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, 2003
|_| 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.
(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, 2003, 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 $40,164,195.
There were 49,630,338 shares of Common Stock outstanding as of March 10,
2004.
Documents incorporated by reference: The Registrant intends to file a
definitive proxy statement pursuant to Regulation 14A, promulgated under the
Securities Exchange Act of 1934, as amended, to be used in connection with the
Registrant's Annual Meeting of Stockholders to be held on May 7, 2004. The
information required in response to Items 10 - 14 of Part III of this Form 10-K,
other than that contained in Item 4A, "Executive Officers of FSP Corp.," is
hereby incorporated by reference to such proxy statement.
TABLE OF CONTENTS
PART I.........................................................................1
Item 1. Business............................................................1
Item 1A. Risk Factors........................................................4
Item 2. Properties.........................................................10
Item 3. Legal Proceedings..................................................12
Item 4. Submission of Matters to a Vote of Security Holders................12
Item 4A. Executive Officers of FSP Corp. ...................................12
PART II.......................................................................15
Item 5. Market For Registrant's Common Equity and Related
Stockholder Matters................................................15
Item 6. Selected Financial and Other Data..................................16
Item 7. Management's Discussion And Analysis Of Financial Condition
And Results Of Operations..........................................17
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.........28
Item 8. Financial Statements and Supplementary Data........................28
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure...........................................28
Item 9A. Controls and Procedures............................................29
PART III......................................................................30
Item 10. Directors and Executive Officers of the Registrant.................30
Item 11. Executive Compensation.............................................30
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters....................................30
Item 13. Certain Relationships and Related Transactions.....................30
Item 14. Principal Accountant Fees and Services.............................30
PART IV.......................................................................30
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...30
SIGNATURES....................................................................32
EXHIBIT INDEX.................................................................33
Index to Consolidated Financial Statements...................................F-1
PART I
Item 1. Business.
History
Our company, Franklin Street Properties Corp., which we will refer to as
FSP Corp. or the Company, 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 the successor to Franklin Street Partners Limited
Partnership, or the FSP Partnership, which 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 converted into FSP Corp. As a result of this conversion, the
FSP Partnership ceased to exist and we succeeded to the business of the FSP
Partnership. In the conversion, each unit of both general and limited
partnership interests in the FSP Partnership was converted into one share of our
common stock. As a result of the conversion, we hold, directly and indirectly,
100% of the interest in three former subsidiaries of the FSP Partnership: FSP
Investments LLC, FSP Property Management LLC, and FSP Holdings LLC. We operate
some of our business through these subsidiaries.
On June 1, 2003, we acquired 13 real estate investment trusts, which we
refer to as Target REITs, by merger. In these mergers, we issued 25,000,091
shares of our common stock to holders of preferred stock in the Target REITs. As
a result of these mergers, we now hold all of the assets previously held by
these Target REITs.
Our Business
We operate in two business segments and have two principal sources of
revenue:
o Real estate operations, including real estate leasing, interim
acquisition financing and asset/property management, which generate
rental income, loan origination fees and management fees,
respectively.
o Investment banking/investment services, which generate brokerage
commissions and other fees related to the organization of
single-purpose entities that own real estate and the private
placement of equity in those entities. We call these entities
Sponsored Entities, and although we previously organized them as
partnerships, in 2001 we began to organize them as corporations
operated in a manner intended to qualify as real estate investment
trusts, and refer to them as Sponsored REITs.
See Note 3 to our consolidated financial statements.
Real Estate
We own a portfolio of real estate, consisting of 28 properties as of
December 31, 2003, which includes apartment complexes, office buildings and
industrial use properties. We derive rental revenue from income paid to us by
tenants of these properties. See Item 2 of this Annual Report.
FSP Corp. typically makes a loan to each Sponsored REIT secured by a
mortgage on the borrower's real estate. Those loans produce revenue in the form
of interest and loan origination fees. These loans typically are repaid out of
the proceeds of the borrower's equity offering.
We also provide asset management services, property management services
and/or property accounting services to certain of our Sponsored REITs through
our subsidiary FSP Property Management. FSP Corp. recognizes revenue for its
receipt of fee income from those Sponsored REITs that have not been acquired by
us. FSP Property Management does not receive any rental income.
Investment Banking/Investment Services
Through our subsidiary FSP Investments, which acts as a real estate
investment banking firm and broker/dealer, we organize Sponsored REITs, and sell
equity in them through private placements exempt from registration under the
1
Securities Act of 1933. These single-purpose entities each typically acquire a
single real estate asset. FSP Investments sells preferred stock in the Sponsored
REIT through best efforts offerings to "accredited investors" within the meaning
of Regulation D of the Securities Act. We retain 100% of the common stock
interest in the Sponsored REIT. Since 1997, FSP Investments has sponsored 34
Sponsored Entities, 14 of which were partnerships, and 20 of which were
Sponsored REITs.
FSP Investments derives revenue from commissions received in connection
with the sale of equity interests in the Sponsored REITs and from fees paid by
the Sponsored REITs for its services in identifying, inspecting and negotiating
to purchase real properties on their behalf. FSP Investments is a registered
broker/dealer with the Securities and Exchange Commission and is a member of the
National Association of Securities Dealers, Inc. We have made an election to
treat FSP Investments as a "taxable REIT subsidiary" for federal income tax
purposes.
Investment Objectives
Our investment objective is to increase the cash available for
distribution in the form of dividends to our stockholders by increasing revenue
from rental income, any net gains from sales of properties and investment
banking services. We expect that, through FSP Investments, we will continue to
organize and cause the offering of Sponsored REITs in the future and that we
will continue to derive investment banking/investment services income, including
loan origination fees and interest, from such activities. We may also acquire
additional real properties by cash purchase or by acquisition of Sponsored
REITs. In addition, we may invest in real estate by purchasing shares of
preferred stock offered in the syndications of Sponsored REITs.
From time to time, as market conditions warrant, we may sell properties
owned by us. In 2003, we sold two properties, Wesleyan Oaks and Reata
Apartments. When we sell a property, we either distribute the sale proceeds to
our stockholders as a dividend or retain some or all of such proceeds for
investment in real properties or other corporate activities.
We may acquire, and have acquired, real properties in any geographic area
of the United States and of any property type. Of the 28 properties we own, four
are apartment complexes, 22 are office buildings and two are industrial. See
Item 2 of this Annual Report.
We rely on the following principles in selecting real properties for
acquisition by a Sponsored REIT or FSP Corp. and managing them after
acquisition:
o we seek to buy investment properties at a price which produces value
for investors and avoid overpaying for real estate merely to outbid
competitors;
o we seek to buy properties in excellent locations with substantial
infrastructure in place around them and avoid investing in locations
where the construction of such infrastructure is speculative;
o we seek to buy properties that are well-constructed and designed to
appeal to a broad base of users and avoid properties where quality
has been sacrificed to cost savings in construction or which appeal
only to a narrow group of users;
o we aggressively manage, maintain and upgrade our properties and
refuse to neglect or undercapitalize management, maintenance and
capital improvement programs;
o we believe that we have the ability to hold properties through down
cycles and avoid leveraging properties and placing them at risk of
foreclosure; as of December 31, 2003, none of our 28 properties was
subject to mortgage debt.
2
Line of Credit
We currently have an unsecured revolving line of credit with a group of
banks that provides for borrowings of up to $125,000,000. We have drawn on this
line of credit, and intend to draw on this line of credit in the future, to
obtain funds for the purpose of making interim mortgage loans to Sponsored
REITs. We typically cause these loans to be secured by a first mortgage of the
real property owned by the Sponsored REIT. We make these loans to enable a
Sponsored REIT 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. We have no restriction on the percentage of our assets that may be
invested in any single mortgage.
Competition
With respect to our real estate investments, we face competition in each
of the markets where the properties are located. In order to maintain or
increase the rental revenues for a property, it must be competitive on location,
cost and amenities with other buildings of similar use. Some of our competitors
may have significantly more resources than we do and may be able to offer more
attractive rental rates or services. On the other hand, some of our competitors
may be smaller or have less cash or other resources that make them willing or
able to accept lower rents in order to maintain a certain occupancy level. In
markets where there is not currently significant competition, our competitors
may decide to enter the market and build new buildings to compete with our
existing projects. Our competition is not only with other landlords, but also
with the choice of home ownership or ownership of office condominiums, and
larger market forces (including changes in interest rates and tax treatment) and
individual decisions beyond our control may affect our ability to compete with
those forms of ownership.
With respect to our investment banking and investment services business,
we face competition for investment dollars from every other kind of investment,
including stocks, bonds, mutual funds and other real-estate related investments,
including other REITs. Some of our competitors have significantly more resources
than we do and are able to advertise their investment products. Because the
offerings of the Sponsored REITs are made pursuant to an exemption from
registration under the Securities Act, FSP Investments may not advertise the
Sponsored REITs or otherwise engage in any general solicitation of investors to
purchase interests in the Sponsored REITs, which may affect our ability to
compete for investment dollars.
Employees
We had 35 employees as of December 31, 2003.
Available Information
We are subject to the informational requirements of the Securities
Exchange Act of 1934, and, in accordance therewith, we file reports and other
information with the Securities and Exchange Commission (SEC). The reports and
other information we file can be inspected and copied at the public reference
facilities maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C.
20549. Copies of such material can be obtained by mail from the Public Reference
Section of the SEC at 450 West Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. Such reports and other information may also be obtained from
the web site that the SEC maintains at http://www.sec.gov. Further information
about these public reference facilities may be obtained by calling the SEC at
1-800-SEC-0330.
Reports and other information concerning us may also be obtained
electronically through a variety of databases, including, among others, our
Electronic Data Gathering and Retrieval (EDGAR) program, Knight-Ridder
Information Inc., Federal Filing/Dow Jones and Lexis/Nexis.
We do not make our reports available electronically, as we do not maintain
an Internet website. We will voluntarily provide paper copies of our filings
upon request.
3
Item 1A. Risk Factors.
The following important factors, among others, could cause actual results
to differ materially from those indicated by forward-looking statements made in
this Annual Report on Form 10-K and presented elsewhere by management from time
to time.
If we are not able to collect sufficient rents from each of our owned real
properties, we may suffer significant operating losses.
A substantial portion of our revenues are generated by the rental income
of our real properties. If our properties do not provide us with a steady rental
income, our revenues will decrease and may cause us to incur operating losses in
the future.
We face risks in continuing to attract investors for Sponsored REITs.
Our investment banking/investment services business continues to depend
upon its ability to attract purchasers of equity interests in Sponsored REITs.
Our success in this area will depend on the propensity and ability of investors
who have previously invested in Sponsored REITs to continue to invest in future
Sponsored REITs and on our ability to expand the investor pool for the Sponsored
REITs by identifying new potential investors. Moreover, our investment
banking/investment services business may be affected to the extent existing
Sponsored REITs incur losses or have operating results that fail to meet
investors' expectations.
If we are unable to fully syndicate a Sponsored REIT, we may be required to keep
a balance outstanding on our line of credit or use our cash balance to repay our
line of credit, which may reduce cash available for distribution to our
stockholders.
We typically draw on our line of credit to make an interim mortgage loan
to a Sponsored REIT, so that it can acquire real property prior to the
consummation of the offering of its equity interests; this interim loan is
secured by a first mortgage of the real property acquired by the Sponsored REIT.
Once the offering has been completed, the Sponsored REIT repays the loan out of
the offering proceeds. If we are unable to fully syndicate a Sponsored REIT, the
Sponsored REIT could be unable to fully repay the loan, and we would have to
satisfy our obligation under our line of credit through other means. If we are
required to use cash for this purpose, we would have less cash available for
distribution to our stockholders.
We may not be able to find properties that meet our criteria for purchase.
Growth in our investment banking/investment services business is dependent
on the ability of our acquisition executives to find properties for sale which
meet our investment critieria. To the extent they fail to find such properties,
we will be unable to syndicate offerings of Sponsored REITs to investors, and
this segment of our business could have lower revenue, which would reduce the
cash available for distribution to our stockholders.
We are dependent on key personnel.
We depend on the efforts of George Carter, our Chief Executive Officer,
and our other executive officers. If they were to resign, our operations could
be adversely affected. We do not have employment agreements with Mr. Carter or
any other of our executive officers.
Our level of dividends may fluctuate.
Because our investment banking/investment services 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 us not being able to maintain or grow
dividend levels in the future.
4
The real properties held by us may significantly decrease in value.
As of December 31, 2003, we owned 28 properties. Some or all of these
properties may decline in value. To the extent our real properties decline in
value, our stockholders could lose some or all the value of their investments.
New acquisitions may fail to perform as expected.
We may acquire new properties, whether by cash purchase, by acquisition of
Sponsored REITs or by investment in a Sponsored REIT. Newly acquired properties
may fail to perform as expected, in which case, our results of operations could
be adversely affected.
We face risks in owning and operating real property.
An investment in us 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 our ability to vary
our 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.
We face risks from tenant defaults or bankruptcies.
If any of our tenants defaults on its lease, we may experience delays in
enforcing our rights as a landlord and may incur substantial costs in protecting
our investment. In addition, at any time, a tenant of one of our 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 our stockholders.
We may encounter significant delays in reletting vacant space, resulting in
losses of income.
When leases expire, we 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 we are unable to re-lease space promptly,
if the terms are significantly less favorable than anticipated or if the costs
are higher, we may have to reduce distributions to our stockholders.
We face risks from geographic concentration.
The properties in our portfolio, by aggregate square footage, are
distributed geographically as follows: Southwest - 26%, Northeast - 31%, Midwest
- - 19%, West - 16% and Southeast 8%. However, within certain of those segments,
we hold a larger concentration of our properties in Houston, Texas - 18% and
Washington, DC - 13%. We are likely to face risks to the extent that any of
these areas in which we hold a larger concentration of our properties suffer
deteriorating economic conditions.
5
We compete with national, regional and local real estate operators and
developers, which could adversely affect our cash flow.
Competition exists in every market in which our properties are located and
in every market in which our properties will be located. We compete with, among
others, national, regional and numerous local real estate operators and
developers. Such competition may adversely affect the percentage of leased space
and the rental revenues of our properties, which could adversely affect our cash
flow from operations and our ability to make expected distributions to our
stockholders. Some of our competitors may have more resources than we do or
other competitive advantages. Competition may be accelerated by any increase in
availability of funds for investment in real estate. For example, decreases in
interest rates tend to increase the availability of funds and therefore can
increase competition. To the extent that our properties continue to operate
profitably, this will likely stimulate new development of competing properties.
The extent to which we are affected by competition will depend in significant
part on local market conditions.
There is limited potential for an increase in leased space gains in our
properties.
We anticipate that future increases in revenue from our properties will be
primarily the result of scheduled rental rate increases or rental rate increases
as leases expire. Properties with higher rates of vacancy are generally located
in soft economic markets so that it may be difficult to realize increases in
revenue when vacant space is re-leased.
We are subject to possible liability relating to environmental matters, and we
cannot assure you that we have 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.
In addition, we cannot assure you that:
o future laws, ordinances or regulations will not impose any material
environmental liability;
o the current environmental conditions of our 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 us;
o tenants will not violate their leases by introducing hazardous or
toxic substances into our properties that could expose us to
liability under federal or state environmental laws; or
o environmental conditions, such as the growth of bacteria and toxic
mold in heating and ventilation systems or on walls, will not occur
at our properties and pose a threat to human health.
We are subject to compliance with the Americans With Disabilities Act and fire
and safety regulations which could require us to make significant capital
expenditures.
All of our properties are required to comply with the Americans With
Disabilities Act (ADA), and the regulations, rules and orders that may be issued
thereunder. The ADA has separate compliance requirements for "public
accommodations" and "commercial facilities," but generally requires that
buildings be made accessible to persons with disabilities. Compliance with ADA
requirements might require, among other things, removal of access barriers and
noncompliance could result in the imposition of fines by the U.S. government, or
an award of damages to private litigants.
6
In addition, we are required to operate our 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
our properties. Compliance with such requirements may require us to make
substantial capital expenditures, which expenditures would reduce cash otherwise
available for distribution to its stockholders.
There are significant conditions to our obligation to redeem shares of our
common stock, and any such redemption will result in the stockholders tendering
shares receiving less than their fair market value.
Under our redemption plan, we are only obligated to use our best efforts
to redeem shares of our common stock from stockholders wishing to have them
redeemed. There are significant conditions to our obligation to redeem shares of
our common stock including:
o we cannot be insolvent or be rendered insolvent by the redemption;
o the redemption cannot impair our capital or operations;
o the redemption cannot contravene any provision of federal or state
securities laws;
o the redemption cannot result in our failing to qualify as a REIT;
and
o our management must determine that the redemption is in our best
interests.
Any redemption effected by us under this plan would result in those
stockholders tendering shares of our common stock receiving 90% of the fair
market value of such shares, as determined by our board of directors in its sole
and absolute discretion, and not their full fair market value.
We may lose capital investment or anticipated profits if an uninsured event
occurs.
We carry or our tenants carry comprehensive liability, fire and extended
coverage with respect to each of our properties, with policy specification and
insured limits customarily carried for similar properties. There are, however,
certain types of losses, such as from wars, 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, we could lose both capital invested in the property and
anticipated profits.
Contingent or unknown liabilities acquired in mergers or similar transactions
could require us to make substantial payments.
The properties which we acquired in mergers were acquired subject to
liabilities and without any recourse with respect to liabilities, whether known
or unknown. As a result, if liabilities were asserted against us based upon any
of these properties, we might have to pay substantial sums to settle them, which
could adversely affect our results of operations and financial condition and our
cash flow and ability to make distributions to our stockholders. Unknown
liabilities with respect to properties acquired might include:
o liabilities for clean-up or remediation of environmental conditions;
o claims of tenants, vendors or other persons dealing with the former
owners of the properties; and
o liabilities incurred in the ordinary course of business.
7
We would incur adverse tax consequences if we failed to qualify as a REIT.
If in any taxable year we do not qualify as a real estate investment
trust, we would be taxed as a corporation and distributions to our stockholders
would not be deductible by us in computing our taxable income. In addition, if
we were to fail to qualify as a real estate investment trust, we 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, we would be taxed as a corporation during such years. Failure to
qualify for even one taxable year could result in a significant reduction of our
cash available for distribution to stockholders or could require us to incur
indebtedness or liquidate investments in order to generate sufficient funds to
pay the resulting federal income tax liabilities. In addition, timing
differences between the receipt of income and payment of expenses and the
inclusion and deduction of such amounts in arriving at taxable income could make
it necessary for us to borrow in order to make certain distributions to our
stockholders in satisfaction of the 90% distribution requirement applicable to
real estate investment trusts. The provisions of the Internal Revenue Code
governing the taxation of real estate investment trusts are very technical and
complex, and although we expect that we will be organized and will operate in a
manner that will enable us to meet such requirements, no assurance can be given
that we will always succeed in doing so. In addition, you should note that if
one or more of the REITs we acquired in June 2003 did not qualify as a real
estate investment trust immediately prior to the consummation of the mergers, we
would be disqualified as a REIT as a result of the mergers.
As a result of our acquisition of 13 REITs, we may no longer qualify as a REIT.
As a result of our acquisition of 13 REITs by merger in June 2003, we
might no longer qualify as a real estate investment trust under Section 856 of
the Internal Revenue Code of 1986, as amended. We could lose our ability to so
qualify for a variety of reasons relating to the nature of the assets acquired
from the acquired REITs, the identity of the shareholders of the acquired REITs
who became our shareholders, or the failure of one or more of the acquired REITs
to have previously qualified as a real estate investment trust.
Provisions in our organizational documents may prevent changes in control.
Our Articles of Incorporation and Bylaws contain provisions, described
below, which may have the effect of discouraging a third party from making an
acquisition proposal for us and may thereby inhibit a change of control under
circumstances that could otherwise give the holders of our common stock the
opportunity to realize a premium over the then-prevailing market prices.
Ownership Limits. In order for us to maintain our qualification as a real
estate investment trust, the holders of our common stock may 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 us, and no holder of common stock may acquire or transfer
shares that would result in our shares of common stock being beneficially owned
by fewer than 100 persons. Such ownership limit may have the effect of
preventing an acquisition of control of us without the approval of our board of
directors. Moreover, we will have the right to redeem any shares of common stock
that are acquired or transferred in violation of these provisions at the market
price, which is determined by our board of directors. In addition, our Articles
of Incorporation give our board of directors the right to refuse to give effect
to the acquisition or transfer of shares by a stockholder in violation of these
provisions.
Staggered Board. Our board of directors is divided into three classes. The
terms of these classes will expire in 2004, 2005 and 2006, respectively.
Directors of each class are elected for a three-year term upon the expiration of
the initial term of each class. The staggered terms for directors may affect our
stockholders' ability to effect a change in control even if a change in control
were in the stockholders' best interests.
Preferred Stock. Our Articles of Incorporation authorize our board of
directors to issue up to 20,000,000 shares of preferred stock, par value $.0001
per share, 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 even if a change in control were in our
stockholders' best interest.
8
Increase of Authorized Stock. Our board of directors, 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 we have
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 even if a change in control were in our stockholders' best interest.
Amendment of Bylaws. Our board of directors has the sole power to amend
our Bylaws. This power could have the effect of delaying or preventing a change
in control even if a change in control were in our stockholders' best interests.
Stockholder Meetings. Our 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. Our 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
even if a change in control were in the best interests of our stockholders.
Supermajority Votes Required. Our Articles of Incorporation 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
our Articles of Incorporation 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 our Articles of
Incorporation to impose cumulative voting in the election of directors. These
provisions could have the effect of delaying or preventing a change in control
even if a change in control were in our stockholders' best interest.
There is no public trading market for our securities.
There is no public trading market for our common stock, and we cannot
assure you that any market will develop or that, if such a market develops,
there will be any liquidity in such a market for our common stock.
9
Item 2. Properties.
Set forth below is information regarding our properties as of December 31,
2003:
Sponsored
Entity Percent Approx.
Date of Number Approx. Leased as Number
Property Location Purchase of Units Square Feet of 12/31/03 of Tenants Major Tenants(1)
- ----------------- -------- -------- ----------- ----------- ---------- ----------------
3919 Essex Lane 6/30/93 135 118,798 over 90% 135 None - Apts.
Houston, TX 77027
7250 Perkins Road 10/16/98 264 223,812 over 95% 264 None - Apts.
Baton Rouge, LA 70808
4000 Essex Lane 7/28/00 210 187,338 over 90% 210 None - Apts.
Houston, TX 77027
22400 Westheimer Parkway, 4/24/02 228 231,363 over 90% 228 None - Apts.
Katy, Texas 77450
-------- -----------
Total Apartments 837 761,311
-------- -----------
Office
451 Andover Street 6/1/96 91,958 over 95% 40 Pentucket
North Andover, MA 01845 Medical
1515 Mockingbird Lane 7/1/97 110,612 77% 70 Primary Physicians
Charlotte, NC 28209 Care
4995 Patrick Henry Dr. 12/1/97 40,280 100% 1 Agere
Santa Clara, CA 95054
33 & 37 Villa Road 3/1/98 143,840 42% 40 New Horizons
Greenville, SC 29615 Computer
678-686 Hillview Drive 3/9/99 36,288 100% 1 Headway
Milpitas, CA 95035 Technologies
5751-5771 Copley Drive 3/12/99 101,726 100% 4 XO, Nextel,
San Diego, CA 92111 Allegiance. Aon Service
Corp.& REVA Medical
600 Forest Point Circle 7/8/99 61,291 100% 2 American Red Cross
Charlotte, NC 28273 Cellco d/b/a Verizon
81 Blue Ravine 9/27/99 47,058 0% 0
Folsom, CA 95630
18000 W. Nine Mile Rd. 9/30/99 212,558 over 90% 7 IBM
Southfield, Michigan 48075
11211 Taylor Draper Lane 12/29/99 68,605 60% 8 CACI Technologies,
Austin, Texas 78759 State Farm, Tiburon
10
Sponsored
Entity Percent Approx.
Date of Number Approx. Leased as Number
Property Location Purchase of Units Square Feet of 12/31/03 of Tenants Major Tenants(1)
- ----------------- -------- -------- ----------- ----------- ---------- ----------------
7130-7150 Columbia 12/20/99 188,819 over 95% 7 Columbia National, Avnet,
Gateway Drive, EVI and Nextira
Columbia, MD 21046
10 Lyberty Way 5/23/00 104,711 100% 1 Lucent
Westford, MA 01886 Technologies
17030 Goldentop Road 9/22/00 141,405 100% 1 Northrop
San Diego, CA 92127 Grumman
4820 & 4920 Centennial Blvd. 9/28/00 110,730 100% 3 Hewlett-Packard
Colorado Springs, CO 80919 Starkey Laboratories
14151 Park Meadow Drive 3/15/01 134,849 100% 1 CACI, Inc.-Federal
Chantilly, VA 20151
1370 & 1390 Timberlake 5/24/01 232,722 over 95% 3 Reinsurance Group
Manor Parkway, of America and AMDOCs
Chesterfield, MO 63017
501 & 505 South 336th Street 9/14/01 117,227 100% 1 Weyerhaeuser Company
Federal Way, WA 98003
12902 Federal Systems Park 9/17/01 210,993 100% 1 IBM
Drive, Fairfax, VA 22033
50 Northwest Point Rd. 12/5/01 176,848 100% 1 Motorola
Elk Grove Village, IL 60005
1350 Timberlake Manor 3/4/02 116,361 over 95% 8 Computer Associates,
Parkway Quest Software, RGA,
Chesterfield, MO 63017 Wachovia
2251 Corporate Park Ridge Dr. 5/23/02 158,016 100% 2 Scitor Corporation
Herndon, VA 20171 Juniper Networks, Inc.
16285 Park Ten Place 6/27/02 155,715 100% 5 Mustang Engineering
Houston, Texas 77084 & TMI aka Trendmaker
Homes
-----------
Total Office 2,762,612
-----------
11
Sponsored
Entity Percent Approx.
Date of Number Approx. Leased as Number
Property Location Purchase of Units Square Feet of 12/31/03 of Tenants Major Tenants(1)
- ----------------- -------- -------- ----------- ----------- ---------- ----------------
Industrial
One Technology Dr. 1982 188,000 100% 1 Alliant Foodservice
Peabody, MA 01960
8730 Bollman Place 1984 98,745 100% 1 Maines Paper and
Savage (Jessup), MD 20794 Foodservice, Inc.
-----------
Total Industrial 286,745
-----------
-------- -----------
Grand Total 837 3,810,668
======== ===========
- ----------
(1) Major tenants are tenants who occupy 10% or more of the space in an
individual property.
All of the properties listed above are owned by us. None of our properties
is 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, 2003.
Item 3. Legal Proceedings.
From time to time, we are subject to legal proceedings and claims that
arise in the ordinary course of our business. Although occasional adverse
decisions (or settlements) may occur, we believe that the final disposition of
such matters will not have a material adverse effect on the our 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.
Item 4A. Executive Officers of FSP Corp.
The following table sets forth the names, ages and positions of all our
directors and executive officers.
Name Age Position
---- --- --------
George J. Carter (5) 55 President, Chief Executive
Officer and Director
Barbara J. Corinha (1), (2), (4), (6) 48 Vice President, Chief Operating
Officer, Treasurer, Secretary
and Director
R. Scott MacPhee 46 Executive Vice President
Richard R. Norris (5) 60 Executive Vice President and
Director
William W. Gribbell 44 Executive Vice President
Janet Prier Notopoulos (1), (3) 56 Vice President and Director
12
- ----------
(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 55, 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 48, 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
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 46, 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 60, 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 44, 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 56, 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
13
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).
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.
14
PART II
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters.
There is no established public trading market for our common stock. The
fair market value of our common stock as determined by our board of directors
was $16.45 per share as of December 31, 2003.
As of March 10, 2004, there were 1,416 holders of record of our common
stock. This computation is based upon the number of record holders reflected in
our corporate records.
We have declared a dividend of $0.31 per share of our common stock payable
to stockholders of record as of February 6, 2004. Set forth below are the
distributions per Unit made by the FSP Partnership or dividends per share of
common stock made FSP Corp., as the case may be, made in each quarter since the
quarter ended March 31, 2001.
Distribution Amount Per Unit of
FSP Partnership or Dividend Amount
Per Share of
Quarter Ended Common Stock of FSP Corp.
------------- -------------------------
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
6/30/03 $0.31
9/30/03 $0.31
12/31/03 $0.43*
3/31/04 $0.31
*Included a special dividend of $0.12 per share.
While not guaranteed, we expect that cash dividends on our common stock
comparable to our most recent quarterly dividend will continue to be paid in the
future.
15
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.
Year Ended December 31,
-----------------------------------------------
2003 2002 2001 2000 1999
------- ------- ------- ------- -------
(In thousands, except per
share or unit amounts)
Operating Data:
Total revenue $83,768 $53,950 $51,955 $32,793 $15,534
Income from:
Continuing operations 39,823 26,741 24,621 8,171 406
Discontinued operations 195 571 747 743 733
Gain on sale of properties 6,362 -- -- -- --
------- ------- ------- ------- -------
Net income 46,380 27,312 25,368 8,914 1,139
Basic and diluted income per
share and per limited and
general partnership unit
from:
Continuing operations 1.02 1.09 1.00 0.43 0.03
Discontinued operations -- 0.02 0.03 0.04 0.06
Gain on sale of properties 0.16 -- -- -- --
------- ------- ------- ------- -------
Total 1.18 1.11 1.03 0.47 0.09
Distributions declared per
unit/share outstanding (1)
from:
Operations 1.24 1.24 1.18 1.02 0.86
Sale of properties 0.12 -- -- -- --
------- ------- ------- ------- -------
Total 1.36 1.24 1.18 1.02 0.86
As of December 31,
------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
Balance Sheet Data
(at period end):
Total assets $528,529 $201,936 $204,117 $219,923 $190,486
Total liabilities 11,674 4,771 4,354 19,280 28,821
Minority interests in
consolidated entities -- -- -- 63 78,090
Total shareholders'/partners'
capital 516,855 197,165 199,763 200,580 83,575
(1) As a result of the conversion of the FSP Partnership into FSP Corp., each
unit in the FSP Partnership was converted into one share of common stock
in FSP Corp.
The 2003 financial statements reflect the merger of 13 Sponsored REITs.
Prior to the merger, FSP Corp. held a non-controlling interest with virtually no
economic benefits or risks in the Target REITs.
16
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, 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 our forward-looking
statements involve risks and uncertainty, including without limitation changes
in economic conditions in the markets in which we own properties, changes in the
demand by investors for investment in Sponsored REITs, risks of a lessening of
demand for the types of real estate owned by us, 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.
Overview
FSP Corp. operates in two business segments: real estate operations and
investment banking/investment services. The real estate operations segment
involves real estate rental operations, leasing, interim acquisition financing
and asset/property management services. The investment banking/investment
services segment involves the provision of real estate investment and
broker/dealer services that include the organization of Sponsored REITs, the
acquisition of real estate on behalf of Sponsored REITs and the syndication of
Sponsored REITs through sale of preferred stock in private placements.
The main factor that affects our real estate operations is the broad
economic market conditions in the United States. These market conditions affect
the occupancy levels and the rent levels on both a national and local level. We
have no influence on the national market conditions. We look to acquire quality
properties in good locations in order to lessen the impact of downturns in the
market and to take advantage of upturns when they occur.
Our investment banking/investment services customers are primarily
institutions and high net-worth individuals. To the extent that the broad
capital markets affect these investors our business is also affected. These
investors have many investment choices. We must continually search for real
estate at a price and at a competitive risk/reward rate of return that meets our
customer's risk/reward profile for providing a stream of income and as a
long-term hedge against inflation.
Trends and Uncertainties
Real Estate Operations
The most significant events in 2003 for the real estate portfolio were our
acquisition by merger of 13 new properties in June and the sale of two of our
Houston apartment properties, Weslayan and Reata, in February and August,
respectively. As a result of these dispositions and acquisitions, our Houston
residential component holdings now include newer buildings with a greater number
of units per project, which we expect will produce operating efficiencies. The
properties sold were built in 1985 and 1994 and contained 84 and 159 units; the
two new apartment properties acquired were built in 1999 and 2000 and contain
210 and 228 units. In general, the office properties which we acquired in the
mergers are also newer and larger than those we held prior to the mergers, and
have leases expiring later than did those properties in the portfolio prior to
the mergers. As a result of these acquisitions, our real estate portfolio is
more diverse not only in geography, but also by property size, lease size, and
lease expiration year.
17
The portfolio was 90% leased at the end of the fourth quarter. During
2003, vacancies increased in our Greenville, South Carolina property due to the
bankruptcies of both Home Gold and Conseco, and in our Austin, Texas property,
where Columbia Universal Life was acquired by Allstate Insurance and did not
renew its lease at its expiration. Both the Greenville, South Carolina and the
Austin, Texas office markets continue to be weak in 2004. In addition to the
Greenville and Austin vacancies, there was the equivalent of one full building
vacant throughout 2003. During the first six months, all of Bollman Place in
Savage, Maryland was vacant until it was relet in July. The single tenant lease
at Blue Ravine in Folsom, California expired June 30, 2003, and the building
remains vacant. In spite of tough market conditions in other office markets,
occupancy was maintained or improved at the other multi-tenant office buildings,
and each apartment building remained over 90% leased.
It is difficult for management to predict what will happen to occupancy or
rents in 2004, because the need for space and the price tenants are willing to
pay are tied to the larger trends in the economy, such as job growth, interest
rates, and corporate earnings, which in turn are tied to even larger
macroeconomic and political factors, such as the risk of war and terrorism. In
addition to the difficulty of predicting macroeconomic factors, it is difficult
to predict which markets, projects, or tenants will suffer or benefit from
changes in the larger economy. Because our properties are in different
geographical sub-markets and our tenants are in diverse industries, these
macroeconomic trends may have a different effect on different properties.
We have begun to see an increase in showings and leasing activity in many
of our office markets during the first two months of 2004. If the trend
continues and there are no further shocks to the economy, we expect there may be
some decrease in vacancy rates in 2004. However, we expect that there will be a
continued decline in rental rates in 2004 as landlords compete on rent to fill
vacancies. Competition for tenants may increase our costs of brokerage
commissions and tenant improvements, as well as our need to invest in services
and amenities to retain tenants, and we expect that trend will continue in 2004.
Less than 10% of the office leases in our real estate portfolio expire in
2004. One full building lease has already been renewed, and we have begun
negotiations with several of the other tenants who have expressed interest in
renewing their leases. We cannot predict if these tenants will stay or what the
terms and conditions of any lease renewals will be. In addition to scheduled
lease expirations, vacancies may occur in 2004 as a result of tenant
bankruptcies or defaults, or because we and our tenants find it mutually
advantageous to negotiate early terminations for all or part of the leased
space. A partial lease termination was signed in February 2004 for the release
of approximately 31,000 square feet, which was not scheduled to expire in 2004,
in exchange for a cash payment of $1,228,000.
The market for Class A apartments in the Houston area (where we currently
own three apartment complexes) in 2004 is expected to be difficult because of
new units that have come on the market. As long as new units continue to be
built and interest rates remain low, we expect the competition from other
apartment complexes and home buying to keep rents and occupancy down.
While many of our properties have received or are expected to receive real
estate tax abatements, this did not result in a significant decrease in our
operating expenses in 2003, nor do we expect to see any decrease in operating
expenses in 2004. We have seen energy prices increase, especially in deregulated
markets, and although insurance rates appear to be stabilizing in the broader
market, our policies renew in April, and we do not know at this time how our
portfolio will be priced or what limits will be available.
The Texas Department of Transportation took land for the expansion of
Interstate 10 from the Park Ten office property in Houston. The proceeds of the
taking are shown as land sales in 2003, because the money was received in 2003.
However, we are protesting the settlement amount on a contingency basis.
Discontinued Operations
We sold two apartment properties in Houston in 2003. We continue to
evaluate our portfolio, and from time to time may decide to dispose of
additional properties in the ordinary course of business.
18
Investment Banking/Investment Services
Unlike our real estate operations business, which provides a rental
revenue stream which is ongoing and recurring in nature, our investment
banking/investment services business is transactional in nature. Both the number
of Sponsored REIT syndications completed and the amount of equity raised in 2003
were below our expectations. Future business in this area is unpredictable.
Our property acquisition executives are concerned about high valuation
levels for prime commercial investment real estate in 2004. It appears that a
combination of factors, including low interest rates, a recovering general
economy and increased capital allocation to real estate assets are increasing
prices on many properties we would have an interest in acquiring. This price
push is causing capitalization rates to fall and prices per square foot to rise.
Specifically, our acquisition executives fear that we will not be able to
purchase enough property during 2004 at a price acceptable under our investment
criteria to grow our overall investment banking/investment services business. If
so, lower revenues from this business could reduce the cash available for
distribution to stockholders as dividends. However, the same capital market
forces that are causing higher real estate prices and difficulties in achieving
property acquisition goals are also presenting some appealing opportunities for
the dispositions of certain of our assets. Although our general intention is to
hold our properties for long-term appreciation, if opportunities present
themselves that are sufficiently attractive, we may take advantage of the
current market environment in 2004 and sell certain selected real estate assets.
The sale of these assets could generate cash gains available for distribution to
shareholders as dividends.
We continue to rely solely on our 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., invest in a Sponsored REIT).
While we continue to expand our in-house sales force, uncertainties always exist
as to whether we are capable, either through our existing client base or through
new clients, of raising the amount of capital invested in Sponsored REITs to
achieve future performance objectives.
Critical Accounting Policies
We have certain critical accounting policies that are subject to judgments
and estimates by our management and uncertainties of outcome that affect the
application of these policies. We base our estimates on historical experience
and on various other assumptions we believe to be reasonable under the
circumstances. On an on-going basis, we evaluate our 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
accounting policies that we believe are most critical to the understanding of
our financial position and results of operations, and that require significant
management estimates and judgments, are discussed below.
Critical accounting policies are those that have the most impact on the
reporting of our financial condition and results of operations and those
requiring significant judgments and estimates. We believe that our judgments and
assessments are consistently applied and produce financial information that
fairly presents our results of operations. Our most critical accounting policies
involve our equity investments and our investments in real property. These
policies affect our:
o allocation of purchase prices between various asset categories and the
related impact on our recognition of rental income and depreciation and
amortization expense;
o assessment of the carrying values and impairments of long lived assets;
o classification of leases; and
o revenue recognition in the syndication of Sponsored REITs.
19
Allocation of Purchase Price
We have historically allocated the purchase prices of properties to land,
buildings and improvements. Each component of purchase price generally has a
different useful life. For properties acquired subsequent to June 1, 2001, the
effective date of Statement of Financial Accounting Standards ("SFAS") No. 141
"Business Combinations," we allocate the value of real estate acquired among
land, buildings, improvements and identified intangible assets and liabilities,
which may consist of the value of above market and below market leases, the
value of in-place leases, and the value of tenant relationships. Purchase price
allocations and the determination of the useful lives are based on management's
estimates. Under some circumstances we may rely upon studies commissioned from
independent real estate appraisal firms.
Purchase price allocated to land and building and improvements is based on
management's determination of the relative fair values of these assets assuming
the property was vacant. Management determines the fair value of a property
using methods similar to those used by independent appraisers. Purchase price
allocated to above market leases is based on the present value (using an
interest rate which reflects the risks associated with the leases acquired) of
the difference between (i) the contractual amounts to be paid pursuant to the
in-place leases and (ii) our estimate of fair market lease rates for the
corresponding leases, measured over a period equal to the remaining
non-cancelable terms of the respective leases. Purchase price allocated to
in-place leases and tenant relationships is determined as the excess of (i) the
purchase price paid for a property after adjusting existing in-place leases to
market rental rates over (ii) the estimated fair value of the property as if
vacant. This aggregate value is allocated between in-place lease values and
tenant relationships is based on management's evaluation of the specific
characteristics of each tenant's lease; however, the value of tenant
relationships has not been separated from in-place lease value because such
value and its consequence to amortization expense is immaterial for acquisitions
reflected in our financial statements. Factors considered by us in performing
these analyses include (i) an estimate of carrying costs during the expected
lease-up periods, including real estate taxes, insurance and other operating
income and expenses and (ii) costs to execute similar leases in current market
conditions, such as leasing commissions, legal and other related costs. If
future acquisitions result in our allocating material amounts to the value of
tenant relationships, those amounts would be separately allocated and amortized
over the estimated life of the relationships.
Depreciation Expense
We compute depreciation expense using the straight-line method over
estimated useful lives of up to 40 years for buildings and improvements, and up
to 15 years for personal property. The allocated cost of land is not
depreciated. The capitalized above-market lease values (included in Acquired
real estate leases in our Consolidated Balance Sheets) are amortized as a
reduction to rental income over the remaining non-cancelable terms of the
respective leases. We do not have any capitalized below-market leases. The value
of in-place leases, exclusive of the value of above-market and below-market
in-place leases, is amortized over the remaining non-cancelable periods of the
respective leases. If a lease is terminated prior to its stated expiration, all
unamortized amounts relating to that lease are written off. Inappropriate
allocation of acquisition costs, or incorrect estimates of useful lives, could
result in depreciation and amortization expenses which do not appropriately
reflect the allocation of our capital expenditures over future periods, as is
required by generally accepted accounting principles.
Impairment
We periodically evaluate our real estate properties for impairment
indicators. These indicators may include declining tenant occupancy, weak or
declining tenant profitability, cash flow or liquidity, our decision to dispose
of an asset before the end of its estimated useful life or legislative, economic
or market changes that permanently reduce the value of our investments. If
indicators of impairment are present, we evaluate the carrying value of the
property by comparing it to its expected future undiscounted cash flows. If the
sum of these expected future cash flows is less than the carrying value, we
reduce the net carrying value of the property to the present value of these
expected future cash flows. This analysis requires us to judge whether
indicators of impairment exist and to estimate likely future cash flows. If we
misjudge or estimate incorrectly or if future tenant profitability, market or
industry factors differ from our expectations, we may record an impairment
charge which is inappropriate or fail to record a charge when we should have
done so, or the amount of such charges may be inaccurate.
20
Lease Classification
Some of our real estate properties are leased on a triple net basis,
pursuant to non-cancelable, fixed term, operating leases. Each time we enter a
new lease or materially modify an existing lease we evaluate whether it is
appropriately classified as a capital lease or as an operating lease. The
classification of a lease as capital or operating affects the carrying value of
a property, as well as our recognition of rental payments as revenue. These
evaluations require us to make estimates of, among other things, the remaining
useful life and market value of a property, discount rates and future cash
flows. Incorrect assumptions or estimates may result in misclassification of our
leases.
Revenue recognition
We earn syndication and transaction fees in connection with the
syndication of Sponsored REITs. This revenue is recognized pursuant to the
provisions of SFAS 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 No. 66 are met.
Accordingly, we recognize syndication fees related to commissions when shares of
the Sponsored REIT are sold and the investor's funds have been transferred from
escrow into our account. We recognize transaction fees related to loan
commitment fees upon an investor closing and the subsequent payment of the
Sponsored REIT's loan to the Company. Other transaction fees are recognized upon
the final syndication of the Sponsored REIT.
Ownership of Stock in a Sponsored REIT
We typically retain a common stock ownership in a Sponsored REIT following
syndication, and earn an ongoing asset and/or property management fee.
Accordingly, transaction fee revenue and our share of the operations of these
Sponsored REITs are not classified as discontinued operations due to its
continuing involvement.
These policies involve significant judgments made based upon our
experience, including judgments about current valuations, ultimate realizable
value, estimated useful lives, salvage or residual value, the ability of our
tenants to perform their obligations to us, current and future economic
conditions and competitive factors in the markets in which our properties are
located. Recent declines in our occupancy percentages at some of our properties
reflect current economic conditions and competition. Competition, economic
conditions and other factors may cause additional occupancy declines in the
future. In the future we may need to revise our carrying value assessments to
incorporate information which is not now known and such revisions could increase
or decrease our depreciation expense related to properties we own, result in the
classification of our leases as other than operating leases or decrease the
carrying values of our assets.
Recent Accounting Standards
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 was
effective for our fiscal year ended December 31, 2003 and the adoption had no
impact on our financial position, results of operations and cash flows.
In July 2002, the FASB issued SFAS No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities." This statement was effective
January 1, 2003. SFAS No. 146 replaces current accounting literature and
requires the recognition of costs associated with exit or disposal activities
when they are incurred rather than at the date of a commitment to an exit or
disposal plan. 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 did not have a material impact on financial position, results of
operations or cash flow.
21
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities. In December 2003, the FASB revised
FIN 46 with certain modifications and clarifications. The objective of this
interpretation is to provide guidance on how to identify a variable interest
entity ("VIE") and determine when the assets, liabilities, non-controlling
interests, and results of operations of a VIE need to be included in a company's
consolidated financial statements. A VIE exists when either the total equity
investment at risk is not sufficient to permit the entity to finance its
activities by itself, or the equity investors lack one of three characteristics
associated with owning a controlling financial interest. Application of this
guidance was effective for interests in certain VIEs commonly referred to as
special-purpose entities (SPEs) as of December 31, 2003. The provisions of this
interpretation became effective upon issuance. The adoption of this standard did
not have a material impact on the Company's financial position, operations or
cash flow.
Results of Operations
The following table shows the variance in dollars for our operations for
years ended December 31, 2003 and 2002 and the years ended December 31, 2002 and
2001.
Variance in Dollars
(in thousands) For the Year Ended December 31,
2003 and 2002 2002 and 2001
---------------------------------
Revenue
Rental revenue
Rental income $ 24,979 $ 732
Transaction fees 1,247 2,462
Sponsored REIT income 2,065 527
Other 209 (374)
---------------------------------
Total real estate revenue 28,500 3,347
---------------------------------
Investment banking/investment
services revenue
Syndication fees 911 720
Transaction fees 407 (2,072)
Other -- --
---------------------------------
Total investment
banking/investment
services revenue 1,318 (1,352)
---------------------------------
Total Revenue 29,818 1,995
---------------------------------
Expenses
Real estate expenses
Rental operating expenses 4,992 (651)
Real estate taxes and insurance 3,625 197
Depreciation and amortization 4,938 85
Selling, general and administrative (45) (253)
Sponsored REIT expenses 1,752 263
Interest 142 76
---------------------------------
Total real estate expenses 15,404 (283)
---------------------------------
Investment banking/investment
services expenses
Selling, general and administrative 662 118
Commissions 467 299
Depreciation and amortization (113) 98
Shares/units issued as compensation (604) (1,140)
---------------------------------
Total investment 412 (625)
banking/investment
services expenses
---------------------------------
Total expenses 15,816 (908)
---------------------------------
22
Variance in Dollars
(in thousands) For the Year Ended December 31,
2003 and 2002 2002 and 2001
---------------------------------
Income before minority interests 14,002 2,903
Income applicable to minority interests -- (40)
Income before interest and taxes 14,002 2,943
Interest income 81 (124)
Income before taxes 14,083 2,819
Taxes on income 1,001 699
---------------------------------
Income from continuing operations 13,082 2,120
Income from discontinued operations (376) (176)
Income before gain on sale of properties 12,706 1,944
Gain on sale of properties 6,362 --
---------------------------------
Net income $ 19,068 $ 1,944
=================================
Comparison of the year ended December 31, 2003 to the year ended
December 31, 2002
On June 1, 2003, we completed the acquisition by merger of 13 Sponsored
REITs, which more than doubled the size of our real estate operations. Increases
in rental revenues and expenses are primarily a result of this merger. We also
sold two properties in 2003. The results of operations for these two properties
are shown as discontinued operations. We owned 15 properties for a full year
and, as a result of the mergers, 13 properties for seven months in 2003. The
results of operations for 2002 have been adjusted to reflect the sale of two
properties in 2003.
Our investment banking/investment services segment syndicated five
Sponsored REITs with total gross proceeds of $231.8 million in 2003; an increase
of $21.7 million compared to six Sponsored REITs syndicated in 2002 with total
gross proceeds of $210.1 million. Revenues and expenses for investment
banking/investment services are directly related to the gross proceeds of these
syndications.
Revenue
Total revenues increased $29.8 million, or 55%, to $83.8 million for the
year ended December 31, 2003, as compared to $54.0 million for the year ended
December 31, 2002.
Income from real estate operations was $67.7 million for the year ended
December 31, 2003; an increase of $28.5 million, or 73%, compared to the year
ended December 31, 2002. The increase is attributable to:
o An increase in rental revenue of $25.0 million relating to the 13
REITs acquired in 2003.
o An increase in transaction (loan commitment) fees of $1.2 million
relating to the increase in gross syndication proceeds.
o An increase of $2.1 million in Sponsored REIT income relating to the
revenues of the Sponsored REITs prior to syndication. The average
property syndicated in 2003 was approximately $46 million compared
to $35 million in 2002. As a result, the Company's proportionate
share of income and expenses increased in 2003. See Off-Balance
Sheet Arrangements, below, for additional discussion of the
calculation of FSP Corp.'s share of income and expenses in Sponsored
REITs.
The increase was offset by a decrease due to vacancies at four properties
aggregating $1.2 million, partially offset by rent increases in the remaining
properties of $0.5 million.
Investment banking/investment services revenue was $16.0 million for the
year ended December 31, 2003; an increase of $1.3 million, or 8.9%, compared to
the year ended December 31, 2002. This increase is attributable to the increase
in gross syndication proceeds as discussed above.
23
Expenses
Total expenses were $42.6 million for the year ended December 31, 2003; an
increase of $15.8 million, or 59%, compared to the year ended December 31, 2002.
Expenses for real estate operations were $30.6 million for the year ended
December 31, 2003, an increase of $15.4 million, or 101%, compared to the year
ended December 31, 2002. The increase is attributable to:
o An increase in expenses for real estate operations of $13.6 million
attributable to the 13 REITs acquired in 2003.
o An increase in Sponsored REIT expenses of $1.8 million attributable
to increased syndication activity.
Expenses for investment banking/investment services were $12.0 million for
the year ended December 31, 2003, a net increase of $0.4 million, or 3.6%,
compared to the year ended December 31, 2002. The increase is attributable to:
o An increase in commission expense of $0.5 million which is directly
related to the increase in syndication proceeds.
o An increase in general and administrative expenses of $0.7 million
which is primarily increased compensation as a result of higher
personnel during the year and merit salary increases.
The decrease was offset by:
o Expenses related to shares issued as compensation of $0.6 million in
2002; no shares were issued as compensation in 2003
Taxes on income were $1.7 million for the year ended December 31, 2003, a
net increase of $1.0 million or 140% compared to the year ended December 31,
2002. The tax rate for 2003 on the taxable REIT subsidiary was approximately 41%
compared to the tax rate for 2002 of approximately 22%. The 2002 rate included
certain benefits that will not occur in the future. We expect a tax rate of
approximately 41% for our taxable REIT subsidiary in the future.
Comparison of the year ended December 31, 2002 to the year ended
December 31, 2001
We 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. In 2002, we
restructured the fees charged to the Sponsored REITs in order to better match
revenue with associated costs and risks. Loan commitment fees were increased
approximately 2%, which was off set by a corresponding decrease in acquisition
and organization fees. We owned seventeen properties in both years. The results
of operations for 2002 and 2001 have been adjusted to reflect the sale of two
properties in 2003.
Revenue
Total revenues increased $2.0 million, or 3.8%, to $54.0 million for the
year ended December 31, 2002, as compared to $52.0 million for the year ended
December 31, 2001.
Income from real estate operations was $39.2 million for the year ended
December 31, 2002, an increase of $3.3 million, or 9.3%, 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;
24
o An increase of $0.5 million in Sponsored REIT income relating to the
revenues of the Sponsored REITs prior to syndication;
o An increase in transaction (loan commitment) fees of $2.5 million as
a result of the volume and fee increases noted above.
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 a
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;
o A decrease of $0.4 million in interest and other income primarily
due to lower interest rates in 2002.
Investment banking/investment services revenue (Syndication fees and
Transaction fees) was $16.1 million for the year ended December 31, 2002; a
decrease of $1.3 million, or 8.4%, compared to the year ended December 31, 2001.
This decrease is attributable to:
o An increase in syndication fees of $0.7 million as a result of an
increase of $7 million of gross proceeds from offerings of the
Sponsored REITs; and
o A decrease of transaction fees of $2.1 million primarily due to the
fee restructure described above.
Expenses
Total expenses were $26.8 million for the year ended December 31, 2002, a
decrease of $0.9 million, or 3.2%, compared to the year ended December 31, 2001.
Expenses for real estate operations were $15.5 million for the year ended
December 31, 2002, a net decrease of $0.3 million, or 1.8%, 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
real estate operations.
The decrease was offset by:
o An increase in real estate taxes and insurance of $0.3 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 real estate operations.
Expenses for investment banking/investment services were $12.2 million for
the year ended December 31, 2002, a net decrease of $0.6 million, or 5.1%,
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.
25
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%.
Liquidity and Capital Resources
Cash and cash equivalents were $58.8 million and $22.3 million at December
31, 2003 and December 31, 2002, respectively. This increase of $36.4 million is
attributable to $39.4 million provided by operating activities, plus $39.7
million provided by investing activities offset by $42.6 million used for
financing activities. Management believes that existing cash, cash anticipated
to be generated internally by operations, cash anticipated to be generated by
the sale of preferred stock in future Sponsored REITs and our line of credit
will be sufficient to meet working capital requirements and anticipated capital
expenditures for at least the next 12 months.
Operating Activities
The cash provided by our operating activities of $39.4 million is
primarily attributable to net income of $46.4 million plus the add-back of $3.3
million of non-cash activity. This was offset by a net decrease in operating
assets of $10.4 million, primarily related to approximately $11 million of
accounts payable and accrued expenses assumed by us when we acquired the 13
REITs.
Investing Activities
Our cash provided by investing activities of $39.7 million is attributable
to $23.5 million of cash acquired when we acquired the 13 REITs, plus $21.9
million in proceeds received from the sale of real estate assets. We used $2.4
million to acquire or improve real estate assets and office computers and
another $4.1 million as the balance of assets held for syndication.
Financing Activities
Our cash used by financing activities of $42.6 million is attributable to
$46.7 million of distributions to shareholders offset by borrowing of $4.1
million used to acquire assets held for syndication.
Line of Credit
We have a revolving line of credit agreement with a group of banks
providing for borrowings of up to $125.0 million. Borrowings under the line of
credit bear interest at either the bank's base rate or a variable LIBOR rate, as
defined. Borrowings by us outstanding under the line of credit at December 31,
2003 were $4.1 million. We are in compliance with all bank covenants required by
this line of credit. The maturity date of the line of credit is August 18, 2005.
26
Rental Income Commitments
Our commercial real estate 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, 2003 are:
Amount
Date (in thousands)
---- --------------
2004 $51,075
2005 $41,701
2006 $35,624
2007 $29,579
2008 $27,626
2009-2012 $44,374
Contractual Obligations
- ------------------------------------------------------------------------------------------------------------------
Payment due by period
(in thousands)
-------------------------------------------------------------------------------
After
Contractual Obligations Total 2004 2005 2006 2007 2008 2008
- ------------------------------------------------------------------------------------------------------------------
Line of Credit $4,117 $4,117 $0 $0 $0 $0 $0
- ------------------------------------------------------------------------------------------------------------------
Operating Leases $1,376 $289 $295 $302 $308 $182 $0
------ ------ ---- ---- ---- ---- ---
- ------------------------------------------------------------------------------------------------------------------
Total $5,493 $4,406 $295 $302 $308 $182 $0
- ------------------------------------------------------------------------------------------------------------------
The operating leases in the table above consist of our lease of corporate
office space, which was amended in 2003. The lease includes a base annual rent
and additional rent for our share of taxes and operating costs.
Off-Balance Sheet Arrangements
Our interest in a Sponsored REIT declines during the syndication process
as we sell shares of preferred stock in the Sponsored REIT to investors. We
record our share of the Sponsored REIT's income and expenses while we have an
ownership stake in the Sponsored REIT as Sponsored REIT income and Sponsored
REIT expenses. Our share of net income in the Sponsored REITs was $832,000,
$519,000, and $255,000, for the years ended December 31, 2003, 2002 and 2001,
respectively. Subsequent to the completion of the offering of the preferred
shares in Sponsored REITs during these three years, we did not share in any of
the Sponsored REITs' earnings.
We typically retain a minimal common stock ownership interest in Sponsored
REITs that we have organized and syndicated. During 2003, 2002 and 2001, we
retained common stock ownership interests in eight, sixteen, and ten Sponsored
REITs, respectively. Our cost of investment in these Sponsored REITs
approximates our share of the underlying equity in the net assets of the REITs.
This value is typically minimal after the Sponsored REIT is completely
syndicated. However, we had completed the syndication of only seven of the eight
Sponsored REITs in which we retained ownership interests as of December 31,
2003. The value of our holdings in the one Sponsored REIT that was not
completely syndicated is approximately $4.1 million and is shown on the balance
sheet as Assets held for syndication.
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
stockholders in each of the Sponsored REITs are entitled to 100% of the
Sponsored REIT's cash distributions. As a common stockholder, we have no rights
to the Sponsored REIT's earnings and any related cash distributions subsequent
27
to the completion of the offering of the preferred shares. However, upon
liquidation of a Sponsored REIT, we will be entitled to its percentage interest
in any proceeds remaining after the preferred stockholders have recovered their
investment. Our 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.
Summarized financial information for the Sponsored REITs is as follows:
(unaudited) December 31,
(in thousands) 2003 2002 2001
-----------------------------------
Balance Sheet Data:
Real estate, net $ 257,700 $ 385,907 $ 222,232
Other assets 53,646 39,465 19,048
Total liabilities (18,129) (6,554) (6,755)
--------- --------- ---------
Shareholders' equity $ 293,217 $ 418,818 $ 234,525
========= ========= =========
December 31,
2003 2002 2001
-----------------------------------
Operating Data:
Rental revenues $ 45,819 $ 46,836 $ 19,816
Other revenues 370 543 354
Operating and maintenance
Expenses (16,594) (14,191) (5,973)
Depreciation and amortization (11,155) (7,220) (3,191)
Interest expense (13,965) (13,395) (9,916)
--------- --------- ---------
Net income $ 4,475 $ 12,573 $ 1,090
========= ========= =========
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We were not a party to derivative financial instruments at or during the
year ended December 31, 2003.
We borrow from time to time on our line of credit. These borrowings bear
interest at a variable rate. As of December 31, 2003, $4,117,000 was outstanding
under the line of credit. We have used the funds drawn on our 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 us under our
line of credit. We therefore believe that we have mitigated our interest rate
risk with respect to our 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.
On April 14, 2003, our prior independent accountants,
PricewaterhouseCoopers LLP, informed us that they were declining to stand for
reelection as our independent accountants and on May 8, 2003 we engaged Ernst &
Young LLP as our independent accountants. Information required by this item has
been previously reported by FSP Corp. on Current Reports on Form 8-K dated April
14, 2003 and May 8, 2003.
28
Item 9A. Controls and Procedures
Our management, with the participation of FSP Corp.'s President and Chief
Executive Officer and FSP Corp.'s Vice President and Chief Operating Officer
(equivalent of Chief Financial Officer), evaluated the effectiveness of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(d)
under the Exchange Act) as of December 31, 2003. Based on this evaluation, FSP
Corp.'s President and Chief Executive Officer and FSP Corp.'s Vice President and
Chief Operating Officer (equivalent of Chief Financial Officer) concluded that,
as of December 31, 2003, our disclosure controls and procedures were (1)
designed to ensure that material information relating to us, including our
consolidated subsidiaries, is made known to FSP Corp.'s President and Chief
Executive Officer and FSP Corp.'s Vice President and Chief Operating Officer
(equivalent of Chief Financial Officer) by others within these entities,
particularly during the period in which this report was being prepared and (2)
effective, in that they provide reasonable assurance that information required
to be disclosed by us in the reports that we file or submit under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms.
No change to our internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the
quarter ended December 31, 2003 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
29
PART III
Certain information required by Part III of this Form 10-K is omitted
because we will file a definitive proxy statement pursuant to Regulation 14A not
later than 120 days after the end of the fiscal year covered by this Form 10-K,
and certain information to be included therein is incorporated herein by
reference.
Item 10. Directors and Executive Officers of the Registrant.
The response to this item is contained in part under the caption "Item 4A.
Executive Officers of the Registrant" in Part I hereof, and the remainder is
contained in the Proxy Statement under the caption "Election of Directors" and
is incorporated herein by reference.
Item 11. Executive Compensation.
The response to this item is contained in the Proxy Statement under the
caption "Executive Compensation" and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
The response to this item is contained in the Proxy Statement under the
caption "Beneficial Ownership of Voting Stock" and under the caption "Securities
Authorized for Issuance Under Equity Compensation Plans" and is incorporated
herein by reference.
Item 13. Certain Relationships and Related Transactions.
The response to this item is contained in the Proxy Statement under the
caption "Certain Relationships and Related Transactions" and is incorporated
herein by reference.
Item 14. Principal Accountant Fees and Services.
The response to this item is contained in the Proxy Statement under the
caption "Auditor Fees and Other Matters" and is incorporated herein by
reference.
PART IV
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.
3. Exhibits:
The Exhibits listed in the Exhibit Index are filed as part of this
Annual Report on Form 10-K.
30
(b) Reports on Form 8-K.
1. On October 8, 2003, FSP Corp. furnished a Current Report on Form 8-K
to disclose certain information regarding A.G. Edwards, Inc.'s
delivery to FSP Corp. of an estimate of the value of FSP Corp.
2. On October 20, 2003, FSP Corp. furnished a Current Report on Form
8-K to disclose A.G. Edwards, Inc.'s written report regarding the
value of FSP Corp.
31
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 12, 2004 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
George J. Carter (Principal Executive Officer) March 12, 2004
/s/ Barbara J. Corinha Vice President, Chief
- -------------------------- Operating Officer, Treasurer,
Barbara J. Corinha Secretary and Director
(Principal Financial Officer) March 9, 2004
/s/ Lloyd S. Dow Vice President and Controller
- -------------------------- (Principal Accounting Officer) March 12, 2004
Lloyd S. Dow
/s/ Richard R. Norris Director March 11, 2004
- --------------------------
Richard R. Norris
/s/ Janet P. Notopoulos Director March 12, 2004
- --------------------------
Janet P. Notopoulos
/s/ Barry Silverstein Director March 12, 2004
- --------------------------
Barry Silverstein
/s/ Dennis J. McGillicuddy Director March 8, 2004
- --------------------------
Dennis J. McGillicuddy
32
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 (5) Amended and Restated Loan Agreement dated as of August 18, 2003
by and among Citizens Bank of Massachusetts, Fleet National
Bank, FSP Corp. and certain affiliates of FSP Corp.
21.1* Subsidiaries of the Registrant.
23.1* Consent of Ernst & Young LLP.
23.2* Consent of PricewaterhouseCoopers LLP
31.1* Certification of FSP Corp.'s President and Chief Executive
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.2* Certification of FSP Corp.'s Vice President, Chief Operating
Officer (equivalent of Chief Financial Officer), Treasurer and
Secretary pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32.1* Certification of FSP Corp.'s President and Chief Executive
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2* Certification of FSP Corp.'s Vice President, Chief Operating
Officer (equivalent of Chief Financial Officer), Treasurer and
Secretary pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
- ----------
(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 Corp.'s Quarterly Report on Form 10-Q,
filed on November 14, 2003.
+ 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
33
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, 2003 and 2002 F-4
Consolidated Statements of Income for the years ended December 31,
2003, 2002, and 2001 F-6
Consolidated Statements of Cash Flows for the years ended December 31,
2003, 2002 and 2001 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 Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have been
omitted.
F-1
Report of Independent Auditors
To the Board of Directors and
Stockholders of Franklin Street Properties Corp.:
We have audited the accompanying consolidated balance sheet of Franklin Street
Properties Corp. as of December 31, 2003 and the related consolidated statements
of income and cash flows for the year then ended. Our audit also included the
financial statement schedule listed in the Index at Item 15(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audit. The financial statements of Franklin Street
Properties Corp. as of December 31, 2002, and for the two years then ended, were
audited by other auditors whose report dated March 5, 2003 except for Note 11,
as to which the date is March 15, 2004, expressed an unqualified opinion on
those statements.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Franklin Street Properties Corp. at December 31, 2003, and the consolidated
results of their operations and their cash flows for the year ended December 31,
2003, in conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
February 6, 2004
F-2
Report of Independent Accountants
To the Board of Directors and
Stockholders of Franklin Street Properties Corp.:
In our opinion, the accompanying consolidated balance sheet 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 the results of its operations and its cash
flows for the years ended December 31, 2002 and 2001 in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our 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, except for Note 11, as to which the date is March 15, 2004
F-3
Franklin Street Properties Corp.
Consolidated Balance Sheets
December 31,
------------------------
(in thousands, except share and par value amounts) 2003 2002
===========================================================================================================
Assets:
Real estate assets:
Land $ 71,236 $ 39,560
Buildings and improvements 403,243 154,785
Fixtures and equipment 889 930
- -----------------------------------------------------------------------------------------------------------
475,368 195,275
Less accumulated depreciation 25,836 21,999
- -----------------------------------------------------------------------------------------------------------
Real estate assets, net 449,532 173,276
Acquired real estate leases, less accumulated amortization of $1,539
and $0, respectively 7,964 --
Assets held for syndication 4,117 --
Cash and cash equivalents 58,793 22,316
Restricted cash 982 483
Tenant rent receivables, less allowance for doubtful accounts
of $155 and $202, respectively 881 327
Straight-line rent receivable, less allowance for doubtful accounts
of $360 and $360, respectively 4,087 3,057
Prepaid expenses 806 743
Deposits on real estate assets -- 841
Office computers and furniture, net of accumulated
depreciation of $473 and $389, respectively 398 234
Deferred leasing commissions, net of accumulated amortization
of $586, and $289, respectively 969 659
- -----------------------------------------------------------------------------------------------------------
Total assets $528,529 $201,936
===========================================================================================================
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 and par value amounts) 2003 2002
===========================================================================================================
Liabilities and Stockholders' Equity:
Liabilities:
Bank note payable $ 4,117 $ --
Accounts payable and accrued expenses 5,030 3,001
Accrued compensation 1,545 1,287
Tenant security deposits 982 483
- -----------------------------------------------------------------------------------------------------------
Total liabilities 11,674 4,771
- -----------------------------------------------------------------------------------------------------------
Commitments and contingencies
Stockholders' Equity:
Preferred Stock, $.0001 par value, 20,000,000 shares
authorized, none issued or outstanding -- --
Common Stock, $.0001 par value, 180,000,000 shares authorized,
49,630,338 and 24,630,247 shares issued and outstanding, respectively 5 2
Additional paid-in capital 512,797 192,743
Retained earnings 3,647 4,420
Accumulated undistributed net realized gain on sale of properties 406 --
- -----------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 516,855 197,165
- -----------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $528,529 $201,936
===========================================================================================================
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) 2003 2002 2001
=======================================================================================================
(Limited
(REIT) (REIT) Partnership)
Revenue:
Rental $49,789 $24,810 $24,078
Syndication fees 14,631 13,720 13,000
Transaction fees 14,745 13,091 12,701
Sponsored REIT income 3,452 1,387 860
Other 1,151 942 1,316
- ------------------------------------------------------------------------------------------------------
Total revenue 83,768 53,950 51,955
- ------------------------------------------------------------------------------------------------------
Expenses:
Real estate operating expenses 10,425 5,433 6,084
Real estate taxes and insurance 6,264 2,639 2,442
Depreciation and amortization 9,265 4,440 4,257
Sponsored REIT expenses 2,620 868 605
Selling, general and administrative 5,711 5,094 5,229
Commissions 7,291 6,824 6,525
Shares/units issued as compensation -- 604 1,744
Interest 1,036 894 818
- ------------------------------------------------------------------------------------------------------
Total expenses 42,612 26,796 27,704
- ------------------------------------------------------------------------------------------------------
Income before minority interests 41,156 27,154 24,251
Income applicable to minority interests -- -- 40
- ------------------------------------------------------------------------------------------------------
Income before interest and taxes 41,156 27,154 24,211
Interest income 367 286 410
- ------------------------------------------------------------------------------------------------------
Income before taxes 41,523 27,440 24,621
Taxes on income 1,700 699 --
- ------------------------------------------------------------------------------------------------------
Income from continuing operations 39,823 26,741 24,621
Income from discontinued operations 195 571 747
- ------------------------------------------------------------------------------------------------------
Income before gain on sale of properties 40,018 27,312 25,368
Gain on sale of properties, less applicable income tax 6,362 -- --
- ------------------------------------------------------------------------------------------------------
Net income $46,380 $27,312 $25,368
======================================================================================================
Weighted average number of shares/units outstanding,
basic and diluted 39,214 24,606 24,512
======================================================================================================
Amounts per share and per limited and general partnership unit,
basic and diluted, attributable to:
Continuing operations $ 1.02 $ 1.09 $ 1.00
Discontinued operations -- 0.02 0.03
Gain on sale of properties, less applicable income tax 0.16 -- --
- ------------------------------------------------------------------------------------------------------
Net income per share and per limited and general
partnership unit, basic and diluted $ 1.18 $ 1.11 $ 1.03
======================================================================================================
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,
---------------------------------------
2003 2002 2001
==================================================================================================================
(in thousands)
Cash flows from operating activities:
Net income $ 46,380 $ 27,312 $ 25,368
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 9,668 4,947 4,797
Shares/units issued as compensation -- 604 1,744
Gain on sale of properties (6,362) -- --
Minority interests -- -- 40
Changes in operating assets and liabilities:
Restricted cash (1) 12 4
Tenant rent receivables, net (302) (264) (196)
Straight-line rents, net (1,030) (1,686) --
Prepaid expenses and other assets, net 305 (239) 162
Accounts payable and accrued expenses (9,053) (858) 537
Accrued compensation 258 1,287 1,041
Tenant security deposits 1 (12) (4)
Payment of deferred leasing commissions (487) (615) (87)
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 39,377 30,488 33,406
- ------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Cash acquired through issuance of common stock in the merger
transaction 23,524 -- --
Purchase of real estate assets and office computer and furniture (2,388) (1,174) (733)
Changes in deposits on real estate assets 841 (841) --
Distributions from (investment in) assets held for syndication (4,117) -- 16,734
Proceeds from (purchase of) marketable securities -- -- 5,322
Proceeds received on sales of real estate assets 21,870 -- 442
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) investing
activities 39,730 (2,015) 21,765
- ------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Distributions to stockholders/partners (46,747) (30,514) (27,929)
Distributions to minority interests in consolidated entities -- -- (103)
Borrowings under bank note payable 4,117 -- --
Repayments of bank note payable -- -- (16,500)
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing
activities (42,630) (30,514) (44,532)
- ------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 36,477 (2,041) 10,639
Cash and cash equivalents, beginning of year 22,316 24,357 13,718
- ------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 58,793 $ 22,316 $ 24,357
==================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 1,036 $ 894 $ 818
Taxes on income $ 1,963 $ 390 $ --
Non-cash investing and financing activities:
assets acquired through issuance of common stock in the
merger transaction, net $ 297,468 $ -- $ --
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. ("FSP Corp." or the "Company", known as
Franklin Street Partners Limited Partnership, or 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 $32,000. The Company
also has a non-controlling common stock interest in eight corporations organized
to operate as real estate investment trusts ("REITs").
In December 2001, the limited partners of the Partnership approved the
conversion of the Partnership from a partnership into a corporation (the
"Conversion"). The Conversion was effective January 1, 2002, and was
accomplished as tax-free reorganization by merging the Partnership with and into
a wholly owned subsidiary, Franklin Street Properties Corp., with the subsidiary
as the surviving entity. In 2002, the Company elected to be taxed as a real
estate investment trust ("REIT"). As part of the Conversion, all of the
Partnership's outstanding units were converted on a one-for-one basis into
24,586,249 shares of common stock of the Company. The Conversion was accounted
for as a reorganization of affiliated entities, with assets and liabilities
recorded at their historical costs.
On May 30, 2003, the shareholders of the Company approved the Company's
acquisition by merger of 13 REITs (the "Target REITs"). The mergers were
effective June 1, 2003 and, as a result, the Company issued approximately
25,000,091 shares in a tax free exchange for all the outstanding preferred
shares of the Target REITs. The mergers are being accounted for as a purchase
and the acquired assets and liabilities are recorded at their fair value.
The Company operates in two business segments: real estate operations and
investment banking/investment services. FSP Investments provides real estate
investment and broker/dealer services. FSP Investments' services include: (i)
the organization of REIT entities (the "Sponsored REITs"), which are syndicated
through private placements; (ii) the acquisition of real estate on behalf of the
Sponsored REITs; and (iii) the sale of preferred stock in Sponsored REITs. FSP
Property Management provides asset management and property management services
for the Sponsored REITs.
2. Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements include all of the accounts
of the Company and its majority-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
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 their financial statements.
Minority Interests in Consolidated Entities
Minority interests included in the Company's consolidated statements of income
represent the minority interest holders' share of the income of the consolidated
entities. Cash distributions paid to minority interest holders were
approximately $103,000 for the year ended December 31, 2001.
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.
F-8
Franklin Street Properties Corp.
Notes to the Consolidated Financial Statements
2. Significant Accounting Policies (continued)
Reclassifications
Certain balances in the 2002 and 2001 financial statements have been
reclassified to conform to the 2003 presentation.
Investments in Sponsored 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, the Company
did not share in any of the Sponsored REITs' earnings nor any related dividend.
On January 30, 2004 the Company purchased 49.25 preferred shares (approximately
8.2%) of a Sponsored REIT, FSP Blue Lagoon Corp., for $4,531,000. The Company
agreed to vote its shares in any matter presented to a vote by the stockholders
of FSP Blue Lagoon Corp. in the same proportion as shares voted by investors
other than the Company.
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 REIT.
Routine replacements and ordinary maintenance and repairs that do not extend the
life of the asset are expensed as incurred. Typical expense items include
interior painting, landscaping, minor carpet replacements and residential
appliances. Funding for repairs and maintenance items typically is provided by
cash flows from operating activities. Depreciation is computed using the
straight-line method over the assets' estimated useful lives as follows:
Category Years
-------- -----
Buildings:
Residential 27
Commercial 39
Building Improvements 15-39
Furniture and equipment 5-7
The 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 impairment has occurred, the affected assets must be
reduced to their fair value. No such impairment losses have been recognized to
date.
F-9
Franklin Street Properties Corp.
Notes to the Consolidated Financial Statements
2. Significant Accounting Policies (continued)
Acquired Real Estate Leases and Amortization
The Company accounts for leases acquired as a result of the acquisition of real
estate assets under the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 141. "Business Combinations". Accordingly, the Company
recorded a value relating to the leases acquired as a result of the acquisition
by merger of 13 Sponsored REITs in 2003. Acquired real estate leases represent
costs associated with acquiring an in-place lease (i.e. the market cost to
execute a similar lease, including leasing commission, legal, vacancy and other
related costs) and the value relating to leases with rents above or below the
market rate.
Amortization related to costs associated with acquiring an in-place lease is
included in Depreciation and amortization on the Consolidated Statements of
Income. Amortization related to leases with rents above the market rate is
included as a reduction of Rental revenue on the Consolidated Statements of
Income.
Discontinued Operations
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 belief by management 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.
The Company typically retains a common stock ownership in a Sponsored REIT
following syndication, and earns an ongoing asset and property management fee;
accordingly, transaction fee revenue and the results of operations are not
classified as discontinued operations.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents. Also included
in cash equivalents at December 31, 2003 is $6 million of cash held as
certificates of deposit with maturity dates exceeding three months. There are no
prepayment penalties if the Company withdraws these funds prior to maturity.
Restricted Cash
Restricted cash consists of tenant security deposits. Tenant security deposits
are refunded when tenants vacate provided that the tenant has not damaged the
property.
Concentration of Credit 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
two banks which the Company believes to be creditworthy. The Company
periodically assesses the financial condition of the banks 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, 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
$4,087,000, and $3,057,000 at December 31, 2003 and 2002, respectively. The
Company provides an allowance for doubtful accounts based on its estimate of a
tenant's ability 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 $258,000, $193,000 and
$222,000 for the years ended December 31, 2003, 2002 and 2001, 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,
----------------------------------
2003 2002 2001
==========================================================================
Income from leases $ 41,416 $ 19,553 $ 20,145
Straight-line rent adjustment 1,030 1,686 797
Reimbursable expenses 6,964 3,393 2,875
Other 379 178 261
--------------------------------------------------------------------------
Total $ 49,789 $ 24,810 $ 24,078
==========================================================================
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.
Syndication Fees -- 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 REIT.
Transaction Fees -- Transaction fees relating to loan commitment fees are
recognized upon an investor closing and the subsequent payment of the Sponsored
REIT's loan to the Company. Other transaction fees such as acquisition and
organization fees are recognized upon the final investor closing of the
Sponsored REIT. The final investor closing is the last admittance of investors
into a Sponsored REIT; at that time, required funds have been received from the
investors, charges relating to the syndication have been paid or accrued,
continuing investment and continuing involvement criteria have been met, and
legal and economic rights have been transferred. Third party transaction-related
costs are deferred and later expensed to match revenue recognition. Internal
costs are expensed as incurred.
F-11
Franklin Street Properties Corp.
Notes to the Consolidated Financial Statements
2. Significant Accounting Policies (continued)
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 income and Sponsored REIT expenses represent the Company's share
of revenues and expenses from a Sponsored REIT prior to the final syndication of
preferred shares.
Other
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 years ended December 31, 2003 and 2002 represent taxes
incurred by a FSP Investments which 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 of the Company.
Net Income Per Share/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 shares/units were exercised or converted
into shares or units. There were no potential dilutive shares/units outstanding
at December 31, 2003, 2002, and 2001. The denominator used for calculating basic
and diluted net income per share/unit is as follows:
Year Ended December 31,
==========================================================================
2003 2002 2001
==========================================================================
Weighted average number of
shares/units outstanding
Common shares 39,214 24,606 --
Limited partners -- -- 23,563
General partner -- -- 949
--------------------------------------------------------------------------
39,214 24,606 24,512
==========================================================================
Recent Accounting Standards
In July 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities". This statement was effective January 1, 2003. SFAS
No. 146 replaces current accounting literature and requires the recognition of
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. SFAS 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 did not have a material
impact on the Company's financial position, 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 guarantor's accounting for, and disclosure of, the issuance of
certain types of guarantees. The disclosure requirements of FIN 45 are effective
for the Company 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 adoption of this
standard did not have a material impact on the Company's financial position,
operations or cash flows.
F-12
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. In December 2003, the FASB reissued
FIN 46 with certain modifications and clarifications. The objective of this
interpretation is to provide guidance on how to identify a variable interest
entity ("VIE") and determine when the assets, liabilities, non-controlling
interests, and results of operations of a VIE need to be included in a company's
consolidated financial statements. A VIE exists when either the total equity
investment at risk is not sufficient to permit the entity to finance its
activities by itself, or the equity investors lack one of three characteristics
associated with owning a controlling financial interest. Application of this
guidance was effective for interests in certain VIEs commonly referred to as
special-purpose entities (SPEs) as of December 31, 2003. The provisions of this
interpretation became effective upon issuance. The adoption of this standard did
not have a material impact on the Company's financial position, operations or
cash flow.
3. Business Segments
The Company operates in two business segments: real estate operations (including
real estate leasing, interim acquisition financing and asset/property
management) and investment banking/investment services (including real estate
acquisition 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 operations are located
in the United States of America.
The Company evaluates the performance of its reportable segments based on Cash
Available for Distribution ("CAD") as management believes that CAD represents
the most accurate measure of the reportable segment's activity and is the basis
for distributions paid to equity holders. The Company defines CAD as: net income
as computed in accordance with accounting principles generally accepted in the
United States of America ("GAAP"); plus certain non-cash items included in the
computation of net income (depreciation and amortization, gain or loss on the
sale of real estate, 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, gain or
loss on the sale of real estate, 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 net 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 are 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-13
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:
Investment
Real Banking/
Estate Investment
(in thousands): Operations Services Total
================================================================================
Year ended December 31, 2003:
Net Income $ 43,949 $ 2,431 $ 46,380
Gain on sale of properties (6,362) -- (6,362)
Depreciation and amortization 9,612 56 9,668
Straight-line rent (1,030) -- (1,030)
Capital expenditures (1,125) (248) (1,373)
Merger costs (1,015) -- (1,015)
Payment of deferred leasing commissions (487) -- (487)
Proceeds from funded reserves 1,877 -- 1,877
Proceeds from sale of land 55 -- 55
- -------------------------------------------------------------------------------
Cash Available for Distribution $ 45,474 $ 2,239 $ 47,713
===============================================================================
Year ended December 31, 2002:
Net Income $ 24,787 $ 2,525 $ 27,312
Depreciation and amortization 4,778 169 4,947
Straight-line rent (1,686) -- (1,686)
Non-cash compensation expenses -- 604 604
Capital expenditures (1,163) (11) (1,174)
Payment of deferred leasing commissions (615) -- (615)
Proceeds from funded reserves 3,200 -- 3,200
Proceeds from sale of land -- -- --
- -------------------------------------------------------------------------------
Cash Available for Distribution $ 29,301 $ 3,287 $ 32,588
===============================================================================
Year ended December 31, 2001:
Net Income $ 21,381 $ 3,987 $ 25,368
Depreciation and amortization 4,726 71 4,797
Straight-line rent (797) -- (797)
Non-cash compensation expenses -- 1,744 1,744
Capital expenditures (566) (167) (733)
Payment of deferred leasing commissions (87) -- (87)
Proceeds from funded reserves 581 -- 581
Proceeds from sale of land 442 -- 442
- -------------------------------------------------------------------------------
Cash Available for Distribution $ 25,680 $ 5,635 $ 31,315
===============================================================================
F-14
Franklin Street Properties Corp.
Notes to the Consolidated Financial Statements
3. Business Segments (continued)
The Company's cash distributions for the years ended December 31, 2003, 2002 and
2001 are summarized as follows:
Distribution Total Cash
Quarter paid Per Share/Unit Distributions
========================================================================
(in thousands)
Second quarter of 2003 $ .31 $ 7,635
Third quarter of 2003 .31 10,135
Fourth quarter of 2003 (A) .43 21,341
First quarter of 2004 (B) .31 15,385
------------------------------------------------------------------------
$ 1.36 $ 54,496
========================================================================
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 (C) .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
========================================================================
(A) Includes a special dividend of $.12 per share in the aggregate amount of
$5,956,000.
(B) Represents dividends declared and paid by the Company in the first quarter
of 2004.
(C) 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.
F-15
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:
Investment
Real Banking/
Estate Investment
Operations Services Total
================================================================================
(in thousands)
December 31, 2003:
Revenue $ 67,720 $16,048 $ 83,768
Interest income 291 76 367
Interest expense 1,036 -- 1,036
Income from discontinued operations, net 195 -- 195
Capital expenditures 1,125 248 1,373
Identifiable assets 524,788 3,741 528,529
December 31, 2002:
Revenue $ 39,220 $14,730 $ 53,950
Interest income 211 75 286
Interest expense 894 -- 894
Income from discontinued operations, net 571 -- 571
Capital expenditures 1,163 11 1,174
Identifiable assets 194,996 6,940 201,936
December 31, 2001:
Revenue $ 35,873 $16,082 $ 51,955
Interest income 299 111 1,726
Interest expense 818 -- 818
Income from discontinued operations, net 747 -- 747
Capital expenditures 566 167 733
Identifiable assets 199,140 4,977 204,117
4. Merger Transactions
On June 1, 2003, the Company issued approximately 25 million shares of common
stock, $0.0001 par value per share in exchange for all of the outstanding
preferred stock of 13 Sponsored REITs it acquired by merger. The results of
operations for each of the Sponsored REITs have been included in the Company's
consolidated financial statements since that date. The merger transactions were
structured as exchanges of shares and no cash was involved.
The aggregate purchase price was approximately $321 million. On the acquisition
date, for each Sponsored REIT, the increase between the appraised value of the
property and the historical cost of the property was allocated to real estate
investments and leases, including Lease origination costs. Lease origination
costs represent the value associated with acquiring an in-place lease (i.e. the
market cost to execute a similar lease, including leasing commission, legal,
vacancy, and other related costs). The value assigned to buildings approximates
their replacement cost; the value assigned to land approximates its appraised
value; and the value assigned to leases approximates their fair value. Other
assets and liabilities are recorded at their historical costs, which
approximates fair value. The following table summarizes the estimated fair value
of the assets acquired at the date of acquisition:
F-16
Franklin Street Properties Corp.
Notes to the Consolidated Financial Statements
4. Merger Transactions (continued)
Value of Assets Acquired
------------------------
(in thousands)
Real estate assets $298,425
Value of acquired real estate leases 9,503
Cash 23,524
Other assets 1,120
Liabilities assumed (11,580)
--------
Total $320,992
========
The following table shows the allocation of the aggregate increase of
$19,500,000 between the value of the real estate assets and leases acquired
(including expenses of the merger of $1,015,000) and the historical costs of the
13 Sponsored REITs.
(in thousands) Life
Category Amount In Years
-------------------------------------------------------------------------
Land $ 944 N/A
Buildings and improvements 15,747 27-39
-------
Real estate investments 16,691
Lease origination costs 2,809 4-10
-------
Total $19,500
=======
Pro forma operating results for the Company and the 13 Sponsored REITs the
Company acquired during 2003 are shown in the following table. The results
assume that the mergers occurred and the shares of the Company's stock were
issued on January 1, 2002 and are not necessarily indicative of what the
Company's actual results of operations would have been for the period indicated,
nor do they purport to represent the results of operations of any future period.
For Year Ended
(unaudited) December 31,
(in thousands except per share amount) 2003 2002
------------------------
Revenue $ 98,972 $ 82,675
Expenses (52,574) (48,781)
Interest income 484 556
Taxes on income (1,700) (699)
-------- --------
Net income from continuing operations 45,182 33,751
Income from discontinued operations 195 571
Gain on sale of property 6,362 --
======== ========
Net income $ 51,739 $ 34,322
======== ========
Weighted average shares outstanding 49,630 49,606
======== ========
Net income per share $ 1.04 $ 0.69
======== ========
F-17
Franklin Street Properties Corp.
Notes to the Consolidated Financial Statements
5. Related Party Transactions
Investment in Sponsored REITs
The Company typically retains a minimal common stock ownership interest in
Sponsored REITs that it has syndicated. 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, 2003, 2002, and
2001, the Company had ownership interests in eight, sixteen, and ten Sponsored
REITs, respectively. However, the Company had completely syndicated only seven
of the eight Sponsored REITs for which it retained ownership interests as of
December 31, 2003. The Company's cost in the one Sponsored REIT that was not
completely syndicated at December 31, 2003 is $4,117,000 and is shown as Assets
held for syndication on the Company's Consolidated Balance Sheet.
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. 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) 2003 2002
-----------------------------
(in thousands)
Balance Sheet Data:
-------------------
Real estate, net $ 257,700 $ 385,907
Other assets 53,646 39,465
Total liabilities (18,129) (6,554)
--------- ---------
Shareholders equity $ 293,217 $ 418,818
========= =========
For the Year Ended
December 31,
------------------------------------
(unaudited) 2003 2002 2001
------------------------------------
(in thousands)
Operating Data:
---------------
Rental revenues $ 45,819 $ 46,836 $ 19,816
Other revenues 370 543 354
Operating and maintenance
expenses (16,594) (14,191) (5,973)
Depreciation and amortization (11,155) (7,220) (3,191)
Interest expense (13,965) (13,395) (9,916)
-------- -------- --------
Net income (loss) $ 4,475 $ 12,573 $ 1,090
======== ======== ========
The operating data for 2003 includes the operations of eight Sponsored REITs in
which the Company held an interest at December 31, 2003 and 13 Target REITs from
January through May 31, 2003. The 13 Target REITs were merged into the Company
on June 1, 2003.
The Company's proportionate share of net income prior to completion of the
syndication from these Sponsored REITs is shown in the following table:
For the Year Ended
(in thousands) December 31,
2003 2002 2001
-----------------------------------
Revenue $ 3,452 $ 1,387 $ 860
Expenses (2,620) (868) (605)
------- ------- -----
Net income $ 832 $ 519 $ 255
======= ======= =====
F-18
Franklin Street Properties Corp.
Notes to the Consolidated Financial Statements
5. Related Party Transactions (continued)
Interest
The Company is typically entitled to interest on funds advanced to syndicated
REITs. The Company recognized interest income of $636,000, $429,000, and
$552,000 for the years ended December 31, 2003, 2002 and 2001, respectively,
relating to these loans.
Sponsored Entity Fees
The Company has provided syndication and real estate acquisition advisory
services for the Sponsored REITs. Syndication and transaction fees from
non-consolidated related entities amounted to approximately $29,376,000,
$26,811,000, and $25,701,000 for the years ended December 31, 2003, 2002 and
2001, 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 $493,000, $503,000, and
$412,000 for the years ended December 31, 2003, 2002 and 2001, respectively, and
is included in "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 group of banks providing for borrowings at the Company's election of up to
$125,000,000. Borrowings under the Loan Agreement bear interest at either the
bank's base rate or a variable LIBOR rate, as defined. The balance outstanding
was $4,117,000, $0, and $0 as of December 31, 2003, 2002, and 2001 respectively.
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 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, 2003 and 2002. The Loan
Agreement matures on August 18, 2005.
7. Shareholders' and Partners' Capital
General
The Company converted from a partnership to a corporation on January 1, 2002.
The changes in partners' capital prior to the 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, 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 as 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-19
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:
Accumulated
Undistributed
Additional Net Realized Total
Common Stock Paid-in Retained Gain on Sale of Stockholders'
Shares Amount Capital Earnings Properties Equity
====================================================================================================================
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
Shares issued 25,000,091 3 320,054 -- -- 320,057
Net Income -- -- -- 40,018 6,362 46,380
Dividends -- -- -- (40,791) (5,956) (46,747)
- --------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 49,630,338 $ 5 $ 512,797 $ 3,647 $ 406 $ 516,855
====================================================================================================================
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.
F-20
Franklin Street Properties Corp.
Notes to the Consolidated Financial Statements
7. Shareholders' and Partners' Capital (continued)
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.
Equity-Based Compensation
There was no equity-based compensation for the year ended December 31, 2003. In
July 2002, July 2001 and January 2001 the Company issued 43,998 shares, 149,131
units, and 2,522 units with a fair value of approximately $604,000, $1,715,000
and $29,000, 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 $0, $604,000 and $1,744,000 are reported in the
accompanying Consolidated Statements of Income for the years ended December 31,
2003, 2002, and 2001, respectively.
The following table summarizes the allocation of net income and the payment of
distributions to partners.
Year Ended
December 31, 2001
------------------------------
Allocation of
Net Income Distributions
------------- -------------
Limited Partners $ 24,936 $ 26,849
General Partners 982 1,080
-------- --------
$ 24,936 $ 27,929
======== ========
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 statement 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:
F-21
Franklin Street Properties Corp.
Notes to the Consolidated Financial Statements
8. Federal Income Tax Reporting (continued)
For the For the
Year Ended Year Ended
(in thousands) December 31, December 31,
2003 2002
--------------------------------------
Federal income tax expense at statutory rate $ 1,446 35.0% $ 1,128 35.0%
Increase (decrease) in taxes resulting from:
State income taxes, net of federal impact 254 6.2% 197 6.1%
Other -- --% (626) (19.4%)
-------- ------ ------- -------
Taxes on income $ 1,700 41.2% $ 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.
At December 31, 2003 and 2002, 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 $14,270,000 and $39,181,000 respectively.
Reconciliation Between GAAP Net Income and Taxable Income subject to dividend
requirements.
The following reconciles book net income to taxable income subject to dividend
requirements for the years ended December 31, 2003 and 2002. The Partnership was
not subject to a minimum dividend requirement.
For the Year Ended
(in thousands) December 31, 2003 December 31, 2002
----------------- -----------------
Net Income per books $ 46,380 $ 27,312
Adjustments to book income
Book depreciation and amortization 9,531 4,699
Tax gain on sale of asset (8,709) --
Deferred rent, net 22 (368)
Tax depreciation and amortization (10,266) (3,824)
Tax basis less book basis of properties sold, net 2,347 --
Straight line rent adjustment, net (1,030) (1,151)
Non-taxable distributions -- (2,113)
Other, net (237) (507)
-------- --------
Taxable income subject to dividend requirement $ 38,038 $ 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 Year Ended
December 31, 2003 December 31, 2002
Per Weighted- Per Weighted-
(in thousands) Total Average Share Total Average Share
-------------------------------------------------------
Cash dividends paid $46,747 $1.19 $ 30,514 $1.24
Plus: Dividends designated from following year -- -- -- --
Less: Portion designated capital gain distribution 8,709 0.22 -- --
Less: Return of Capital -- -- (6,466) (0.26)
-------------------------------------------------------
Dividends paid deduction $38,038 $0.97 $ 24,048 $0.98
=======================================================
F-22
Franklin Street Properties Corp.
Notes to the Consolidated Financial Statements
8. Federal Income Tax Reporting (continued)
Partnership Taxes
Prior to the 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
========
9. Commitments
The Company's commercial real estate operations include the leasing of office
buildings and industrial properties subject to leases with terms greater than
one year. The leases 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, 2003:
Rentals Under Operating Leases
Year ended
(in thousands) December 31,
========================================================
2004 $ 51,075
2005 41,701
2006 35,624
2007 29,579
2008 27,626
Thereafter 44,374
--------------------------------------------------------
$229,979
========================================================
Office Lease
The Company leases its corporate office space under an operating lease that was
amended in 2003. 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 as follows:
(in thousands) Year ended
December 31,
--------------------------------------------------------
2004 $ 289
2005 295
2006 302
2007 308
2008 182
--------------------------------------------------------
$1,376
========================================================
F-23
Franklin Street Properties Corp.
Notes to the Consolidated Financial Statements
9. Commitments (continued)
Rent expense was approximately $219,000, $206,000 and $196,000 for the years
ended December 31, 2003, 2002 and 2001, respectively, and is included in
selling, general and administration expenses in the Consolidated Statement of
Income.
Retirement Plan
In 1999, the Company began a retirement savings plan for eligible employees.
Under the plan, the Company annually matches participant contributions up to the
maximum allowed by tax regulations. The Company's total contribution under the
plan amounted to approximately $132,000, $105,000 and $76,000 for the years
ended December 31, 2003, 2002 and 2001, 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.
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 of 43,998 shares of FSP Common Stock were issued to an Executive
Vice President of FSP Corp. 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
========== ========
There were no shares granted for the year ended December 31, 2003.
11. Discontinued Operations
Effective January 1, 2002, the Company adopted the provisions of SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," which
superceded SFAS No. 121. SFAS No. 144 requires that long-lived assets that are
to be disposed of by sale be measured at the lesser of book value or fair value
less cost to sell. SFAS No. 144 retains the requirements of SFAS No. 121
regarding impairment loss recognition and measurement. In addition, it requires
that one accounting model be used for long-lived assets to be disposed of by
sale and broadens the presentation of discontinued operations to include more
disposal transactions.
During the year ended December 31, 2003, the Company disposed of two apartment
properties, Weslayan Oaks and Reata, both located in Houston, Texas. The
operating results for these two real estate assets have been reflected as
discontinued operations in the Consolidated Statements of Income on a
comparative basis for the years ended December 31, 2003, 2002 and 2001.
The operating results for the real estate assets sold during 2003 are summarized
below.
F-24
Franklin Street Properties Corp.
Notes to the Consolidated Financial Statements
11. Discontinued Operations (continued)
For the Years Ended
December 31,
-------------------------------
2003 2002 2001
------- ------- -------
Rental revenue $ 1,215 $ 2,603 $ 2,687
Rental operating expenses (507) (1,034) (942)
Real estate taxes and insurance (247) (491) (458)
Depreciation and amortization (266) (507) (540)
------- ------- -------
Net Income $ 195 $ 571 $ 747
======= ======= =======
12. Subsequent Events
On February 6, 2004, the Company declared a dividend of $.31 per share of common
stock payable to stockholders of record as of February 6, 2004.
13. Selected unaudited quarterly information
Selected unaudited quarterly information is shown in the following table
2003
----------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in thousands, except per share data)
Revenue $12,548 $14,661 $31,703 $24,876
======= ======= ======= =======
Income from continuing operations $ 5,772 $ 6,733 $15,711 $11,608
Income from discontinued operations 95 50 55 (6)
Gain on sale of properties 1,421 -- 4,914 27
------- ------- ------- -------
Net income $ 7,288 $ 6,783 $20,680 $11,629
======= ======= ======= =======
Basic and diluted net income per share $ 0.30 $ 0.21 $ 0.42 $ 0.23
======= ======= ======= =======
Weighted average number of shares outstanding 24,630 32,964 49,630 49,630
======= ======= ======= =======
2002
----------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in thousands, except per share data)
Revenue $ 9,260 $14,225 $14,733 $15,732
======= ======= ======= =======
Income from continuing operations 3,961 7,277 6,981 8,522
Income from discontinued operations 136 192 147 96
Gain on sale of properties -- -- -- --
------- ------- ------- -------
Net income $ 4,097 $ 7,469 $ 7,128 $ 8,618
======= ======= ======= =======
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-25
Franklin Street Properties Corp.
Notes to the Consolidated Financial Statements
13. Selected unaudited quarterly information (continued)
Due to an oversight, transaction fee income of $1,330,000 related to commitment
fees charged to a Sponsored REIT was understated in the first quarter of 2003
and overstated in the second quarter of 2003. The following table shows the
effects on the related quarters. There was no effect on the six months ended
June 30, 2003.
First Quarter ended March 31, 2003
-----------------------------------------
As reported Adjustments As amended
----------- ----------- ----------
(in thousands, except per share data)
Revenue $11,218 $ 1,330 $12,548
======= ======== =======
Income from continuing operations 4,442 1,330 5,772
Income from discontinued operations 95 -- 95
Gain on sale of properties 1,421 -- 1,421
------- -------- -------
Net income $ 5,958 $ 1,330 $ 7,288
======= ======== =======
Basic and diluted net income per share $ 0.24 $ 0.06 $ 0.30
======= ======== =======
Weighted average number of shares outstanding 24,630 -- 24,630
======= ======== =======
Second Quarter ended June 30, 2003
-----------------------------------------
As reported Adjustments As amended
----------- ----------- ----------
(in thousands, except per share data)
Revenue $15,971 $ (1,330) $14,641
======= ======== =======
Income from continuing operations 8,063 (1,330) 6,733
Income from discontinued operations 50 -- 50
Gain on sale of properties -- -- --
------- -------- -------
Net income $ 8,113 $ (1,330) $ 6,783
======= ======== =======
Basic and diluted net income per share $ 0.25 $ 0.04 $ 0.21
======= ======== =======
Weighted average number of shares outstanding 32,964 -- 32,964
======= ======== =======
F-26
SCHEDULE III
FRANKLIN STREET PROPERTIES CORP.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2003
Initial Cost
-------------------------------------
Costs
Capitalized
Buildings (Disposals)
Improvements Subsequent
Encumbrances and to
Description (1) Land Equipment Acquisition
------------ ---- --------- -----------
(in thousands)
Residential Apartments:
Essex House, Houston, TX -- $ 2,920 $ 9,367 $ 648
Silverside Plantation, Baton Rouge, LA -- 2,000 17,082 119
Gael Apartments, Houston, TX -- 2,796 16,127 -
Merrywood Apartments, Katy, TX -- 2,170 15,334 -
Commercial Properties:
One Technology Drive, Peabody, MA -- 1,658 10,246 (450)
NAOP, No. Andover, MA -- 1,311 8,136 907
Park Seneca, Charlotte, NC -- 1,815 7,917 108
4995 Patrick Henry, Santa Clara, CA -- 3,274 4,130 58
Piedmont Center, Greenville, SC -- 1,449 9,839 1,027
Hillview Center, Milpitas, CA -- 2,203 2,813 7
Telecom Business Center, San Diego, CA -- 5,035 11,363 432
Southfield Centre, Southfield, MI -- 4,344 11,455 956
Blue Ravine, Folsom, CA -- 846 5,450 38
Bollman Place, Savage, MD -- 1,585 4,121 109
Austin N.W., Austin, TX -- 708 10,494 471
Gateway Crossing 95, Columbia, MD -- 4,453 15,931 4
Fores t Park, Charlotte, NC -- 1,559 5,672
10 Lyberty Way, Westford, MA -- 1,315 8,862 301
Centennial Center, Colorado Springs, CO -- 1,549 11,877 23
Goldentop Technology Center, San Diego, CA -- 5,356 17,049 -
Meadow Point, Chantilly, VA -- 2,634 18,911 -
Timberlake, Chesterfield, MO -- 2,984 38,661 -
Fair Lakes, Fairfax, VA -- 4,383 33,976 24
Northwest Point, Elk Grove Village, IL -- 2,914 26,295 -
Federal Way, Federal Way, WA -- 2,518 13,212 -
Timberlake East, Chesterfield, MO -- 2,626 17,608 66
Plaza Ridge, Hemdon, VA -- 4,210 25,640 -
Park Ten, Houston, TX -- 1,061 21,303 (27)
---- ------- -------- ------
-- $71,676 $398,871 $4,821
==== ======= ======== ======
Historical Costs
-------------------------------------------------------------
Buildings Total Costs,
Improvements Net of Depreciable Date of
and Accumulated Accumulated Life Acquisition
Description Land Equipment Total (2) Depreciation Depreciation Years (3)
---- --------- --------- ------------ ------------ ----- -----------
(in thousands)
Residential Apartments:
Essex House, Houston, TX $ 2,920 $ 10,015 $ 12,935 $ 3,648 $ 9,287 5-27 1993
Silverside Plantation, Baton Rouge, LA 2,021 17,180 19,201 3,209 15,992 5-27 1998
Gael Apartments, Houston, TX 2,796 16,127 18,923 319 18,604 5-27 2000
Merrywood Apartments, Katy, TX 2,170 15,334 17,504 302 17,202 5-27 2002
Commercial Properties:
One Technology Drive, Peabody, MA 1,658 9,796 11,454 1,866 9,588 5-39 1995
NAOP, No. Andover, MA 1,311 9,043 10,354 2,199 8,155 5-39 1996
Park Seneca, Charlotte, NC 1,815 8,025 9,840 1,142 8,698 5-39 1997
4995 Patrick Henry, Santa Clara, CA 3,274 4,188 7,462 636 6,826 5-39 1997
Piedmont Center, Greenville, SC 1,449 10,866 12,315 1,648 10,667 5-39 1998
Hillview Center, Milpitas, CA 2,203 2,820 5,023 336 4,687 5-39 1999
Telecom Business Center, San Diego, CA 5,035 11,795 16,830 1,440 15,390 5-39 1999
Southfield Centre, Southfield, MI 4,344 12,411 16,755 1,290 15,465 5-39 1999
Blue Ravine, Folsom, CA 846 5,488 6,334 565 5,769 5-39 1999
Bollman Place, Savage, MD 1,585 4,230 5,815 414 5,401 5-39 1999
Austin N.W., Austin, TX 708 10,965 11,673 1,085 10,588 5-39 1999
Gateway Crossing 95, Columbia, MD 4,019 16,369 20,388 1,704 18,684 5-39 1999
Fores t Park, Charlotte, NC 1,559 5,672 7,231 62 7,169 5-39 1999
10 Lyberty Way, Westford, MA 1,315 9,163 10,478 821 9,657 5-39 2000
Centennial Center, Colorado Springs, CO 1,549 11,900 13,449 154 13,295 5-39 2000
Goldentop Technology Center, San Diego, CA 5,356 17,049 22,405 232 22,173 5-39 2000
Meadow Point, Chantilly, VA 2,634 18,911 21,545 260 21,285 5-39 2001
Timberlake, Chesterfield, MO 2,984 38,661 41,645 555 41,090 5-39 2001
Fair Lakes, Fairfax, VA 4,383 34,000 38,383 486 37,897 5-39 2001
Northwest Point, Elk Grove Village, IL 2,914 26,295 29,209 370 28,839 5-39 2001
Federal Way, Federal Way, WA 2,518 13,212 15,730 184 15,546 5-39 2001
Timberlake East, Chesterfield, MO 2,626 17,674 20,300 246 20,054 5-39 2002
Plaza Ridge, Hemdon, VA 4,210 25,640 29,850 368 29,482 5-39 2002
Park Ten, Houston, TX 1,034 21,303 22,337 295 22,042 5-39 2002
------- -------- -------- ------- --------
$71,236 $404,132 $475,368 $25,836 $449,532
======= ======== ======== ======= ========
(1) There are no encumbrances on the above properties.
(2) The aggregate cost for Federal Income Tax purposes is $474,029.
(3) Original date of acquisition by Sponsored Entity.
F-27
The following table summarizes the changes in the Company's real estate
investments and accumulated depreciation:
December 31,
------------------------------------
(in thousands) 2003 2002 2001
===============================================================================
Real estate investments, at cost:
Balance, beginning of period $ 195,275 $ 194,112 $ 193,988
Acquisitions 298,425 -- --
Improvements 1,125 1,163 546
Dispositions (19,457) -- (422)
- -------------------------------------------------------------------------------
Balance, end of period $ 475,368 $ 195,275 $ 194,112
===============================================================================
Accumulated depreciation:
Balance, beginning of period $ 21,999 $ 17,419 $ 12,917
Depreciation 7,786 4,580 4,502
Dispositions (3,949) -- --
- -------------------------------------------------------------------------------
Balance, end of period $ 25,836 $ 21,999 $ 17,419
===============================================================================
F-28