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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2002
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-32615
FRANKLIN STREET PROPERTIES CORP.
(formerly known as Franklin Street Partners Limited Partnership)
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(Exact name of registrant as specified in its charter)
Maryland 04-3578653
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
401 Edgewater Place, Suite 200, Wakefield, Massachusetts 01880-6210
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (781) 557-1300
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.0001 par value per share
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Indicate by check mark whether the registrant is an accelerated filer as
defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended.
Yes |X| No |_|.
As of June 30, 2002, the aggregate fair market value of Common Stock held
by non-affiliates of the registrant, as determined in good faith by the Board of
Directors of the registrant, was $287,153,099.
There were 24,630,247 shares of Common Stock outstanding as of March 15,
2003.
TABLE OF CONTENTS
PART I.........................................................................1
Item 1. Business..........................................................1
Item 2. Properties........................................................9
Item 3. Legal Proceedings................................................10
Item 4. Submission of Matters to a Vote of Security Holders..............10
PART II.......................................................................13
Item 5. Market For Registrant's Common Equity and Related
Stockholder Matters..............................................13
Item 6. Selected Financial and Other Data................................13
Item 7. Management's Discussion And Analysis Of Financial
Condition And Results Of Operations..............................14
Item 8. Financial Statements and Supplementary Data......................30
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure..............................30
PART III......................................................................31
Item 10. Directors and Executive Officers of the Registrant...............31
Item 11. Executive Compensation...........................................31
Item 12. Security Ownership of Certain Beneficial Owners
And Management...................................................33
Item 13. Certain Relationships and Related Transactions...................35
PART IV.......................................................................36
Item 14. Controls and Procedures..........................................36
Item 15. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K..............................................36
Index to Consolidated Financial Statements...................................F-1
PART I
Item 1. Business.
History
Franklin Street Properties 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. FSP Corp. is self-managed. It is the successor
to Franklin Street Partners Limited Partnership, a Massachusetts limited
partnership (the "FSP Partnership"). The FSP Partnership was originally formed
as a Massachusetts general partnership in January 1997 as the successor to a
Massachusetts general partnership that was formed in 1981. 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 common stock, $.0001 par value per share (the "FSP
Common Stock"). As a result of the Conversion, FSP Corp. now holds, directly and
indirectly, 100% of the interest in three former subsidiaries of the FSP
Partnership: FSP Investments LLC, a Massachusetts limited liability company
("FSP Investments"), FSP Property Management LLC, a Massachusetts limited
liability company ("FSP Property Management") and FSP Holdings LLC, a Delaware
limited liability company ("FSP Holdings").
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 of 1933, as amended ("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 (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.
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. 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.
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 its limited partnership interest (the "FSP
Units") 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 Annual Report on Form 10-K 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 Board of Directors of FSP
Corp. (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. As of November 26, 2002, FSP Corp. obtained foreign terrorism
insurance 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.
On January 14, 2003, FSP Corp. entered into an agreement (the "Merger
Agreement") to acquire 13 Sponsored REITs by merger. Under the terms of the
Merger Agreement, FSP Corp. would issue an aggregate of 25,000,091 shares of FSP
Common Stock to the stockholders of the 13 Sponsored REITs. The consummation of
these mergers is subject to the approval of FSP Corp.'s stockholders and the
stockholders of each of the 13 Sponsored REITs.
Investment Objectives
FSP Corp. has two principal sources of revenue:
o investment banking income consisting of brokerage commissions and
other related fees paid to FSP Investments in connection with the
organization and offering of Sponsored Entities and loan origination
fees paid in connection with loans to Sponsored Entities.
o rental income from the real properties it owns.
FSP Corp.'s investment objective is to increase the cash available for
distribution to its stockholders by increasing its revenue from investment
banking services and rental income. FSP Corp. expects that 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. As of December
31, 2002, FSP Corp. owned 17 properties, four of which are apartment complexes,
11 of which are office buildings and two of which are industrial; four of these
properties are located in Texas, three properties are located in Massachusetts,
three properties are located in northern California, two properties are located
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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 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
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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. See "Management's
Analysis and Discussion of Financial Condition and Results of Operations -
Trends and Uncertainties" in Item 7. 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 100% 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 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.
FSP Corp. does not maintain a website or Internet address, and therefore
its annual report on Form 10-K, quarterly reports on Form 10-Q and current
reports on Form 8-K are not available when electronically filed with or
furnished to the Securities and Exchange Commission (the "SEC"). FSP Corp. will
voluntarily provide electronic or paper copies of such filings free of charge
upon request.
Item 1A. Risk Factors.
FSP Corp. would incur adverse tax consequences if it failed to qualify as a
REIT.
If in any taxable year FSP Corp. 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 FSP Corp. in computing its taxable
income. In addition, if FSP Corp. were to fail to qualify as a real estate
investment trust, it 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 FSP Corp.'s cash available for distributions to its
stockholders or could require it to incur indebtedness or liquidate investments
in order to generate sufficient funds to pay the resulting federal income tax
liabilities. The provisions of the Internal Revenue Code governing the taxation
of real estate investment trusts are very technical and complex, and although
FSP Corp. expects that it will operate in a manner that will enable it to meet
such requirements, no assurance can be given that it will succeed in doing so
during its entire life.
FSP Corp. faces risks in continuing to attract investors for the Sponsored
Entities.
FSP Corp.'s investment banking business depends upon its ability to
attract purchasers of equity interests in Sponsored Entities. FSP Corp.'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 its 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.
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FSP Corp.'s level of dividends may fluctuate.
Because FSP Corp.'s investment banking business is transactional in nature
and real estate occupancy levels and rental rates can fluctuate, there is no
predictable recurring level of revenue from 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 or grow dividend levels in the
future.
FSP Corp. faces risks in owning and operating real property.
An investment in FSP Corp. 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 FSP
Corp.'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.
FSP Corp. faces risks from tenant defaults or bankruptcies.
If any of FSP Corp.'s tenants defaults on its lease, FSP Corp. 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 FSP Corp.'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 FSP Corp.'s
stockholders.
FSP Corp. may encounter significant delays in reletting vacant space, resulting
in losses of income.
When leases expire, FSP Corp. 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 FSP Corp. is unable to re-lease space
promptly, if the terms are significantly less favorable than anticipated or if
the costs are higher, FSP Corp. may have to reduce its distributions to its
stockholders.
FSP Corp. faces risks from geographic concentration.
A large percentage of real properties included in FSP Corp.'s portfolio
are concentrated in Texas and Massachusetts, with each area constituting
approximately 20% of the aggregate square footage owned by the Company. FSP
Corp. also owns properties in California, Maryland, Louisiana, Michigan, North
Carolina and South Carolina. FSP Corp. is likely to face risks to the extent
that any of these areas suffer deteriorating economic conditions.
FSP Corp. competes with national, regional and local real estate operators and
developers, which could adversely affect FSP Corp.'s cash flow.
Competition exists in every market in which FSP Corp.'s properties are
located. Such competition may adversely affect the percentage of leased space
and the rental revenues of FSP Corp.'s properties, which could adversely affect
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FSP Corp.'s cash flow from operations and its ability to make expected
distributions to its stockholders. Some of FSP Corp.'s competitors may have more
resources than it or have 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 FSP Corp. 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 FSP Corp.'s
properties.
FSP Corp. anticipates that future increases in revenue from FSP Corp.'s
properties will be primarily the result of scheduled rental rate increases or
rental rate increases as leases expire. Twelve out of the 17 FSP Corp.
properties' percentage of rentable square feet leased was in excess of 95% as of
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 FSP Corp.'s
properties continue to operate profitably, this will likely stimulate new
development of competing properties.
FSP Corp. is 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. FSP Corp. cannot assure you that any
environmental assessments it has undertaken 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
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 FSP Corp.'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 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.;
o the current environmental conditions of FSP Corp.'s properties will
not be affected by toxic mold, bacteria or other environmental
pollutants that could affect indoor air quality or pose a threat to
human health; or
o tenants will not violate their leases by introducing hazardous or
toxic substances into the FSP Corp.'s properties that could expose
FSP Corp. to liability under federal or state environmental laws.
FSP Corp. is subject to compliance with the Americans With Disabilities Act and
fire and safety regulations which could require FSP Corp. to make significant
capital expenditures.
All of FSP Corp.'s 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
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an award of damages to private litigants. In addition, FSP Corp. 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 FSP Corp.'s
properties. Compliance with such requirements may require FSP Corp. to make
substantial capital expenditures, which expenditures would reduce cash otherwise
available for distribution to its stockholders.
There are significant conditions to FSP Corp.'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 FSP Corp.'s redemption plan, it 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 FSP Corp.'s obligation to
redeem shares of FSP Common Stock, including:
o FSP Corp. cannot be insolvent or be rendered insolvent by the
redemption;
o redemption cannot impair the capital or operations of FSP Corp.;
o the redemption cannot contravene any provision of federal or state
securities laws;
o the redemption cannot result in FSP Corp.'s failing to qualify as a
REIT; and
o FSP Corp.'s management must determine that the redemption is in FSP
Corp.'s best interests.
Any redemption effected by FSP Corp. 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.
FSP Corp. may lose capital investment or anticipated profits if an uninsured
event occurs.
FSP Corp. will carry or cause its tenants to carry comprehensive
liability, fire and extended coverage with respect to each of the properties
owned by FSP Corp., 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, FSP Corp. could lose both its capital invested in the property and
anticipated profits.
Provisions in FSP Corp.'s organizational documents may prevent changes in
control.
FSP Corp.'s Articles of Incorporation (the "Articles") and Bylaws (the
"Bylaws") contain provisions, described below, which may have the effect of
discouraging a third party from making an acquisition proposal for FSP Corp. and
may thereby inhibit a change of control of FSP Corp. under circumstances that
could give the holders of shares of FSP Common Stock the opportunity to realize
a premium over the then-prevailing market prices.
Ownership Limits. In order for FSP Corp. to maintain its qualification as
a real estate investment trust, the holders of FSP Common Stock will be limited
to owning, either directly or under applicable attribution rules of the Internal
Revenue Code, no more than 9.8% of the lesser of the value or the number of
equity shares of FSP Corp., and no holder of FSP Common Stock will be able to
acquire or transfer shares that would result in FSP Corp. being beneficially
owned by fewer than 100 persons. Such ownership limit may have the effect of
preventing an acquisition of control of FSP Corp. without the approval of the
FSP Board. Moreover, FSP Corp. will have the right to redeem any shares of FSP
Common Stock that are acquired or transferred in violation of these provisions
at the market price. In addition, the Articles give the FSP Board the right to
refuse to give effect to the acquisition or transfer of shares by a stockholder
in violation of these provisions.
Staggered Board. The FSP Board is divided into three classes. The terms of
these classes will expire in 2003, 2004 and 2005, respectively. Directors of
each class are elected for a three-year term upon the expiration of the initial
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term of each class. The staggered terms for directors may affect the
stockholders' ability to effect a change in control of FSP Corp. even if a
change in control were in the stockholders' best interests.
Preferred Stock. The Articles authorize the FSP Board to issue up to
20,000,000 shares of preferred stock, par value $.0001 per share (the "Preferred
Stock"), and to establish the preferences and rights of any such shares issued.
The issuance of Preferred Stock could have the effect of delaying or preventing
a change in control of FSP Corp. even if a change in control were in the
stockholders' best interest.
Increase of Authorized Stock. The FSP Board, without any vote or consent
of the stockholders, may increase the number of authorized shares of any class
or series of stock or the aggregate number of authorized shares FSP Corp. has
authority to issue. The ability to increase the number of authorized shares and
issue such shares could have the effect of delaying or preventing a change in
control of FSP Corp. even if a change in control were in the stockholders' best
interest.
Amendment of Bylaws. The FSP Board has the sole power to amend the Bylaws.
This power could have the effect of delaying or preventing a change in control
of FSP Corp. even if a change in control were in the stockholders' best
interests.
Stockholder Meetings. The Bylaws require advance notice for stockholder
proposals to be considered at annual meetings of stockholders and for
stockholder nominations for election of directors at special meetings of
stockholders. The Bylaws also provide that stockholders entitled to cast more
than 50% of all the votes entitled to be cast at a meeting must join in a
request by stockholders to call a special meeting of stockholders. These
provisions could have the effect of delaying or preventing a change in control
of FSP Corp. even if a change in control were in the best interests of the
stockholders.
Supermajority Votes Required. The Articles require the affirmative vote of
the holders of no less than 80% of the shares of capital stock outstanding and
entitled to vote in order (i) to amend the provisions of the Articles relating
to the classification of directors, removal of directors, limitation of
liability of officers and directors or indemnification of officers and directors
or (ii) to amend the Articles to impose cumulative voting in the election of
directors. These provisions could have the effect of delaying or preventing a
change in control of FSP Corp. even if a change in control were in the
stockholders' best interest.
There is no public trading market for FSP Corp.'s securities.
There is no public trading market for the FSP Common Stock. FSP Corp.
cannot assure you that any market will develop or that there will be any
liquidity in a market for the FSP Common Stock.
The consummation of FSP Corp.'s proposed acquisitions by merger would
substantially dilute its existing stockholders.
If the mergers contemplated by the Merger Agreement are consummated, the
percentage ownership and voting power of FSP Corp.'s stockholders would be
reduced to approximately 50% of what they currently are.
The consummation of FSP Corp.'s proposed acquisitions by merger would result in
an increased level of voting control for FSP Corp.'s officers and directors.
If the mergers contemplated by the Merger Agreement are consummated, the
ownership of the officers and directors will increase from 15.04% of FSP Corp.
to 19.06% of FSP Corp., and Messrs. Barry Silverstein and Dennis J.
McGillicuddy, directors of FSP Corp., will own 10.68% and 5.21% of FSP Corp.,
respectively. The greater concentration of ownership in the officers and
directors of FSP Corp. might make it easier for the FSP Board, or management, to
obtain in the future shareholder approval of corporate actions or election of
FSP Corp.'s nominees as directors.
-8-
Item 2. Properties.
Set forth below is information regarding our properties as of December 31,
2002:
Sponsored Approx.
Sponsored Partnership Percent Number
Partnership's Date of Number Approx. Leased as of
Property Location Purchase Price Purchase of Units Square Feet of 12/31/02 Tenants Major Tenant(s)(1)
- ----------------- -------------- -------- -------- ----------- ----------- ------- ------------------
Apartments
3919 Essex Lane $ 10,100,000 6/30/93 135 118,800 over 95% 135 None - Apts.
Houston, TX (2)
3231 Allen Parkway $ 10,700,000 8/11/94 159 129,000 over 95% 159 None - Apts.
Houston, TX (2)
4041 Weslayan & Law $ 4,200,000 4/29/97 84 70,500 over 95% 84 None - Apts.
Houston, TX (2) (5)
7250 Perkins Road $ 18,000,000 10/16/98 264 223,800 over 95% 264 None - Apts.
Baton Rouge, LA (3)
------------- --- -------
Total Apartments $ 43,000,000 642 542,100
------------- --- -------
Office
451 Andover Street North $ 8,000,000 6/1/96 92,000 over 95% 40 Pentucket
Andover, MA (2) Medical
1515 Mockingbird Lane $ 6,850,000 7/1/97 110,600 79% 80 Primary Physicians Care
Charlotte, NC (2)
33 & 37 Villa Road $ 10,550,000 3/1/98 143,800 63% 40 Home Gold
Greenville, SC (2)
4995 Patrick Henry Dr. $ 6,800,000 12/1/97 40,300 100% 1 Agere
Santa Clara, CA (2)
678-686 Hillview Drive $ 4,862,500 3/9/99 36,300 100% 1 Headway Technologies
Milpitas, CA (3)
5751-5771 Copley Drive $ 15,400,000 3/12/99 101,700 100% 3 XO, Nextel,
San Diego, CA (3) Allegiance, AON
Service Corp. and MD3,
Inc.
81 Blue Ravine $ 5,700,000 9/27/99 47,000 100% 1 Cardinal Health
Folsom, CA (4)
18000 W. Nine Mile Rd. $ 14,950,000 9/30/99 212,500 85% 6 IBM
Southfield, Michigan (4)
11211 Taylor Draper Lane, $ 10,000,000 12/29/99 68,600 100% 6 Columbia Universal
Austin, Texas (4) Life Insurance Co.
7130-7150 Columbia Gateway Dr. $ 19,850,000 12/20/99 188,800 94% 7 Columbia National,
Columbia, MD (4) Avnet, EVI and Nextira
-9-
Sponsored Approx.
Sponsored Partnership Percent Number
Partnership's Date of Number Approx. Leased as of
Property Location Purchase Price Purchase of Units Square Feet of 12/31/02 Tenants Major Tenant(s)(1)
- ----------------- -------------- -------- -------- ----------- ----------- ------- ------------------
10 Lyberty Way $ 9,100,000 5/23/00 104,700 100% 1 Lucent Technologies
Westford, MA (4)
------------- ---------
Total Office $ 112,062,500 1,146,300
------------- ---------
Industrial
One Technology Dr. $ 9,175,000 12/1/95 188,000 100% 1 Alliant Foodservice
Peabody, MA (2)
8730 Bollman Place $ 5,600,000 12/14/99 99,000 0% 0 Vacant
Savage (Jessup), MD (4) ------------- ---------
Total Industrial $ 14,775,000 287,000
============= === =========
Grand Total $ 169,837,500 642 1,975,400
============= === =========
(1) Major tenants are tenants who occupy 10% or more of the space in an
individual property.
(2) Merged into FSP Corp. on January 1, 1999.
(3) Merged into FSP Corp. on January 1, 2000.
(4) Merged into FSP Corp. on October 1, 2000.
(5) The property owned by this Sponsored Partnership was sold on February 7,
2003.
All of the properties listed above are or were owned by FSP Corp. None of
our properties are subject to any mortgage loans. We have no material
undeveloped or unimproved properties, and we have no proposed programs for the
renovation, improvement or development of any of our properties. We believe that
our properties are adequately covered by insurance as of December 31, 2002.
Item 3. 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 the FSP
Corp.'s financial position, cash flows or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
-10-
Item 4A. Directors and Executive Officers of FSP Corp.
The following table sets forth the names, ages and positions of all
directors and executive officers of FSP Corp.
Name Age Position
---- --- --------
George J. Carter (5) 54 President, Chief Executive Officer
and Director
Barbara J. Corinha (1),(2),(4),(6) 47 Vice President, Chief Operating
Officer, Treasurer, Secretary and
Director
R. Scott MacPhee 45 Executive Vice President
Richard R. Norris (5) 59 Executive Vice President and
Director
William W. Gribbell 43 Executive Vice President
Janet Prier Notopoulos (1),(3) 55 Vice President and Director
Barry Silverstein (2),(4) 69 Director
Dennis J. McGillicuddy (2),(3) 61 Director
- ----------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
(3) Class I Director
(4) Class II Director
(5) Class III Director
(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 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
-11-
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 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 the FSP Partnership in 1997,
Ms. Notopoulos was a real estate and marketing consultant for various clients.
From 1975 to 1983, she was Vice President of North Coast Properties, Inc., a
Boston real estate investment company. Between 1969 and 1973, she was a real
estate paralegal at Goodwin, Procter & Hoar. Ms. Notopoulos is a graduate of
Wellesley College (B.A.) and the Harvard School of Business Administration
(M.B.A).
Barry Silverstein, age 69, is a Director and a member of the Compensation
Committee. Mr. Silverstein took his law degree from Yale University in 1957 and
subsequently held positions as attorney/officer/director of various
privately-held manufacturing companies in Chicago, Illinois. After selling those
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.
-12-
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.
PART II
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters.
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 March 15, 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 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.
On January 1, 2002, in connection with the Conversion, FSP Corp. issued an
aggregate of 24,586,249 shares of FSP Common Stock to the general and limited
partners of the Partnership pursuant to an exemption from registration under
Rule 506 of Regulation D and Section 4(2) of the Securities Act. FSP Corp. bases
its belief that such transaction had the benefit of these exemptions on the fact
that no general solicitation was conducted and on information furnished in
investor questionnaires and representations made by the limited partners of the
Partnership as to their status as accredited investors.
Item 6. Selected Financial and Other Data.
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" in
Item 7 and with the FSP Partnership's and FSP Corp.'s consolidated financial
statements and related notes thereto included in Item 8.
-13-
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 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" in
Item 7.
Item 7. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations.
The following discussion should be read in conjunction with the financial
statements and notes thereto appearing elsewhere in this report. 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. The
following discussion and other parts of this annual report on Form 10-K may also
contain forward-looking statements based on current judgments and current
knowledge of management, which are subject to certain risks, trends and
uncertainties that could cause actual results to differ materially from those
indicated in such forward-looking statements. Accordingly, readers are cautioned
not to place undue reliance on forward-looking statements. Investors are
cautioned that FSP Corp.'s forward-looking statements involve risks and
uncertainty, including without limitation, changes in economic conditions in the
markets in which FSP Corp. owns properties, changes in the demand by investors
for investment in Sponsored REITs, the continuing impact of the events of
September 11, 2001, risks of a lessening of demand for the types of real estate
owned by FSP Corp., changes in government regulations, and expenditures that
cannot be anticipated such as utility rate and usage increases, unanticipated
repairs, additional staffing, insurance increases and real estate tax valuation
reassessments. See "Risk Factors" in Item 1A. Although we believe the
expectations reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance or
achievements. We will not update any of the forward-looking statements after the
date this annual report on Form 10-K is filed to conform them to actual results
or to changes in our expectations that occur after such date, other than as
required by law.
-14-
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
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
-15-
(1) The sale of the property owned by 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 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. There were no Sponsored REITs in 1999.
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. 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.
-16-
Prior to the mergers, the accounts of the Sponsored Partnerships have been
consolidated into the FSP Partnership's financial statements under the
principles of accounting applicable to investments in subsidiaries in accordance
with SOP 78-9.
Real Estate 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 "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.
-17-
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 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
-18-
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
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. 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,
(in thousands) 2002 2001 2000
----------------------------------
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
==================================
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)
==================================
-19-
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
-------------------------------------------
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
===========================================
-20-
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
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.
-21-
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:
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.
-22-
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.
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
-23-
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) 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.
-24-
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:
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.
-25-
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 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.
-26-
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 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 Sponsored 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
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
-27-
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 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.
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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.
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. 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.
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
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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Item 7A. 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, 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.
Item 8. Financial Statements and Supplementary Data.
The information required by this item is included elsewhere herein.
Reference is made to the Index to Consolidated Financial Statements in Item 15
of Part IV.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
The information required by this item has been previously reported by FSP
Corp. on a Current Report on Form 8-K filed with the SEC on October 17, 2001.
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PART III
Item 10. Directors and Executive Officers of the Registrant.
The response to this item is contained in part under the caption
"Directors and Executive Officers of FSP Corp. " in Part I of this Annual Report
on Form 10-K.
Sections 16(a) Beneficial Ownership Reporting Compliance
Based solely on its review of copies of reports filed by the directors and
executive officers of FSP Corp. pursuant to Section 16(a) of the Exchange Act or
written representations from certain persons required to file reports under
Section 16(a) of the Exchange Act that no Form 5 filing was required for such
person, FSP Corp. believes that during 2002 all filings required to be made by
its Reporting Persons were timely made in accordance with the requirements of
the Exchange Act.
Item 11. 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.
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(3) The FSP Partnership issued FSP Units to all executive officers in April
2000 and July 2001, valued at $10 per FSP Unit and $11.50 per FSP Unit,
respectively, as part of their annual compensation. The valuations of $10
and $11.50 per FSP Unit were determined in good faith by the FSP General
Partner, the general partner of the FSP Partnership. The value of $10 had
been ascribed to each FSP Unit in connection with certain mergers that
were effective January 1, 2000 in which the FSP Partnership acquired
several of the limited partnerships whose offerings FSP Investments had
previously sponsored, and no material changes in the financial condition
or results of the FSP Partnership had occurred between that date and April
1, 2000. The value of $11.50 per FSP Unit was determined by the general
partner based on the value ascribed to each FSP Unit in connection with
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.
(20) Includes $50,000 in FSP Units and a $6,000 FSP Partnership contribution to
a Simple IRA plan.
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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., 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.
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.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee consists of Mr. McGillicuddy, Chairman, Ms.
Corinha and Mr. Silverstein. No executive officer of FSP Corp. has served as a
director or member of the compensation committee (or other committee serving an
equivalent function) of any other entity, one of whose executive officers served
as a director or member of the Compensation Committee of FSP Corp.
Item 12. Security Ownership of Certain Beneficial Owners And Management.
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,
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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.
(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 7,988 shares of FSP Common Stock held by the
Karen C. Norris Living Trust.
Equity Compensation Plan Information
The following table provides information about FSP Common Stock that may
be issued under all of FSP Corp.'s equity compensation plans as of January 1,
2003. FSP Corp. only has one equity compensation plan, the 2002 Stock Incentive
Plan. FSP Corp.'s stockholders approved this plan in May 2002.
(c)
Number of Securities
Available for Future
(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
Plan Category Warrants and Rights(1)(2) Warrants and Rights Column(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., in July 2002
under the 2002 Stock Incentive Plan.
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Item 13. 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:
Total
Financing Amount
Original Commitment Interest Outstanding
Principal Average Fees Earned Income Earned Date of as of
Date of Loan Amount of Note Interest Rate by FSP Corp. by FSP Corp. Repayment December 31, 2002
------------ -------------- ------------- ------------ ------------ --------- -----------------
12/14/00 $16,500,000 8.93% $669,500 $56,116 02/01/01 $0
03/02/01 $21,000,000 8.42% $965,625 $76,758 03/30/01 $0
05/24/01 $42,150,000 6.57% $1,931,250 $128,362 06/28/01 $0
09/13/01 $16,000,000 6.58% $1,150,000 $15,665 09/17/01 $0
09/14/01 $39,000,000 6.22% $2,760,000 $227,227 11/01/01 $0
12/04/01 $30,150,000 5.56% $2,141,875 $44,806 12/14/01 $0
03/01/02 $20,360,000 4.75% $1,437,500 $8,059 03/06/02 $0
04/23/02 $17,000,000 4.75% $1,184,500 $18,371 05/01/02 $0
05/22/02 $32,250,000 4.75% $2,300,000 $96,960 06/27/02 $0
06/03/02 $22,300,000 4.75% $1,581,250 $78,123 08/01/02 $0
08/26/02 $26,000,000 4.75% $1,920,500 $28,886 09/03/02 $0
09/29/02 $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
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on equity interests in FSP Corp. issued to such senior officers 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 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).
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).
PART IV
Item 14. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Based on their evaluation of FSP Corp.'s disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15(d)-14(c) under the Securities
Exchange Act of 1934) as of a date within 90 days of filing this Annual Report
on Form 10-K, FSP Corp.'s chief executive officer and chief financial officer
have concluded that FSP Corp.'s disclosure controls and procedures are designed
to ensure that information required to be disclosed by FSP Corp. in the reports
that FSP Corp. files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms and are operating in an effective manner.
(b) Changes in Internal Controls
There were no significant changes in FSP Corp.'s internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their most recent evaluation.
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed as part of this report:
1. Financial Statements:
The Financial Statements listed in the accompanying Index to
Financial Statements are filed as part of this Annual Report on Form
10-K.
2. Financial Statement Schedules:
The Financial Statement Schedule listed on the accompanying Index to
Financial Statements is filed as part of this Annual Report on Form
10-K.
-36-
3. Exhibits:
The Exhibits listed in the Exhibit Index are filed as part of this
Annual Report on Form 10-K.
(b) Reports on Form 8-K.
None.
-37-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf as of March 26, 2003 by the undersigned, thereunto duly authorized.
FRANKLIN STREET PROPERTIES CORP.
By: /s/ George J. Carter
--------------------
George J. Carter
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ George J. Carter
- --------------------------- President, Chief Executive Officer and Director March 26, 2003
George J. Carter (Principal Executive Officer)
/s/ Barbara J. Corinha
- --------------------------- Vice President, Chief Operating Officer, Treasurer, March 26, 2003
Barbara J. Corinha Secretary and Director (Principal Financial Officer)
/s/ Lloyd S. Dow
- --------------------------- Controller
Lloyd S. Dow (Principal Accounting Officer) March 26, 2003
/s/ Richard R. Norris
- --------------------------- Director March 26, 2003
Richard R. Norris
/s/ Janet P. Notopoulos
- --------------------------- Director March 26, 2003
Janet P. Notopoulos
/s/ Barry Silverstein
- --------------------------- Director March 26, 2003
Barry Silverstein
/s/ Dennis J. McGillicuddy
- --------------------------- Director March 24, 2003
Dennis J. McGillicuddy
-38-
CERTIFICATIONS
I, George J. Carter, certify that:
1. I have reviewed this annual report on Form 10-K of Franklin Street
Properties Corp.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Registrant as of, and for, the periods presented
in this annual report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant
and have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the Registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
(b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the Registrant's auditors
and the audit committee of Registrant's board of directors (or
persons performing the equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
Registrant's ability to record, process, summarize and report
financial data and have identified for the Registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Registrant's internal controls; and
6. The Registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ George J. Carter
--------------------
Dated: March 26, 2003 George J. Carter,
President and Chief Executive Officer
-39-
I, Barbara J. Corinha, certify that:
1. I have reviewed this annual report on Form 10-K of Franklin Street
Properties Corp.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Registrant as of, and for, the periods presented
in this annual report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant
and have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the Registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
(b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the Registrant's auditors
and the audit committee of Registrant's board of directors (or
persons performing the equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
Registrant's ability to record, process, summarize and report
financial data and have identified for the Registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Registrant's internal controls; and
6. The Registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ Barbara J. Corinha
----------------------
Dated: March 26, 2003 Barbara J. Corinha
Vice President, Chief Operating
Officer, Treasurer and Secretary
-40-
EXHIBIT INDEX
Exhibit No. Description
2.1(1) Agreement and Plan of Merger by and among FSP Corp. and 13 Target
REITs (as defined therein), dated as of January 14, 2003.
3.1(2) Articles of Organization.
3.2(3) By-laws.
10.1+(4) FSP Corp.'s 2002 Stock Incentive Plan.
10.2(4) Loan Agreement dated as of February 23, 1999 by and among
Citizens Bank of Massachusetts, FSP Corp. and certain affiliates
of FSP Corp., as amended.
21.1(5) Subsidiaries of the Registrant.
23.1* Consent of PricewaterhouseCoopers LLP
23.2* Consent of BDO Seidman, LLP
99.1* Officer Certifications of Chief Executive Officer
99.2* Officer Certification of Chief Operating Officer
- ----------
(1) Incorporated by reference to FSP Corp.'s Current Report on Form 8-K, filed
on January 15, 2003.
(2) Incorporated by reference to Appendix B of FSP Partnership's Definitive
Proxy Statement on Schedule 14A, filed on December 18, 2001.
(3) Incorporated by reference to Appendix C of FSP Partnership's Definitive
Proxy Statement on Schedule 14A, filed on December 18, 2001.
(4) Incorporated by reference to FSP Corp.'s Annual Report on Form 10-K, filed
on March 29, 2002.
(5) Incorporated by reference to FSP Partnership's Form 10-12G/A, filed on
December 18, 2001.
(+) Management contract or compensatory plan or arrangement filed as an
Exhibit to this Form 10-K pursuant to Items 15(a) and 15(c) of Form 10-K.
* Filed herewith
-41-
Franklin Street Properties Corp.
Index to Consolidated Financial Statements
Reports of independent certified public accountants F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 2002 and 2001 F-4
Consolidated Statements of Income for the years ended December 31,
2002, 2001 and 2000 F-6
Consolidated Statements of Cash Flows for the years ended December 31,
2002, 2001 and 2000 F-7
Notes to consolidated financial statements F-8
Financial Statement Schedule - Schedule III F-27
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-1
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-2
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-3
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-4
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-5
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-6
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-7
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-8
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-9
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-10
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-11
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-12
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-13
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-14
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-15
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-16
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-17
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-18
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-19
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-20
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-21
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-22
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-23
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-24
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-25
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-26
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-27
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-28