for investments in debt securities under the provisions of
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". The Company typically has classified its debt securities as
available-for-sale.
There were no investments in marketable securities at December 31, 2002, 2001
and 2000.
F-116
FSP Goldentop Technology Center Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
CONCENTRATION OF CREDIT RISKS
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.
For the years ended December 31, 2002 and 2001 and the period ended December 31,
2000, rental income was derived from one tenant, Northrup Grumman. As such,
future receipts are dependent upon the financial strength of the lessee and its
ability to perform under the lease agreement.
FINANCIAL INSTRUMENTS
The Company estimates that the carrying value of cash and cash equivalents, and
cash-funded reserves approximate their fair values based on their short-term
maturity and prevailing interest rates.
STEP RENT RECEIVABLE
Certain leases provide for fixed increases over the life of the lease. Rental
revenue is recognized on the straight-line basis over the related lease term;
however, billings by the Company are based on required minimum rentals in
accordance with the lease agreements. Step rent receivable, which is the
cumulative revenue recognized in excess of amounts billed by the Company, is
$289,000, $193,000 and $42,000 at December 31, 2002, 2001 and 2000,
respectively.
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
$1,929,000 have been reported as a reduction in the Stockholders' Equity in the
Company's Balance Sheets.
REVENUE RECOGNITION
The Company has retained substantially all of the risks and benefits of
ownership of the Company's commercial property and accounts for its lease as an
operating lease. Rental income from the lease, which may include rent
concessions (including free rent and tenant improvement allowances) and
scheduled increases in rental rates during the lease term, is recognized on a
straight-line basis. The Company does not have any percentage rent arrangements
with its commercial property tenant. Reimbursable costs are included in rental
income in the period earned.
Year Ended Period Ended
December 31, December, 31
(in thousands) 2002 2001 2000
==========================================================================
Income from leases $ 2,002 $ 1,947 $ 534
Straight-line rent adjustment 96 151 42
Reimbursable expenses 312 341 94
--------------------------------------------------------------------------
Total $ 2,410 $ 2,439 $ 670
==========================================================================
INTEREST AND OTHER
Interest income and other income are recognized when the related services are
performed and the earnings process is complete.
F-117
FSP Goldentop Technology Center Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
INCOME TAXES
The Company has elected to be taxed as a REIT under the Internal Revenue Code of
1986, 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 taxable income
that must be distributed annually.
NET INCOME PER SHARE
The Company follows Statement of Financial Accounting Standards 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
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 December 31, 2002, 2001 and 2000. The denominator used for
calculating basic and diluted net income per share is as follows:
Year Ended Period Ended
December 31, December 31,
2002 2001 2000
==========================================================================
Weighted average number of
preferred shares outstanding 231.5 231.5 231.5
3. 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. 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. The impact of adoption did not have a
material impact on the Company's financial position, results of operations and
cash flows. The Company does not have any real estate assets that it considers
"held for sale" at December 31, 2002.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements Nos.
4, 44, and 64, Amendment of SFAS 13, and Technical Corrections". This Statement
rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt",
and an amendment of that Statement, SFAS No. 64, "Extinguishments of Debt Made
to Satisfy Sinking-Fund Requirements". This Statement amends SFAS 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 SFAS 145 and believes that the impact of adoption
will not be material to its financial position, results of operations and cash
flows.
F-118
FSP Goldentop Technology Center Corp.
Notes to Financial Statements
3. Recent Accounting Standards (continued)
In July 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities". This statement was 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 position, results of operations and cash flows.
4. Income Taxes
The Company files as a REIT under Sections 856-860 of the Internal Revenue Code
of 1986, as amended. In order to qualify as a REIT, the Company is required to
distribute at least 90% of its taxable income to shareholders and to meet
certain asset and income tests as well as certain other requirements. The
Company will generally not be liable for federal income taxes, provided it
satisfies their requirements. Even as a qualified REIT, the Company is subject
to certain state and local taxes on its income and property.
For the period 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.
At December 31, 2002, 2001 and 2000 the Company's net tax basis of its real
estate assets approximates the amount set forth in the Company's Balance Sheets.
The following schedule reconciles GAAP Net Income to Taxable Income subject to
dividend requirements
Year Ended Period Ended
December 31, December 31,
(in thousands) 2002 2001 2000
================================================================================================================
GAAP net income (loss) $ 1,627 $ 1,711 $ (382)
Add: Book depreciation 389 389 113
Less: Tax depreciation (442) (422) (41)
Straight-line rents (96) (151) (42)
----------------------------------------------------------------------------------------------------------------
Taxable income (loss) subject to dividend requirement(1) $ 1,478 $ 1,527 $ (352)
================================================================================================================
(2) A tax loss is not subject to a dividend requirement.
The following schedule reconciles cash dividends paid to the dividends paid
deduction:
Year Ended Period Ended
December 31, December 31,
(in thousands) 2002 2001 2000
==============================================================================================================
Cash dividends paid $ 1,915 $ 1,896 $ --
Plus: Dividends designated from following year -- -- --
Less: Portion designated capital gain distribution -- -- --
Less: Return of Capital (437) (369) --
--------------------------------------------------------------------------------------------------------------
Dividends paid deduction $ 1,478 $ 1,527 $ --
==============================================================================================================
F-119
FSP Goldentop Technology Center Corp.
Notes to Financial Statements
5. Cash Available for Distribution
The Company evaluates its performance based on Cash Available for Distribution
("CAD") as management believes that CAD represents the most accurate measure of
the Company's activity. CAD 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 funds raised by the issuance of shares; plus the net proceeds
from the sale of land; less purchases of real estate assets, property and
equipment ("Capital Expenditures"), payments for deferred leasing commissions
and payments for deferred lease origination costs; plus (less) proceeds from
(payments to) cash reserves established at the acquisition date of the property
(cash funded reserve). 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 payments for deferred lease origination costs 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 financial statements.
The calculation of CAD is shown in the following table:
Year Ended Period Ended
December 31, December 31,
(in thousands) 2002 2001 2000
===================================================================================================
Net income (loss) $ 1,627 $ 1,711 $ (382)
Depreciation 389 389 113
Straight line rent (96) (151) (42)
Proceeds from offering of shares - - 21,221
Purchase of land and building and improvements - - (19,610)
Establish funded reserve 11 (16) (835)
---------------------------------------------------------------------------------------------------
Cash Available for Distribution $ 1,931 $ 1,933 $ 465
===================================================================================================
The Company's cash distributions are summarized as follows:
(in thousands) Year Ended Period Ended
December 31, December 31,
Quarter Paid 2002 2001 2000
===================================================================================================
First Quarter $ 480 $ 467 $ --
Second Quarter 471 482
Third Quarter 467 468 --
Fourth Quarter 497 479 --
---------------------------------------------------------------------------------------------------
Dividends paid $ 1,915 $ 1,896 $ --
===================================================================================================
Cash distributions are declared and paid based on the total outstanding shares
as of the record date and are typically paid in the quarter following the
quarter that CAD is generated.
F-120
FSP Goldentop Technology Center Corp.
Notes to Financial Statements
6. Capital Stock
PREFERRED STOCK
Generally, each holder of Shares of Preferred Stock is entitled to receive
ratably all income and 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
holders of common shares are not entitled to receive any income, nor shall the
Company declare or pay any cash dividends on shares of Common Stock.
7. Related Party Transactions
The Company executed a management agreement with FSP Property Management LLC, an
affiliate of FSP, that provides for a management fee equal to 1% of collected
revenues and is cancelable with 30 days notice by either party. For the years
ended December 31, 2002, 2001 and 2000, fees incurred under the agreement were
$20,000, $19,000 and $6,000, respectively.
An acquisition fee of $463,000 and other costs totaling $199,000 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 Company's preferred
stock.
During 2000, the Company borrowed and repaid in full:
Note payable to FSP, principal of $18,900,000 with interest equal to the
Citizens Bank base. Interest paid to FSP was $57,000. The average interest
rate during the time the loan was outstanding was 9.50%.
A commitment fee of $752,000 was paid to FSP for obtaining the first
mortgage loan. Such amount is included in interest expense on the Statement
of Operations.
F-121
FSP Goldentop Technology Center Corp.
Notes to Financial Statements
8. Commitments and Contingencies
The Company, as lessor, has future minimum rentals due under a non-cancelable
operating lease as follows:
Year Ended
(in thousands) December 31, Amount
------------ -------
2003 $ 2,057
2004 2,115
2005 2,174
2006 2,235
2007 1,149
-------
$ 9,730
=======
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 original lease period is seven years with renewal options.
9. Subsequent Event
The Company has entered into a merger agreement with its common shareholder,
Franklin Street Properties Corp ("FSP"). In January 2003 FSP filed a proxy
statement with the United States Securities and Exchange Commission indicating
its intent to acquire the preferred stock interests of the Company and twelve
additional REITs. The merger requires the approval of the shareholders of the
Company as well as the shareholders of the twelve additional REITs and the
shareholders of FSP. If approved, FSP will issue shares of its common stock in
exchange for a 100% ownership interest in the Company.
F-122
SCHEDULE III
FSP GOLDENTOP TECHNOLOGY CENTER CORP.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2002
(in thousands)
Initial Cost
------------------------------------
Costs
Capitalized
(Disposals)
Subsequent
Encumbrances Buildings & to
Description (1) Land Improvements Acquisition
------------ ---- ------------ -----------
Goldentop, San Diego, CA -- $ 4,427 $ 15,183 $ --
========== ======== ========== =========
(in thousands)
Historical Costs
-------------------------------------------------------------
Total
Costs, Net
of Depreciable
Buildings & Accumulated Accumulated Life Date of
Description Land Improvements Total(2) Depreciation Depreciation Years Acquisition
---- ------------ -------- ------------ ------------ ----------- -----------
Goldentop, San Diego, CA $ 4,427 $ 15,183 $ 19,610 $ 892 $ 18,718 15-39 September, 2000
======== ============ ======== ========== ==========
(1) There are no encumbrances on the above property.
(2) The aggregate cost for Federal Income Tax purposes approximates total
historical costs.
F-123
FSP GOLDENTOP TECHNOLOGY CORP.
REAL ESTATE AND ACCUMULATED DEPRECIATION
The following table summarizes the changes in the Company's real estate
investment and accumulated depreciation:
December 31,
(in thousands) 2002 2001 2000
================================================================================
Real estate investments, at cost:
Balance, beginning of period $ 19,610 $ 19,610 $ --
Acquisitions -- -- 19,610
Improvements -- -- --
Dispositions -- -- --
--------------------------------------------------------------------------------
Balance, end of period $ 19,610 $ 19,610 $ 19,610
================================================================================
Accumulated depreciation:
Balance, beginning of period $ 503 $ 114 $ --
Depreciation 389 389 114
Dispositions -- -- --
--------------------------------------------------------------------------------
Balance, end of period $ 892 $ 503 $ 114
================================================================================
F-124
FSP GOLDENTOP TECHNOLOGY
CENTER CORP.
(A DELAWARE CORPORATION)
FINANCIAL STATEMENT
DECEMBER 31, 2001
CONTENTS
PAGE
Independent auditors report F-126
Financial statements:
Balance sheet F-127
Statement of operations F-128
Statement of changes in stockholders equity F-129
Statement of cash flows F-130
Notes accompanying financial statements F-131
F-125
[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-126
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-127
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-128
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-129
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-130
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-131
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-132
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-133
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-135
Financial Statements:
Balance Sheet F-136
Statement of Operations F-137
Statement of Changes in Stockholders' Equity F-138
Statement of Cash Flows F-139
Notes to Financial Statements F-140
F-134
[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.
Boston, Massachusetts
January 30, 2001
(Except for Note 6, as to which the date is March 23, 2001)
F-135
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-136
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-137
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-138
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-139
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-140
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-141
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-142
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-143
FSP Centennial Technology Center Corp.
Financial Statements
December 31, 2002
Table of Contents
Page
----
Financial Statements
Independent Auditor's Report.............................................. F-145
Balance Sheets as of December 31, 2002 and 2001........................... F-146
Statements of Operations for the years ended December 31, 2002 and 2001
and For the Period August 15, 2000 (date of inception) to
December 31, 2000.................................................... F-147
Statements of Changes in Stockholders' Equity for the years ended
December 31, 2002 and 2001 and For the Period August 15, 2000
(date of inception) to December, 31, 2000............................ F-148
Statements of Cash Flows for the years ended December 31, 2002 and 2001
and For the Period August 15, 2000 (date of inception) to
December, 31, 2000................................................... F-149
Notes to the Financial Statements......................................... F-150
Schedule of Real Estate and Accumulated Depreciation...................... F-158
F-144
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
FSP Centennial Technology Center Corp.
(a Delaware Corporation)
We have audited the accompanying balance sheets of FSP Centennial Technology
Center Corp. (a Delaware Corporation) as of December 31, 2002 and 2001, and the
related statements of operations, changes in stockholders' equity and cash
flows, as well as the financial statement schedule listed in the accompanying
index, for the years ended December 31, 2002 and 2001, and for the period from
August 15, 2000 (date of inception) to December 31, 2000. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
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 audits to obtain reasonable assurance about whether the financial
statements and financial statement schedule are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements and financial statement schedule. 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 provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial statement schedule
referred to above present fairly, in all material respects, the financial
position of FSP Centennial Technology Center Corp. as of December 31, 2002 and
2001, and the results of its operations and its cash flows for the years ended
December 31, 2002 and 2001, and for the initial period ended December 31, 2000
in conformity with accounting principles generally accepted in the United States
of America.
/s/ Braver and Company, P.C.
Newton, Massachusetts
February 7, 2003
F-145
FSP Centennial Technology Center Corp.
Balance Sheets
December 31, 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 714 403
---------------------------------------------------------------------------------------------
Real estate investments, net 12,743 13,054
Cash and cash equivalents 540 535
Cash-funded reserve 470 470
Restricted cash 13 13
Step rent receivable 210 131
Prepaid expenses and other assets 9 19
---------------------------------------------------------------------------------------------
Total assets $13,985 $14,222
=============================================================================================
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and accrued expenses 152 173
Dividends payable 338 329
Tenant security deposits 13 13
---------------------------------------------------------------------------------------------
Total liabilities 503 515
---------------------------------------------------------------------------------------------
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 deficit and dividends in excess of earnings (977) (752)
---------------------------------------------------------------------------------------------
Total Stockholders' Equity 13,482 13,707
---------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $13,985 $14,222
=============================================================================================
See accompanying notes to financial statements.
F-146
FSP Centennial Technology Center Corp.
Statements of Operations
For the Period
For the August 15, 2000
Years Ended (date of inception)
December 31, to December 31
(in thousands, except shares and per share amounts) 2002 2001 2000
========================================================================================================
Revenue:
Rental $1,832 $ 1,817 $ 414
Interest and other 16 37 5
--------------------------------------------------------------------------------------------------------
Total revenue 1,848 1,854 419
--------------------------------------------------------------------------------------------------------
Expenses:
Rental operating expenses 262 237 81
Depreciation 311 312 91
Real estate taxes and insurance 146 137 27
Interest -- -- 698
--------------------------------------------------------------------------------------------------------
Total expenses 719 686 897
--------------------------------------------------------------------------------------------------------
Net income (loss) before common dividends 1,129 1,168 (478)
Dividends paid to common shareholders prior to
syndication of preferred shares -- -- --
--------------------------------------------------------------------------------------------------------
Net income (loss) attributable to preferred shareholders 1,129 1,168 (478)
========================================================================================================
Weighted average number of preferred shares outstanding,
basic and diluted 158 158 158
========================================================================================================
Net income (loss) per preferred share, basic and diluted $7,146 $ 7,392 $(3,025)
========================================================================================================
See accompanying notes to financial statements.
F-147
FSP Centennial Technology Center Corp.
Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 2002 and 2001 and
For the Period August 15, 2000 (date of inception) to
December 31, 2000
Retained Deficit
Additional and Dividends Total
Preferred Common Paid in in Excess of Stockholders'
(in thousands, except shares) Stock Stock Capital Earnings Equity
===========================================================================================================================
Private offering of 158 shares, net $ -- $ -- $ 14,459 $ -- $ 14,459
Dividends -- -- -- (124) (124)
Net Loss -- -- -- (478) (478)
---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 -- -- 14,459 (602) 13,857
Dividends -- -- -- (1,318) (1,318)
Net Income -- -- -- 1,168 1,168
---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 -- -- 14,459 (752) 13,707
Dividends -- -- -- (1,354) (1,354)
Net Income -- -- -- 1,129 1,129
---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 $ -- $ -- $ 14,459 $ (977) $ 13,482
===========================================================================================================================
See accompanying notes to financial statements.
F-148
FSP Centennial Technology Center Corp.
Statements of Cash Flows
For the Period
For the August 15, 2000
Years Ended (date of inception)
December 31, to December 31,
(in thousands) 2002 2001 2000
=============================================================================================================
Cash flows from operating activities:
Net income (loss) $ 1,129 $ 1,168 $ (478)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation 311 312 91
Changes in operating assets and liabilities:
Cash-funded reserve -- -- (470)
Restricted cash -- -- (13)
Step rent receivable (79) (131) --
Prepaid expenses and other assets 11 (16) (3)
Accounts payable and accrued expenses (22) 85 88
Tenant security deposits -- -- 13
-------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 1,350 1,418 (772)
-------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets -- -- (13,457)
-------------------------------------------------------------------------------------------------------------
Net cash used for investing activities -- -- (13,457)
-------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of company stock -- -- 15,800
Syndication costs -- -- (1,340)
Dividends to stockholders (1,345) (1,114) --
Proceeds from long-term debt -- -- 13,000
Principal payments on long-term debt -- -- (13,000)
-------------------------------------------------------------------------------------------------------------
Net cash (used for) provided by financing activities (1,345) (1,114) 14,460
-------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 5 304 231
Cash and cash equivalents, beginning of year 535 231 --
-------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 540 $ 535 $ 231
=============================================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ -- $ -- $ 698
Disclosure of non-cash financing activities:
Dividends declared but not paid $ 338 $ 329 $ 125
See accompanying notes to financial statements.
F-149
FSP Centennial Technology Center Corp.
Notes to Financial Statements
1. Organization
FSP Centennial Technology Center Corp. ("the "Company") 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 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.
2. Summary of Significant Accounting Policies
ESTIMATES AND ASSUMPTIONS
The Company prepares its financial statements and related notes in conformity
with accounting principles generally accepted in the United States of America
("GAAP"). 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 information in the 2001 and 2000 financial statements have been
reclassified to conform to the 2002 presentation.
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 improvement
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 15-39
Furniture and equipment 5-7
F-150
FSP Centennial Technology Center Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
REAL ESTATE AND DEPRECIATION (continued)
The Company 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, 2002, no
such indicators of impairment were identified.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with an initial
maturity of three months or less to be cash equivalents.
CASH-FUNDED RESERVES
The Company has set aside funds in anticipation of future capital needs of the
property. Although these funds typically are used for the payment of real estate
assets and deferred leasing commissions, there is no legal restriction on their
use and they may be used for any company purpose.
RESTRICTED CASH
Restricted cash consists of tenant security deposits.
MARKETABLE SECURITIES
The Company accounts for investments in debt securities under the provisions of
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". The Company typically has classified its debt securities as
available-for-sale.
There were no investments in marketable securities at December 31, 2002, 2001
and 2000.
CONCENTRATION OF CREDIT RISKS
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.
For the period ended December 31, 2002 rental income was derived from various
tenants. As such, future receipts are dependent upon the financial strength of
the lessees and their ability to perform under the lease agreements.
The following tenants represent greater than 10% of total revenue:
2002 2001 2000
Hewlett Packard 81% 74% 78%
Starkey Laboratories, Inc. 12% 11% 12%
FINANCIAL INSTRUMENTS
The Company estimates that the carrying value of cash and cash equivalents,
cash-funded reserves and restricted cash approximate their fair values based on
their short-term maturity and prevailing interest rates.
F-151
FSP Centennial Technology Center Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
STEP RENT RECEIVABLE
Certain leases provide for fixed increases over the life of the lease. Rental
revenue is recognized on the straight-line basis over the related lease term;
however, billings by the Company are based on required minimum rentals in
accordance with the lease agreements. Step rent receivable, which is the
cumulative revenue recognized in excess of amounts billed by the Company, is
$210,000, $131,000 and $0 at December 31, 2002, 2001 and 2000, respectively.
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 in the
Company's Balance Sheet.
REVENUE RECOGNITION
The Company has retained substantially all of the risks and benefits of
ownership of the Company's commercial property and accounts for its leases as
operating leases. Rental income from leases, which may include rent concessions
(including free rent and tenant improvement allowances) and scheduled increases
in rental rates during the lease term, is recognized on a straight-line basis.
The Company does not have any percentage rent arrangements with its commercial
property tenants. Reimbursable costs are included in rental income in the period
earned. A schedule showing the components of rental revenue is shown below.
Year Ended Period Ended
(in thousands) December, 31 December, 31
2002 2001 2000
===============================================================================
Income from leases $ 1,375 $ 1,323 $ 396
Straight-line rent adjustment 79 131 --
Reimbursable expenses 378 363 18
-------------------------------------------------------------------------------
Total $ 1,832 $ 1,817 $ 414
===============================================================================
INTEREST AND OTHER
Interest income and other income are recognized when the related services are
performed and the earnings process is complete.
INCOME TAXES
The Company has elected to be taxed as a REIT under the Internal Revenue Code of
1986, 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 taxable income
that must be distributed annually.
F-152
FSP Centennial Technology Center Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
NET INCOME PER SHARE
The Company follows Statement of Financial Accounting Standards 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
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 December 31, 2002. Subsequent to the completion of the
offering of preferred shares, the holders of common stock are not entitled to
share in any income. The denominator used for calculating basic and diluted net
income per share is shown for preferred shares only and is as follows:
Year Ended Period Ended
December 31, December 31,
2002 2001 2000
============================================================================
Weighted average number of
preferred shares outstanding 158 158 158
3. 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. 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. The impact of adoption did not have a
material impact on the Company's financial position, results of operations and
cash flows. The Company does not have any real estate assets that it considers
"held for sale" at December 30, 2002.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements Nos.
4, 44, and 64, Amendment of SFAS 13, and Technical Corrections". This Statement
rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt",
and an amendment of that Statement, SFAS No. 64, "Extinguishments of Debt Made
to Satisfy Sinking-Fund Requirements". This Statement amends SFAS 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 SFAS 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 was 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 position, results of operations and cash flow.
F-153
FSP Centennial Technology Center Corp.
Notes to Financial Statements
4. Income Taxes
The Company files as a REIT under Sections 856-860 of the Internal Revenue Code
of 1986, as amended. In order to qualify as a REIT, the Company is required to
distribute at least 90% of its taxable income to shareholders and to meet
certain asset and income tests as well as certain other requirements. The
Company will generally not be liable for federal income taxes, provided it
satisfies their requirements. Even as a qualified REIT, the Company is subject
to certain state and local taxes on its income and property.
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.
At December 31, 2002, 2001 and 2000 the Company's net tax basis of properties
approximates the amount set forth in the Company's Balance Sheet.
The following schedule reconciles GAAP net income to taxable income subject to
dividend requirements:
Year Ended Period Ended
December 31, December 31,
(in thousands) 2002 2001 2000
===============================================
GAAP net income (loss) $ 1,129 $ 1,168 $ (478)
Add: Book depreciation and amortization 311 312 91
Less: Tax depreciation and amortization (303) (304) (70)
Straight-line rents (79) (131) --
-----------------------------------------------
Taxable income (loss) subject to dividend requirement(1) $ 1,058 $ 1,045 $ (457)
===============================================
(1) A tax loss is not subject to a dividend requirement.
The following schedule reconciles cash dividends paid to the dividends paid
deduction:
Year Ended Period Ended
December 31, December 31,
(in thousands) 2002 2001 2000
=================================================
Cash dividends paid $ 1,345 $ 1,114 $ --
Less: Dividends designated to prior year -- -- --
Plus: Dividends designated from following year -- -- --
Less: Portion designated capital gain distribution -- -- --
Less: Return of Capital (287) (69) --
-------------------------------------------------
Dividends paid deduction $ 1,058 $ 1,045 $ --
=================================================
F-154
FSP Centennial Technology Center Corp.
Notes to Financial Statements
5. Cash Available for Distribution
The Company evaluates its performance based on Cash Available for Distribution
("CAD") as management believes that CAD represents the most accurate measure of
the Company's activity. CAD 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 funds raised by the issuance of shares; plus the net proceeds
from the sale of land; less purchases of real estate assets, property and
equipment ("Capital Expenditures") payments for deferred leasing commissions and
payments for deferred lease origination costs; plus (less) proceeds from
(payments to) cash reserves established at the acquisition date of the property
(cash-funded reserves). 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 payments for deferred lease origination costs 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 financial statements.
The calculation of CAD is shown in the following table:
December 31,
(in thousands) 2002 2001 2000
=============================================================================
Net income (loss) $ 1,129 $ 1,168 $ (478)
Depreciation and amortization 312 312 91
Straight line rent (79) (131) --
Proceeds from offering of shares -- -- 14,460
Purchase of land and building -- -- (13,457)
Establish funded reserve -- -- (470)
-----------------------------------------------------------------------------
Cash Available for Distribution $ 1,362 $ 1,349 $ 146
=============================================================================
The Company's cash distributions are summarized as follows:
(in thousands)
Total Cash
Quarter Paid Dividends
2002 2001 2000
========================================================================
First Quarter $ 329 $ 124 $ --
Second Quarter 331 330 --
Third Quarter 341 330 --
Fourth Quarter 344 330 --
------------------------------------------------------------------------
Dividends Paid $ 1,345 $ 1,114 $ --
========================================================================
Cash distributions are declared and paid based on the total outstanding shares
as of the record date and are typically paid in the quarter following the
quarter that CAD is generated.
FSP Centennial Technology Center Corp.
F-155
Notes to Financial Statements
6. Capital Stock
PREFERRED STOCK
Generally, 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.
Subsequent to the completion of the offering of the preferred shares the holders
of common shares are not entitled to receive any income, nor shall the Company
declare or pay any cash dividends on shares of Common Stock.
7. Related Party Transactions
The Company executed a management agreement with FSP Property Management LLC, an
affiliate of FSP, that provides for a management fee equal to 1% of collected
revenues and is cancelable with 30 days notice by either party. For the year
ended December 31, 2002, 2001 and period ended December 31, 2000, fees incurred
under the agreement were $17,886, $21,638 and $4,304, respectively
An acquisition fee of $316,000 and other costs totaling $51,356 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 Company's preferred
stock.
During 2000, the Company borrowed and repaid in full:
Note payable to FSP, principal of $13,000,000 with interest equal to the
Citizens Bank base. Interest paid to FSP was $172,744. The average interest
rate during the time the loan was outstanding was 7.87%.
A commitment fee of $513,500 was paid to FSP for obtaining the first
mortgage loan. Such amount is included in interest expenses on the
Statement of Operations.
F-156
FSP Centennial Technology Center Corp.
Notes to Financial Statements
8. Commitments and Contingencies
The Company, as lessor, has minimum future rentals due under non-cancelable
operating leases as follows:
Year Ended
(in thousands) December 31, Amount
------------ ---------------
2003 $ 1,391
2004 1,305
2005 1,177
2006 1,226
2007 1,236
Thereafter 2,802
---------------
$ 9,137
===============
In addition, the lessees are liable for real estate taxes and certain operating
expenses of the property.
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 four to ten years with
renewal options.
9. Subsequent Event
The Company has entered into a merger agreement with its common shareholder,
Franklin Street Properties Corp ("FSP"). In January 2003 FSP filed a proxy
statement with the United States Securities and Exchange Commission indicating
its intent to acquire the preferred stock interests of the Company and twelve
additional REITs. The merger requires the approval of the shareholders of the
Company as well as the shareholders of the twelve additional REITs and the
shareholders of FSP. If approved, FSP will issue shares of its common stock in
exchange for a 100% ownership interest in the Company.
F-157
SCHEDULE III
FSP CENTENNIAL TECHNOLOGY CENTER CORP.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2002
(in thousands)
Initial Cost
-----------------------------------
Costs
Capitalized
(Disposals)
Subsequent
Encumbrances Buildings & to
Description (1) Land Improvements Acquisition
----------- ------------ ---- ------------ -----------
Centennial Technology Center
Colorado Springs, CO -- $ 1,305 $ 12,152 $ --
============= ======= ========== =========
(in thousands)
Historical Costs
----------------------------------------------------------------
Total Costs,
Net of Depreciable
Buildings & Accumulated Accumulated Life Date of
Description Land Improvements Total(2) Depreciation Depreciation Years Acquisition
----------- ---- ------------ -------- ------------ ------------ ----- -----------
Centennial Technology Center
Colorado Springs, CO $ 1,305 $ 12,152 $ 13,457 $ 714 $ 12,743 15-39 September, 2000
======== =========== ======== =========== ===========
(1) There are no encumbrances on the above property.
(2) The aggregate cost for Federal Income Tax purposes approximates total
historical costs.
F-158
FSP CENTENNIAL TECHNOLOGY CENTER CORP.
REAL ESTATE AND ACCUMULATED DEPRECIATION
The following table summarizes the changes in the Company's real estate
investment and accumulated depreciation:
December 31,
(in thousands) 2002 2001 2000
======================================================================================
Real estate investments, at cost:
Balance, beginning of period $ 13,457 $ 13,457 $ --
Acquisitions -- -- 13,457
Improvements -- -- --
Dispositions -- -- --
--------------------------------------------------------------------------------------
Balance, end of year/period $ 13,457 $ 13,457 $ 13,457
======================================================================================
Accumulated depreciation:
Balance, beginning of period $ 403 $ 91 $ --
Depreciation 311 312 91
Dispositions -- -- --
--------------------------------------------------------------------------------------
Balance, end of year/period $ 714 $ 403 $ 91
======================================================================================
F-159
FSP CENTENNIAL TECHNOLOGY
CENTER CORP.
(A DELAWARE CORPORATION)
DECEMBER 31, 2001
CONTENTS
PAGE
Independent auditors' report F-161
Financial statements:
Balance sheet F-162
Statement of operations F-163
Statement of changes in stockholders' equity F-164
Statement of cash flows F-165
Notes accompanying financial statements F-166
F-160
[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-161
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-162
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-163
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-164
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-165
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-166
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-167
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-168
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-170
Financial Statements:
Balance Sheet F-171
Statement of Operations F-172
Statement of Changes in Stockholders' Equity F-173
Statement of Cash Flows F-174
Notes to Financial Statements F-175
F-169
[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-170
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-171
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-172
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-173
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-174
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-175
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-176
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-177
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-178
FSP Meadow Point Corp.
Financial Statements
December 31, 2002
Table of Contents
Page
----
Financial Statements
Independent Auditor's Report.............................................. F-180
Balance Sheets as of December 31, 2002 and 2001........................... F-181
Statements of Operations for the year ended December 31, 2002 and
for the period January 24, 2001 (date of inception) to
December 31, 2001................................................... F-182
Statements of Changes in Stockholders' Equity for the year ended
December 31, 2002 and for the period January 24, 2001 (date of
inception) to December 31, 2001..................................... F-183
Statements of Cash Flows for the year ended December 31, 2002 and
for the period January 24, 2001 (date of inception) to
December 31, 2001................................................... F-184
Notes to the Financial Statements......................................... F-185
Schedule of Real Estate and Accumulated Depreciation...................... F-193
F-179
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
FSP Meadow Point Corp.
(a Delaware Corporation)
We have audited the accompanying balance sheets of FSP Meadow Point Corp. (a
Delaware Corporation) as of December 31, 2002 and 2001, and the related
statements of operations, changes in stockholders' equity and cash flows, as
well as the financial statement schedule listed in the accompanying index, for
the year ended December 31, 2002, and for the period from January 24, 2001 (date
of inception) to December 31, 2001. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
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 audits to obtain reasonable assurance about whether the financial
statements and financial statement schedule are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements and financial statement schedule. 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 provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial statement schedule
referred to above present fairly, in all material respects, the financial
position of FSP Meadow Point Corp. as of December 31, 2002 and 2001, and the
results of its operations and its cash flows for the year ended December 31,
2002, and for the initial period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America.
/s/ Braver and Company, P.C.
Newton, Massachusetts
February 7, 2003
F-180
FSP Meadow Point Corp.
Balance Sheets
December 31, 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 19,625 19,625
-----------------------------------------------------------------------------------
21,751 21,751
Less accumulated depreciation 902 398
-----------------------------------------------------------------------------------
Real estate investments, net 20,849 21,353
Cash and cash equivalents 771 607
Cash-funded reserve 896 896
Restricted cash 271 268
Tenant rent receivable 5 1
Step rent receivable 525 267
Prepaid expenses and other assets 22 25
-----------------------------------------------------------------------------------
Total assets $ 23,339 $ 23,417
===================================================================================
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and accrued expenses 183 130
Dividends payable 562 511
Tenant security deposits 271 268
-----------------------------------------------------------------------------------
Total liabilities 1,016 909
-----------------------------------------------------------------------------------
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 deficit and dividends in excess of earnings (1,301) (1,116)
-----------------------------------------------------------------------------------
Total Stockholders' Equity 22,323 22,508
-----------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 23,339 $ 23,417
===================================================================================
See accompanying notes to financial statements.
F-181
FSP Meadow Point Corp.
Statements of Operations
For the Period
For the January 24, 2001
Year Ended (date of inception)
December 31, to December 31,
(in thousands, except shares and per share amounts) 2002 2001
====================================================================================================
Revenue:
Rental $ 3,617 $ 2,788
Interest and other 30 37
----------------------------------------------------------------------------------------------------
Total revenue 3,647 2,825
----------------------------------------------------------------------------------------------------
Expenses:
Rental operating expenses 863 707
Real estate taxes and insurance 334 255
Depreciation 504 398
Interest -- 1,047
----------------------------------------------------------------------------------------------------
Total expenses 1,701 2,407
----------------------------------------------------------------------------------------------------
Net income before common dividends 1,946 418
Dividends paid to common shareholders prior to syndication of
preferred shares -- 13
----------------------------------------------------------------------------------------------------
Net income attributable to preferred shareholders $ 1,946 $ 405
====================================================================================================
Weighted average number of preferred shares outstanding,
basic and diluted 257.5 257.5
====================================================================================================
Net income per preferred share, basic and diluted $ 7,557 $ 1,573
====================================================================================================
See accompanying notes to financial statements.
F-182
FSP Meadow Point Corp.
Statements of Changes in Stockholders' Equity
For the Year Ended December 31, 2002 and
For the Period January 24, 2001 (date of inception) to
December 31, 2001
Retained Deficit
Additional and Dividends Total
Preferred Common Paid in in Excess of Stockholders'
(in thousands, except shares) Stock Stock Capital Earnings Equity
========================================================================================================
Private offering of 257.5 shares, net $ -- $ -- $ 23,624 $ -- $ 23,624
Dividends -- -- -- (1,534) (1,534)
Net Income -- -- -- 418 418
--------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 -- -- 23,624 (1,116) 22,508
Dividends -- -- -- (2,131) (2,131)
Net Income -- -- -- 1,946 1,946
--------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 $ -- $ -- $ 23,624 $ (1,301) $ 22,323
========================================================================================================
See accompanying notes to financial statements.
F-183
FSP Meadow Point Corp.
Statements of Cash Flows
For the Period
For the January 24, 2001
Year Ended (date of inception)
December 31, to December 31,
(in thousands) 2002 2001
======================================================================================================
Cash flows from operating activities:
Net income $ 1,946 $ 418
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation 504 398
Changes in operating assets and liabilities:
Cash-funded reserve -- (896)
Restricted cash (3) (268)
Tenant rent receivable (4) (1)
Step rent receivable (258) (267)
Prepaid expenses and other assets 3 (25)
Accounts payable and accrued expenses 53 130
Tenant security deposits 3 268
------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 2,244 (243)
------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets -- (21,751)
------------------------------------------------------------------------------------------------------
Net cash used for investing activities -- (21,751)
------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of company stock -- 25,750
Syndication costs -- (2,126)
Dividends to stockholders (2,080) (1,023)
Proceeds from long-term debt -- 21,000
Principal payments on long-term debt -- (21,000)
------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities (2,080) 22,601
------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 164 607
Cash and cash equivalents, beginning of year 607 --
------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 771 $ 607
======================================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ -- $ 1,047
Disclosure of non-cash financing activities:
Dividends declared but not paid $ 562 $ 511
See accompanying notes to financial statements.
F-184
FSP Meadow Point Corp.
Notes to Financial Statements
1. Organization
FSP Meadow Point Corp. (the "Company") was organized on January 24, 2001 as a
Corporation under the laws of the State of Delaware to purchase, own and operate
a commercial office building located in Chantilly, Virginia (the "Property").
The Property consists of a five-story Class "A" suburban office building
containing approximately 135,000 square feet located on approximately 6.3 acres
of land. The company acquired the Property on March 15, 2001.
2. Summary of Significant Accounting Policies
ESTIMATES AND ASSUMPTIONS
The Company prepares its financial statements and related notes in conformity
with accounting principles generally accepted in the United States of America
("GAAP"). 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 2001 financial statements have been reclassified to
conform to the 2002 presentation.
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 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
F-185
FSP Meadow Point Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
REAL ESTATE AND DEPRECIATION (continued)
The following schedule reconciles the cost of the property as shown in the
Offering Memorandum as to the amounts shown on the Company's Balance Sheet:
(in thousands)
Price per Offering Memorandum $ 21,000
Plus: Acquisition fees paid to FSP 515
Plus: Other acquisition costs 236
---------------------------------------------------------
Total Acquisition Costs $ 21,751
=========================================================
These costs are reported in the Company's Balance Sheet as follows :
Land $ 2,126
Building 19,625
---------------------------------------------------------
Total reported in Balance Sheet $ 21,751
=========================================================
The Company 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, 2002, no
such indicators of impairment were identified.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with an initial
maturity of three months or less to be cash equivalents.
CASH-FUNDED RESERVES
The Company has set aside funds in anticipation of future capital needs of the
property. Although these funds typically are used for the payment of real estate
assets and deferred leasing commissions, there is no legal restriction on their
use and they may be used for any company purpose.
RESTRICTED CASH
Restricted cash consists of tenant security deposits.
MARKETABLE SECURITIES
The Company accounts for investments in debt securities under the provisions of
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". The Company typically has classified its debt securities as
available-for-sale.
There were no investments in marketable securities at December 31, 2002 and
2001.
CONCENTRATION OF CREDIT RISKS
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.
For the year ended December 31, 2002 rental income was derived principally from
one tenant, CACI, Inc. As such, future receipts are dependent upon the financial
strength of the lessee and its ability to perform under the lease agreement.
F-186
FSP Meadow Point Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
FINANCIAL INSTRUMENTS
The Company estimates that the carrying value of cash and cash equivalents,
cash-funded reserves and restricted cash approximate their fair values based on
their short-term maturity and prevailing interest rates.
STEP RENT RECEIVABLE
Certain leases provide for fixed increases over the life of the lease. Rental
revenue is recognized on the straight-line basis over the related lease term;
however, while billings by the Company are based on required minimum rentals in
accordance with the lease agreements. Step rent receivable, which is the
cumulative revenue recognized in excess of amounts billed by the Company, is
$525,000 and $267,000 at December 31, 2002 and 2001, respectively.
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
$2,126,000 have been reported as a reduction in the Stockholders' Equity in the
Company's Balance Sheets.
REVENUE RECOGNITION
The Company has retained substantially all of the risks and benefits of
ownership of the Company's commercial property and accounts for its leases as
operating leases. Rental income from leases, which may include rent concession
(including free rent and tenant improvement allowances) and scheduled increases
in rental rates during the lease term, is recognized on a straight-line basis.
The Company does not have any percentage rent arrangements with its commercial
property tenants. Reimbursable costs are included in rental income in the period
earned. A schedule showing the components of rental revenue is shown below.
Year Ended Period Ended
December 31, December 31,
(in thousands) 2002 2001
==================================================================
Income from leases $ 3,214 $ 2,496
Straight-line rent adjustment 258 267
Reimbursable expenses 145 25
------------------------------------------------------------------
Total $ 3,617 $ 2,788
==================================================================
INTEREST AND OTHER
Interest income and other income are recognized when the related services are
performed and the earnings process is complete.
INCOME TAXES
The Company has elected to be taxed as a REIT under the Internal Revenue Code of
1986, 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 taxable income
that must be distributed annually.
F-187
FSP Meadow Point Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
NET INCOME PER SHARE
The Company follows Statement of Financial Accounting Standards 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
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 December 31, 2002. Subsequent to the completion of the
offering of preferred shares, the holders of common stock are not entitled to
share in any income. The denominator used for calculating basic and diluted net
income per share is shown for preferred shares only and is as follows:
Year Ended Period Ended
December 31, December 31,
2002 2001
==========================================================================
Weighted average number of preferred
shares outstanding 257.5 257.5
3. 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. 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. The impact of adoption did not have a
material impact on the Company's financial position, results of operations and
cash flows. The Company does not have any real estate assets that it considers
"held for sale" at December 31, 2002.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements Nos.
4, 44, and 64, Amendment of SFAS 13, and Technical Corrections". This Statement
rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt",
and an amendment of that Statement, SFAS No. 64, "Extinguishments of Debt Made
to Satisfy Sinking-Fund Requirements". This Statement amends SFAS 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 SFAS 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.
F-188
FSP Meadow Point Corp.
Notes to Financial Statements
4. Income Taxes
The Company files as a REIT under Sections 856-860 of the Internal Revenue Code
of 1986, as amended. In order to qualify as a REIT, the Company is required to
distribute at least 90% of its taxable income to shareholders and to meet
certain asset and income tests as well as certain other requirements. The
Company will generally not be liable for federal income taxes, provided it
satisfies their requirements. Even as a qualified REIT, the Company is subject
to certain state and local taxes on its income and property.
For the period ended December 31, 2001, the Company incurred a net operating
loss for income tax purposes of approximately $12,000 that can be carried
forward until it expires in the year 2021.
The Company's net tax basis of its real estate assets approximates the amount
set forth in the Company's Balance Sheets at December 31, 2002 and 2001.
The following schedule reconciles GAAP Net Income to Taxable Income subject to
dividend requirements:
Year Ended Period Ended
December 31, December 31,
(in thousands) 2002 2001
===========================================================================================
GAAP net income $ 1,946 $ 418
Add: Book depreciation 504 398
Other book/tax differences, net -- 12
Less: Tax depreciation (491) (388)
Straight-line rents (258) (267)
-------------------------------------------------------------------------------------------
Taxable income subject to dividend requirement $ 1,701 $ 173
===========================================================================================
The following schedule reconciles cash dividends paid to the dividends paid
deduction:
Year Ended Period Ended
December 31, December 31,
(in thousands) 2002 2001
===========================================================================================
Cash dividends paid $ 2,080 $ 1,023
Plus: Dividends designated from following year -- --
Less: Portion designated capital gain distribution -- --
Less: Return of Capital (379) (850)
----------------------------------------------------------------------------- -------------
Dividends paid deduction $ 1,701 $ 173
===========================================================================================
F-189
FSP Meadow Point Corp.
Notes to Financial Statements
5. Cash Available for Distribution
The Company evaluates its performance based on Cash Available for Distribution
("CAD") as management believes that CAD represents the most accurate measure of
the Company's activity. CAD 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 funds raised by the issuance of shares; plus the net proceeds
from the sale of land; less purchases of real estate assets, property and
equipment ("Capital Expenditures"), payments for deferred leasing commissions
and payments for deferred lease origination costs; plus (less) proceeds from
(payments to) cash reserves established at the acquisition date of the property
(cash-funded reserves). 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 payments for deferred lease origination costs 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 financial statements.
The calculation of CAD is shown in the following table:
Year Ended Period Ended
December 31, December 31,
(in thousands) 2002 2001
=====================================================================================
Net income $ 1,946 $ 418
Depreciation 504 398
Straight line rent (258) (267)
Proceeds from offering of shares -- 23,624
Purchase of land and building and improvements -- (21,751)
Proceeds from (establish) funded reserve -- (896)
-------------------------------------------------------------------------------------
Cash Available for Distribution $ 2,192 $ 1,526
=====================================================================================
The Company's cash distributions are summarized as follows:
(in thousands) Year Ended Period Ended
December 31, December 31,
Quarter Paid 2002 2001
=====================================================================================
First Quarter $ 511 $ --
Second Quarter 523 --
Third Quarter 524 518
Fourth Quarter 522 505
--------------------------------------------------------------------------------------
Dividends paid $ 2,080 $ 1,023
=====================================================================================
The Company declared a dividend payable to stockholders of record as of December
31, 2002 and 2001 of $562,000 and $511,000, respectively.
Cash distributions are declared and paid based on the total outstanding shares
as of the record date and are typically paid in the quarter following the
quarter that CAD is generated.
F-190
FSP Meadow Point Corp.
Notes to Financial Statements
6. Capital Stock
PREFERRED STOCK
Generally, each holder of Shares of Preferred Stock is entitled to receive
ratably all income and 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.
Subsequent to the completion of the offering of the preferred shares the holders
of common shares are not entitled to receive any income, nor shall the Company
declare or pay any cash dividends on shares of Common Stock.
7. Related Party Transactions
The Company executed a management agreement with FSP Property Management LLC, an
affiliate of FSP, that provides for a management fee equal to 1% of collected
revenues and is cancelable with 30 days notice by either party. For the year
ended December 31, 2002 and the period ended December 31, 2001, fees incurred
under the agreement were $37,000 and $26,000, respectively.
An acquisition fee $515,000 and other costs totaling $108,000 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 $2,060,000 were paid in 2001 to an affiliate of the Common
Shareholder for services related to syndication of the Company's preferred
stock.
During 2001, the Company borrowed and repaid in full:
Note payable to FSP, principal of $21,000,000 with interest equal to the
Citizens Bank base. Interest paid to FSP was $81,000. The average interest
rate during the time the loan was outstanding was 8.25%.
A commitment fee of $966,000 was paid for obtaining the first mortgage
loan. Such amount is included in interest expense on the Statement of
Operations.
The Company paid a dividend of $13,000 in 2001 to the common shareholder
relating to earnings of the Company prior to the completion of the offering of
preferred shares.
F-191
FSP Meadow Point Corp.
Notes to Financial Statements
8. Commitments and Contingencies
The Company, as lessor, has future minimum rentals due under non-cancelable
operating leases as follows:
Year Ended
(in thousands) December 31, Amount
------------ --------
2003 $ 3,294
2004 3,376
2005 3,461
2006 3,547
2007 3,636
Thereafter 7,230
--------
$ 24,544
========
In addition, the lessees are liable for real estate taxes and certain operating
expenses.
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.
The lease periods expire in 2009 and 2010 with renewal options.
9. Subsequent Event
The Company has entered into a merger agreement with its common shareholder,
Franklin Street Properties Corp ("FSP"). In January 2003 FSP filed a proxy
statement with the United States Securities and Exchange Commission indicating
its intent to acquire the preferred stock interests of the Company and twelve
additional REITs. The merger requires the approval of the shareholders of the
Company as well as the shareholders of the twelve additional REITs and the
shareholders of FSP. If approved, FSP will issue shares of its common stock in
exchange for a 100% ownership interest in the Company.
F-192
SCHEDULE III
FSP MEADOW POINT CORP.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2002
(in thousands)
Initial Cost
-----------------------------------
Costs
Capitalized
(Disposals)
Subsequent
Encumbrances Buildings & to
Description (1) Land Improvements Acquisition
------------ -------- ------------ -----------
Meadow Point, Chantilly, Virginia -- $ 2,126 $ 19,625 $ --
============ ======== =========== ===========
(in thousands)
Historical Costs
------------------------------------------------------------
Total
Costs, Net
of Depreciable
Buildings & Accumulated Accumulated Life Date of
Description Land Improvements Total(2) Depreciation Depreciation Years Acquisition
-------- ------------ -------- ------------ ------------ ----------- -----------
Meadow Point, Chantilly, Virginia $ 2,126 $ 19,625 $ 21,751 $ 902 $ 20,849 15-39 March, 2001
======== ============ ======== ========== ===========
(1) There are no encumbrances on the above properties.
(2) The aggregate cost for Federal Income Tax purposes approximates total
historical costs.
F-193
FSP MEADOW POINT CORP.
REAL ESTATE AND ACCUMULATED DEPRECIATION
The following table summarizes the changes in the Company's real estate
investment and accumulated depreciation:
December 31,
(in thousands) 2002 2001
==================================================================
Real estate investments, at cost:
Balance, beginning of period $ 21,751 $ --
Acquisitions -- 21,751
Improvements -- --
Dispositions -- --
------------------------------------------------------------------
Balance, end of period $ 21,751 $ 21,751
==================================================================
Accumulated depreciation:
Balance, beginning of period $ 398 $ --
Depreciation 504 398
Dispositions -- --
------------------------------------------------------------------
Balance, end of period $ 902 $ 398
==================================================================
F-194
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-196
Financial statements:
Balance sheet F-197
Statement of operations F-198
Statement of changes in stockholders' equity F-199
Statement of cash flows F-200
Notes accompanying financial statements F-201
F-195
[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-196
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-197
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-198
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-199
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-200
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-201
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-202
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-203
FSP Timberlake Corp.
Financial Statements
December 31, 2002
Table of Contents
Page
----
Financial Statements
Independent Auditor's Report ............................................. F-205
Balance Sheets as of December 31, 2002 and 2001 .......................... F-206
Statements of Operations for the year ended December 31, 2002 and for
the period April 16, 2001 (date of inception) to December 31, 2001 . F-207
Statements of Changes in Stockholders' Equity for the year ended
December 31, 2002 and for the period April 16, 2001
(date of inception) to December 31, 2001 ........................... F-208
Statements of Cash Flows for the year ended December 31, 2002 and for
the period April 16, 2001 (date of inception) to December 31, 2001 . F-209
Notes to the Financial Statements ........................................ F-210
Schedule of Real Estate and Accumulated Depreciation ..................... F-219
F-204
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
FSP Timberlake Corp.
(a Delaware Corporation)
We have audited the accompanying balance sheets of FSP Timberlake Corp. (a
Delaware Corporation) as of December 31, 2002 and 2001, and the related
statements of operations, changes in stockholders' equity and cash flows, as
well as the financial statement schedule listed in the accompanying index, for
the year ended December 31, 2002, and for the period from April 16, 2001 (date
of inception) to December 31, 2001. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
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 audits to obtain reasonable assurance about whether the financial
statements and financial statement schedule are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements and financial statement schedule. 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 provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial statement schedule
referred to above present fairly, in all material respects, the financial
position of FSP Timberlake Corp. as of December 31, 2002 and 2001, and the
results of its operations and its cash flows for the year ended December 31,
2002, and for the initial period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America.
/s/ Braver and Company, P.C.
Newton, Massachusetts
February 7, 2003
F-205
FSP Timberlake Corp.
Balance Sheets
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 40,714 40,714
-------------------------------------------------------------------------------------------------------
43,545 43,545
Less accumulated depreciation 1,696 652
-------------------------------------------------------------------------------------------------------
Real estate investments, net 41,849 42,893
Cash and cash equivalents 1,201 948
Cash - funded reserve 1,759 1,787
Restricted cash 8 8
Tenant rent receivable 64 149
Step rent receivable 470 185
Prepaid expenses and other assets 7 13
Deferred leasing commissions costs, net of accumulated amortization of $4 and $0 24 --
-------------------------------------------------------------------------------------------------------
Total assets $ 45,382 $ 45,983
=======================================================================================================
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and accrued expenses 92 80
Dividends payable 1,129 1,021
Tenant security deposits 8 8
-------------------------------------------------------------------------------------------------------
Total liabilities 1,229 1,109
-------------------------------------------------------------------------------------------------------
Commitments and Contingencies:
Stockholders' Equity:
Preferred Stock, $.01 par value, 515 shares -- --
authorized, issued and outstanding
Common Stock, $.01 par value, 1 share -- --
authorized, issued and outstanding
Additional paid-in capital 47,253 47,253
Retained deficit and dividends in excess of earnings (3,100) (2,379)
-------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 44,153 44,874
-------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 45,382 $ 45,983
=======================================================================================================
See accompanying notes to financial statements.
F-206
FSP Timberlake Corp.
Statements of Operations
For the Period
For the April 16, 2001
Year Ended (date of inception) to
(in thousands, except shares and per share amounts) December 31, 2002 December 31, 2001
===========================================================================================================================
Revenue:
Rental $6,155 $ 3,641
Interest and other 43 45
---------------------------------------------------------------------------------------------------------------------------
Total revenue 6,198 3,686
---------------------------------------------------------------------------------------------------------------------------
Expenses:
Rental operating expenses 896 546
Real estate taxes and insurance 804 479
Depreciation and amortization 1,048 652
Interest -- 2,060
---------------------------------------------------------------------------------------------------------------------------
Total expenses 2,748 3,737
---------------------------------------------------------------------------------------------------------------------------
Net income (loss) before common dividends 3,450 (51)
Dividends paid to common shareholders prior to syndication of preferred shares -- 90
---------------------------------------------------------------------------------------------------------------------------
Net income (loss) attributable to preferred shareholders $3,450 $ (141)
===========================================================================================================================
Weighted average number of preferred shares outstanding,
basic and diluted 515 515
===========================================================================================================================
Net income (loss) per preferred share, basic and diluted $6,699 $ (274)
===========================================================================================================================
See accompanying notes to financial statements.
F-207
FSP Timberlake Corp.
Statements of Changes in Stockholders' Equity
For the Year Ended December 31, 2002 and
For the Period April 16, 2001 (date of inception)
to December 31, 2001
Retained Deficit
Additional and Dividends Total
Preferred Common Paid in in Excess of Stockholders'
(in thousands, except shares) Stock Stock Capital Earnings Equity
=======================================================================================================================
Private offering of 515 shares, net $ - $ - $ 47,253 $ -- $ 47,253
Dividends - - - (2,328) (2,328)
Net Loss - - - (51) (51)
-----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 - - 47,253 (2,379) 44,874
Dividends - - - (4,171) (4,171)
Net Income - - - 3,450 3,450
-----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 $ - $ - $ 47,253 $ (3,100) $ 44,153
=======================================================================================================================
See accompanying notes to financial statements.
F-208
FSP Timberlake Corp.
Statements of Cash Flows
For the Period
For the April 16, 2001
Year Ended (date of inception) to
(in thousands) December 31, 2002 December 31, 2001
==========================================================================================================
Cash flows from operating activities:
Net income (loss) $ 3,450 $ (51)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization 1,048 652
Changes in operating assets and liabilities:
Cash-funded reserve 28 (1,787)
Restricted cash -- (8)
Tenant rent receivable 85 (149)
Step rent receivable (285) (185)
Prepaid expenses and other assets 6 (13)
Payment of deferred leasing commissions (28) --
Accounts payable and accrued expenses 12 80
Tenant security deposits -- 8
----------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 4,316 (1,453)
----------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets -- (43,545)
----------------------------------------------------------------------------------------------------------
Net cash used for investing activities -- (43,545)
----------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of company stock -- 51,500
Syndication costs -- (4,247)
Dividends to stockholders (4,063) (1,307)
Proceeds from long-term debt -- 42,150
Principal payments on long-term debt -- (42,150)
----------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities (4,063) 45,946
----------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 253 948
Cash and cash equivalents, beginning of year 948 --
Cash and cash equivalents, end of year $ 1,201 $ 948
==========================================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ -- $ 2,060
Disclosure of non-cash financing activities:
Dividends declared but not paid $ 1,129 $ 1,021
See accompanying notes to financial statements.
F-209
FSP Timberlake Corp.
Notes to Financial Statements
1. Organization
FSP Timberlake Corp. (the "Company") was organized on April 16, 2001 as a
Corporation under the laws of the State of Delaware to purchase, own and operate
a commercial office building located in Chesterfield, Missouri (the "Property").
The Property consists of two five-story Class "A" suburban office buildings that
contains approximately 233,000 square feet of space situated on approximately
11.5 acres of land. The Company acquired the Property on May 24, 2001.
2. Summary of Significant Accounting Policies
ESTIMATES AND ASSUMPTIONS
The Company prepares its financial statements and related notes in conformity
with accounting principles generally accepted in the United States of America
("GAAP"). 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 2001 financial statements have been reclassified to
conform to the 2002 presentation.
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 improvement
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 15-39
Furniture and equipment 5-7
F-210
FSP Timberlake Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
REAL ESTATE AND DEPRECIATION (continued)
The following schedule reconciles the cost of the property as shown in the
Offering Memorandum as to the amounts shown on the Company's Balance Sheet:
(in thousands)
Price per Offering Memorandum $ 42,150
Plus: Acquisition fees 1,030
Plus: Other acquisition costs 365
-----------------------------------------------------------------------
Total Acquisition Costs $ 43,545
=======================================================================
These costs are reported in the Company's Balance Sheet as follows :
Land $ 2,831
Building 40,714
-----------------------------------------------------------------------
Total reported in Balance Sheet $ 43,545
=======================================================================
The Company 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, 2002, no
such indicators of impairment were identified.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with an initial
maturity of three months or less to be cash equivalents.
CASH-FUNDED RESERVES
The Company has set aside funds in anticipation of future capital needs of the
property. Although these funds typically are used for the payment of real estate
assets and deferred leasing commissions, there is no legal restriction on their
use and they may be used for any company purpose.
RESTRICTED CASH
Restricted cash consists of tenant security deposits.
MARKETABLE SECURITIES
The Company accounts for investments in debt securities under the provisions of
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". The Company typically has classified its debt securities as
available-for-sale.
There were no investments in marketable securities at December 31, 2002 and
2001.
F-211
FSP Timberlake Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
CONCENTRATION OF CREDIT RISKS
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.
For the year ended December 31, 2002 and period ended December 31, 2001 rental
income was derived from various tenants. As such, future receipts are dependent
upon the financial strength of the lessees and their ability to perform under
the lease agreements.
The following tenants represent greater than 10% of total revenue:
2002 2001
AMDOCS, Inc. 57% 51%
ReinsuranceGroup of America, Inc. 41% 41%
FINANCIAL INSTRUMENTS
The Company estimates that the carrying value of cash and cash equivalents,
cash-funded reserves and restricted cash approximate their fair values based on
their short-term maturity and prevailing interest rates.
STEP RENT RECEIVABLE
Certain leases provide for fixed increases over the life of the lease. Rental
revenue is recognized on the straight-line basis over the related lease term;
however, billings by the Company are based on required minimum rentals in
accordance with the lease agreements. Step rent receivable, which is the
cumulative revenue recognized in excess of amounts billed by the Company, is
$470,000 and $185,000 at December 31, 2002 and 2001, respectively.
DEFERRED LEASING COMMISSIONS
Deferred leasing commissions represent external leasing costs incurred in the
leasing of commercial space. These costs are capitalized and are amortized on a
straight-line basis over the remaining life of the related lease. Amortization
expense was approximately $4,000 and $0 for the years ended December 31, 2002
and 2001, respectively.
Payments for deferred leasing commission in 2002 amounted to $28,000 which is
being amortized over the weighted-average period of four years in respect of the
lease. Details of the deferred lease origination costs as of December 31, 2002:
Cost $ 28,000
Accumulated amortization 4,000
-----------
Book value $ 24,000
===========
The estimated annual amortization expense for the years succeeding December 31,
2002 are as follows:
2003 $ 7,000
2004 $ 7,000
2005 $ 7,000
2006 $ 3,000
F-212
FSP Timberlake Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
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
$4,247,000 have been reported as a reduction in the Stockholders' Equity in the
Company's Balance Sheets.
REVENUE RECOGNITION
The Company has retained substantially all of the risks and benefits of
ownership of the Company's commercial property and accounts for its leases as
operating leases. Rental income from leases, which may include rent concessions
(including free rent and tenant improvement allowances) and scheduled increases
in rental rates during the lease term, is recognized on a straight-line basis.
The Company does not have any percentage rent arrangements with its commercial
property tenants. Reimbursable costs are included in rental income in the period
earned. A schedule showing the components of rental revenue is shown below.
Year Ended Period Ended
December 31, December, 31
(in thousands) 2002 2001
==========================================================================
Income from leases $ 4,989 $ 2,937
Straight-line rent adjustment 285 185
Reimbursable expenses and other 881 519
--------------------------------------------------------------------------
Total $ 6,155 $ 3,641
==========================================================================
INTEREST AND OTHER
Interest income and other income are recognized when the related services are
performed and the earnings process is complete.
INCOME TAXES
The Company has elected to be taxed as a REIT under the Internal Revenue Code of
1986, 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 taxable income
that must be distributed annually.
NET INCOME PER SHARE
The Company follows Statement of Financial Accounting Standards 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
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 December 31, 2002 and 2001. Subsequent to the completion
of the offering of preferred shares, the holders of common stock are not
entitled to share in any income. The denominator used for calculating basic and
diluted net income per share is shown for preferred shares only and is as
follows:
Year Ended Period Ended
December 31, December 31,
2002 2001
==========================================================================
Weighted average number of preferred
shares outstanding 515 515
F-213
FSP Timberlake Corp.
Notes to Financial Statements
3. 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. 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. The impact of adoption did not have a
material impact on the Company's financial position, results of operations and
cash flows. The Company does not have any real estate assets that it considers
"held for sale" at December 31, 2002.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements Nos.
4, 44, and 64, Amendment of SFAS 13, and Technical Corrections". This Statement
rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt",
and an amendment of that Statement, SFAS No. 64, "Extinguishments of Debt Made
to Satisfy Sinking-Fund Requirements". This Statement amends SFAS 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 SFAS 145 and believes that the impact of adoption
will not be material to its financial position, results of operations and cash
flows.
In July 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities". This statement was 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.
4. Income Taxes
The Company has elected to be taxed as a REIT under Sections 856-860 of the
Internal Revenue Code of 1986, as amended. In order to qualify as a REIT, the
Company is required to distribute at least 90% of its taxable income to
shareholders and to meet certain asset and income tests as well as certain other
requirements. The Company will generally not be liable for federal income taxes,
provided it satisfies these requirements. Even as a qualified REIT, the Company
is subject to certain state and local taxes on its income and property.
For the period ended December 31, 2001, the Company incurred a net operating
loss for income tax purposes of approximately $216,000 that can be carried
forward until it expires in the year 2021.
The Company's net tax basis of its real estate assets approximates the amount
set forth in the Company's Balance Sheet at December 31, 2002 and 2001.
F-214
FSP Timberlake Corp.
Notes to Financial Statements
4. Income Taxes (continued)
The following schedule reconciles GAAP Net Income to Taxable Income subject to
dividend requirements:
Year Ended Period Ended
December 31, December 31,
(in thousands) 2002 2001
================================================================================================
GAAP net income (loss) $ 3,450 $ (51)
Add: Book depreciation and amortization 1,048 652
Other book/tax differences, net -- 23
Less: Tax depreciation and amortization (1,021) (636)
Straight-line rents (285) (185)
------------------------------------------------------------------------------------------------
Taxable income (loss) subject to dividend requirement(1) $ 3,192 $ (197)
================================================================================================
(1) A tax loss is not subject to a dividend requirement.
The following schedule reconciles cash dividends paid to the dividends paid
deduction:
Year Ended Period Ended
December 31, December 31,
(in thousands) 2002 2001
================================================================================================
Cash dividends paid $ 4,063 $ 1,307
Plus: Dividends designated from following year -- --
Less: Portion designated capital gain distribution -- --
Less: Return of Capital (871) (1,307)
------------------------------------------------------------------------------------------------
Dividends paid deduction $ 3,192 $ --
================================================================================================
5. Cash Available for Distribution
The Company evaluates its performance based on Cash Available for Distribution
("CAD") as management believes that CAD represents the most accurate measure of
the Company's activity. CAD 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 funds raised by the issuance of shares; plus the net proceeds
from the sale of land; less purchases of real estate assets, property and
equipment ("Capital Expenditures") payments for deferred leasing commissions and
payments for deferred lease origination costs; plus (less) proceeds from
(payments to) cash reserves established at the acquisition date of the property
(cash-funded reserves). 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 payments for deferred lease origination costs 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 financial statements.
F-215
FSP Timberlake Corp.
Notes to Financial Statements
5. Cash Available for Distribution (continued)
The calculation of CAD is shown in the following table:
Year Ended Period Ended
December 31, December 31,
(in thousands) 2002 2001
=====================================================================================
Net income (loss) $ 3,450 $ (51)
Depreciation and amortization 1,048 652
Straight line rent (285) (185)
Proceeds from offering of shares -- 47,253
Purchase of land and building and improvements -- (43,545)
Payment of deferred leasing commissions (28) --
Proceeds from (establish) funded reserve 28 (1,787)
-------------------------------------------------------------------------------------
Cash Available for Distribution $ 4,213 $ 2,337
=====================================================================================
The Company's cash distributions are summarized as follows:
(in thousands) Year Ended Period Ended
December 31, December 31,
Quarter Paid 2002 2001
==========================================================================
First Quarter $ 1,021 $ --
Second Quarter 1,008 --
Third Quarter 989 295
Fourth Quarter 1,045 1,012
--------------------------------------------------------------------------
Dividends paid $ 4,063 $ 1,307
==========================================================================
Cash distributions are declared and paid based on the total outstanding shares
as of the record date and are typically paid in the quarter following the
quarter that CAD is generated.
6. Capital Stock
PREFERRED STOCK
Generally, each holder of Shares of Preferred Stock is entitled to receive
ratably all income and 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.
F-216
FSP Timberlake Corp.
Notes to Financial Statements
6. Capital Stock (continued)
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.
Subsequent to the completion of the offering of the preferred shares the holders
of common shares are not entitled to receive any income, nor shall the Company
declare or pay any cash dividends on shares of Common Stock.
7. Related Party Transactions
The Company executed a management agreement with FSP Property Management LLC, an
affiliate of FSP, that provides for a management fee equal to 1% of collected
revenues and is cancelable with 30 days notice by either party. For the year
ended December 31, 2002 and period ended December 31, 2001, fees incurred under
the agreement were $60,000 and $33,000, respectively.
An acquisition fee of $1,030,000 and other costs totaling $240,000 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 $4,120,000 were paid in 2001 to an affiliate of the Common
Shareholder for services related to syndication of the Company's preferred
stock.
During 2001, the Company borrowed and repaid in full:
Note payable to FSP, principal of $42,150,000 with interest equal to the
Citizens Bank base. Interest paid to FSP was $128,000. The average interest
rate during the time the loan was outstanding was 6.25%.
A commitment fee of $1,931,000 was paid for obtaining the first mortgage
loan. Such amount is included in interest expense on the Statement of
Operations.
The Company paid dividends of $90,000 in 2001, to the common shareholder
relating to earnings of the Company prior to the completion of the offering of
preferred shares.
8. Commitments and Contingencies
The Company, as lessor, has future minimum rentals due under non-cancelable
operating leases as follows:
Year Ended
(in thousands) December 31, Amount
------------ ---------
2003 $ 5,263
2004 5,263
2005 5,318
2006 3,580
2007 2,307
Thereafter 3,947
---------
$ 25,678
=========
In addition, the lessees are liable for real estate taxes and certain operating
expenses of the property.
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 2004 through 2009 with
renewal options.
F-217
FSP Timberlake Corp.
Notes to Financial Statements
9. Subsequent Event
The Company has entered into a merger agreement with its common shareholder,
Franklin Street Properties Corp ("FSP"). In January 2003 FSP filed a proxy
statement with the United States Securities and Exchange Commission indicating
its intent to acquire the preferred stock interests of the Company and twelve
additional REITs. The merger requires the approval of the shareholders of the
Company as well as the shareholders of the twelve additional REITs and the
shareholders of FSP. If approved, FSP will issue shares of its common stock in
exchange for a 100% ownership interest in the Company.
F-218
SCHEDULE III
FSP TIMBERLAKE CORP.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2002
(in thousands)
Initial Cost
------------------------------------
Costs
Capitalized
(Disposals)
Subsequent
Encumbrances Buildings & to
Description (1) Land Improvements Acquisition
------------ ---- ------------ -----------
Timberlake, Chesterfield, Missouri -- $ 2,831 $ 40,714 $ --
=========== ======== ========== =========
(in thousands)
Historical Costs
-------------------------------------------------------------
Total
Costs, Net
of Depreciable
Buildings & Accumulated Accumulated Life Date of
Description Land Improvements Total(2) Depreciation Depreciation Years Acquisition
---- ------------ -------- ------------ ------------ ----------- -----------
Timberlake, Chesterfield, Missouri $ 2,831 $ 40,714 $ 43,545 $ 1,696 $ 41,849 15-39 May, 2001
======== ============ ======== =========== ===========
(1) There are no encumbrances on the above property.
(2) The aggregate cost for Federal Income Tax purposes approximates the total
historical cost.
F-219
FSP TIMBERLAKE CORP.
REAL ESTATE AND ACCUMULATED DEPRECIATION
The following table summarizes the changes in the Company's real estate
investment and accumulated depreciation:
December 31,
(in thousands) 2002 2001
===============================================================================
Real estate investments, at cost:
Balance, beginning of period $ 43,545 $ --
Acquisitions -- 43,545
Improvements -- --
Dispositions -- --
-------------------------------------------------------------------------------
Balance, end of period $ 43,545 $ 43,545
===============================================================================
Accumulated depreciation:
Balance, beginning of period $ 652 $ --
Depreciation 1,044 652
Dispositions -- --
-------------------------------------------------------------------------------
Balance, end of period $ 1,696 $ 652
===============================================================================
F-220
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-222
Financial statements:
Balance sheet F-223
Statement of operations F-224
Statement of changes in stockholders' equity F-225
Statement of cash flows F-226
Notes accompanying financial statements F-227
F-221
[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-222
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-223
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-224
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-225
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-226
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-227
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-228
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-229
FSP Federal Way Corp.
Financial Statements
December 31, 2002
Table of Contents
Page
----
Financial Statements
Independent Auditor's Report.............................................. F-231
Balance Sheets as of December 31, 2002 and 2001........................... F-232
Statements of Operations for the year ended December 31, 2002 and
for the period July 26, 2001 (date of inception) to
December 31, 2001.................................................. F-233
Statements of Changes in Stockholders' Equity for the year ended
December 31, 2002 and for the period July 26, 2001
(date of inception) to December 31, 2001........................... F-234
Statements of Cash Flows for the year ended December 31, 2002 and
for the period July 26, 2001 (date of inception) to
December 31, 2001.................................................. F-235
Notes to the Financial Statements......................................... F-236
Schedule of Real Estate and Accumulated Depreciation...................... F-245
F-230
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
FSP Federal Way Corp.
(a Delaware Corporation)
We have audited the accompanying balance sheets of FSP Federal Way Corp. (a
Delaware Corporation) as of December 31, 2002 and 2001, and the related
statements of operations, changes in stockholders' equity and cash flows, as
well as the financial statement schedule listed in the accompanying index, for
the year ended December 31, 2002, and for the period from July 26, 2001 (date of
inception) to December 31, 2001. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
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 audits to obtain reasonable assurance about whether the financial
statements and financial statement schedule are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements and financial statement schedule. 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 provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial statement schedule
referred to above present fairly, in all material respects, the financial
position of FSP Federal Way Corp. as of December 31, 2002 and 2001, and the
results of its operations and its cash flows for the year ended December 31,
2002, and for the initial period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America.
/s/ Braver and Company, P.C.
Newton, Massachusetts
February 7, 2003
F-231
FSP Federal Way Corp.
Balance Sheets
December 31, 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 13,141 13,141
---------------------------------------------------------------------------------------------------------------
Less accumulated depreciation 439 98
---------------------------------------------------------------------------------------------------------------
Real estate investments, net 15,211 15,552
Cash and cash equivalents 558 560
Cash - funded reserve 1,038 1,038
Step rent receivable 142 26
Prepaid expenses and other assets 2 1
Deferred lease origination costs, net of accumulated amortization of $99 and $4 362 457
---------------------------------------------------------------------------------------------------------------
Total assets $ 17,313 $ 17,634
===============================================================================================================
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and accrued expenses $ 161 $ 173
Dividends payable 412 405
---------------------------------------------------------------------------------------------------------------
Total liabilities 573 578
---------------------------------------------------------------------------------------------------------------
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 -- --
Additional paid-in capital 18,329 18,329
Retained deficit and dividends in excess of earnings (1,589) (1,273)
---------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 16,740 17,056
---------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 17,313 $ 17,634
===============================================================================================================
See accompanying notes to financial statements.
F-232
FSP Federal Way Corp.
Statements of Operations
For the Period
For the July 26, 2001
Year Ended (date of inception)
December 31, to December 31,
(in thousands, except shares and per share amounts) 2002 2001
=====================================================================================================
Revenue:
Rental $1,810 $ 528
Interest and other 25 8
-----------------------------------------------------------------------------------------------------
Total revenue 1,835 536
-----------------------------------------------------------------------------------------------------
Expenses:
Rental operating expenses 39 43
Depreciation and amortization 436 102
Real estate taxes and insurance 49 16
Interest -- 1,166
-----------------------------------------------------------------------------------------------------
Total expenses 524 1,327
-----------------------------------------------------------------------------------------------------
Net income (loss) before common dividends $1,311 $ (791)
Dividends paid to common shareholders prior to syndication
of preferred shares -- 15
-----------------------------------------------------------------------------------------------------
Net income (loss) attributable to preferred shareholders $1,311 $ (806)
=====================================================================================================
Weighted average number of preferred shares outstanding,
basic and diluted 200 200
=====================================================================================================
Net income (loss) per preferred share, basic and diluted $6,555 $(4,030)
=====================================================================================================
See accompanying notes to financial statements.
F-233
FSP Federal Way Corp.
Statements of Changes in Stockholders' Equity
For the Year Ended December 31, 2002 and for
the period July 26, 2001 (date of inception)
to December 31, 2001
Retained Deficit
Additional and Dividends Total
Preferred Common Paid in in Excess of Stockholders'
(in thousands, except shares) Stock Stock Capital Earnings Equity
============================================================================================================
Private offering of 200 shares, net $ -- $ -- $18,329 $ -- $ 18,329
Dividends -- -- -- (482) (482)
Net Loss -- -- -- (791) (791)
------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 -- -- 18,329 (1,273) 17,056
Dividends -- -- -- (1,627) (1,627)
Net Income -- -- -- 1,311 1,311
------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 $ -- $ -- $18,329 $(1,589) $ 16,740
============================================================================================================
See accompanying notes to financial statements.
F-234
FSP Federal Way Corp.
Statements of Cash Flows
For the Period
For the July 26, 2001
Year Ended (date of inception)
December 31, to December 31,
(in thousands) 2002 2001
==========================================================================================================
Cash flows from operating activities:
Net income (loss) $ 1,311 $ (791)
Adjustments to reconcile net income (loss) to net cash
Provided by (used for) operating activities:
Depreciation and amortization 436 102
Changes in operating assets and liabilities:
Cash funded reserve -- (1,038)
Step rent receivable (116) (26)
Prepaid expenses and other assets (1) (1)
Accounts payable and accrued expenses (12) 173
----------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 1,618 (1,581)
----------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets -- (15,650)
Purchase of deferred lease origination costs -- (461)
----------------------------------------------------------------------------------------------------------
Net cash used for investing activities -- (16,111)
----------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of company stock -- 20,000
Syndication costs -- (1,671)
Dividends to stockholders (1,620) (77)
Proceeds from long-term debt -- 16,000
Principal payments on long-term debt -- (16,000)
----------------------------------------------------------------------------------------------------------
Net cash (used for) provided by financing activities (1,620) 18,252
----------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (2) 560
Cash and cash equivalents, beginning of year 560 --
Cash and cash equivalents, end of year $ 558 $ 560
==========================================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ -- $ 1,166
Disclosure of non-cash financing activities:
Dividends declared but not paid $ 412 $ 405
See accompanying notes to financial statements.
F-235
FSP Federal Way Corp.
Notes to Financial Statements
1. Organization
FSP Federal Way Corp. (the "Company") was organized on July 26, 2001 as a
Corporation under the laws of the State of Delaware to purchase, own and operate
commercial office buildings located in Federal Way, Washington (the "Property").
The Property consists of two Class "A" suburban office buildings containing
117,000 square feet. The company acquired the Property on September 14, 2001.
2. Summary of Significant Accounting Policies
ESTIMATES AND ASSUMPTIONS
The Company prepares its financial statements and related notes in conformity
with accounting principles generally accepted in the United States of America
("GAAP"). 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 information in the 2001 financial statements have been reclassified to
conform to the 2002 presentation.
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 improvement
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 15-39
Furniture and equipment 5-7
F-236
FSP Federal Way Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
REAL ESTATE AND DEPRECIATION (continued)
The following schedule reconciles the cost of the property as shown in the
Offering Memorandum as to the amounts shown on the Company's Balance Sheet:
(in thousands)
Price per Offering Memorandum $ 16,000
Plus: Acquisition fees 111
-----------------------------------------------------------------------
Total Acquisition Costs $ 16,111
=======================================================================
These costs are reported in the Company's Balance Sheet as follows:
Land $ 2,509
Building 13,141
Deferred lease origination costs 461
-----------------------------------------------------------------------
Total reported in Balance Sheet $ 16,111
=======================================================================
The Company 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, 2002 and
2001, no such indicators of impairment were identified.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with an initial
maturity of three months or less to be cash equivalents.
CASH-FUNDED RESERVES
The Company has set aside funds in anticipation of future capital needs of the
property. Although these funds typically are used for the payment of real estate
assets and deferred leasing commissions, there is no legal restriction on their
use and they may be used for any company purpose.
RESTRICTED CASH
Restricted cash consists of tenant security deposits.
MARKETABLE SECURITIES
The Company accounts for investments in debt securities under the provisions of
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". The Company typically has classified its debt securities as
available-for-sale.
There were no investments in marketable securities at December 31, 2002 and
2001.
F-237
FSP Federal Way Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
CONCENTRATION OF CREDIT RISKS
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.
For the year ended December 31, 2002 and period ended December 31, 2001, 100% of
the rental income was derived from one lessee. As such, future receipts are
dependent upon the financial strength of the lessee and its ability to perform
under the lease agreement.
FINANCIAL INSTRUMENTS
The Company estimates that the carrying value of cash and cash equivalents,
cash-funded reserves and restricted cash, approximate their fair values based on
their short-term maturity and prevailing interest rates.
STEP RENT RECEIVABLE
Certain leases provide for fixed increases over the life of the lease. Rental
revenue is recognized on the straight-line basis over the related lease term;
however, billings by the Company are based on required minimum rentals in
accordance with the lease agreements. Step rent receivable, which is the
cumulative revenue recognized in excess of amounts billed by the Company, is
$142,000 and $26,000 at December 31, 2002 and 2001, respectively.
DEFERRED LEASE ORIGINATION COSTS
Deferred lease origination costs are the estimated value of legal and leasing
costs related to acquired leases that were included in the purchase price when
the Company acquired the property. Under Statement of Financial Accounting
Standards No. 141 "Business Combination" ("SFAS 141"), which was approved by the
Financial Accounting Standards Board in June 2001, the Company is required to
segregate these costs from its investment in real estate. The Company
subsequently amortizes these costs on a straight-line basis over the
weighted-average remaining life of the related lease. Amortization expense of
approximately $99,000 and $4,000 is included in Depreciation and Amortization in
the Company's Statements of Operations for the year ended December 31, 2002 and
the period ended December 31, 2001, respectively.
Deferred lease origination costs included in the purchase price of the property
were $461,000 and are being amortized over the weighted-average period of five
years in respect of the lease assumed. Details of the deferred lease origination
costs as of December 31:
2002 2001
------------ -----------
Cost $ 461,000 $ 461,000
Accumulated amortization 99,000 4,000
----------- -----------
Book value $ 362,000 $ 457,000
=========== ===========
The estimated annual amortization expense for the five years succeeding December
31, 2002 are as follows:
2003 $ 99,000
2004 $ 99,000
2005 $ 99,000
2006 $ 65,000
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
$1,671,000 have been reported as a reduction in the Stockholders' Equity in the
Company's Balance Sheets.
F-238
FSP Federal Way Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
REVENUE RECOGNITION
The Company has retained substantially all of the risks and benefits of
ownership of the Company's commercial property and accounts for its lease as an
operating lease. Rental income from leases, which may include rent concessions
(including free rent and tenant improvement allowances) and scheduled increases
in rental rates during the lease term, is recognized on a straight-line basis.
The Company does not have any percentage rent arrangements with its commercial
property tenants. Reimbursable costs are included in rental income in the period
earned. A schedule showing the components of rental revenue is shown below.
Year Ended Period Ended
December 31, December, 31
(in thousands) 2002 2001
===================================================================
Income from lease $ 1,653 $ 488
Straight-line rent adjustment 116 26
Reimbursable expense 41 14
-------------------------------------------------------------------
Total $ 1,810 $ 528
===================================================================
INTEREST AND OTHER
Interest income and other income are recognized when the related services are
performed and the earnings process is complete.
INCOME TAXES
The Company has elected to be taxed as a REIT under the Internal Revenue Code of
1986, 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 taxable income
that must be distributed annually.
NET INCOME PER SHARE
The Company follows Statement of Financial Accounting Standards 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
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 December 31, 2002 and 2001. Subsequent to the completion
of the offering of preferred shares, the holders of common stock are not
entitled to share in any income. The denominator used for calculating basic and
diluted net income per share is shown for preferred shares only and is as
follows:
Year Ended Period Ended
December 31, December 31,
2002 2001
==========================================================================
Weighted average number of
preferred shares outstanding 200 200
F-239
FSP Federal Way Corp.
Notes to Financial Statements
3. 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. 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. The impact of adoption did not have a
material impact on the Company's financial position, results of operations and
cash flows. The Company does not have any real estate assets that it considers
"held for sale" at December 31, 2002.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements Nos.
4, 44, and 64, Amendment of SFAS 13, and Technical Corrections". This Statement
rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt",
and an amendment of that Statement, SFAS No. 64, "Extinguishments of Debt Made
to Satisfy Sinking-Fund Requirements". This Statement amends SFAS 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 SFAS 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.
4. Income Taxes
The Company files as a REIT under Sections 856-860 of the Internal Revenue Code
of 1986, as amended. In order to qualify as a REIT, the Company is required to
distribute at least 90% of its taxable income to shareholders and to meet
certain asset and income tests as well as certain other requirements. The
Company will generally not be liable for federal income taxes, provided it
satisfies their requirements. Even as a qualified REIT, the Company is subject
to certain state and local taxes on its income and property.
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 Company's net tax basis of its real estate assets is higher than the amount
set forth in the Company's Balance Sheet by approximately $449,000.
F-240
FSP Federal Way Corp.
Notes to Financial Statements
4. Income Taxes (continued)
The following schedule reconciles GAAP Net Income to Taxable Income subject to
dividend requirements:
Year Ended Period Ended
December 31, December 31,
(in thousands) 2002 2001
======================================================================================
GAAP net income (loss) $ 1,311 $ (791)
Add: Book depreciation and amortization 436 102
Deferred rent -- 136
Less: Tax depreciation and amortization (335) (84)
Straight-line rents (117) (26)
--------------------------------------------------------------------------------------
Taxable income (loss) subject to dividend requirement(1) $ 1,295 $ (663)
======================================================================================
(1) A tax loss is not subject to a dividend requirement.
The following schedule reconciles cash dividends paid to the dividends paid
deduction:
Year Ended Period Ended
December 31, December 31,
(in thousands) 2002 2001
=======================================================================================
Cash dividends paid $ 1,620 $ 77
Plus: Dividends designated from following year -- --
Less: Portion designated capital gain distribution -- --
Less: Return of Capital (325) (77)
---------------------------------------------------------------------------------------
Dividends paid deduction $ 1,295 $ --
=======================================================================================
5. Cash Available for Distribution
The Company evaluates its performance based on Cash Available for Distribution
("CAD") as management believes that CAD represents the most accurate measure of
the Company's activity. CAD 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 funds raised by the issuance of shares; plus the net proceeds
from the sale of land; less purchases of real estate assets, property and
equipment ("Capital Expenditures"), payments for deferred leasing commissions
and payments for deferred lease origination costs; plus (less) proceeds from
(payments to) cash reserves established at the acquisition date of the property
(cash-funded reserves). 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 payments for deferred lease origination costs 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 financial statements.
F-241
FSP Federal Way Corp.
Notes to Financial Statements
5. Cash Available for Distribution (continued)
The calculation of CAD is shown in the following table:
December 31, December 31,
(in thousands) 2002 2001
==========================================================================
Net income (loss) $ 1,311 $ (791)
Depreciation and amortization 436 102
Straight line rent (117) (26)
Proceeds from offering of shares -- 18,329
Purchase of land and building -- (15,650)
Establish funded reserve -- (1,038)
Payment of deferred lease origination costs -- (461)
--------------------------------------------------------------------------
Cash Available for Distribution $ 1,630 $ 465
==========================================================================
The Company's cash distributions are summarized as follows:
(in thousands)
Year Ended Period Ended
December 31, December 31,
Quarter Paid 2002 2001
============================================================
First Quarter $ 405 $ --
Second Quarter 405 --
Third Quarter 403 --
Fourth Quarter 407 77
------------------------------------------------------------
Dividends Paid $ 1,620 $ 77
============================================================
Cash distributions are typically paid in the quarter following the quarter that
CAD is generated.
Cash distributions are declared and paid based on the total outstanding shares
as of the record date.
6. Capital Stock
PREFERRED STOCK
Generally, each holder of Shares of Preferred Stock is entitled to receive
ratably all income and 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.
F-242
FSP Federal Way Corp.
Notes to Financial Statements
6. Capital Stock (continued)
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.
Subsequent to the completion of the offering of the preferred shares the holders
of common shares are not entitled to receive any income, nor shall the Company
declare or pay any cash dividends on shares of Common Stock.
7. Related Party Transactions
The Company executed a management agreement with FSP Property Management LLC, an
affiliate of FSP, that provides for a management fee equal to 1% of collected
revenues and is cancelable with 30 days notice by either party. For the year
ended December 31, 2002 and the period ended December 31, 2001, fees incurred
under the agreement were $17,000 and $5,000, respectively.
An acquisition fee of $50,000 was paid in 2001 to an affiliate of the Common
Shareholder. Such fees were included in the cost of the real estate.
Syndication fees of $1,600,000 were paid in 2001 to an affiliate of the Common
Shareholder for services related to syndication of the Company's preferred
stock.
During 2001, the Company borrowed and repaid in full:
Note payable to FSP, principal of $16,000,000 with interest equal to the
Citizens Bank base. Interest paid to FSP was $16,000. The average interest
rate during the time the loan was outstanding was 4.75%
A commitment fee of $1,150,000 was paid to FSP for obtaining the first
mortgage loan. Such amount is included in interest expense on the
Statement of Operations.
The Company paid a dividend of $15,000 to the common shareholder relating to
earnings of the Company prior to the completion of the offering of preferred
shares.
8. Commitments and Contingencies
The Company, as lessor, has future minimum rentals due under a non-cancelable
operating lease as follows:
Year Ended
(in thousands) December 31, Amount
------------ --------------
2003 $ 1,696
2004 1,739
2005 1,782
2006 1,207
--------------
$ 6,424
==============
In addition, the lessee is liable for real estate taxes and certain operating
expenses of the property.
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 tenant. The original lease period is five years with renewal options.
F-243
FSP Federal Way Corp.
Notes to Financial Statements
9. Subsequent Event
The Company has entered into a merger agreement with its common shareholder,
Franklin Street Properties Corp ("FSP"). In January 2003 FSP filed a proxy
statement with the United States Securities and Exchange Commission indicating
its intent to acquire the preferred stock interests of the Company and twelve
additional REITs. The merger requires the approval of the shareholders of the
Company as well as the shareholders of the twelve additional REITs and the
shareholders of FSP. If approved, FSP will issue shares of its common stock in
exchange for a 100% ownership interest in the Company.
F-244
SCHEDULE III
FSP FEDERAL WAY CORP.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2002
(in thousands) Initial Cost
----------------------------------
Costs
Capitalized
(Disposals)
Subsequent
Encumbrances Buildings & to
Description (1) Land Improvements Acquisition
----------- ------------ ---- ------------ -----------
Federal Way, Federal Way, Washington -- $ 2,509 $ 13,141 $ --
------------ ------- ------------ ---------
(in thousands)
Historical Costs
--------------------------------------------------------
Total
Costs, Net
of Depreciable
Buildings & Accumulated Accumulated Life Date of
Description Land Improvements Total(2) Depreciation Depreciation Years Acquisition
----------- ---- ------------ --------- ------------ ------------ ----- -----------
Federal Way, Federal Way, Washington $ 2,509 $ 13,141 $ 15,650 $ 439 $ 15,211 15-39 September, 2001
------- ----------- ---------- ----------- ------------
(1) There are no encumbrances on the above properties.
(2) The aggregate cost for Federal Income Tax purposes is greater than the
total historical cost by approximately $461,000.
F-245
FSP FEDERAL WAY CORP.
REAL ESTATE AND ACCUMULATED DEPRECIATION
The following table summarizes the changes in the Company's real estate
investment and accumulated depreciation:
December 31,
(in thousands) 2002 2001
==========================================================================
Real estate investments, at cost:
Balance, beginning of year/period $ 15,650 $ --
Acquisitions -- 15,650
Improvements -- --
Dispositions -- --
--------------------------------------------------------------------------
Balance, end of year/period $ 15,650 $ 15,650
==========================================================================
Accumulated depreciation:
Balance, beginning of year/ period $ 98 $ --
Depreciation 341 98
Dispositions -- --
---------------------------------------------------------- ---------------
Balance, end of year/period $ 439 $ 98
==========================================================================
F-246
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-248
Financial statements:
Balance sheet F-249
Statement of operations F-250
Statement of changes in stockholders' equity F-251
Statement of cash flows F-252
Notes accompanying financial statements F-253
F-247
[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-248
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-249
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-250
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-251
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-252
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-253
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-254
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-255
FSP Fair Lakes Corp.
Financial Statements
December 31, 2002
Table of Contents
Page
----
Financial Statements
Independent Auditor's Report.............................................. F-257
Balance Sheets as of December 31, 2002 and 2001........................... F-258
Statements of Operations for the year ended December 31, 2002 and for the
period July 24, 2001 (date of inception) to December 31, 2001....... F-259
Statements of Changes in Stockholders' Equity for the year ended
December 31, 2002 and for the period July 24, 2001 (date of
inception) to December 31, 2001..................................... F-260
Statements of Cash Flows for the year ended December 31, 2002 and for the
period July 24, 2001 (date of inception) to December 31, 2001....... F-261
Notes to the Financial Statements......................................... F-262
Schedule of Real Estate and Accumulated Depreciation...................... F-271
F-256
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
FSP Fair Lakes Corp.
(a Delaware Corporation)
We have audited the accompanying balance sheets of FSP Fair Lakes Corp. (a
Delaware Corporation) as of December 31, 2002 and 2001, and the related
statements of operations, changes in stockholders' equity and cash flows, as
well as the financial statement schedule listed in the accompanying index, for
the year ended December 31, 2002, and for the period from July 24, 2001 (date of
inception) to December 31, 2001. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
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 audits to obtain reasonable assurance about whether the financial
statements and financial statement schedule are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements and financial statement schedule. 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 provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial statement schedule
referred to above present fairly, in all material respects, the financial
position of FSP Fair Lakes Corp. as of December 31, 2002 and 2001, and the
results of its operations and its cash flows for the year ended December 31,
2002, and for the initial period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America.
/s/ Braver and Company, P.C.
Newton, Massachusetts
February 7, 2003
F-257
FSP Fair Lakes Corp.
Balance Sheets
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 33,791 33,791
--------------------------------------------------------------------------------------------------------------------------
37,974 37,974
Less accumulated depreciation 1,130 253
--------------------------------------------------------------------------------------------------------------------------
Real estate investments, net 36,844 37,721
Cash and cash equivalents 1,200 1,050
Cash - funded reserve 1,801 1,801
Tenant rent receivable 38 99
Step rent receivable 599 154
Prepaid expenses and other assets 31 6
Deferred lease origination costs, net of accumulated amortization of $195 and $11 1,291 1,475
--------------------------------------------------------------------------------------------------------------------------
Total assets $ 41,804 $ 42,306
==========================================================================================================================
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and accrued expenses 250 285
Dividends payable 955 924
--------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,205 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 (3,446) (2,948)
--------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 40,599 41,097
--------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 41,804 $ 42,306
==========================================================================================================================
See accompanying notes to financial statements.
F-258
FSP Fair Lakes Corp.
Statements of Operations
For the Period
For the July 24, 2001
Year Ended (date of inception) to
(in thousands, except shares and per share amounts) December 31, 2002 December 31, 2001
=============================================================================================================================
Revenue:
Rental $6,514 $ 1,831
Interest and other 48 14
-----------------------------------------------------------------------------------------------------------------------------
Total revenue 6,562 1,845
-----------------------------------------------------------------------------------------------------------------------------
Expenses:
Rental operating expenses 1,606 493
Depreciation and amortization 1,061 264
Real estate taxes and insurance 504 148
Interest 13 2,941
-----------------------------------------------------------------------------------------------------------------------------
Total expenses 3,184 3,846
-----------------------------------------------------------------------------------------------------------------------------
Net income (loss) before common dividends 3,378 (2,001)
Dividends paid to common shareholders prior to syndication of preferred shares -- 111
-----------------------------------------------------------------------------------------------------------------------------
Net income (loss) attributable to preferred shareholders $3,378 $(2,112)
=============================================================================================================================
Weighted average number of preferred shares outstanding,
basic and diluted 480 480
=============================================================================================================================
Net income (loss) per preferred share, basic and diluted $7,038 $(4,402)
=============================================================================================================================
See accompanying notes to financial statements.
F-259
FSP Fair Lakes Corp.
Statements of Changes in Stockholders' Equity
For the Year Ended December 31, 2002 and
For the Period July 24, 2001 (date of inception) to December 31, 2001
Retained Deficit
Additional and Dividends Total
Preferred Common Paid in in Excess of Stockholders'
(in thousands, except shares) Stock Stock Capital Earnings Equity
=================================================================================================================
Private offering of 480 shares, net $ -- $ -- $44,045 $ -- $ 44,045
Dividends -- -- -- (947) (947)
Net Loss -- -- -- (2,001) (2,001)
-----------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 -- -- 44,045 (2,948) 41,097
Dividends -- -- -- (3,876) (3,876)
Net Income -- -- -- 3,378 3,378
-----------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 $ -- $ -- $44,045 $(3,446) $ 40,599
=================================================================================================================
See accompanying notes to financial statements.
F-260
FSP Fair Lakes Corp.
Statements of Cash Flows
For the Period
For the July 24, 2001
Year Ended (date of inception) to
(in thousands) December 31, 2002 December 31, 2001
===================================================================================================
Cash flows from operating activities:
Net income (loss) $ 3,378 $ (2,001)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization 1,061 264
Changes in operating assets and liabilities:
Cash-funded reserve -- (1,801)
Tenant rent receivable 61 (99)
Step rent receivable (445) (154)
Prepaid expenses and other assets (25) (6)
Accounts payable and accrued expenses (35) 285
---------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 3,995 (3,512)
---------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets -- (37,974)
Purchase of deferred lease origination costs -- (1,486)
---------------------------------------------------------------------------------------------------
Net cash used for investing activities -- (39,460)
---------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of company stock -- 48,000
Syndication costs -- (3,955)
Dividends to stockholders (3,845) (23)
Proceeds from long-term debt -- 39,000
Principal payments on long-term debt -- (39,000)
---------------------------------------------------------------------------------------------------
Net cash (used for) provided by financing activities (3,845) 44,022
---------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 150 1,050
Cash and cash equivalents, beginning of year 1,050 --
---------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 1,200 $ 1,050
===================================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 13 $ 2,941
Disclosure of non-cash financing activities:
Dividends declared but not paid $ 955 $ 924
See accompanying notes to financial statements.
F-261
FSP Fair Lakes Corp.
Notes to Financial Statements
1. Organization
FSP 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.
2. Summary of Significant Accounting Policies
ESTIMATES AND ASSUMPTIONS
The Company prepares its financial statements and related notes in conformity
with accounting principles generally accepted in the United States of America
("GAAP"). 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 2001 financial statements have been reclassified to
conform to the 2002 presentation.
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 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
F-262
FSP Fair Lakes Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
REAL ESTATE AND DEPRECIATION (continued)
The following schedule reconciles the cost of the property as shown in the
Offering Memorandum as to the amounts shown on the Company's Balance Sheet:
(in thousands)
Price per Offering Memorandum $ 39,000
Plus: Acquisition fees --
Plus: Other acquisition costs 460
-----------------------------------------------------------------------
Total Acquisition Costs $ 39,460
=======================================================================
These costs are reported in the Company's Balance Sheet as follows :
Land $ 4,183
Building 33,791
Deferred lease origination costs 1,486
-----------------------------------------------------------------------
Total reported in Balance Sheet $ 39,460
=======================================================================
The Company 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, 2002, no
such indicators of impairment were identified.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with an initial
maturity of three months or less to be cash equivalents.
CASH-FUNDED RESERVES
The Company has set aside funds in anticipation of future capital needs of the
property. Although these funds typically are used for the payment of real estate
assets and deferred leasing commissions, there is no legal restriction on their
use and they may be used for any company purpose.
RESTRICTED CASH
Restricted cash consists of tenant security deposits.
MARKETABLE SECURITIES
The Company accounts for investments in debt securities under the provisions of
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". The Company typically has classified its debt securities as
available-for-sale.
There were no investments in marketable securities at December 31, 2002 and
2001.
F-263
FSP Fair Lakes Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
CONCENTRATION OF CREDIT RISKS
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.
For the year ended December 31, 2002 and period ended December 31, 2001 rental
income was derived from a single tenant. As such, future receipts are dependent
upon the financial strength of the lessee and its ability to perform under the
lease agreement.
The property was originally leased to PricewaterhouseCoopers LLP ("PWC"). In
2002, PWC sold its consulting practice and assigned the lease to IBM
Corporation. However, PWC still remains obligated under the lease in the event
IBM Corporation fails to meet the terms of the lease.
FINANCIAL INSTRUMENTS
The Company estimates that the carrying value of cash and cash equivalents,
cash-funded reserves and restricted cash approximate their fair values based on
their short-term maturity and prevailing interest rates.
STEP RENT RECEIVABLE
Certain leases provide for fixed increases over the life of the lease. Rental
revenue is recognized on the straight-line basis over the related lease term;
however, billings by the Company are based on required minimum rentals in
accordance with the lease agreements. Step rent receivable, which is the
cumulative revenue recognized in excess of amounts billed by the Company, is
$599,000 and $154,000 at December 31, 2002 and 2001, respectively.
DEFERRED LEASE ORIGINATION COSTS
Deferred lease origination costs are the estimated value of legal and leasing
costs related to the acquired lease that was included in the purchase price when
the Company acquired the property. Under Statement of Financial Accounting
Standards No. 141 "Business Combinations" ("SFAS 141"), which was approved by
the Financial Accounting Standards Board in June 2001, the Company is required
to segregate these costs from its investment in real estate. The Company
subsequently amortizes these costs on a straight-line basis over the remaining
life of the related lease. Amortization expense of approximately $184,000 and
$11,000 is included in Depreciation and Amortization in the Company's Statements
of Operations for the year ended December 31, 2002 and the period ended December
31, 2001, respectively.
Deferred lease origination costs included in the purchase price of the property
were $1,486,000 and are being amortized over the weighted-average period of
eight years in respect of the lease assumed. Details of the deferred lease
origination costs as of December 31:
2002 2001
----------------------------------
Cost $ 1,486,000 $ 1,486,000
Accumulated amortization 195,000 11,000
----------------------------------
Book value $ 1,291,000 $ 1,475,000
==================================
The estimated annual amortization expense for the five years succeeding December
31, 2002 are as follows:
2003 $ 184,000
2004 $ 184,000
2005 $ 184,000
2006 $ 184,000
2007 $ 184,000
F-264
FSP Fair Lakes Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
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
$3,955,000 have been reported as a reduction in the Stockholders' Equity in the
Company's Balance Sheets.
REVENUE RECOGNITION
The Company has retained substantially all of the risks and benefits of
ownership of the Company's commercial property and accounts for its lease as
operating lease. Rental income from leases, which may include rent concessions
(including free rent and tenant improvement allowances) and scheduled increases
in rental rates during the lease term, is recognized on a straight-line basis.
The Company does not have any percentage rent arrangements with its commercial
property tenant. Reimbursable costs are included in rental income in the period
earned. A schedule showing the components of rental revenue is shown below.
Year Ended Period Ended
December 31, December, 31
(in thousands) 2002 2001
========================================================================
Income from leases $ 3,877 $ 1,117
Straight-line rent adjustment 445 154
Reimbursable expenses 2,192 560
------------------------------------------------------------------------
Total $ 6,514 $ 1,831
========================================================================
INTEREST AND OTHER
Interest income and other income are recognized when the related services are
performed and the earnings process is complete.
INCOME TAXES
The Company has elected to be taxed as a REIT under the Internal Revenue Code of
1986, 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 taxable income
that must be distributed annually.
NET INCOME PER SHARE
The Company follows Statement of Financial Accounting Standards 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
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 December 31, 2002 and 2001. Subsequent to the completion
of the offering of preferred shares, the holders of common stock are not
entitled to share in any income. The denominator used for calculating basic and
diluted net income per share is shown for preferred shares only and is as
follows:
Year Ended Period Ended
December 31, December 31,
2002 2001
============================================================================
Weighted average number of preferred
shares outstanding 480 480
F-265
FSP Fair Lakes Corp.
Notes to Financial Statements
3. 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. 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. The impact of adoption did not have a
material impact on the Company's financial position, results of operations and
cash flows. The Company does not have any real estate assets that it considers
"held for sale" at December 31, 2002.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements Nos.
4, 44, and 64, Amendment of SFAS 13, and Technical Corrections". This Statement
rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt",
and an amendment of that Statement, SFAS No. 64, "Extinguishments of Debt Made
to Satisfy Sinking-Fund Requirements". This Statement amends SFAS 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 SFAS 145 and believes that the impact of adoption
will not be material to its financial position, results of operations and cash
flows.
In July 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities". This statement was 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.
4. Income Taxes
The Company files as a REIT under Sections 856-860 of the Internal Revenue Code
of 1986, as amended. In order to qualify as a REIT, the Company is required to
distribute at least 90% of its taxable income to shareholders and to meet
certain asset and income tests as well as certain other requirements. The
Company will generally not be liable for federal income taxes, provided it
satisfies these requirements. Even as a qualified REIT, the Company is subject
to certain state and local taxes on its income and property.
For the period ended December 31, 2001, the Company incurred a net operating
loss for income tax purposes of approximately $2,137,000 that can be carried
forward until it expires in the year 2021.
The Company's net tax basis of its real estate assets is higher than the amount
set forth in the Company's Balance Sheet by approximately $1,448,000 at December
31, 2002 and 2001.
F-266
FSP Fair Lakes Corp.
Notes to Financial Statements
4. Income Taxes (continued)
The following schedule reconciles GAAP Net Income to Taxable Income subject to
dividend requirements:
Year Ended Period Ended
December 31, December 31,
(in thousands) 2002 2001
===========================================================================================
GAAP net income (loss) $ 3,378 $ (2,001)
Add: Book depreciation and amortization 1,061 264
Less: Tax depreciation and amortization (881) (239)
Straight-line rents (445) (154)
-------------------------------------------------------------------------------------------
Taxable income (loss) subject to dividend requirement(1) $ 3,113 $ (2,130)
===========================================================================================
(1) A tax loss is not subject to a dividend requirement.
The following schedule reconciles cash dividends paid to the dividends paid
deduction:
Year Ended Period Ended
December 31, December 31,
(in thousands) 2002 2001
=========================================================================================
Cash dividends paid $ 3,845 $ 23
Plus: Dividends designated from following year -- --
Less: Portion designated capital gain distribution -- --
Less: Return of Capital (732) (23)
-----------------------------------------------------------------------------------------
Dividends paid deduction $ 3,113 $ --
=========================================================================================
5. Cash Available for Distribution
The Company evaluates its performance based on Cash Available for Distribution
("CAD") as management believes that CAD represents the most accurate measure of
the Company's activity. CAD 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 funds raised by the issuance of shares; plus the net proceeds
from the sale of land; less purchases of real estate assets, property and
equipment ("Capital Expenditures"), payments for deferred leasing commissions
and payments for deferred lease origination costs; plus (less) proceeds from
(payments to) cash reserves established at the acquisition date of the property
(Cash-funded reserves). 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 payments for deferred lease origination costs 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.
F-267
FSP Fair Lakes Corp.
Notes to Financial Statements
5. Cash Available for Distribution (continued)
The calculation of CAD is shown in the following table:
Year Ended Period Ended
December 31, December 31,
(in thousands) 2002 2001
=============================================================================
Net income (loss) $ 3,378 $ (2,001)
Depreciation and amortization 1,061 264
Straight line rent (445) (154)
Proceeds from offering of shares -- 44,045
Purchase of land and building and improvements -- (37,974)
Establish funded reserve -- (1,801)
Payment of deferred lease origination costs -- (1,486)
-----------------------------------------------------------------------------
Cash Available for Distribution $ 3,994 $ 893
=============================================================================
The Company's cash distributions are summarized as follows:
(in thousands)
Year Ended Period Ended
December 31, December 31,
Quarter Paid 2002 2001
==========================================================================
First Quarter $ 924 $ --
Second Quarter 999 --
Third Quarter 953 --
Fourth Quarter 969 23
--------------------------------------------------------------------------
Dividends paid $ 3,845 $ 23
==========================================================================
Cash distributions are declared and paid based on the total outstanding shares
as of the record date and are typically paid in the quarter following the
quarter that CAD is generated.
6. Capital Stock
PREFERRED STOCK
Generally, each holder of Shares of Preferred Stock is entitled to receive
ratably all income and 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.
F-268
FSP Fair Lakes Corp.
Notes to Financial Statements
6. Capital Stock (continued)
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.
Subsequent to the completion of the offering of the preferred shares the holders
of common shares are not entitled to receive any income, nor shall the Company
declare or pay any cash dividends on shares of Common Stock.
7. Related Party Transactions
The Company executed a management agreement with FSP Property Management LLC, an
affiliate of FSP, that provides for a management fee equal to 1% of collected
revenues and is cancelable with 30 days notice by either party. For the year
ended December 31, 2002 and the period ended December 31, 2001, fees incurred
under the agreement were $66,000 and $17,000, respectively.
An acquisition fee and other costs totaling $280,000 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 $3,840,000 were paid in 2001 to an affiliate of the Common
Shareholder for services related to syndication of the Company's preferred
stock.
During 2001, the Company borrowed and repaid in full:
Note payable to FSP, principal of $39,000,000 with interest equal to the
Citizens Bank base. Interest paid to FSP was $181,000. The average
interest rate during the time the loan was outstanding was 6.0%.
A commitment fee of $2,760,000 was paid to FSP for obtaining the first
mortgage loan. Such amount is included in interest expense on the
Statement of Operations.
The Company paid dividends of $88,000 and $23,000 in 2002 and 2001,
respectively, to the common shareholder relating to earnings of the Company
prior to the completion of the offering of preferred shares.
8. Commitments and Contingencies
The Company, as lessor, has future minimum rentals due under a non-cancelable
operating lease as follows:
Year Ended
(in thousands) December 31, Amount
------------ -----------
2003 $ 4,087
2004 4,190
2005 4,294
2006 4,402
2007 4,512
Thereafter 9,364
-----------
$ 30,849
===========
In addition, the lessee is liable for real estate taxes and certain operating
expenses of the property.
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 tenant.
The original lease expires December 31, 2009 with two five-year options to
renew.
F-269
FSP Fair Lakes Corp.
Notes to Financial Statements
9. Subsequent Event
The Company has entered into a merger agreement with its common shareholder,
Franklin Street Properties Corp ("FSP"). In January 2003 FSP filed a proxy
statement with the United States Securities and Exchange Commission indicating
its intent to acquire the preferred stock interests of the Company and twelve
additional REITs. The merger requires the approval of the shareholders of the
Company as well as the shareholders of the twelve additional REITs and the
shareholders of FSP. If approved, FSP will issue shares of its common stock in
exchange for a 100% ownership interest in the Company.
F-270
FSP FAIR LAKES CORP.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2002
(in thousands)
Initial Cost
----------------------------------
Costs
Capitalized
(Disposals)
Subsequent
Encumbrances Buildings & to
Description (1) Land Improvements Acquisition
----------- ------------ ---- ------------ -----------
Fair Lakes, Fairfax, VA -- $ 4,183 $ 33,791 $ --
============ ======== ========== =========
Historical Costs
----------------------------------------------------------
Total
Costs, Net
of Depreciable
Buildings & Accumulated Accumulated Life Date of
Description Land Improvements Total(2) Depreciation Depreciation Years Acquisition
----------- ---- ------------ -------- ------------ ------------ ----- -----------
Fair Lakes, Fairfax, VA $ 4,183 $ 33,791 $ 37,974 $ 1,130 $ 36,844 15-39 September, 2001
======= ============ ======== =========== ===========
(1) There are no encumbrances on the above property.
(2) The aggregate cost for Federal Income Tax purposes is greater than the
total historical cost by approximately $1,486,000.
F-271
FSP FAIR LAKES CORP.
REAL ESTATE AND ACCUMULATED DEPRECIATION
The following table summarizes the changes in the Company's real estate
investment and accumulated depreciation:
December 31, December 31,
(in thousands) 2002 2001
================================================================================
Real estate investments, at cost:
Balance, beginning of period $37,974 $ --
Acquisitions -- 37,974
Improvements -- --
Dispositions -- --
--------------------------------------------------------------------------------
Balance, end of year $37,974 $37,974
================================================================================
Accumulated depreciation:
Balance, beginning of period $ 253 $ --
Depreciation 877 253
Dispositions -- --
--------------------------------------------------------------------------------
Balance, end of period $ 1,130 $ 253
================================================================================
F-272
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-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 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-274
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-275
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-276
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-277
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-278
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-279
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-280
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-281
FSP Northwest Point Corp.
Financial Statements
December 31, 2002
Table of Contents
Page
----
Financial Statements
Independent Auditor's Report.............................................. F-283
Balance Sheets as of December 31, 2002 and 2001........................... F-284
Statements of Operations for the year ended December 31, 2002 and
for the period October 17, 2001 (date of inception)
to December 31, 2001................................................ F-285
Statements of Changes in Stockholders' Equity for the year ended
December 31, 2002 and for the period October 17, 2001 (date
of inception) to December 31, 2001.................................. F-286
Statements of Cash Flows for the year ended December 31, 2002 and
for the period October 17, 2001 (date of inception) to
December 31, 2001................................................... F-287
Notes to the Financial Statements......................................... F-288
Schedule of Real Estate and Accumulated Depreciation...................... F-297
F-282
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
FSP Northwest Point Corp.
(a Delaware Corporation)
We have audited the accompanying balance sheets of FSP Northwest Point Corp. (a
Delaware Corporation) as of December 31, 2002 and 2001, and the related
statements of operations, changes in stockholders' equity and cash flows, as
well as the financial statement schedule listed in the accompanying index, for
the year ended December 31, 2002, and for the period from October 17, 2001 (date
of inception) to December 31, 2001. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
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 audits to obtain reasonable assurance about whether the financial
statements and financial statement schedule are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements and financial statement schedule. 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 provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial statement schedule
referred to above present fairly, in all material respects, the financial
position of FSP Northwest Point Corp. as of December 31, 2002 and 2001, and the
results of its operations and its cash flows for the year ended December 31,
2002, and for the initial period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America.
/s/ Braver and Company, P.C.
Newton, Massachusetts
February 7, 2003
F-283
FSP Northwest Point Corp.
Balance Sheets
December 31, 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 26,555 26,555
-------------------------------------------------------------------------------------
29,797 29,797
Less accumulated depreciation 711 28
-------------------------------------------------------------------------------------
Real estate investments, net 29,086 29,769
Cash and cash equivalents 1,492 657
Cash - funded reserve 1,498 1,498
Step rent receivable 339 --
Prepaid expenses and other assets 49 37
Deferred lease origination costs, net of accumulated
amortization of $170 and $2 1,230 1,398
-------------------------------------------------------------------------------------
Total assets $ 33,694 $ 33,359
=====================================================================================
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and accrued expenses $ 1,216 $ 790
Accrued rents 407 391
Dividends payable 716 132
-------------------------------------------------------------------------------------
Total liabilities 2,339 1,313
-------------------------------------------------------------------------------------
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 (2,831) (2,140)
-------------------------------------------------------------------------------------
Total Stockholders' Equity 31,355 32,046
-------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 33,694 $ 33,359
=====================================================================================
See accompanying notes to financial statements.
F-284
FSP Northwest Point Corp.
Statements of Operations
For the Period
For the October 17, 2001
Year Ended (date of inception)
December 31, to December 31,
(in thousands, except shares and per share amounts) 2002 2001
=======================================================================================================
Revenue:
Rental $ 5,127 $ 351
Interest and other 40 7
-------------------------------------------------------------------------------------------------------
Total revenue 5,167 358
-------------------------------------------------------------------------------------------------------
Expenses:
Rental operating expenses 628 89
Depreciation and amortization 851 30
Real estate taxes and insurance 1,435 60
Interest -- 2,187
-------------------------------------------------------------------------------------------------------
Total expenses 2,914 2,366
-------------------------------------------------------------------------------------------------------
Net income (loss) before common dividends 2,253 (2,008)
Dividends paid to common shareholders prior to syndication
of preferred shares -- 26
-------------------------------------------------------------------------------------------------------
Net income (loss) attributable to preferred shareholders $ 2,253 $ (2,034)
=======================================================================================================
Weighted average number of preferred shares outstanding,
basic and diluted 372.5 372.5
=======================================================================================================
Net income (loss) per preferred share, basic and diluted $ 6,048 $ (5,460)
=======================================================================================================
See accompanying notes to financial statements.
F-285
FSP Northwest Point Corp.
Statements of Changes in Stockholders' Equity
For the Year Ended December 31, 2002
and for the period October 17, 2001
(date of inception)
to December 31, 2001
Retained Deficit
Additional and Dividends Total
Preferred Common Paid in in Excess of Stockholders'
(in thousands, except shares) Stock Stock Capital Earnings Equity
=============================================================================================================
Private offering of 372.5 shares, net $ -- $ -- $ 34,186 $ -- $ 34,186
Dividends -- -- -- (132) (132)
Net Loss -- -- -- (2,008) (2,008)
-------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 -- -- 34,186 (2,140) 32,046
Dividends -- -- -- (2,944) (2,944)
Net Income -- -- -- 2,253 2,253
-------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 $ -- $ -- $ 34,186 $ (2,831) $ 31,355
=============================================================================================================
See accompanying notes to financial statements.
F-286
FSP Northwest Point Corp.
Statements of Cash Flows
For the Period
For the October 17, 2001
Year Ended (date of inception)
December 31, to December 31,
================================================================================================
(in thousands) 2002 2001
Cash flows from operating activities:
Net income (loss) $ 2,253 $ (2,008)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization 851 30
Changes in operating assets and liabilities:
Cash funded reserve -- (1,498)
Prepaid expenses and other assets (12) (37)
Step rent receiveable (339) --
Accounts payable and accrued expenses 426 790
Accrued rents 16 391
------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 3,195 (2,332)
------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets -- (29,797)
Purchase of deferred lease origination costs -- (1,400)
------------------------------------------------------------------------------------------------
Net cash used in investing activities -- (31,197)
------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of company stock -- 37,250
Syndication costs -- (3,064)
Dividends to stockholders (2,360) --
Proceeds from long-term debt -- 30,150
Principal payments on long-term debt -- (30,150)
------------------------------------------------------------------------------------------------
Net cash (used for) provided by financing activities (2,360) 34,186
------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 835 657
Cash and cash equivalents, beginning of year 657 --
------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 1,492 $ 657
================================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ -- $ 2,187
Disclosure of non-cash financing activities:
Dividends declared but not paid $ 716 $ 132
See accompanying notes to financial statements.
F-287
FSP Northwest Point Corp.
Notes to Financial Statements
1. 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, Illinois (the "Property").
The Property consists of a six-story Class "A" suburban office building that
contains approximately 177,000 square feet of space situated on approximately
5.3 acres of land. The company acquired the Property on December 5, 2001.
2. Summary of Significant Accounting Policies
ESTIMATES AND ASSUMPTIONS
The Company prepares its financial statements and related notes in conformity
with accounting principles generally accepted in the United States of America
("GAAP"). 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 information in the 2001 financial statements have been reclassified to
conform to the 2002 presentation.
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 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
F-288
FSP Northwest Point Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
REAL ESTATE AND DEPRECIATION (continued)
The following schedule reconciles the cost of the property as shown in the
Offering Memorandum as to the amounts shown on the Company's Balance Sheet:
(in thousands)
Price per Offering Memorandum $ 30,150
Plus: Acquisition fees 186
Plus: Other acquisition costs 861
----------------------------------------------------------------
Total Acquisition Costs $ 31,197
================================================================
These costs are reported in the Company's Balance Sheet as follows:
Land $ 3,242
Building 26,555
Deferred lease origination costs 1,400
----------------------------------------------------------------
Total reported in Balance Sheet $ 31,197
================================================================
The Company 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, 2002 and
2001, no such indicators of impairment were identified.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with an initial
maturity of three months or less to be cash equivalents.
CASH-FUNDED RESERVES
The Company has set aside funds in anticipation of future capital needs of the
property. Although these funds typically are used for the payment of real estate
assets and deferred leasing commissions, there is no legal restriction on their
use and they may be used for any company purpose.
RESTRICTED CASH
Restricted cash consists of tenant security deposits.
MARKETABLE SECURITIES
The Company accounts for investments in debt securities under the provisions of
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". The Company typically has classified its debt securities as
available-for-sale.
There were no investments in marketable securities at December 31, 2002 and
2001.
CONCENTRATION OF CREDIT RISKS
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-289
FSP Northwest Point Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
CONCENTRATION OF CREDIT RISKS (continued)
For the year ended December 31, 2002 and the period ended December 31, 2001,
100% of the rental income was derived from one tenant, Motorola. As such, future
receipts are dependent upon the financial strength of the lessee and its ability
to perform under the lease agreement.
FINANCIAL INSTRUMENTS
The Company estimates that the carrying value of cash and cash equivalents and
cash-funded reserves and restricted cash approximate their fair values based on
their short-term maturity and prevailing interest rates.
STEP RENT RECEIVABLE
Certain leases provide for fixed increases over the life of the lease. Rental
revenue is recognized on the straight-line basis over the related lease term;
however, billings by the Company are based on required minimum rentals in
accordance with the lease agreements. Step rent receivable, which is the
cumulative revenue recognized in excess of amounts billed by the Company, is
$339,000 and $0 at December 31, 2002 and 2001, respectively.
DEFERRED LEASE ORIGINATION COSTS
Deferred lease origination costs are the estimated value of legal and leasing
costs related to acquired leases that were included in the purchase price when
the Company acquired the property. Under Statement of Financial Accounting
Standards No. 141 "Business Combinations" ("SFAS 141"), which was approved by
the Financial Accounting Standards Board in June 2001, the Company is required
to segregate these costs from its investment in real estate. The Company
subsequently amortizes these costs on a straight-line basis over the
weighted-average remaining life of the related lease. Amortization expense of
approximately $168,000 and $2 is included in Depreciation and Amortization in
the Company's Statements of Operations for the year ended December 31, 2002 and
the period ended December 31, 2001, respectively.
Deferred lease origination costs included in the purchase price of the property
were $1,400,000 and are being amortized over the weighted-average period of six
years in respect of the lease assumed. Details of the deferred lease origination
costs as of December 31:
2002 2001
------------ ------------
Cost $ 1,400,000 $ 1,400,000
Accumulated amortization 170,000 2,000
------------ ------------
Book value $ 1,230,000 $ 1,398,000
============ ============
The estimated annual amortization expense for the years succeeding December 31,
2002 are as follows:
2003 $ 170,000
2004 $ 170,000
2005 $ 170,000
2006 $ 170,000
2007 $ 170,000
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
$3,064,000 have been reported as a reduction in the Stockholders' Equity in the
Company's Balance Sheets.
F-290
FSP Northwest Point Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
REVENUE RECOGNITION
The Company has retained substantially all of the risks and benefits of
ownership of the Company's commercial property and accounts for its lease as an
operating lease. Rental income from the lease, which may include rent concession
(including free rent and tenant improvement allowances) and scheduled increases
in rental rates during the lease term, is recognized on a straight-line basis.
The Company does not have any percentage rent arrangements with its commercial
property tenants. Reimbursable costs are included in rental income in the period
earned. A schedule showing the components of rental revenue is shown below:
Year Ended Period Ended
December 31, December, 31
(in thousands) 2002 2001
====================================================================
Income from lease $ 2,956 $ 210
Straight-line rent adjustment 339 --
Reimbursable expense 1,832 141
--------------------------------------------------------------------
Total $ 5,127 $ 351
====================================================================
INTEREST AND OTHER
Interest income and other income are recognized when the related services are
performed and the earnings process is complete.
INCOME TAXES
The Company has elected to be taxed as a REIT under the Internal Revenue Code of
1986, 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 taxable income
that must be distributed annually.
NET INCOME PER SHARE
The Company follows Statement of Financial Accounting Standards 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
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 December 31, 2002 and 2001. Subsequent to the completion
of the offering of preferred shares, the holders of the common stock are not
entitled to share in any income. The denominator used for calculating basic and
diluted net income per share is shown for preferred shares only and is as
follows:
Year Ended Period Ended
December 31, December 31,
2002 2001
======================================================================
Weighted average number of
preferred shares outstanding 372.5 372.5
F-291
FSP Northwest Point Corp.
Notes to Financial Statement
3. 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. 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. The impact of adoption did not have a
material impact on the Company's financial position, results of operations and
cash flows. The Company does not have any real estate assets that it considers
"held for sale" at December 31, 2002.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements Nos.
4, 44, and 64, Amendment of SFAS 13, and Technical Corrections". This Statement
rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt",
and an amendment of that Statement, SFAS No. 64, "Extinguishments of Debt Made
to Satisfy Sinking-Fund Requirements". This Statement amends SFAS 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 SFAS 145 and believes that the impact of adoption
will not be material to its financial position, results of operations and cash
flows.
In July 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities". This statement was 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.
4. Income Taxes
The Company files as a REIT under Sections 856-860 of the Internal Revenue Code
of 1986, as amended. In order to qualify as a REIT, the Company is required to
distribute at least 90% of its taxable income to shareholders and to meet
certain asset and income tests as well as certain other requirements. The
Company will generally not be liable for federal income taxes, provided it
satisfies their requirements. Even as a qualified REIT, the Company is subject
to certain state and local taxes on its income and property.
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 Company's net tax basis of its real estate assets is higher than the amount
set forth in the Company's Balance Sheet by approximately $1,364,000.
F-292
FSP Northwest Point Corp.
Notes to Financial Statement
4. Income Taxes (continued)
The following schedule reconciles GAAP Net Income to Taxable Income subject to
dividend requirements:
Year Ended Period Ended
December 31, December 31,
(in thousands) 2002 2001
====================================================================================
GAAP net income (loss) $ 2,253 $ (2,008)
Add: Book depreciation and amortization 851 30
Other book/tax differences, net -- 415
Less: Tax depreciation and amortization (683) (31)
Straight-line rents (339) --
------------------------------------------------------------------------------------
Taxable income (loss) subject to dividend requirement(1) $ 2,082 $ (1,594)
====================================================================================
(1) A tax loss is not subject to a dividend requirement.
The following schedule reconciles cash dividends paid to the dividends paid
deduction:
Year Ended Period Ended
December 31, December 31,
(in thousands) 2002 2001
====================================================================================
Cash dividends paid $ 2,360 $ --
Plus: Dividends designated from following year -- --
Less: Portion designated capital gain distribution -- --
Less: Return of Capital (278) --
------------------------------------------------------------------------------------
Dividends paid deduction $ 2,082 $ --
====================================================================================
5. Cash Available for Distribution
The Company evaluates its performance based on Cash Available for Distribution
("CAD") as management believes that CAD represents the most accurate measure of
the Company's activity. CAD 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 funds raised by the issuance of shares; plus the net proceeds
from the sale of land; less purchases of real estate assets, property and
equipment ("Capital Expenditures"), payments for deferred leasing commissions
and payments for deferred lease origination costs; plus (less) proceeds from
(payments to) cash reserves established at the acquisition date of the property
(cash-funded reserve). 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 payments for deferred lease origination costs 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 financial statements.
F-293
FSP Northwest Point Corp.
Notes to Financial Statements
5. Cash Available for Distribution (continued)
The calculation of CAD is shown in the following table:
December 31,
(in thousands) 2002 2001
=======================================================================================
Net income (loss) $ 2,253 $ (2,008)
Depreciation and amortization 851 30
Straight line rent (339) --
Proceeds from offering of shares -- 34,186
Purchase of land and building and improvements -- (29,797)
Establish funded reserve -- (1,498)
Payment of deferred origination costs -- (1,400)
---------------------------------------------------------------------------------------
Cash Available for Distribution $ 2,765 $ (487)
=======================================================================================
The Company's cash distributions are summarized as follows:
(in thousands) Year Ended Period Ended
December 31, December 31,
Quarter Paid 2002 2001
=======================================================================================
First Quarter $ 132 $ --
Second Quarter 745 --
Third Quarter 739 --
Fourth Quarter 744 --
---------------------------------------------------------------------------------------
Dividends Paid $ 2,360 $ --
=======================================================================================
Cash distributions are typically paid in the quarter following the quarter that
CAD is generated.
Cash distributions are declared and paid based on the total outstanding shares
as of the record date.
6. Capital Stock
PREFERRED STOCK
Generally 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.
F-294
FSP Northwest Point Corp.
Notes to Financial Statements
6. Capital Stock (continued)
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.
Subsequent to the completion of the offering of the preferred shares, the
holders of common shares are not entitled to receive any income, nor shall the
Company declare or pay any cash dividends on shares of Common Stock.
7. Related Party Transactions
The Company executed a management agreement with FSP Property Management LLC, an
affiliate of FSP, that provides for a management fee equal to 1% of collected
revenues and is cancelable with 30 days notice by either party. For the year
ended December 31, 2002 and the period ended December 31, 2001, fees incurred
under the agreement were $50,000 and $3,400, respectively.
An acquisition fee of $186,000 was 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 Company's preferred
stock.
During 2001, the Company borrowed and repaid in full:
Note payable to FSP, principal of $30,150,000 with interest equal to the
Citizens Bank base. Interest paid to FSP was $45,000. The average interest
rate during the time the loan was outstanding was 4.75%.
A commitment fee of $2,142,000 was paid to FSP for obtaining the first
mortgage loan. Such amount is included in interest expense on the
Statement of Operations.
The Company paid a dividend of $26,394 in 2001 to the common shareholder
relating to earnings of the Company prior to the completion of the offering of
preferred shares.
8. Commitments and Contingencies
The Company, as lessor, has future minimum rentals due under a non-cancelable
operating lease as follows:
Year Ended
(in thousands) December 31, Amount
------------------ ---------------
2003 $ 3,021
2004 3,112
2005 3,206
2006 3,302
2007 3,401
Thereafter 8,019
---------------
$ 24,061
===============
In addition, the lessee is liable for real estate taxes and certain operating
expenses of the property.
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-295
FSP Northwest Point Corp.
Notes to Financial Statements
9. Subsequent Event
The Company has entered into a merger agreement with its common shareholder,
Franklin Street Properties Corp ("FSP"). In January 2003 FSP filed a proxy
statement with the United States Securities and Exchange Commission indicating
its intent to acquire the preferred stock interests of the Company and twelve
additional REITs. The merger requires the approval of the shareholders of the
Company as well as the shareholders of the twelve additional REITs and the
shareholders of FSP. If approved, FSP will issue shares of its common stock in
exchange for a 100% ownership interest in the Company.
F-296
SCHEDULE III
FSP NORTHWEST POINT CORP.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2002
(in thousands)
Initial Cost
------------------------------------
Costs
Capitalized
(Disposals)
Subsequent
Encumbrances Buildings & to
Description (1) Land Improvements Acquisition
------------ -------- ------------ -----------
Northwest Point, Elk Grove, Illinois -- $ 3,242 $ 26,555 $ --
============ ======== ============ ===========
(in thousands)
Historical Costs
-------------------------------------------------------------
Total
Costs, Net
of Depreciable
Buildings & Accumulated Accumulated Life Date of
Description Land Improvements Total(2) Depreciation Depreciation Years Acquisition
-------- ------------ -------- ------------ ------------ ----------- --------------
Northwest Point, Elk Grove, Illinois $ 3,242 $ 26,555 $ 29,797 $ 711 $ 29,086 15-39 December, 2001
======== ============ ======== ============ ============
(1) There are no encumbrances on the above properties.
(2) The aggregate cost for Federal Income Tax purposes is greater than the
total historical cost by approximately $1,400,000.
F-297
FSP NORTHWEST POINT CORP.
REAL ESTATE AND ACCUMULATED DEPRECIATION
The following table summarizes the changes in the Company's real estate
investment and accumulated depreciation.
December 31,
(in thousands) 2002 2001
===================================================================
Real estate investments, at cost:
Balance, beginning of period $ 29,797 $ --
Acquisitions -- 29,797
Improvements -- --
Dispositions -- --
-------------------------------------------------------------------
Balance, end of period $ 29,797 $ 29,797
===================================================================
Accumulated depreciation:
Balance, beginning of period $ 28 $ --
Depreciation 683 28
Dispositions -- --
-------------------------------------------------------------------
Balance, end of period $ 711 $ 28
===================================================================
F-298
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-300
Financial statements:
Balance sheet F-301
Statement of operations F-302
Statement of changes in stockholders' equity F-303
Statement of cash flows F-304
Notes accompanying financial statements F-305
F-299
[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-300
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-301
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-302
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-303
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-304
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-305
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-306
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-307
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-308
FSP Timberlake East Corp.
Financial Statements
December 31, 2002
Table of Contents
Page
----
Financial Statements
Independent Auditor's Report.............................................. F-310
Balance Sheet as of December 31, 2002..................................... F-311
Statement of Operations for the period January 10, 2002
(date of inception) to December 31, 2002............................ F-312
Statement of Changes in Stockholders' Equity for the period
January 10, 2002 (date of inception) to December 31, 2002........... F-313
Statement of Cash Flows for the period January 10, 2002
(date of inception) to December 31, 2002............................ F-314
Notes to the Financial Statements......................................... F-315
Schedule of Real Estate and Accumulated Depreciation...................... F-324
Additional Information:
Independent Auditor's Report on Additional Information................. F-326
Statement of Predecessor's Operations for the period January 1, 2002
to March 3, 2002.................................................... F-327
F-309
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
FSP Timberlake East Corp.
(a Delaware Corporation)
We have audited the accompanying balance sheet of FSP Timberlake East Corp. ( a
Delaware Corporation) as of December 31, 2002, and the related statements of
operations, changes in stockholders' equity and cash flows, as well as the
financial statement schedule listed in the accompanying index, for the period
from January 10, 2002 (date of inception) to December 31, 2002. These financial
statements and financial statement schedule are the responsibility of the
Company'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 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 and financial statement schedule are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements and financial statement schedule. 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 and financial statement schedule
referred to above present fairly, in all material respects, the financial
position of FSP Timberlake East Corp. as of December 31, 2002, and the results
of its operations and its cash flows for the initial period then ended in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Braver and Company, P.C.
Newton, Massachusetts
February 7, 2003
F-310
FSP Timberlake East Corp.
Balance Sheet
December 31,
(in thousands, except shares and par value amounts) 2002
=======================================================================================
Assets:
Real estate investments, at cost:
Land $ 2,931
Buildings and improvements 16,525
---------------------------------------------------------------------------------------
19,456
Less accumulated depreciation 334
---------------------------------------------------------------------------------------
Real estate investments, net 19,122
Cash and cash equivalents 868
Cash - funded reserve 778
Restricted cash
Tenant rent receivable 73
Step rent receivable 108
Prepaid expenses and other assets 4
Deferred lease origination costs, net of accumulated amortization of $112 593
Deferred leasing commissions, net of accumulated amortization of $5 30
---------------------------------------------------------------------------------------
Total assets $ 21,593
=======================================================================================
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and accrued expenses $ 131
Dividends payable 500
Tenant security deposits 17
---------------------------------------------------------------------------------------
Total liabilities 648
---------------------------------------------------------------------------------------
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 22,892
Retained deficit and dividends in excess of earnings (1,947)
---------------------------------------------------------------------------------------
Total Stockholders' Equity 20,945
---------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 21,593
=======================================================================================
See accompanying notes to financial statements.
F-311
FSP Timberlake East Corp.
Statement of Operations
For the Period
January 10, 2002
(date of inception) to
(in thousands, except shares and per share amounts) December 31, 2002
=======================================================================================================
Revenue:
Rental $ 2,403
Interest and other 42
-------------------------------------------------------------------------------------------------------
Total revenue 2,445
-------------------------------------------------------------------------------------------------------
Expenses:
Rental operating expenses 531
Depreciation and amortization 451
Real estate taxes and insurance 307
Interest 1,457
-------------------------------------------------------------------------------------------------------
Total expenses 2,746
-------------------------------------------------------------------------------------------------------
Net loss before common dividends (301)
Dividends paid to common shareholders prior to syndication of preferred shares 15
-------------------------------------------------------------------------------------------------------
Net loss attributable to preferred shareholders $ (316)
=======================================================================================================
Weighted average number of preferred shares outstanding,
basic and diluted 250
=======================================================================================================
Net loss per preferred share, basic and diluted $(1,264)
=======================================================================================================
See accompanying notes to financial statements.
F-312
FSP Timberlake East Corp.
Statement of Changes in Stockholders' Equity
For the Period January 10, 2002
(date of inception) to December 31, 2002
Retained Deficit
Additional and Dividends Total
Preferred Common Paid in in Excess of Stockholders'
(in thousands, except shares) Stock Stock Capital Earnings Equity
====================================================================================================================
Private offering of 250 shares, net $ -- $ -- $ 22,892 $ -- $ 22,892
Dividends -- -- -- (1,646) (1,646)
Net Loss -- -- -- (301) (301)
--------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 $ -- $ -- $ 22,892 $ (1,947) $ 20,945
====================================================================================================================
See accompanying notes to financial statements.
F-313
FSP Timberlake East Corp.
Statement of Cash Flows
For the Period January 10, 2002
(date of inception) to December 31, 2002
(in thousands)
=======================================================================================
Cash flows from operating activities:
Net loss $ (301)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 451
Changes in operating assets and liabilities:
Cash-funded reserve (778)
Restricted cash (17)
Tenant rent receivable (73)
Step rent receivable (108)
Prepaid expenses and other assets (4)
Accounts payable and accrued expenses 131
Tenant security deposits 17
Payment of deferred lease commissions (35)
---------------------------------------------------------------------------------------
Net cash used for operating activities (717)
---------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets (19,456)
Purchase of deferred lease origination costs (705)
---------------------------------------------------------------------------------------
Net cash used for investing activities (20,161)
---------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of company stock 25,000
Syndication costs (2,108)
Dividends to stockholders (1,146)
Proceeds from long-term debt 20,360
Principal payments on long-term debt (20,360)
---------------------------------------------------------------------------------------
Net cash provided by financing activities 21,746
---------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 868
Cash and cash equivalents, beginning of period --
---------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 868
=======================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 1,457
Disclosure of non-cash financing activities:
Dividends declared but not paid $ 500
See accompanying notes to financial statements.
F-314
FSP Timberlake East Corp.
Notes to Financial Statements
1. 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, Missouri (the "Property").
The Property consists of a five-story Class "A" suburban office building that
contains approximately 116,000 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
BASIS OF PRESENTATION
The results of operations from inception to date are not necessarily indicative
of the results to be obtained for other interim periods or for the full fiscal
year.
ESTIMATES AND ASSUMPTIONS
The Company prepares its financial statements and related notes in conformity
with accounting principles generally accepted in the United States of America
("GAAP"). 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.
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 improvement
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 15-39
Furniture and equipment 5-7
F-315
FSP Timberlake East Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
REAL ESTATE AND DEPRECIATION (continued)
The following schedule reconciles the cost of the property as shown in the
Offering Memorandum as to the amounts shown on the Company's Balance Sheet:
(in thousands)
Price per Offering Memorandum $ 20,360
Plus: Acquisition fees 125
Plus: Other acquisition costs 76
Less: Purchase price adjustments from seller (535)
-----------------------------------------------------------------------
Total Acquisition Costs $ 20,026
=======================================================================
These costs are reported in the Company's Balance Sheet as follows :
Land $ 2,931
Building, less improvements of $135 16,390
Deferred lease origination costs 705
-----------------------------------------------------------------------
Total reported in Balance Sheet $ 20,026
=======================================================================
The Company 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, 2002, no
such indicators of impairment were identified.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with an initial
maturity of three months or less to be cash equivalents.
CASH-FUNDED RESERVES
The Company has set aside funds in anticipation of future capital needs of the
property. Although these funds typically are used for the payment of real estate
assets and deferred leasing commissions, there is no legal restriction on their
use and they may be used for any company purpose.
RESTRICTED CASH
Restricted cash consists of tenant security deposits.
MARKETABLE SECURITIES
The Company accounts for investments in debt securities under the provisions of
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". The Company typically has classified its debt securities as
available-for-sale.
There were no investments in marketable securities at December 31, 2002.
F-316
FSP Timberlake East Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
CONCENTRATION OF CREDIT RISKS
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.
For the period ended December 31, 2002 rental income was derived from various
tenants. As such, future receipts are dependent upon the financial strength of
the lessees and their ability to perform under the lease agreements.
The following tenants represent greater than 10% of total revenue:
Quest Software, Inc. 22%
Computer Associates International, Inc. 21%
Prudential Securities Incorporated 13%
Reinsurance Group of America, Inc. 12%
FINANCIAL INSTRUMENTS
The Company estimates that the carrying value of cash and cash equivalents,
cash-funded reserves and restricted cash approximate their fair values based on
their short-term maturity and prevailing interest rates.
STEP RENT RECEIVABLE
Certain leases provide for fixed increases over the life of the lease. Rental
revenue is recognized on the straight-line basis over the related lease term;
however, billings by the Company are based on required minimum rentals in
accordance with the lease agreements. Step rent receivable, which is the
cumulative revenue recognized in excess of amounts billed by the Company, is
$108,000 at December 31, 2002.
DEFERRED LEASE ORIGINATION COSTS
Deferred lease origination costs are the estimated value of legal and leasing
costs related to acquired leases that were included in the purchase price when
the Company acquired the property. Under Statement of Financial Accounting
Standards No. 141 "Business Combinations" ("SFAS 141"), which was approved by
the Financial Accounting Standards Board in June 2001, the Company is required
to segregate these costs from its investment in real estate. The Company
subsequently amortizes these costs on a straight-line basis over the
weighted-average remaining life of the related leases. Amortization expense of
approximately $112,000 is included in Depreciation and Amortization in the
Company's Statement of Operations for the period ended December 31, 2002.
Deferred lease origination costs included in the purchase price of the property
were $705,000 and are being amortized over the weighted-average period of six
years in respect of the leases assumed. Details of the deferred lease
origination costs as of December 31, 2002:
Cost $ 705,000
Accumulated amortization 112,000
-----------
Book value $ 593,000
===========
The estimated annual amortization expense for the five years succeeding December
31, 2002 are as follows:
2003 $ 134,000
2004 $ 134,000
2005 $ 134,000
2006 $ 134,000
2007 $ 56,000
F-317
FSP Timberlake East Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
DEFERRED LEASING COMMISSIONS
Deferred leasing commissions represent external leasing costs incurred in the
leasing of commercial space. These costs are capitalized and are amortized on a
straight-line basis over the weighted-average remaining life of the related
leases. Amortization expense of approximately $5,000 is included in Depreciation
and Amortization in the Company's Statement of Operations for the period ended
December 31, 2002.
Payments for deferred leasing commissions in 2002 amounted to $35,000 which is
being amortized over the weighted-average period of seven years in respect of
the leases. Details of the deferred leasing commissions as of December 31, 2002:
Cost $ 35,000
Accumulated amortization 5,000
-----------
Book value $ 30,000
===========
The estimated annual amortization expense for the five years succeeding December
31, 2002 are as follows:
2003 $ 5,000
2004 $ 5,000
2005 $ 5,000
2006 $ 5,000
2007 $ 5,000
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
$2,108,000 have been reported as a reduction in the Stockholders' Equity in the
Company's Balance Sheet.
REVENUE RECOGNITION
The Company has retained substantially all of the risks and benefits of
ownership of the Company's commercial property and accounts for its leases as
operating leases. Rental income from leases, which may include rent concessions
(including free rent and tenant improvement allowances) and scheduled increases
in rental rates during the lease term, is recognized on a straight-line basis.
The Company does not have any percentage rent arrangements with its commercial
property tenants. Reimbursable costs are included in rental income in the period
earned. A schedule showing the components of rental revenue is shown below.
Period Ended
December 31,
(in thousands) 2002
======================================================================
Income from leases $ 2,076
Straight-line rent adjustment 108
Reimbursable expenses 219
----------------------------------------------------------------------
Total $ 2,403
======================================================================
INTEREST AND OTHER
Interest income and other income are recognized when the related services are
performed and the earnings process is complete.
F-318
FSP Timberlake East Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
INCOME TAXES
The Company has elected to be taxed as a REIT under the Internal Revenue Code of
1986, 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 taxable income
that must be distributed annually.
NET INCOME PER SHARE
The Company follows Statement of Financial Accounting Standards 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
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 December 31, 2002. Subsequent to the completion of the
offering of preferred shares, the holders of common stock are not entitled to
share in any income. The denominator used for calculating basic and diluted net
income per share is shown for preferred shares only and is as follows:
Period Ended
December 31,
2002
==========================================================================
Weighted average number of preferred shares
outstanding 250
3. 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. 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. The impact of adoption did not have a
material impact on the Company's financial position, results of operations and
cash flows. The Company does not have any real estate assets that it considers
"held for sale" at December 31, 2002.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements Nos.
4, 44, and 64, Amendment of SFAS 13, and Technical Corrections". This Statement
rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt",
and an amendment of that Statement, SFAS No. 64, "Extinguishments of Debt Made
to Satisfy Sinking-Fund Requirements". This Statement amends SFAS 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 SFAS 145 and believes that the impact of adoption
will not be material to its financial position, results of operations and cash
flows.
F-319
FSP Timberlake East Corp.
Notes to Financial Statements
3. Recent Accounting Standards (continued)
In July 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities". This statement was 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 position, results of operations and cash flows.
4. Income Taxes
The Company files as a REIT under Sections 856-860 of the Internal Revenue Code
of 1986, as amended. In order to qualify as a REIT, the Company is required to
distribute at least 90% of its taxable income to shareholders and to meet
certain asset and income tests as well as certain other requirements. The
Company will generally not be liable for federal income taxes, provided it
satisfies their requirements. Even as a qualified REIT, the Company is subject
to certain state and local taxes on its income and property.
For the period ended December 31, 2002, the Company incurred a net operating
loss for income tax purposes of approximately $300,000 that can be carried
forward until it expires in the year 2022.
At December 31, 2002 the Company's net tax basis of its real estate assets is
higher than the amount set forth in the Company's Balance Sheet by approximately
$691,000.
The following schedule reconciles GAAP Net Income to Taxable Income subject to
dividend requirements:
Period Ended
December 31,
(in thousands) 2002
=========================================================================
GAAP net loss $ (301)
Add: Book depreciation and amortization 451
Other book/tax differences, net 3
Less: Tax depreciation and amortization (345)
Straight-line rents (108)
-------------------------------------------------------------------------
Taxable income (loss) subject to dividend requirement(1) $ (300)
=========================================================================
(1) A tax loss is not subject to a dividend requirement.
The following schedule reconciles cash dividends paid to the dividends paid
deduction:
Period Ended
December 31,
(in thousands) 2002
========================================================================
Cash dividends paid $ 1,146
Plus: Dividends designated from following year --
Less: Portion designated capital gain distribution --
Less: Return of Capital (1,146)
------------------------------------------------------------------------
Dividends paid deduction $ --
========================================================================
F-320
FSP Timberlake East Corp.
Notes to Financial Statements
5. Cash Available for Distribution
The Company evaluates its performance based on Cash Available for Distribution
("CAD") as management believes that CAD represents the most accurate measure of
the Company's activity. CAD 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,
certain non-cash compensation expenses and straight line rent adjustments); plus
funds raised by the issuance of shares; plus the net proceeds from the sale of
land; less purchases of real estate assets, property and equipment ("Capital
Expenditures") payments for deferred leasing commissions and payments for
deferred lease origination costs; plus (less) proceeds from (payments to) cash
reserves established at the acquisition date of the property (cash funded
reserves). 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 payments for deferred lease origination costs 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 financial statements.
The calculation of CAD is shown in the following table:
December 31,
(in thousands) 2002
=======================================================================
Net loss $ (301)
Depreciation and amortization 451
Straight line rent (108)
Proceeds from offering of shares 22,892
Purchase of land and building and improvements (19,456)
Establish funded reserve (778)
Payment of deferred leasing commissions (35)
Payment of deferred lease origination costs (705)
-----------------------------------------------------------------------
Cash Available for Distribution $ 1,960
=======================================================================
The Company's cash distributions for the period ended December 31, 2002 are
summarized as follows:
(in thousands)
Total Cash
Quarter Paid Dividends
=======================================================================
Second Quarter of 2002 $ 128
Third Quarter of 2002 520
Fourth Quarter of 2002 498
-----------------------------------------------------------------------
Dividends Paid in 2002 1,146
First Quarter of 2003(1) 500
-----------------------------------------------------------------------
Dividends paid or accrued in 2002 $ 1,646
=======================================================================
(1) The Company declared a dividend payable to stockholders of record as of
December 31, 2002.
Cash distributions are declared and paid based on the total outstanding shares
as of the record date and are typically paid in the quarter following the
quarter that CAD is generated.
F-321
FSP Timberlake East Corp.
Notes to Financial Statements
6. Capital Stock
PREFERRED STOCK
Generally, each holder of Shares of Preferred Stock is entitled to receive
ratably all income and 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.
Subsequent to the completion of the offering of the preferred shares the holders
of common shares are not entitled to receive any income, nor shall the Company
declare or pay any cash dividends on shares of Common Stock.
7. Related Party Transactions
The Company executed a management agreement with FSP Property Management LLC, an
affiliate of FSP, that provides for a management fee equal to 1% of collected
revenues and is cancelable with 30 days notice by either party. For the period
ended December 31, 2002, fees incurred under the agreement were $22,000.
An acquisition fee of $125,000 and other costs totaling $11,000 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 $2,000,000 were paid in 2002 to an affiliate of the Common
Shareholder for services related to syndication of the Company's preferred
stock.
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. Interest paid to FSP was $17,000. The average interest
rate during the time the loan was outstanding was 4.75%.
A commitment fee of $1,437,000 was paid to FSP for obtaining the first
mortgage loan. Such amount is included in interest expense on the
Statement of Operations.
The Company paid a dividend of $15,000 to the common shareholder relating to
earnings of the Company prior to the completion of the offering of preferred
shares.
F-322
FSP Timberlake East Corp.
Notes to Financial Statements
8. Commitments and Contingencies
The Company, as lessor, has future minimum rentals due under non-cancelable
operating leases as follows:
Year Ended
(in thousands) December 31, Amount
------------ ---------------
2003 $ 2,588
2004 2,666
2005 2,249
2006 1,559
2007 901
Thereafter 1,971
---------------
$ 11,934
===============
In addition, the lessees are liable for real estate taxes and certain operating
expenses of the property.
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.
9. Subsequent Event
The Company has entered into a merger agreement with its common shareholder,
Franklin Street Properties Corp ("FSP"). In January 2003 FSP filed a proxy
statement with the United States Securities and Exchange Commission indicating
its intent to acquire the preferred stock interests of the Company and twelve
additional REITs. The merger requires the approval of the shareholders of the
Company as well as the shareholders of the twelve additional REITs and the
shareholders of FSP. If approved, FSP will issue shares of its common stock in
exchange for a 100% ownership interest in the Company.
F-323
SCHEDULE III
FSP TIMBERLAKE EAST CORP.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2002
(in thousands)
Initial Cost
-----------------------------------
Costs
Capitalized
(Disposals)
Subsequent
Encumbrances Buildings & to
Description (1) Land Improvements Acquisition
------------ --------- ------------ ------------
Timberlake East, Chesterfield, MO -- $ 2,931 $ 16,390 $ 135
============ ========= ============ ============
(in thousands)
Historical Costs
--------------------------------------------------------------
Total
Costs, Net
of Depreciable
Buildings & Accumulated Accumulated Life Date of
Description Land Improvements Total(2) Depreciation Depreciation Years Acquisition
-------- ------------ --------- ------------- ------------ ------- ------------
Timberlake East, Chesterfield, MO $ 2,931 $ 16,525 $ 19,456 $ 334 $ 19,122 15-39 March, 2002
======== ============ ========= ============= ============
(1) There are no encumbrances on the above property.
(2) The aggregate cost for Federal Income Tax purposes is greater than the
total historical cost by approximately $705,000.
F-324
FSP TIMBERLAKE EAST CORP.
REAL ESTATE AND ACCUMULATED DEPRECIATION
The following table summarizes the changes in the Company's real estate
investment and accumulated depreciation:
December 31,
(in thousands) 2002
====================================================
Real estate investments, at cost:
Balance, beginning of period $ --
Acquisitions 19,321
Improvements 135
Dispositions --
----------------------------------------------------
Balance, end of period $ 19,456
====================================================
Accumulated depreciation:
Balance, beginning of period $ --
Depreciation 334
Dispositions --
----------------------------------------------------
Balance, end of period $ 334
====================================================
F-325
INDEPENDENT AUDITOR'S REPORT
ON ADDITIONAL INFORMATION
To the Stockholders
FSP Timberlake East Corp.
(a Delaware Corporation)
Our report on the audit of the basic financial statements and the financial
statement schedule of FSP Timberlake East Corp. for 2002 appears on page 1. That
audit was conducted for the purpose of forming an opinion on the basic financial
statements and financial statement schedule taken as a whole. The information
shown on page 18 is presented for purposes of additional analysis and is not a
part of the basic financial statements and financial statement schedule. The
information has not been subjected to the auditing procedures applied in the
audit of the basic financial statements and financial statement schedule, and,
accordingly, we express no opinion on it.
Newton, Massachusetts
February 7, 2003
F-326
FSP Timberlake East Corp.
Statement of Predecessor's Operations
(Unaudited)
For the Period
January 1, 2002 to
March 3, 2002
-------------
(in thousands)
=============================================================
Revenue:
Rental $ 468
Interest and other 2
-------------------------------------------------------------
Total revenue 470
-------------------------------------------------------------
Expenses:
Rental operating expenses 118
Depreciation and amortization 65
Real estate taxes and insurance 60
Interest 93
-------------------------------------------------------------
Total expenses 336
-------------------------------------------------------------
Net Income $ 134
=============================================================
Note: The Company purchased the land and building on March 4, 2002. There is no
comparative information for the corresponding period in the prior year.
See auditor's report on additional information.
F-327
FSP Merrywood Apartments Corp.
Financial Statements
December 31, 2002
Table of Contents
Page
----
Financial Statements
Independent Auditor's Report ............................................ F-329
Balance Sheet as of December 31, 2002 ................................... F-330
Statement of Operations for the period March 1, 2002 (date of inception)
to December 31, 2002 .............................................. F-331
Statement of Changes in Stockholders' Equity for the period March 1, 2002
(date of inception) to December 31, 2002 .......................... F-332
Statement of Cash Flows for the period March 1, 2002 (date of inception)
to December 31, 2002 .............................................. F-333
Notes to the Financial Statements ....................................... F-334
Schedule of Real Estate and Accumulated Depreciation .................... F-340
Additional Information:
Independent Auditor's Report on Additional Information ............... F-342
Statement of Predecessor's Operations for the period January 1, 2002
to April 23, 2002 ................................................. F-343
F-328
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
FSP Merrywood Apartments Corp.
(a Delaware Corporation)
We have audited the accompanying balance sheet of FSP Merrywood Apartments Corp.
(a Delaware Corporation) as of December 31, 2002, and the related statements of
operations, changes in stockholders' equity and cash flows, as well as the
financial statement schedule listed in the accompanying index, for the period
from March 1, 2002 (date of inception) to December 31, 2002. These financial
statements and financial statement schedule are the responsibility of the
Company'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 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 and financial statement schedule are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements and financial statement schedule. 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 and financial statement schedule
referred to above present fairly, in all material respects, the financial
position of FSP Merrywood Apartments Corp. as of December 31, 2002, and the
results of its operations and its cash flows for the initial period then ended
in conformity with accounting principles generally accepted in the United States
of America.
/s/ Braver and Company, P.C.
Newton, Massachusetts
February 7, 2003
F-329
FSP Merrywood Apartments Corp.
Balance Sheet
December 31,
(in thousands, except shares and par value amounts) 2002
================================================================================
Assets:
Real estate investments, at cost:
Land $ 2,318
Buildings and improvements 14,867
--------------------------------------------------------------------------------
17,185
Less accumulated depreciation 383
--------------------------------------------------------------------------------
Real estate investments, net 16,802
Cash and cash equivalents 499
Cash - funded reserve 500
Restricted cash 79
Prepaid expenses and other assets 25
--------------------------------------------------------------------------------
Total assets $ 17,905
================================================================================
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and accrued expenses $ 208
Dividends payable 323
Tenant security deposits 79
--------------------------------------------------------------------------------
Total liabilities 610
--------------------------------------------------------------------------------
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 dividends in excess of earnings (1,597)
--------------------------------------------------------------------------------
Total Stockholders' Equity 17,295
--------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 17,905
================================================================================
See accompanying notes to financial statements.
F-330
FSP Merrywood Apartments Corp.
Statement of Operations
For the Period
March 1, 2002
(date of inception) to
(in thousands, except shares and per share amounts) December 31, 2002
=====================================================================================
Revenue:
Rental $ 1,811
Interest and other 10
-------------------------------------------------------------------------------------
Total revenue 1,821
-------------------------------------------------------------------------------------
Expenses:
Rental operating expenses 483
Depreciation 383
Real estate taxes and insurance 365
Interest 1,203
-------------------------------------------------------------------------------------
Total expenses 2,434
-------------------------------------------------------------------------------------
Net loss before common dividends (613)
Dividends paid to common shareholders prior to syndication of
preferred shares 26
-------------------------------------------------------------------------------------
Net loss attributable to preferred shareholders $ (639)
=====================================================================================
Weighted average number of preferred shares outstanding,
basic and diluted 206
=====================================================================================
Net loss per preferred share, basic and diluted $ (3,102)
=====================================================================================
See accompanying notes to financial statements.
F-331
FSP Merrywood Apartments Corp.
Statement of Changes in Stockholders' Equity
For the Period March 1, 2002 (date of inception)
to December 31, 2002
Retained Deficit
Additional and Dividends Total
Preferred Common Paid in in Excess of Stockholders'
(in thousands, except shares) Stock Stock Capital Earnings Equity
==========================================================================================================
Private offering of 206 shares, net $ -- $ -- $ 18,892 $ -- $ 18,892
Dividends -- -- -- (984) (984)
Net Loss -- -- -- (613) (613)
----------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 $ -- $ -- $ 18,892 $ (1,597) $ 17,295
==========================================================================================================
See accompanying notes to financial statements.
F-332
FSP Merrywood Apartments Corp.
Statement of Cash Flows
For the Period March 1, 2002
(Date of inception)
to December 31, 2002
(in thousands)
================================================================================
Cash flows from operating activities:
Net loss $ (613)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation 383
Changes in operating assets and liabilities:
Cash-funded reserve (500)
Restricted cash (79)
Prepaid expenses and other assets (25)
Accounts payable and accrued expenses 208
Tenant security deposits 79
--------------------------------------------------------------------------------
Net cash used for operating activities (547)
--------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets (17,185)
--------------------------------------------------------------------------------
Net cash used for investing activities (17,185)
--------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of company stock 20,601
Syndication costs (1,709)
Dividends to stockholders (661)
Proceeds from note payable on long-term debt 17,000
Principal payment on long-term debt (17,000)
--------------------------------------------------------------------------------
Net cash provided by financing activities 18,231
--------------------------------------------------------------------------------
Net increase in cash and cash equivalents 499
Cash and cash equivalents, beginning of period --
--------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 499
================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 1,203
Disclosure of non-cash financing activities:
Dividends declared but not paid $ 323
See accompanying notes to financial statements.
F-333
FSP Merrywood Apartments Corp.
Notes to Financial Statements
1. Organization
FSP Merrywood Apartments Corp. (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, Texas
(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 April 24, 2002.
2. Summary of Significant Accounting Policies
BASIS OF PRESENTATION
The results of operations from inception to date are not necessarily indicative
of the results to be obtained for other interim periods or for the full fiscal
year.
ESTIMATES AND ASSUMPTIONS
The Company prepares its financial statements and related notes in conformity
with accounting principles generally accepted in the United States of America
("GAAP"). 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.
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 improvement
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 - Apartments 27.5
Building Improvements 15-27.5
Furniture and equipment 5-7
F-334
FSP Merrywood Apartments Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with an initial
maturity of three months or less to be cash equivalents.
CASH-FUNDED RESERVES
The Company has set aside funds in anticipation of future capital needs of the
property. Although these funds typically are used for the payment of real estate
assets and deferred leasing commissions, there is no legal restriction on their
use and they may be used for any company purpose.
RESTRICTED CASH
Restricted cash consists of tenant security deposits.
MARKETABLE SECURITIES
The Company accounts for investments in debt securities under the provisions of
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". The Company typically has classified its debt securities as
available-for-sale.
There were no investments in marketable securities at December 31, 2002.
CONCENTRATION OF CREDIT RISKS
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.
FINANCIAL INSTRUMENTS
The Company estimates that the carrying value of cash and cash equivalents,
cash-funded reserves and restricted cash approximate their fair values based on
their short-term maturity and prevailing interest rates.
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
$1,709,000 have been reported as a reduction in the Stockholders' Equity in the
Company's Balance Sheet.
REVENUE RECOGNITION
The Company'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.
INTEREST AND OTHER
Interest income and other income are recognized when the related services are
performed and the earnings process is complete.
F-335
FSP Merrywood Apartments Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
INCOME TAXES
The Company has elected to be taxed as a REIT under the Internal Revenue Code of
1986, 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 taxable income
that must be distributed annually.
NET INCOME PER SHARE
The Company follows Statement of Financial Accounting Standards 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
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 December 31, 2002. The denominator used for calculating
basic and diluted net income per share is shown for preferred shares only and is
as follows:
Period Ended
December 31,
2002
==============================================================
Weighted average number of preferred
shares outstanding 206
3. 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. 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. The impact of adoption did not have a
material impact on the Company's financial position, results of operations and
cash flows. The Company does not have any real estate assets that it considers
"held for sale" at December 31, 2002.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statement Nos.
4, 44, and 64, Amendment of SFAS 13, and Technical Corrections". This Statement
rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt",
and an amendment of that Statement, SFAS No. 64, "Extinguishments of Debt Made
to Satisfy Sinking-Fund Requirements". This Statement amends SFAS 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 SFAS 145 and believes that the impact of adoption
will not be material to its financial position, results of operations and cash
flows.
F-336
FSP Merrywood Apartments Corp.
Notes to Financial Statements
3. Recent Accounting Standards (continued)
In July 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities". This statement was 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 position, results of operations and cash flows.
4. Income Taxes
The Company files as a REIT under Sections 856-860 of the Internal Revenue Code
of 1986, as amended. In order to qualify as a REIT, the Company is required to
distribute at least 90% of its taxable income to shareholders and to meet
certain asset and income tests as well as certain other requirements. The
Company will generally not be liable for federal income taxes, provided it
satisfies their requirements. Even as a qualified REIT, the Company is subject
to certain state and local taxes on its income and property.
For the period ended December 31, 2002, the Company incurred a net operating
loss for income tax purposes of approximately $565,000 that can be carried
forward until it expires in the year 2022.
At December 31, 2002 the Company's net tax basis of its real estate assets
approximates the amount set forth in the Company's Balance Sheet.
The following schedule reconciles GAAP Net Income to Taxable Income subject to
dividend requirements:
Period Ended
December 31,
(in thousands) 2002
==========================================================================
GAAP net loss $ (613)
Add: Book depreciation 383
Less: Tax depreciation and amortization (242)
Deferred rent 30
--------------------------------------------------------------------------
Taxable loss subject to dividend requirement(1) $ (442)
==========================================================================
(1) tax loss is not subject to a dividend requirement.
Period Ended
December 31,
(in thousands) 2002
==========================================================================
Cash dividends paid $ 661
Plus: Dividends designated from following year --
Less: Portion designated capital gain distribution --
Less: Return of Capital (661)
--------------------------------------------------------------------------
Dividends paid deduction $ --
==========================================================================
F-337
FSP Merrywood Apartments Corp.
Notes to Financial Statements
5. Cash Available for Distribution
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 certain non-cash compensation expenses); plus funds raised by the issuance
of shares; plus the net proceeds from the sale of land; less purchases of real
estate assets and property and equipment ("Capital Expenditures") plus (less)
proceeds from (payments to) cash reserves established at the acquisition date of
the property (Cash-funded reserves). Depreciation and non-cash compensation are
an adjustment to CAD, as these are non-cash items included in net income.
Capital Expenditures 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 financial statements.
The calculation of CAD is shown in the following table:
December 31,
(in thousands) 2002
=======================================================================
Net loss $ (613)
Depreciation 383
Proceeds from offering of shares 18,892
Purchase of land and building (17,185)
Establish funded reserve (500)
-----------------------------------------------------------------------
Cash Available for Distribution $ 977
=======================================================================
The Company's cash distributions for the period ended December 31, 2002 are
summarized as follows:
(in thousands)
Total Cash
Quarter Paid Dividends
======================================================================
Third Quarter of 2002 $ 264
Fourth Quarter of 2002 397
----------------------------------------------------------------------
Dividends Paid in 2002 661
First Quarter of 2003(1) 323
----------------------------------------------------------------------
Dividends paid or accrued in 2002 $ 984
======================================================================
(1) The Company declared a dividend payable to stockholders of record as of
December 31, 2002.
Cash distributions are declared and paid based on the total outstanding shares
as of the record date and are typically paid in the quarter following the
quarter that CAD is generated.
F-338
FSP Merrywood Apartments Corp.
Notes to Financial Statements
6. Capital Stock
PREFERRED STOCK
Generally, each holder of Shares of Preferred Stock is entitled to receive
ratably all income and 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.
Subsequent to the completion of the offering of the preferred shares the holders
of common shares are not entitled to receive any income, nor shall the Company
declare or pay any cash dividends on shares of Common Stock .
7. Related Party Transactions
The Company executed a management agreement with FSP Property Management LLC, an
affiliate of FSP, that provides for a management fee equal to 1% of collected
revenues and is cancelable with 30 days notice by either party. For the period
ended December 31, 2002, fees earned under the agreement were $18,205.
An acquisition fee of $107,000 was paid in 2002 to an affiliate of the Common
Shareholder. Such fees were included in the cost of the real estate.
Syndication fees of $1,648,000 were paid in 2002 to an affiliate of the Common
Shareholder for services related to syndication of the Company's preferred
stock.
During 2002, the Company borrowed and repaid in full:
Note payable to FSP, principal of $17,000,000 with interest equal to the
Citizens Bank base rate (4.75%). Interest paid to the affiliate was
$18,371.
A commitment fee of $1,184,500 was paid for obtaining the first mortgage
loan. Such amount is included in interest expense on the Statement of
Operations.
The Company paid a dividend of $26,000 to the common shareholder relating to
earnings of the Company prior to the completion of the offering of preferred
shares.
8. Subsequent Event
The Company has entered into a merger agreement with its common shareholder,
Franklin Street Properties Corp ("FSP"). In January 2003 FSP filed a proxy
statement with the United States Securities and Exchange Commission indicating
its intent to acquire the preferred stock interests of the Company and twelve
additional REITs. The merger requires the approval of the shareholders of the
Company as well as the shareholders of the twelve additional REITs and the
shareholders of FSP. If approved, FSP will issue shares of its common stock in
exchange for a 100% ownership interest in the Company.
F-339
SCHEDULE III
FSP MERRYWOOD APARTMENTS CORP.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2002
(in thousands)
Initial Cost
-----------------------------------
Costs
Capitalized
(Disposals)
Subsequent
Encumbrances Buildings & to
Description (1) Land Improvements Acquisition
------------ -------- ------------ -----------
Merrywood Apartments, Katy, TX -- 2,318 $ 14,867 --
============ ======== ============ ===========
(in thousands)
Historical Costs
--------------------------------------------------------------
Total
Costs, Net
of Depreciable
Buildings & Accumulated Accumulated Life Date of
Description Land Improvements Total(2) Depreciation Depreciation Years Acquisition
-------- ------------ -------- ------------ ------------ ----------- -----------
Merrywood Apartments, Katy, TX 2,318 $ 14,867 $ 17,185 $ 383 $ 16,802 15-27.5 April, 2002
======== ============ ======== ============ ============
(1) There are no encumbrances on the above property.
(2) The aggregate cost for federal income tax purposes approximates total
historical costs.
F-340
FSP MERRYWOOD APARTMENTS CORP.
REAL ESTATE AND ACCUMULATED DEPRECIATION
The following table summarizes the changes in the Company's real estate
investment and accumulated depreciation:
December 31,
(in thousands) 2002
==================================================
Real estate investments, at cost:
Balance, beginning of period $ --
Acquisitions 17,185
Improvements --
Dispositions --
--------------------------------------------------
Balance, end of period $ 17,185
==================================================
Accumulated depreciation:
Balance, beginning of period $ --
Depreciation 383
Dispositions --
--------------------------------------------------
Balance, end of period $ 383
==================================================
F-341
INDEPENDENT AUDITOR'S REPORT
ON ADDITIONAL INFORMATION
To the Stockholders
FSP Merrywood Apartments Corp.
(a Delaware Corporation)
Our report on the audit of the basic financial statements and the financial
statement schedule of FSP Merrywood Apartments Corp. for 2002 appears on page 1.
That audit was conducted for the purpose of forming an opinion on the basic
financial statements and financial statement schedule taken as a whole. The
information shown on page 15 is presented for purposes of additional analysis
and is not a part of the basic financial statements and financial statement
schedule. The information has not been subjected to the auditing procedures
applied in the audit of the basic financial statements and financial statement
schedule, and, accordingly, we express no opinion on it.
Newton, Massachusetts
February 7, 2003
F-342
FSP Merrywood Apartments Corp.
Statement of Operations
(Unaudited)
For the Period
January 1, 2002 to
April 23, 2002
(in thousands) (predecessor)
================================================================================
Revenue:
Rental $ 833
Interest and other 3
--------------------------------------------------------------------------------
Total revenue 836
--------------------------------------------------------------------------------
Expenses:
Rental operating expenses 219
Depreciation and amortization 180
Real estate taxes and insurance 180
--------------------------------------------------------------------------------
Total expenses 579
--------------------------------------------------------------------------------
Net income $ 257
================================================================================
Note: The Company purchased the land and building on April 24, 2002. There is no
comparative information for the corresponding period in the prior year.
See auditor's report on additional information.
F-343
FSP Plaza Ridge Corp.
Financial Statements
December 31, 2002
Table of Contents
Page
----
Financial Statements
Independent Auditor's Report ............................................. F-345
Balance Sheet as of December 31, 2002 .................................... F-346
Statement of Operations for the period February 28, 2002
(date of inception) to December 31, 2002 ........................... F-347
Statement of Changes in Stockholders' Equity for the period
February 28, 2002 (date of inception) to December 31, 2002 ......... F-348
Statement of Cash Flows for the period February 28, 2002
(date of inception) to December 31, 2002 ........................... F-349
Notes to the Financial Statements ........................................ F-350
Schedule of Real Estate and Accumulated Depreciation ..................... F-359
Additional Information:
Independent Auditor's Report on Additional Information ................ F-361
Statement of Predecessor's Operations for the period January 1, 2002
to May 22, 2002 .................................................... F-362
F-344
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
FSP Plaza Ridge Corp.
(a Delaware Corporation)
We have audited the accompanying balance sheet of FSP Plaza Ridge Corp. (a
Delaware Corporation) as of December 31, 2002, and the related statements of
operations, changes in stockholders' equity and cash flows, as well as the
financial statement schedule listed in the accompanying index, for the period
from February 28, 2002 (date of inception) to December 31, 2002. These financial
statements and financial statement schedule are the responsibility of the
Company'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 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 and financial statement schedule are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements and financial statement schedule. 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 and financial statement schedule
referred to above present fairly, in all material respects, the financial
position of FSP Plaza Ridge Corp. as of December 31, 2002, and the results of
its operations and its cash flows for the initial period then ended in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Braver and Company, P.C.
Newton, Massachusetts
February 7, 2003
F-345
FSP Plaza Ridge Corp.
Balance Sheet
December 31,
(in thousands, except shares and par value amounts) 2002
=======================================================================================
Assets:
Real estate investments, at cost:
Land $ 4,055
Buildings and improvements 25,210
---------------------------------------------------------------------------------------
29,265
Less accumulated depreciation 404
---------------------------------------------------------------------------------------
Real estate investments, net 28,861
Cash and cash equivalents 1,506
Cash-funded reserve 1,729
Tenant rent receivable 37
Step rent receivable 299
Prepaid expenses and other assets 106
Deferred lease origination costs, net of accumulated amortization of $119 1,618
Provision for favorable leases, net of accumulated amortization of $137 1,509
---------------------------------------------------------------------------------------
Total assets $ 35,665
=======================================================================================
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and accrued expenses $ 324
Dividends payable 872
---------------------------------------------------------------------------------------
Total liabilities 1,196
---------------------------------------------------------------------------------------
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 36,690
Retained deficit and dividends in excess of earnings (2,221)
---------------------------------------------------------------------------------------
Total Stockholders' Equity 34,469
---------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 35,665
=======================================================================================
See accompanying notes to financial statements.
F-346
FSP Plaza Ridge Corp.
Statement of Operations
For the Period
February 28, 2002
(date of inception) to
(in thousands, except shares and per share amounts) December 31, 2002
==============================================================================================
Revenue:
Rental $ 3,358
Interest and other 27
----------------------------------------------------------------------------------------------
Total revenue 3,385
----------------------------------------------------------------------------------------------
Expenses:
Rental operating expenses 593
Depreciation and amortization 523
Real estate taxes and insurance 184
Interest 2,400
----------------------------------------------------------------------------------------------
Total expenses 3,700
----------------------------------------------------------------------------------------------
Net loss before common dividends (315)
Dividends paid to common shareholders prior to syndication of
preferred shares 99
----------------------------------------------------------------------------------------------
Net loss attributable to preferred shareholders $ (414)
==============================================================================================
Weighted average number of preferred shares outstanding,
basic and diluted 400
==============================================================================================
Net loss per preferred share, basic and diluted $(1,035)
==============================================================================================
See accompanying notes to financial statements.
F-347
FSP Plaza Ridge Corp.
Statement of Changes in Stockholders' Equity
For the Period February 28, 2002
(Date of inception) to December 31, 2002
Retained Deficit
Additional and Dividends Total
Preferred Common Paid in in Excess of Stockholders'
(in thousands, except shares) Stock Stock Capital Earnings Equity
========================================================================================================================
Private offering of 400 shares, net $ -- $ -- $ 36,690 $ -- $ 36,690
Dividends -- -- -- (1,906) (1,906)
Net Loss -- -- -- (315) (315)
------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 $ -- $ -- $ 36,690 $ (2,221) $ 34,469
========================================================================================================================
See accompanying notes to financial statements.
F-348
FSP Plaza Ridge Corp.
Statement of Cash Flows
For the Period February 28, 2002
(Date of inception) to December 31, 2002
(in thousands)
================================================================================
Cash flows from operating activities:
Net loss $ (315)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 523
Provision for favorable leases 137
Changes in operating assets and liabilities:
Cash-funded reserve (1,729)
Tenant rent receivable (37)
Step rent receivable (299)
Prepaid expenses and other assets (106)
Accounts payable and accrued expenses 324
--------------------------------------------------------------------------------
Net cash used for operating activities (1,502)
--------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets (29,265)
Purchase of deferred lease origination costs and favorable leases (3,383)
--------------------------------------------------------------------------------
Net cash used for investing activities (32,648)
--------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of company stock 40,010
Syndication costs (3,320)
Dividends to stockholders (1,034)
Proceeds from long-term debt 32,250
Principal payments on long-term debt (32,250)
--------------------------------------------------------------------------------
Net cash provided by financing activities 35,656
--------------------------------------------------------------------------------
Net increase in cash and cash equivalents 1,506
Cash and cash equivalents, beginning of period --
--------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 1,506
================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 2,400
Disclosure of non-cash financing activities:
Dividends declared but not paid $ 872
See accompanying notes to financial statements.
F-349
FSP Plaza Ridge Corp.
Notes to Financial Statements
1. Organization
FSP Plaza Ridge Corp. (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, Virginia (the "Property"). The
Property consists of a six-story Class "A" suburban office building that
contains approximately 158,000 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
BASIS OF PRESENTATION
The results of operations from inception to date are not necessarily indicative
of the results to be obtained for other interim periods or for the full fiscal
year.
ESTIMATES AND ASSUMPTIONS
The Company prepares its financial statements and related notes in conformity
with accounting principles generally accepted in the United States of America
("GAAP"). 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.
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 improvement
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 15-39
Furniture and equipment 5-7
F-350
FSP Plaza Ridge Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
REAL ESTATE AND DEPRECIATION (continued)
The following schedule reconciles the cost of the property as shown in the
Offering Memorandum as to the amounts shown of the Company's Balance Sheet:
(in thousands)
Price per Offering Memorandum $ 32,250
Plus: Acquisition fees 200
Plus: Other acquistion costs 198
-----------------------------------------------------------------------
Total Acquisition Costs $ 32,648
=======================================================================
These costs are reported in the Company's Balance Sheet as follows:
Land $ 4,055
Building 25,210
Deferred lease origination costs 1,737
Provision for favorable leases 1,646
-----------------------------------------------------------------------
Total reported in Balance Sheets $ 32,648
=======================================================================
The Company 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, 2002, no
such indicators of impairment were identified.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with an initial
maturity of three months or less to be cash equivalents.
CASH-FUNDED RESERVES
The Company has set aside funds in anticipation of future capital needs of the
property. Although these funds typically are used for the payment of real estate
assets and deferred leasing commissions, there is no legal restriction on their
use and they may be used for any company purpose.
MARKETABLE SECURITIES
The Company accounts for investments in debt securities under the provisions of
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". The Company typically has classified its debt securities as
available-for-sale.
There were no investments in marketable securities at December 31, 2002.
F-351
FSP Plaza Ridge Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
CONCENTRATION OF CREDIT RISKS
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.
For the period ended December 31, 2002 rental income was derived from various
tenants. As such, future receipts are dependent upon the financial strength of
the lessees and their ability to perform under the lease agreements.
The following tenants represent greater than 10% of total revenue:
Scitor Corporation 51%
Juniper Networks, Inc. 30%
FINANCIAL INSTRUMENTS
The Company estimates that the carrying value of cash and cash equivalents, and
cash-funded reserves approximate their fair values based on their short-term
maturity and prevailing interest rates.
STEP RENT RECEIVABLE
Certain leases provide for fixed increases over the life of the lease. Rental
revenue is recognized on the straight-line basis over the related lease term;
however, billings by the Company are based on required minimum rentals in
accordance with the lease agreements. Step rent receivable, which is the
cumulative revenue recognized in excess of amounts billed by the Company, is
$299,000 at December 31, 2002.
DEFERRED LEASE ORIGINATION COSTS
Deferred lease origination costs are the estimated value of legal and leasing
costs related to acquired leases that were included in the purchase price when
the Company acquired the property. Under Statement of Financial Accounting
Standards No. 141 "Business Combinations" ("SFAS 141"), which was approved by
the Financial Accounting Standards Board in June 2001, the Company is required
to segregate these costs from its investment in real estate. The Company
subsequently amortizes these costs on a straight-line basis over the
weighted-average remaining life of the related leases. Amortization expense of
approximately $119,000 is included in Depreciation and Amortization in the
Company's Statement of Operations for the period ended December 31, 2002.
Deferred lease origination costs included in the purchase price of the property
were $1,737,000 and are being amortized over the weighted-average period of nine
years in respect of the leases assumed. Details of the deferred lease
origination costs as of December 31, 2002:
Cost $ 1,737,000
Accumulated amortization 119,000
------------
Book value $ 1,618,000
============
The estimated annual amortization expense for the five years succeeding December
31, 2002 are as follows:
2003 $ 204,000
2004 $ 204,000
2005 $ 204,000
2006 $ 204,000
2007 $ 204,000
F-352
FSP Plaza Ridge Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
PROVISION FOR FAVORABLE LEASES
The provision for favorable leases is the estimated benefit the Company receives
when the lease payments due under a tenant's lease exceed the market rate of the
lease at the date the property was acquired. Under SFAS 141 the Company is
required to capitalize this difference and report it separately from its
investment in real estate. The Company subsequently amortizes this provision on
a straight-line basis over the remaining life of the tenant's lease.
Amortization of $137,000 is shown as a reduction of rental income in the
Company's Statement of Operations for the period ended December 31, 2002.
Provision for favorable leases included in the purchase price of the property
were $1,646,000 and are being amortized over the weighted-average period of
seven years in respect of the leases assumed. Details of the provision for
favorable leases as of December 31, 2002:
Cost $ 1,646,000
Accumulated amortization 137,000
------------
Book value $ 1,509,000
============
The estimated annual amortization expense for the five years succeeding December
31, 2002 are as follows:
2003 $ 235,000
2004 $ 235,000
2005 $ 235,000
2006 $ 235,000
2007 $ 235,000
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
$3,320,000 have been reported as a reduction in the Stockholders' Equity in the
Company's Balance Sheet.
REVENUE RECOGNITION
The Company has retained substantially all of the risks and benefits of
ownership of the Company's commercial property and accounts for its leases as
operating leases. Rental income from leases, which may include rent concession
(including free rent and tenant improvement allowances) and scheduled increases
in rental rates during the lease term, is recognized on a straight-line basis.
The Company does not have any percentage rent arrangements with its commercial
property tenants. Reimbursable costs are included in rental income in the period
earned. A schedule showing the components of rental revenue is shown below.
Period Ended
December, 31
(in thousands) 2002
====================================================================
Income from leases $ 3,041
Straight-line rent adjustment 299
Reimbursable expenses 155
Amortization of favorable leases (137)
--------------------------------------------------------------------
Total $ 3,358
====================================================================
INTEREST AND OTHER
Interest income and other income are recognized when the related services are
performed and the earnings process is complete.
F-353
FSP Plaza Ridge Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
INCOME TAXES
The Company has elected to be taxed as a REIT under the Internal Revenue Code of
1986, 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 taxable income
that must be distributed annually.
NET INCOME PER SHARE
The Company follows Statement of Financial Accounting Standards 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
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 December 31, 2002. Subsequent to the completion of the
offering of preferred shares, the holders of common stock are not entitled to
share in any income. The denominator used for calculating basic and diluted net
income per share is shown for preferred shares only and is as follows:
Period Ended
December 31,
2002
==========================================================================
Weighted average number of preferred shares
outstanding 400
3. 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. 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. The impact of adoption did not have a
material impact on the Company's financial position, results of operations and
cash flows. The Company does not have any real estate assets that it considers
"held for sale" at December 31, 2002.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statement Nos.
4, 44, and 64, Amendment of SFAS 13, and Technical Corrections". This Statement
rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt",
and an amendment of that Statement, SFAS No. 64, "Extinguishments of Debt Made
to Satisfy Sinking-Fund Requirements". This Statement amends SFAS 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 SFAS 145 and believes that the impact of adoption
will not be material to its financial position, results of operations and cash
flows.
F-354
FSP Plaza Ridge Corp.
Notes to Financial Statements
3. Recent Accounting Standards (continued)
In July 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities". This statement was 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 position, results of operations and cash flows.
4. Income Taxes
The Company files as a REIT under Sections 856-860 of the Internal Revenue Code
of 1986, as amended. In order to qualify as a REIT, the Company is required to
distribute at least 90% of its taxable income to shareholders and to meet
certain asset and income tests as well as certain other requirements. The
Company will generally not be liable for federal income taxes, provided it
satisfies their requirements. Even as a qualified REIT, the Company is subject
to certain state and local taxes on its income and property.
For the period ended December 31, 2002, the Company incurred a net operating
loss for income tax purposes of approximately $396,000 that can be carried
forward until it expires in the year 2022.
At December 31, 2002 the Company's net tax basis of its real estate assets is
higher than the amount set forth in the Company's Balance Sheet by approximately
$3,329,000.
The following schedule reconciles GAAP Net Income to Taxable Income subject to
dividend requirements:
Period Ended
December 31,
(in thousands) 2002
==========================================================================
GAAP net loss $ (315)
Add: Book depreciation and amortization 660
Less: Tax depreciation and amortization (442)
Straight-line rents (299)
--------------------------------------------------------------------------
Taxable loss subject to dividend requirement(1) $ (396)
==========================================================================
(1) A tax loss is not subject to a dividend requirement.
The following schedule reconciles cash dividends paid to the dividends paid
deduction:
Period Ended
December 31,
(in thousands) 2002
==========================================================================
Cash dividends paid $ 1,034
Plus: Dividends designated from following year --
Less: Portion designated capital gain distribution --
Less: Return of Capital (1,034)
--------------------------------------------------------------------------
Dividends paid deduction $ --
==========================================================================
F-355
FSP Plaza Ridge Corp.
Notes to Financial Statements
5. Cash Available for Distribution
The Company evaluates its performance based on Cash Available for Distribution
("CAD") as management believes that CAD represents the most accurate measure of
the Company's activity. CAD 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 funds raised by the issuance of shares; plus the net proceeds
from the sale of land; less purchases of real estate assets, property and
equipment ("Capital Expenditures"), payments for deferred leasing commissions
and payments for deferred lease origination costs; plus (less) proceeds from
(payments to) cash reserves established at the acquisition date of the property
(cash funded reserves). 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 payments for deferred lease origination costs 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 financial statements.
The calculation of CAD is shown in the following table:
December 31,
(in thousands) 2002
=======================================================================
Net loss $ (315)
Depreciation, amortization and provision for
favorable leases 660
Straight line rent (299)
Proceeds from offering of shares 36,690
Purchase of land and building and improvements (29,265)
Establish funded reserve (1,729)
Payment of deferred lease origination costs and
favorable leases (3,383)
-----------------------------------------------------------------------
Cash Available for Distribution $ 2,359
=======================================================================
The Company's cash distributions for the period ended December 31, 2002 are
summarized as follows:
(in thousands)
Total Cash
Quarter Paid Dividends
======================================================================
Third Quarter of 2002 $ 212
Fourth Quarter of 2002 822
----------------------------------------------------------------------
Dividends Paid in 2002 1,034
First Quarter of 2003(1) 872
----------------------------------------------------------------------
Dividends paid or accrued in 2002 $ 1,906
======================================================================
(1) The Company declared a dividend payable to stockholders of record as of
December 31, 2002.
Cash distributions are declared and paid based on the total outstanding shares
as of the record date and are typically paid in the quarter following the
quarter that CAD is generated.
F-356
FSP Plaza Ridge Corp.
Notes to Financial Statements
6. Capital Stock
PREFERRED STOCK
Generally 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.
Subsequent to the completion of the offering of the preferred shares the holders
of common shares are not entitled to receive any income, nor shall the Company
declare or pay any cash dividends on shares of Common Stock.
7. Related Party Transactions
The Company executed a management agreement with FSP Property Management LLC, an
affiliate of FSP, that provides for a management fee equal to 1% of collected
revenues and is cancelable with 30 days notice by either party. For the period
ended December 31, 2002, fees incurred under the agreement were $35,840.
An acquisition fee of $200,000 and other costs of $37,000 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 $3,320,000 were paid in 2002 to an affiliate of the Common
Shareholder for services related to syndication of the Company's preferred
stock.
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. Interest paid to the affiliate was $96,960. The average
interest rate during the time the loan was outstanding was 4.75%
A commitment fee of $2,300,000 was paid for obtaining the first mortgage
loan. Such amount is included in interest expense on the Statement of
Operations.
The Company paid a dividend of $99,000 to the common shareholder relating to
earnings of the Company prior to the completion of the offering of preferred
shares.
F-357
FSP Plaza Ridge Corp.
Notes to Financial Statements
8. Commitments and Contingencies
The Company, as lessor, has minimum future rentals due under non-cancelable
operating leases as follows:
Year Ended
(in thousands) December 31, Amount
------------ --------
2003 $ 4,760
2004 4,886
2005 5,015
2006 5,147
2007 5,283
Thereafter 18,148
---------
$ 43,239
=========
In addition, the lessees are liable for real estate taxes and certain operating
expenses of the property.
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.
9. Subsequent Event
The Company has entered into a merger agreement with its common shareholder,
Franklin Street Properties Corp ("FSP"). In January 2003 FSP filed a proxy
statement with the United States Securities and Exchange Commission indicating
its intent to acquire the preferred stock interests of the Company and twelve
additional REITs. The merger requires the approval of the shareholders of the
Company as well as the shareholders of the twelve additional REITs and the
shareholders of FSP. If approved, FSP will issue shares of its common stock in
exchange for a 100% ownership interest in the Company.
F-358
SCHEDULE III
FSP PLAZA RIDGE CORP.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2002
(in thousands)
Initial Cost
------------------------------------
Costs
Capitalized
(Disposals)
Subsequent
Encumbrances Buildings & to
Description (1) Land Improvements Acquisition
------------ ---- ------------ -----------
Plaza Ridge, Herndon, VA -- $ 4,055 $ 25,210 $ --
=========== ========= =========== ==========
(in thousands)
Historical Costs
-------------------------------------------------------------
Total
Costs, Net
of Depreciable
Buildings & Accumulated Accumulated Life Date of
Description Land Improvements Total(2) Depreciation Depreciation Years Acquisition
---- ------------ -------- ------------ ------------ ----------- -----------
Plaza Ridge, Herndon, VA $ 4,055 $ 25,210 $ 29,265 $ 404 $ 28,861 15-39 May, 2002
======= ============ ======== =========== ===========
(1) There are no encumbrances on the above property.
(2) The aggregate cost for Federal Income Tax purposes is greater than the
historical cost by approximately $3,383,000.
F-359
FSP PLAZA RIDGE CORP.
REAL ESTATE AND ACCUMULATED DEPRECIATION
The following table summarizes the changes in the Company's real estate
investment and accumulated depreciation:
December 31,
(in thousands) 2002
===============================================================================
Real estate investments, at cost:
Balance, beginning of period $ --
Acquisitions 29,265
Improvements --
Dispositions --
-------------------------------------------------------------------------------
Balance, end of period $ 29,265
===============================================================================
Accumulated depreciation:
Balance, beginning of period $ --
Depreciation 404
Dispositions --
-------------------------------------------------------------------------------
Balance, end of period $ 404
===============================================================================
F-360
INDEPENDENT AUDITOR'S REPORT
ON ADDITIONAL INFORMATION
To the Stockholders
FSP Plaza Ridge Corp.
(a Delaware Corporation)
Our report on the audit of the basic financial statements and the financial
statement schedule of FSP Plaza Ridge Corp. for 2002 appears on page 1. That
audit was conducted for the purpose of forming an opinion on the basic financial
statements and financial statement schedule taken as a whole. The information
shown on page 18 is presented for purposes of additional analysis and is not a
part of the basic financial statements and financial statement schedule. The
information has not been subjected to the auditing procedures applied in the
audit of the basic financial statements and financial statement schedule, and,
accordingly, we express no opinion on it.
Newton, Massachusetts
February 7, 2003
F-361
FSP Plaza Ridge Corp.
Statement of Predecessor's Operations
(Unaudited)
For the Period
January 1, 2002 to
(in thousands) May 22, 2002
================================================================================
Revenue:
Rental $ 958
Interest and other 6
--------------------------------------------------------------------------------
Total revenue 964
--------------------------------------------------------------------------------
Expenses:
Rental operating expenses 390
Depreciation and amortization 304
Real estate taxes and insurance 107
--------------------------------------------------------------------------------
Total expenses 801
--------------------------------------------------------------------------------
Net income $ 163
================================================================================
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 Auditor's Report on Additional Information.
F-362
FSP Park Ten Corp.
Financial Statements
December 31, 2002
Table of Contents
Page
----
Financial Statements
Independent Auditor's Report ............................................ F-364
Balance Sheet as of December 31, 2002 ................................... F-365
Statement of Operations for the period May 14, 2002 (date of inception)
to December 31, 2002 .............................................. F-366
Statement of Changes in Stockholders' Equity for the period May 14, 2002
(date of inception) to December 31, 2002 .......................... F-367
Statement of Cash Flows for the period May 14, 2002 (date of inception)
to December 31, 2002 .............................................. F-368
Notes to the Financial Statements ....................................... F-369
Schedule of Real Estate and Accumulated Depreciation .................... F-378
Additional Information:
Independent Auditor's Report on Additional Information ............... F-380
Statement of Predecessor's Operations for the period January 1, 2002
to June 26, 2002 .................................................. F-381
F-363
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
FSP Park Ten Corp.
(a Delaware Corporation)
We have audited the accompanying balance sheet of FSP Park Ten Corp. (a Delaware
Corporation) as of December 31, 2002, and the related statements of operations,
changes in stockholders' equity and cash flows, as well as the financial
statement schedule listed in the accompanying index, for the period from May 14,
2002 (date of inception) to December 31, 2002. These financial statements and
financial statement schedule are the responsibility of the Company'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 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 and financial statement schedule are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements and financial statement schedule. 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 and financial statement schedule
referred to above present fairly, in all material respects, the financial
position of FSP Park Ten Corp. as of December 31, 2002, and the results of its
operations and its cash flows for the initial period then ended in conformity
with accounting principles generally accepted in the United States of America.
/s/ Braver and Company, P.C.
Newton, Massachusetts
February 7, 2003
F-364
FSP Park Ten Corp.
Balance Sheet
December 31,
(in thousands, except shares and par value amounts) 2002
================================================================================
Assets:
Real estate investments, at cost:
Land $ 1,367
Buildings and improvements 20,509
--------------------------------------------------------------------------------
21,876
Less accumulated depreciation 329
--------------------------------------------------------------------------------
Real estate investments, net 21,547
Cash and cash equivalents 865
Cash-funded reserves 1,061
Restricted cash 53
Tenant rent receivable 13
Step rent receivable 80
Prepaid expenses and other assets 16
Deferred lease origination costs, net of accumulated
amortization of $76 580
--------------------------------------------------------------------------------
Total assets $ 24,215
================================================================================
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and accrued expenses $ 250
Dividends payable 563
Tenant security deposits 53
--------------------------------------------------------------------------------
Total liabilities 866
--------------------------------------------------------------------------------
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
Retained deficit and dividends in excess of earnings (1,840)
--------------------------------------------------------------------------------
Total Stockholders' Equity 23,349
--------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 24,215
================================================================================
See accompanying notes to financial statements.
F-365
FSP Park Ten Corp.
Statement of Operations
For the Period
May 14, 2002
(date of inception) to
(in thousands, except shares and per share amounts) December 31, 2002
================================================================================
Revenue:
Rental $ 1,930
Interest and other 13
--------------------------------------------------------------------------------
Total revenue 1,943
--------------------------------------------------------------------------------
Expenses:
Rental operating expenses 398
Depreciation and amortization 405
Real estate taxes and insurance 260
Interest 1,659
--------------------------------------------------------------------------------
Total expenses 2,722
--------------------------------------------------------------------------------
Net loss before common dividends (779)
Dividends paid to common shareholders prior to syndication
of preferred shares 131
--------------------------------------------------------------------------------
Net loss attributable to preferred shareholders $ (910)
================================================================================
Weighted average number of preferred shares outstanding,
basic and diluted 275
================================================================================
Net loss per preferred share, basic and diluted $ (3,309)
================================================================================
See accompanying notes to financial statements.
F-366
FSP Park Ten Corp.
Statement of Changes in Stockholders' Equity
For the Period May 14, 2002
(date of inception) to December 31, 2002
Retained Deficit
Additional and Dividends Total
Preferred Common Paid in in Excess of Stockholders'
(in thousands, except shares) Stock Stock Capital Earnings Equity
=============================================================================================================
Private offering of 275 shares, net $ -- $ -- $ 25,189 $ $ 25,189
Dividends -- -- -- (1,061) (1,061)
Net Loss -- -- -- (779) (779)
-------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 $ -- $ -- $ 25,189 $ (1,840) $ 23,349
=============================================================================================================
See accompanying notes to financial statements.
F-367
FSP Park Ten Corp.
Statement of Cash Flows
For the Period May 14, 2002
(Date of inception) to December 31, 2002
(in thousands)
================================================================================
Cash flows from operating activities:
Net loss $ (779)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 405
Changes in operating assets and liabilities:
Cash-funded reserve (1,061)
Restricted cash (53)
Tenant rent receivable (13)
Step rent receivable (80)
Prepaid expenses and other assets (16)
Accounts payable and accrued expenses 250
Tenant security deposits 53
--------------------------------------------------------------------------------
Net cash used for operating activities (1,294)
--------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets (21,876)
Purchase of deferred lease origination costs (656)
--------------------------------------------------------------------------------
Net cash used for investing activities (22,532)
--------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of company stock 27,510
Syndication costs (2,321)
Dividends to stockholders (498)
Proceeds from long-term debt 22,300
Principal payments on long-term debt (22,300)
--------------------------------------------------------------------------------
Net cash provided by financing activities 24,691
--------------------------------------------------------------------------------
Net increase in cash and cash equivalents 865
Cash and cash equivalents, beginning of period --
--------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 865
================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 1,659
Disclosure of non-cash financing activities:
Dividends declared but not paid $ 563
See accompanying notes to financial statements.
F-368
FSP Park Ten Corp.
Notes to Financial Statements
1. Organization
FSP Park Ten Corp. (the "Company") was organized on May 14, 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
BASIS OF PRESENTATION
The results of operations from inception to date are not necessarily indicative
of the results to be obtained for other interim periods or for the full fiscal
year.
ESTIMATES AND ASSUMPTIONS
The Company prepares its financial statements and related notes in conformity
with accounting principles generally accepted in the United States of America
("GAAP"). 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.
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 improvement
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 15-39
Furniture and equipment 5-7
F-369
FSP Park Ten Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
REAL ESTATE AND DEPRECIATION (continued)
The following schedule reconciles the cost of the property as shown in the
Offering Memorandum as to the amounts shown of the Company's Balance Sheet:
(in thousands)
Price per Offering Memorandum $ 22,300
Plus: Acquisition fees 137
Plus: Other acquisition costs 95
----------------------------------------------------------
Total Acquisition Costs $ 22,532
==========================================================
These costs are reported in the Company's Balance Sheet as follows:
Land $ 1,367
Building 20,509
Deferred lease origination costs 656
----------------------------------------------------------
Total reported on Balance Sheet $ 22,532
==========================================================
The Company 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, 2002, no
such indicators of impairment were identified.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with an initial
maturity of three months or less to be cash equivalents.
CASH-FUNDED RESERVES
The Company has set aside funds in anticipation of future capital needs of the
property. Although these funds typically are used for the payment of real estate
assets and deferred leasing commissions, there is no legal restriction on their
use and they may be used for any company purpose.
RESTRICTED CASH
Restricted cash consists of tenant security deposits.
MARKETABLE SECURITIES
The Company accounts for investments in debt securities under the provisions of
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". The Company typically has classified its debt securities as
available-for-sale.
There were no investments in marketable securities at December 31, 2002.
F-370
FSP Park Ten Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
CONCENTRATION OF CREDIT RISKS
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.
For the period ended December 31, 2002 rental income was derived from various
tenants. As such, future receipts are dependent upon the financial strength of
the lessees and their ability to perform under the lease agreements.
The following tenant represents greater than 10% of total revenue:
Mustang Engineering, L.P. 94%
FINANCIAL INSTRUMENTS
The Company estimates that the carrying value of cash and cash equivalents,
cash-funded reserves and restricted cash approximate their fair values based on
their short-term maturity and prevailing interest rates.
STEP RENTS RECEIVABLE
Certain leases provide for fixed increases over the life of the lease. Rental
revenue is recognized on the straight-line basis over the related lease term;
however, billings by the Company are based on required minimum rentals in
accordance with the lease agreements. Step rent receivable which is the
cumulative revenue recognized in excess of amounts billed by the Company, is
$80,000 at December 31, 2002.
DEFERRED LEASE ORIGINATION COSTS
Deferred origination costs are the estimated value of legal and leasing costs
related to acquired leases that were included in the purchase price when the
Company acquired the property. Under Statement of Financial Accounting Standards
No. 141 "Business Combinations" ("SFAS 141"), which was approved by the
Financial Accounting Standards Board in June 2001, the Company is required to
segregate these costs from its investment in real estate. The Company
subsequently amortizes these costs on a straight-line basis over the
weighted-average remaining life of the related leases. Amortization expense of
approximately $76,000 is included in Depreciation and Amortization in the
Company's Statement of Operations for the period ended December 31, 2002.
Deferred lease origination cost included in the purchase price of the property
were $656,000 and are being amortized over the weighted-average period of five
years in respect of the leases assumed. Detail of the deferred lease origination
costs as of December 31, 2002:
Cost $ 656,000
Accumulated amortization 76,000
-----------
Book value $ 580,000
===========
The estimated annual amortization expense for the four years succeeding December
31, 2002 are as follows:
2003 $ 151,456
2004 $ 151,456
2005 $ 151,456
2006 $ 125,632
F-371
FSP Park Ten Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
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
$2,321,000 have been reported as a reduction in the Stockholders' Equity in the
Company's Balance Sheet.
REVENUE RECOGNITION
The Company has retained substantially all of the risks and benefits of
ownership of the Company's commercial properties and accounts for its leases as
operating leases. Rental income from leases, which may include rent concession
(including free rent and tenant improvement allowances) and scheduled increases
in rental rates during the lease term, is recognized on a straight-line basis.
The Company does not have any percentage rent arrangements with its commercial
property tenants. Reimbursable costs are included in rental income in the period
earned. A schedule showing the components of rental revenue is shown below.
Period Ended
December, 31
(in thousands) 2002
=================================================
Income from leases $ 1,755
Straight-line rent adjustment 80
Reimbursable expenses 95
-------------------------------------------------
Total $ 1,930
=================================================
INTEREST AND OTHER
Interest income and other income are recognized when the related services are
performed and the earnings process is complete.
INCOME TAXES
The Company has elected to be taxed as a REIT under the Internal Revenue Code of
1986, 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 taxable income
that must be distributed annually.
NET INCOME PER SHARE
The Company follows Statement of Financial Accounting Standards 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
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 December 31, 2002. Subsequent to the completion of the
offering of preferred shares, the holders of common stock are not entitled to
share in any income. The denominator used for calculating basic and diluted net
income per share is shown for preferred shares only and is as follows:
Year Ended
December 31,
2002
===============================================================
Weighted average number of preferred shares
outstanding 275
F-372
FSP Park Ten Corp.
Notes to Financial Statements
3. 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. 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. The impact of adoption did not have a
material impact on the Company's financial position, results of operations and
cash flows. The Company does not have any real estate assets that it considers
"held for sale" at December 31, 2002.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements Nos.
4, 44, and 64, Amendment of SFAS 13, and Technical Corrections". This Statement
rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt",
and an amendment of that Statement, SFAS No. 64, "Extinguishments of Debt Made
to Satisfy Sinking-Fund Requirements". This Statement amends SFAS 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 SFAS 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 was 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 position, results of operations and cash flow.
4. Income Taxes
The Company files as a REIT under Sections 856-860 of the Internal Revenue Code
of 1986, as amended. In order to qualify as a REIT, the Company is required to
distribute at least 90% of its taxable income to shareholders and to meet
certain asset and income tests as well as certain other requirements. The
Company will generally not be liable for federal income taxes, provided it
satisfies their requirements. Even as a qualified REIT, the Company is subject
to certain state and local taxes on its income and property.
For the period ended December 31, 2002, the Company incurred a net operating
loss for income tax purposes of approximately $790,000 that can be carried
forward until it expires in the year 2022.
At December 31, 2002, the Company's net tax basis of its real estate assets is
higher than the amount set forth in the Company's Balance Sheet by approximately
$646,000.
F-373
FSP Park Ten Corp.
Notes to Financial Statements
4. Income Taxes (continued)
The following schedule reconciles GAAP Net Income to Taxable Income subject to
dividend requirements:
Period Ended
December 31,
(in thousands) 2002
===========================================================================
GAAP net loss $ (779)
Add: Book depreciation and amortization 405
Less: Tax depreciation and amortization (328)
Straight-line rents (80)
---------------------------------------------------------------------------
Taxable loss subject to dividend requirement(1) $ (782)
===========================================================================
(1) A tax loss is not subject to a dividend requirement.
The following schedule reconciles cash dividends paid to the dividends paid
deduction:
Period Ended
December 31,
(in thousands) 2002
===========================================================================
Cash dividends paid $ 498
Plus: Dividends designated from following year --
Less: Portion designated capital gain distribution --
Less: Return of Capital (498)
---------------------------------------------------------------------------
Dividends paid deduction $ --
===========================================================================
5. Cash Available for Distribution
The Company evaluates its performance based on Cash Available for Distribution
("CAD") as management believes that CAD represents the most accurate measure of
the Company's activity. CAD 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 funds raised by the issuance of shares; plus the net proceeds
from the sale of land; less purchases of real estate assets, property and
equipment ("Capital Expenditures"), payments for deferred leasing commissions
and payments for deferred lease origination costs; plus (less) proceeds from
(payments to) cash reserves established at the acquisition date of the property
(cash-funded reserves). 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 payments for deferred lease origination costs 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 financial statements.
F-374
FSP Park Ten Corp.
Notes to Financial Statements
5. Cash Available for Distribution (continued)
The calculation of CAD is shown in the following table:
December 31,
(in thousands) 2002
=======================================================================
Net Income $ (779)
Depreciation and amortization 405
Straight line rent (80)
Proceeds from offering of shares 25,189
Purchase of land and building and improvements (21,876)
Establish funded reserve (1,061)
Payment of deferred lease origination costs (656)
-----------------------------------------------------------------------
Cash Available for Distribution $ 1,142
=======================================================================
The Company's cash distributions for the period ended December 31, 2002 are
summarized as follows:
(in thousands)
Total Cash
Quarter Paid Dividends
=======================================================================
Second Quarter of 2002 $ --
Third Quarter of 2002 --
Fourth Quarter of 2002 498
-----------------------------------------------------------------------
Dividends Paid in 2002 $ 498
First Quarter of 20033 $ 563
-----------------------------------------------------------------------
Dividends Declared in 2002 $ 1,061
=======================================================================
4 The Company declared a dividend payable to stockholders of record as of
December 31, 2002.
Cash distributions are declared and paid based on the total outstanding shares
as of the record date and are typically paid in the quarter following the
quarter that CAD is generated.
6. Capital Stock
PREFERRED STOCK
Generally, each holder of Shares of Preferred Stock is entitled to receive
ratably all income and 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.
F-375
FSP Park Ten Corp.
Notes to Financial Statements
6. Capital Stock (continued)
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.
Subsequent to the completion of the offering of the preferred shares the holders
of common shares are not entitled to receive any income, nor shall the Company
declare or pay any cash dividends on shares of Common Stock.
7. Related Party Transactions
The Company executed a management agreement with FSP Property Management LLC, an
affiliate of FSP, that provides for a management fee equal to 1% of collected
revenues and is cancelable with 30 days notice by either party. For the period
ended December 31, 2002, fees incurred under the agreement were $18,403.
An acquisition fee of $137,500 and other costs of $11,000 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 $2,321,000 were paid in 2002 to an affiliate of the Common
Shareholder for services related to syndication of the Company's preferred
stock.
During 2002, the Company borrowed and repaid in full:
Note payable to FSP, principal of $22,300,00 with interest equal to the
Citizens Bank base. Interest paid to FSP was $78,123. The average interest
rate during the time the loan was outstanding was 4.75%.
A commitment fee of $1,581,250 was paid to FSP for obtaining the first
mortgage loan. Such amount is included in interest expenses on the
Statement of Operations.
The Company paid a dividend of $131,000 to the common shareholder relating to
earnings of the Company prior to the completion of the offering of preferred
shares.
8. Commitments and Contingencies
The Company, as lessor, has minimum future rentals due under a non-cancelable
operating lease as follows:
Year Ended
(in thousands) December 31, Amount
------------------- ---------------
2003 $ 3,414
2004 3,428
2005 3,549
2006 2,983
2007 850
Thereafter 1,115
---------------
$ 15,339
===============
In addition, the lessees are liable for real estate taxes and certain operating
expenses of the property.
Upon acquiring the commercial rental property in June, 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.
F-376
FSP Park Ten Corp.
Notes to Financial Statements
9. Subsequent Event
The Company has entered into a merger agreement with its common shareholder,
Franklin Street Properties Corp ("FSP"). In January 2003 FSP filed a proxy
statement with the United States Securities and Exchange Commission indicating
its intent to acquire the preferred stock interests of the Company and twelve
additional REITs. The merger requires the approval of the shareholders of the
Company as well as the shareholders of the twelve additional REITs and the
shareholders of FSP. If approved, FSP will issue shares of its common stock in
exchange for a 100% ownership interest in the Company.
F-377
SCHEDULE III
FSP PARK TEN CORP.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2002
(in thousands)
Initial Cost
-----------------------------------
Costs
Capitalized
(Disposals)
Subsequent
Encumbrances Buildings & to
Description (1) Land Improvements Acquisition
------------ -------- ------------ -----------
Park Ten, Houston, Texas -- $ 1,367 $ 20,509 $ --
============ ======== ============ ===========
(in thousands)
Historical Costs
--------------------------------------------------------------
Total
Costs, Net
of Depreciable
Buildings & Accumulated Accumulated Life Date of
Description Land Improvements Total(2) Depreciation Depreciation Years Acquisition
-------- ------------ -------- ------------ ------------ ----------- -----------
Park Ten, Houston, Texas $ 1,367 $ 20,509 $ 21,876 $ 329 $ 21,547 15-39 June, 2002
======== ============ ======== ============ ============
(1) There are no encumbrances on the above property.
(2) The aggregate cost for Federal Income Tax purposes is greater than the
total historical cost by approximately $656,000.
F-378
FSP PARK TEN CORP.
REAL ESTATE AND ACCUMULATED DEPRECIATION
The following table summarizes the changes in the Company's real estate
investment and accumulated depreciation:
December 31,
(in thousands) 2002
===================================================
Real estate investments, at cost:
Balance, beginning of period $ --
Acquisitions 21,876
Improvements --
Dispositions --
---------------------------------------------------
Balance, end of period $ 21,876
===================================================
Accumulated depreciation:
Balance, beginning of period $ --
Depreciation 329
Dispositions --
---------------------------------------------------
Balance, end of period $ 329
===================================================
F-379
INDEPENDENT AUDITOR'S REPORT
ON ADDITIONAL INFORMATION
To the Stockholders
FSP Park Ten Corp.
(a Delaware Corporation)
Our report on the audit of the basic financial statements and the financial
statement schedule of FSP Park Ten Corp. for 2002 appears on page 1. That audit
was conducted for the purpose of forming an opinion on the basic financial
statements and financial statement schedule taken as a whole. The information
shown on page 17 is presented for purposes of additional analysis and is not a
part of the basic financial statements and financial statement schedule. The
information has not been subjected to the auditing procedures applied in the
audit of the basic financial statements and financial statement schedule, and,
accordingly, we express no opinion on it.
Newton, Massachusetts
February 7, 2003
F-380
FSP Park Ten Corp.
Statement of Predecessor's Operations
(Unaudited)
For the Period
January 1, 2002 to
(in thousands) June 26, 2002
================================================================================
Revenue:
Rental $ 1,791
Interest and other --
--------------------------------------------------------------------------------
Total revenue 1,791
--------------------------------------------------------------------------------
Expenses:
Rental operating expenses 368
Depreciation and amortization 269
Real estate taxes and insurance 240
Interest --
--------------------------------------------------------------------------------
Total expenses 877
--------------------------------------------------------------------------------
Net Income $ 914
================================================================================
Note: The Company purchased the land and building on June 26, 2002. There is no
comparative information for the corresponding period in the prior year.
See auditor's report on additional information.
F-381
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.
"Closing Date" - the closing date of the Mergers.
"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 June 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
May [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.
"Valuation Overview" - The summary of forecasts used by FSP Corp.'s
management to determine a range of estimated hypothetical values of FSP Corp.
prior to the Mergers and of the Combined Company following the consummation of
the Mergers. The Valuation Overview is attached as Appendix D to this Proxy
Statement.
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.
This letter 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
---------------------------------------------------
Current Price To
===================
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
---------------------------------------------------
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
---------------------------------------------------
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
---------------------------------------------------
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
---------------------------------------------------
Mean 11.9x 11.5x
Median 11.9x 11.5x
===================================================
---------------------------------------------------
Overall Mean 12.7x 12.0x
Overall Median 12.5x 11.5x
===================================================
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
------------------------------------------------------------------------------------------------------------------------------------
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
D-1
PROXY
FRANKLIN STREET PROPERTIES, CORP.
SPECIAL MEETING OF STOCKHOLDERS
May [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
FSP Corp. to be held on Wednesday, May [28], 2003, at [9:00] a.m., Boston time,
at the offices of FSP Corp., 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 CONTINUED AND TO BE SIGNED ON REVERSE SEE REVERSE
SIDE SIDE SIDE
--------------------- -------------------
-------------------------
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 FSP Corp.
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: ____________________